So what should a
It is because of this uncertainty that one should look for a ‘safe harbour’ exemption which, if fully complied with, will ensure that the SEC will not challenge it.
The first available exemption is Rule 504 of the Securities Act which exempts from registration, offerings whose aggregate offering price does not exceed $1m (£500,000) in any given year. The Rule 504 exemption requires no specific disclosure requirements about the issuer, except to the extent necessary to protect against the anti-fraud provisions of the federal securities laws and blue-sky laws; there is no limit on the number of purchasers.
The downside to Rule 504 is the volume and timing limitations and the fact that an offering under Rule 504 is deemed by US securities laws to be a public offering; albeit a small public offering exempt from registration. Its categorisation as a ‘public offering’, no matter how small, requires the filing of a registration statement under certain state laws. In addition, Rule 504 requires the filing of a Form D which discloses information to the SEC that some
Rule 505, which broadens the exemption to offerings that do not exceed $5m (£2.5m), alleviates the volume limitations somewhat, but suffers from the same disadvantages as a Rule 504 offering. In addition, an offering under Rule 505 cannot be made to more than 35 non-high net-worth investors and requires specific and enhanced financial and non-financial disclosure to be given to them.
The next available exemption is Rule 506, which permits the sale of an unlimited dollar amount of securities to an unlimited amount of high net-worth individuals or accredited investors, with minimal informational or financial disclosure required. The offer and sale of securities pursuant to Rule 506 is deemed to be a private placement. The disadvantages of Rule 506 are the Form D requirement and that many employees may not be accredited investors; a fact that will require the furnishing of enhanced, specific financial and non-financial information.
The next available exemption is Rule 701. This is the most widely used exemption for incentive plans of non-public entities. Rule 701, not available for companies listed in the US, permits a UK company, pursuant to a written compensation plan/contract, to issue securities to its US subsidiaries’ employees in an amount up to the greater of $1m or 15% of the issuer’s assets in a one-year period. For sales of securities that exceed $5m per year, the issuer must provide enhanced disclosure. No filing of a Form D is required and there is no limit to the number of accredited/non-accredited employees that may participate. Many states respect the Rule 701 exemption and issue an exemption from state registration based upon it.
Common to securities sold under all of the above exemptions is that they are restricted securities, which means that they cannot be freely sold in the
The Rule 701 exemption is available only to the issuer and not to an affiliate of the issuer. In the
In a number of SEC no-action letters, the SEC agreed not to challenge the application of Rule 701 to trust structures in which the issuer was in control of the appointment and the activities of the trustee; the trust was a special purpose entity for the implementation of the employee benefit plan; the moneys received from the sale of securities to the employees were remitted to the issuer; and the issuer determined the grant recipients and other conditions of the grants.
Foreign companies who exclude US employees from their incentive plans or limit them to a small number of high-level US executives for fear of violating US securities laws is a thing of the past. We now see more foreign companies taking advantage of the above exemptions and extending the reach of their incentive plans to more rank and file employees.
Raphael Grunfeld is a partner at Carter Ledyard & Milburn in