SEC Expands Companies’ Ability to Issue Securities Pursuant to Compensatory Arrangements, Solicits Public Comment on Further Modernization
On July 18, the SEC announced that it had taken two steps towards allowing companies to more easily pay their employees in stock while still complying with federal securities laws. First, the SEC issued final rules to amend Securities Act Rule 701, which provides an exemption from registration for securities issued by non-reporting companies pursuant to compensatory arrangements. Second, the SEC issued a concept release seeking public comment on ways to modernize compensatory securities offerings and sales.
As amended, Rule 701 allows non-reporting companies to issue up to an aggregate of $10 million in equity compensation during any 12-month period without needing to provide recipients with financial statements, risk factors or other disclosures. Before the amendment, which became effective on July 23, that threshold was $5 million.
In addition to raising the Rule 701 threshold from $5 million to $10 million, which was explicitly required by the May 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act, the SEC’s concept release requests public comment on other ways in which the rules for compensatory securities offerings could potentially be revised to adapt to developments and innovations in labor markets and compensation practices (e.g., the rise of the “gig economy”).
As noted above, Rule 701 is available only to non-reporting companies. Reporting companies must use Form S-8, a simplified registration statement, in order to issue compensatory securities to employees, consultants and other advisors. Among other topics, the concept release considers whether Form S-8 should be eliminated and Rule 701 extended to reporting companies.