Expanded Exemption from Registration with the SEC

Are you a small company that operates under a plan to offer shares of your company’s stock, options, or other securities as payment to your employees, officers, directors, partners, trustees, consultants, and advisors?

The Economic Growth, Regulatory Relief and Consumer Protection Act, Pub. L. 115-174, 132 Stat. 1296 (2018), section 507, recently amended Securities Act Rule 701, which provides an exemption from registration for securities issued by non-reporting companies pursuant to compensatory arrangements.  The amendment, Rule 701(e), increases, from $5 million to $10 million, the threshold for which the issuing company can give stock compensation without being required to deliver additional disclosures to the recipients.

The Commission has long recognized that these sorts of stock issuances present different issues than capital-raising issuances. So, rather than requiring a private company to register employee stock offerings, or requiring a public company to go through the traditional registration process for these types of offerings, the Commission adopted rule 701 and Form S-8.

Without the Rule 701(e) exemption, found in 17 CFR 230.701(e), “if a company issues more than $10 million in securities in a 12-month period, it is required to provide greater investor protection in the form of certain financial and other disclosure to the persons that received the securities during that period. This is true even if those who received the stock are employees. This requirement was borne out of the Commission’s concern that the larger the offering—even in the context of employee compensation—the greater the possibility of investor harm if there isn’t accompanying investor protections, like financial disclosure.”  The $10 million thresholds will be indexed to inflation every five years.  Securities issued under rule 701 are “restricted securities” and may not be freely traded unless the securities are registered or the holders can rely on an exemption.

“Many private companies rely on Rule 701 to issue stock and options to recruit and retain talent. There are a number of conditions that must be met to rely on Rule 701, including those relating to which entity may issue the securities, who may receive the securities, limits on the aggregate amounts that can be sold during any 12-month period, disclosure requirements and restrictions on resale. A company can sell up to $1 million of securities during any consecutive 12-month period under this exemption, regardless of its size. A company can also sell a larger amount of securities if it satisfies certain formulas based on its assets or the number of its outstanding securities.”  Come see the lawyers at The Bradshaw Law Group to learn more about the Rule 701(e) exemption, and how you can use it to avoid the hassle of compensating your employees with stock or other securities.

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