By Laura Anthony, Esq.
Employee Compensation Plans; Determining Holders of Record
The new rules establish a non-exclusive safe harbor that companies may follow to exclude persons who received securities pursuant to employee compensation plans when calculating the shareholders of record for purposes of triggering the registration requirements under Section 12(g). Exchange Act Section 12(g)(5) as amended of the JOBS Act provides that the definition of “held of record” shall not include securities held by persons who received them pursuant to an “employee compensation plan” in exempt transactions. By its express terms, this new statutory exclusion applies solely for purposes of determining whether an issuer is required to register a class of equity securities under the Exchange Act and does not apply to a determination of whether such registration may be terminated or suspended.
The new rule implements the JOBS Act by establishing a statutory exclusion for security holders who received their stock in unregistered employee stock compensation plans, and provides a safe harbor for determining whether holders of their securities received them pursuant to an employee compensation plan in exempt transactions.
The SEC declines to add a new definition of “employee compensation plan”; rather, the SEC incorporates Rule 701(c) and the guidance under that rule for issuers to rely on in their Section 12(g) analysis. The proposed safe harbor allows an issuer to conclude that shares were issued pursuant to an employee compensation plan in an unregistered transaction as long as all the conditions of Rule 701(c) are met, even if other requirements of Rule 701, such as 701 (b) (volume limitations) or 701(d) (disclosure delivery requirements) are not met.
The new Rule amends the definition of “held of record” such that for purposes of Section 12(g), an issuer may exclude securities that are either:
- held by persons who received the securities pursuant to an employee compensation plan in transactions exempt from, or not subject to, the registration requirements of Section 5 of the Securities Act or that did not involve a sale within the meaning of Section 2(a)(3) of the Securities Act; or
- held by persons who received the securities in a transaction exempt from, or not subject to, the registration requirements of Section 5 from the issuer, a predecessor of the issuer or an acquired company, as long as the persons were eligible to receive securities pursuant to Rule 701(c) at the time the excludable securities were originally issued to them.
The SEC also excludes securities issued under the “no-sale” exemption to registration theory from the “held of record” definition, including shares issued as a dividend to employees. That is, the SEC is excluding securities that did not involve a sale within the meaning of Section 2(a)(3), as well as exempt securities issued under Section 3 of the Securities Act. Examples of securities issued under Section 3 include exchange securities under sections 3(a)(9) and 3(a)(10).
The new rules are meant to encompass securities issued in exchange for or related to business combination transactions, as long as the employee or former employee was eligible to receive the securities under Rule 701(c) at the time of original issuance.
The new rules related to determining securities “held of record,” including both determinations of accredited investors and shareholders that have received shares under employee compensation plans, are complicated and will require meticulous record keeping, chains of title, and follow-up. I imagine that either transfer agents or separate third-party service providers will need to offer tracing services to assist companies in maintaining these records and meeting their registration requirements.
Note 1: Read Part I of this Article. Click HERE
Note 2: Read Part II of this Article. Click HERE
Note 3: Read Part III of this Article. Click HERE
Note 4: Original appeared on Legal & Compliance, LLC on 10 May 2016. Click HERE
Securities attorney Laura Anthony is the founding partner of Legal & Compliance, LLC, a corporate, securities and business transactions law firm. The firm’s experienced legal team provides ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded issuers as well as private companies going public on the NASDAQ, NYSE MKT or over-the-counter market, such as the OTCQB and OTCQX. For nearly two decades Legal & Compliance, LLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances.