As mandated by the Economic Growth, Regulatory Relief, and Consumer Protection Act, on July 18, 2018, the US Securities and Exchange Commission (SEC) amended Rule 701(e) under the Securities Act of 1933 (Securities Act) to increase the aggregate sales price or amount of securities sold during any consecutive 12-month period from $5 million to $10 million. Except for the increase in the aggregate sales price or amount of securities sold under Rule 701(e), the amendment does not change the operation of Rule 701. This amendment will become effective immediately upon publication in the Federal Register.
Rule 701 provides an exemption from the registration requirements of the Securities Act for securities issued in compensatory circumstances to specified investors (i.e., officers, directors, employees and consultants) by companies that are not subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934. If the aggregate sales price or amount of securities sold in a consecutive 12-month period exceeds the threshold provided by Rule 701(e), the company must deliver specified disclosures to investors within a reasonable period of time before the date of sale. These additional disclosures, which can be quite burdensome for some companies to prepare, include a summary plan description of the compensatory plan or a summary of the material terms of the plan, including information about risks of the investment, and financial statements as of a date no more than 180 days before the sale of securities in reliance on Rule 701. Some companies may avoid making compensatory offerings if the additional disclosure under Rule 701(e) would be triggered out of the concern that confidential information regarding the company will fall into the hands of competitors.
As a result of the amendment to Rule 701(e), private companies that rely on Rule 701 to offer securities on a compensatory basis to officers, directors, employees and consultants may want to revisit their programs to determine whether it would be beneficial for them to increase the size of their programs, while remaining at a level where they would not need to incur the expenses of additional required disclosures.
In addition to amending Rule 701(e), the SEC issued a concept release seeking public comment on ways to modernize compensatory securities offerings and sales focusing on Rule 701 and Form S-8 in light of the fact that "[s]ignificant evolution has taken place both in the types of compensatory offerings issuers make and the composition of the workforce" since the SEC last substantively amended Rule 701.
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