Last week, the U.S. Securities and Exchange Commission (the "SEC") (i) approved the increase of the threshold at which private companies must provide financial disclosures in private company compensatory Rule 701 offerings from $5 million to $10 million and (ii) requested comments on ways to modernize compensatory-related offerings for private and public companies under Rule 701 and Form S-8.
SEC Raises Additional Disclosure Threshold to $10 Million
Rule 701 of the Securities Act of 1933, as amended (the "Act"), provides non-reporting companies with a registration exemption for issuances pursuant to certain compensatory benefit plans and agreements. As mandated by the Economic Growth, Regulatory Relief and Consumer Protection Act enacted earlier this year, the SEC amended Rule 701(e) effective July 23, 2018 to increase the threshold, in excess of which private company issuers must deliver additional disclosures to investors, from $5 million to $10 million of aggregate sales/amount of securities sold in any rolling 12-month period.
If the aggregate sales price exceeds $10 million, the issuer must deliver to investors, a reasonable time before sale, certain financial, risk factor and other disclosures. If such disclosures are not provided to all investors before sale, then the issuer will lose the exemption for the entire offering when the threshold is exceeded during a 12-month period.*
SEC Indicates Rule 701 and Form S-8 Are Ripe for Modernization
In a separate Concept Release on Compensatory Securities Offerings and Sales**, the SEC requested comments on a wide range of potential changes to Rule 701 and Form S-8 offerings. As discussed above, Rule 701 provides private companies with a registration exemption for certain compensatory issuances. Form S-8 serves as a simplified form for the registration of securities to be issued pursuant to compensatory benefit and incentive plans by public companies.
The issues on which the SEC has requested comment include:
- Should the SEC expand the reach of Rule 701 and/or Form S-8 to more clearly cover new forms of service relationships between workers and companies in the "gig economy" (e.g., short-term, part-time, and freelance arrangements where workers set their schedules and arrangements where workers use a company's Internet platform to provide services, sell goods or lease property but are not traditional employees or consultants)?
- Should the timing of Rule 701(e) disclosures (i.e., requiring disclosure prior to crossing the $10 million threshold) be changed? Should additional guidance be given as to disclosure timing and delivery? Under the current Rule 701 structure, issuers may be forced to anticipate the possibility that they may exceed the dollar limitation in order to provide the additional required disclosures on a timely basis.
- Is the current Rule 701(d) sales cap of the greater of (i) $1 million, (ii) 15% of the total assets of the issuer or (iii) 15% of the total outstanding amount of the class of securities being offered in reliance on Rule 701 sufficient and/or necessary, especially for start-up and smaller companies?
- Does the increased use of restricted stock units ("RSUs") and other forms of equity compensation necessitate changes to the operation of Rule 701?
- Should Rule 701 replace Form S-8 for public companies? If not, what modifications to Form S-8 are appropriate (e.g., pay-as you-go fees; periodic fee payment; single registration statement for all employee benefit plan issuances)?
- Consider whether to provide comment. Public and private companies that utilize individuals in the "gig economy," private companies that find the Rule 701 offering limitations and/or disclosure requirements burdensome and public companies that have ideas on streamlining Form S-8 may wish to respond to the SEC's request for comment. Comments may be provided to the SEC via e-mail to firstname.lastname@example.org or via mail to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090. All submissions should reference File Number S7-18-18. Comments must be submitted by September 22, 2018.
- Be alert to further developments. Given the uncertainty of what, if any, amendments affecting compensatory-related offerings will be adopted by the SEC, companies need not alter their incentive plans and programs at this time in anticipation of potential changes. The SEC is under no statutory obligation to modernize Rule 701 or Form S-8. However, the Concept Release makes clear that the SEC views Rule 701 and Form S-8 ripe for amendment. Companies should therefore stay alert to proposed (and ultimately final) amendments in these areas.
*Securities Act Release No. 33-10520 may be accessed at https://www.sec.gov/rules/final/2018/33-10520.pdf.
**The Concept Release may be accessed at https://www.sec.gov/rules/concept/2018/33-10521.pdf. Public statements made by Commissioners Kara M. Stein and Hester M. Peirce may respectively be accessed at https://www.sec.gov/news/public-statement/statement-stein-071818 and https://www.sec.gov/news/public-statement/statement-peirce-071818.
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