SEC Amends Rules for Equity-Based Compensation under Securities Act Rule 701

July 31, 2018
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The SEC Finalized Rules to Amend Securities Act Rule 701

The Securities and Exchange Commission (SEC) finalized rules to amend Securities Act Rule 701, which exempts from registration for securities issued by non-reporting companies pursuant to compensatory arrangements. Under the amended rule, the threshold for triggering additional disclosures was increased from $5 million of securities sold in a 12-month period to $10 million.

SEC Finalizes Rules to Amend Securities Act Rule 701
Photo courtesy of Verne Ho (Unsplash.com)

Rule 701 Amendments

Rule 701 exempts certain sales of securities made to compensate employees, consultants, and advisors. The exemption, which is not available to Exchange Act reporting companies, was enacted specifically for private companies seeking to offer stock option and other compensatory employee benefit plans. In most cases, the grant of the options will not be deemed a sale of a security for purposes of the Securities Act. 

Under Rule 701, nonreporting companies are authorized to sell, during any consecutive 12-month period, securities equal in aggregate value to the greatest of [(1) $1 million or 15 percent of the total assets of the company; or (2) 15 percent of the outstanding amount of the class of securities being offered and sold under the Rule 701 exemption.

Rule 701 also contains disclosure obligations. Issuers must provide to recipients a copy of the stock option plan, as well as any underlying contracts governing the offering to all investors. Previously, if the aggregate sales price or the amount of securities sold in any consecutive 12-month period exceeded $5 million, additional disclosures were required. As amended, the disclosure threshold is now $10 million. 

SEC’s Concept Release

The SEC is seeking comments on whether Rule 701 should be further revised to modernize it to reflect the significant evolution in both the types of compensatory offerings and the composition of the workforce since Rule 701 was last revised.

“The rule as amended, and the concept release, are responsive to the fact that the American economy is rapidly evolving, including through the development of both new compensatory instruments and novel worker relationships – often referred to as the ‘gig economy.’  We must do all we can to ensure our regulatory framework reflects changes in our marketplace, including our labor markets,” said SEC Chairman Jay Clayton.  

The SEC is soliciting comment on possible ways to update the requirements of Rule 701 and Form S-8, which provides a simplified registration form for companies to use to issue securities pursuant to employee stock purchase plans. The Concept Release solicits comment on:

  • “Gig economy” relationships, in light of issuers using internet platforms to provide workers the opportunity to sell goods and services, to better understand how they work and determine what attributes of these relationships potentially may provide a basis for extending eligibility for the Rule 701 exemption;
  • Whether the Commission should further revise the disclosure content and timing requirements of Rule 701(e); and
  • Whether the use of Form S-8 to register the offering of securities pursuant to employee benefit plans should be further streamlined.

The amendment to Rule 701 and the prospect of future changes are good news for New Jersey and New York businesses, particularly startups and other small or high tech companies that rely on equity compensation to attract and retain talented employees and consultants.

If you have any questions, please contact us

If you have any questions or if you would like to discuss additional compensation structures that may be available, please contact me, Paul A. Lieberman, at 201-806-3364.