On April 4, 2017, the House of Representatives passed H.R. 1343,
entitled the Encouraging Employee Ownership Act of 2017, increasing
the number of shares that can be granted as compensation by an
issuer to its employees without registration.
For background, Rule 701 under the Securities Act of 1933
currently provides a mechanism for non-public companies to offer
and sell their securities for the purpose of providing compensation
to their own employees without the need to register those
securities. The idea behind the Rule was to help small start-up
companies avoid complex reporting and disclosure requirements to
register their securities when their only sales were to their own
employees. As a result, Rule 701 arrangements are thought of
as compensatory plans, and a copy of the plan must be delivered to
each employee investor. There are limits on how much may be
sold in any 12-month period, but if the company believes sales
under the plan will exceed $5,000,000 in a coming 12-month period,
the company must disclose risk factors and certain financial
statements to the employee investors.
The new legislation would double the $5,000,000 figure to
$10,000,000 before a company would have to reveal financial
information. Those in favor of the bill point out that the limit
has not been adjusted since 1999, and the new limit would be
indexed for changes in the Consumer Price Index. They also argue
that the increased limit will help small companies recruit talent
by being able to offer increased equity stakes. Those against the
bill believe it would limit transparency and companies who wish to
compensate their employees with large amounts of equity should have
to disclose the risks of that equity.
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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