SEC Rule 701 exempts non-reporting companies from registering securities offered or sold to employees, officers, directors, partners, trustees, consultants, and advisors under compensatory benefit plans or other compensation agreements. As discussed in an earlier post, under the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) passed by Congress in 2018, the threshold for the aggregate sales price of securities sold during any consecutive 12-month period that triggers additional disclosure requirements under Rule 701 was increased from $5 million to $10 million.   What may have gone unnoticed was that the SEC has adopted final rules to implement EGRRCPA and has published a concept release “soliciting comment on possible ways to modernize rules related to compensatory arrangements in light of the significant evolution in both the types of compensatory offerings and the composition of the workforce since the Commission last substantively amended these rules in 1999.”

Under the final rules, if a company exceeds the $10 million threshold in any consecutive 12-month period, the company will forfeit the Rule 701 exemption for all sales made in the prior 12 months if it did not provide the additional required disclosures to investors before the sales took place. The additional required disclosures include a summary of the material terms of the compensation plan, information about the risks associated with investing in the securities sold under the compensation plan, and financial statements of the company. Companies that are at risk of exceeding this threshold should take precautions to monitor the amount and date of each sale under this exemption. If there is a chance that the company will offer more than the $10 million threshold, the company should make the required disclosures to avoid the possibility of losing the exemption.

The concept release seeks comments on how to modernize the Rule 701 exemption and Form S-8, the registration statement used to make compensatory offerings by reporting companies. The notable topics the SEC would like to address include:

  • Adapting Rule 701 and Form S-8 to capture workers in the growing gig economy that are not necessarily considered “employees.” This would allow companies to offer equity to contractors the same way they can to their ordinary employees.
  • Eliminating Form S-8 altogether – instead, allowing companies to use the Rule 701 exemption more broadly.
  • Alternatively, simplifying Form S-8 so as to lower the costs of compliance — for example, by allowing issuers to use fewer forms to register multiple offers or allowing issuers to add securities to previous Form S-8s by amendment.
  • Limiting the consequences of exceeding the $10 million threshold to the portion of the offering that exceeded the threshold and did not have the required disclosures.
  • Eliminating or raising the current cap on the aggregate amount of securities that may be offered under Rule 701.

While action on these items does not appear likely in the near term (and does not appear on the SEC’s most recent RegFlex Agenda), these and other initiatives demonstrates that it is aware of the need for modernization of the rules governing compensatory offerings.

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Photo of Christopher Seifter Christopher Seifter

Christopher Seifter is a member of Gunster’s Corporate Law, Securities Law and Corporate Governance, Technology Law, and Emerging Companies Practice Groups. Christopher advises public and private companies on matters involving securities laws and regulations, corporate governance issues and practices, and general corporate law issues, as well as mergers and acquisitions.