SEC Proposes Amendments to Rule 701 of the Securities Act of 1933
The SEC recently announced that it voted to propose amendments to Rule 701 of the Securities Act of 1933 (the "Securities Act"), which provides an exemption from registration in connection with the issuance of compensatory securities by non-reporting issuers to certain employees, consultants and advisors.
12.16.20
Rule 701 has historically been used by non-reporting issuers to allow employees and other workers who do not meet the “accredited investor” definition as required in order to meet other exemptions from registration to be able to participate in an employer’s securities offerings. The proposed amendments to Rule 701 will expand the scope of circumstances under which the exemption may be relied upon and reduce the burdens associated with certain disclosure requirements.
The proposed amendments to Rule 701:
- Raise two of the three alternative regulatory ceilings that cap the overall amount of securities that a non-reporting issuer may sell pursuant to the exemption during any consecutive 12-month period by increasing the $1 million cap to $2 million and increasing the 15% of the issuer’s assets cap to 25% of the issuer’s assets.
- Make the exemption available for offers and sales of securities under a written compensatory benefit plan established by the non-reporting issuer’s subsidiaries, whether or not majority-owned.
- Extend consultant and advisor eligibility to entities meeting specified ownership criteria designed to link the securities to the performance of services.
- Expand eligibility for former employees to specified post-termination grants and former employees of acquired entities.
- Revise the additional disclosure requirements for Rule 701 exempt transactions exceeding $10 million by, applying the disclosure requirements only to sales in excess of the $10 million threshold, expanding the scope of acceptable financial disclosures to include alternative valuation information in lieu of financial statements, and reducing the frequency with which financial disclosures must be updated from quarterly to semi-annually.
- Revise the time at which such disclosure is required to be delivered from a reasonable time period before the issuance, to a reasonable time period after the issuance, for derivative securities that do not involve a decision by the recipient to exercise or convert, and in specified circumstances where such derivative securities are granted to new hires.
Additionally, in a companion release, the SEC also proposed amendments to Rule 701 to permit, on a temporary basis and subject to certain conditions, a non-reporting issuer to provide equity compensation to certain “platform workers” who provide services available through the non-reporting issuer’s technology-based marketplace platform or system.
The comment period for each of the proposals will remain open until February 9, 2021.
Please contact us if you have any questions about the amendments.
Co-authors Keith Kaplan, partner, and Nicole Haiem, associate, are members of the fund formation practice group within the corporate and securities department at Klehr Harrison.