SEC Increases Rule 701 Disclosure Threshold and Issues Concept Release Regarding Modernization of Compensatory Securities Offerings

Increased 701 Disclosure Threshold

The U.S. Securities and Exchange Commission unanimously voted on July 18 to adopt final amendments to Rule 701, which provides private companies an exemption from registration for options or stock awards granted pursuant to compensatory arrangements. In accordance with a congressional mandate, the SEC increased the financial information and risk factor disclosure threshold from $5 million to $10 million. This new disclosure threshold will allow private companies to have more flexibility under Rule 701 and remain exempt from enhanced disclosure.

The increase will be effective immediately following publication of the final rule in the Federal Register for any 12-month offering that is in effect on the day of publication, including periods for which disclosure has already been made for equity awards granted in excess of $5 million.

Issuance of Concept Release

The SEC issued a “Concept Release ” on July 18 for public solicitation of comments on ways to further modernize rules related to compensatory arrangements exempted under Rule 701 or registered on Form S-8. This request follows suggestions from numerous commentators, practitioners and issuers, to take account of the significant transformation in both the composition of the workforce and the variance of compensatory offerings since the SEC last made any substantive amendments to Rule 701 and Form S-8 in 1999.

The Concept Release solicits comments on (among other items):

  • “Gig economy” relationships, in light of issuers using internet platforms to provide workers the opportunity to sell goods and services, to better understand how they work and determine what attributes of these relationships potentially may provide a basis for extending eligibility for the Rule 701 exemption
  • Whether the SEC should further revise the disclosure content and timing requirements of Rule 701(e) and
  • Whether the use of Form S-8 to register the offering of securities pursuant to employee benefit plans should be further streamlined

In issuing the Concept Release the SEC stated: “The rule as amended, and the concept release, are responsive to the fact that the American economy is rapidly evolving, including through the development of both new compensatory instruments and novel worker relationships – often referred to as the ‘gig economy.’ We must do all we can to ensure our regulatory framework reflects changes in our marketplace, including our labor markets.”

Comments are requested within 60 days of publication of the Concept Release in the Federal Register.

We will continue to follow this development as more analysis becomes available in connection with the Concept Release.

*Jamal Johnson is a summer associate in Fenwick’s corporate group.


Don’t have an account yet?