It seems like just yesterday I was blogging about the SEC exempting stock options from the 500-holder limit for private companies, but it turns out that I never blogged about that because it happened back in 2007, before we had The NASPP Blog. Time flies and here we are almost five years later and the SEC has provided broad no-action relief from the same limit for RSUs.
What the Heck?
For those of you that aren’t sure what I’m talking about, let’s take a step back. Under U.S. securities laws, private companies that have more than $10 million in assets and more than 500 holders in any company security are required to register with the SEC under the 1934 Act. Most private companies are loath to exceed this threshold because registration causes them to be subject to pretty much all the same public reporting requirements as public companies–Forms 10-Q and 10-K., Form 8-K, Section 16, the whole shebang. It’s all the onerous parts of being a public company but without the upside of raising a bunch of money in an IPO and having publicly traded securities.
Stock options are a type of security, as are RSUs. Now the rule is that the company can’t have more than 500 holders in a single class of securities, so a company could have 499 shareholders and 499 option holders and 499 RSU holders without triggering the registration requirement (so long as none of the optionees exercised their options and none of the RSUs were paid out). But if a company had, say, 501 option holders, the company could be required to register with the SEC. This is a problem for private companies with, say, more than 500 employees that want to grant stock options to all their employees.
So, in 2007, after issuing numerous no-action letters on the matter, the SEC carved out an exception providing that compensatory employee stock options don’t count for purposes of the 500-holder limit, provided the options meet certain requirements. (See the NASPP alert, “SEC Exempts Stock Options from Registration for Private Companies,” December 15, 2007).
Now RSUs, Too
The 2007 exemption, however, didn’t extend to RSUs. So, where a private company wanted to grant RSUs to more than 500 employees, the company had to either register with the SEC or request relief from the registration requirement via a no-action letter–even if the RSUs, by their terms, could not possibly ever be paid out before the IPO.
Earlier this month, however, the SEC granted no-action relief for RSUs to the law firm Fenwick & West. By granting relief to a law firm, rather than a specific company, this no-action letter serves as broad relief for all private companies that wish to offer RSUs to their employees.
The RSUs must meet certain conditions to be eligible for relief–the awards must be granted by a private company, granted to individuals providing service to the company as defined under Rule 701, and transferable under only limited circumstances. In addition, the company must disclose information relating to its financials and risk factors to employees.
But Not Stock Acquired Under RSUs and Options
The relief described above extends only to options and RSUs themselves; it doesn’t cover stock employees acquire under options or RSUs. That stock still counts towards the 500-holder limit.
As I’m sure all of my readers know by now, the 20th Annual NASPP Conference will be held in New Orleans from October 8-11, 2012. New Orleans is always a lot of fun and a great location for us, so this year’s Conference is not to be missed–I know I’m already looking forward to it! In today’s blog, I offer some last minute tips for submitting a speaking proposal for the Conference.
(NASPP followers on Twitter and Facebook knew the location of the NASPP Conference before anyone else. Follow the NASPP on Twitter and Facebook to make sure you don’t miss the next big announcement.)
Tips for Getting Accepted to Speak at the NASPP Conference
1. Don’t be late! Speaking proposals are due by next Friday, March 2–no excuses, no matter how dire the circumstances. If you feel a cold coming on now, plan accordingly. Timeliness is very important in a speaker–we need you to submit your materials on time, show up for your session on time, finish your presentation on time. This is a test–submitting your proposal on time demonstrates that you’ll take our deadlines seriously.
2. Be unique! We’re looking for presentations that haven’t been done before–by you or anyone else. Fresh out of ideas? Consider trolling the NASPP Q&A Discussion Forum. The questions posed in the forum are an indication of the issues our members are currently struggling with and can be a great source of ideas for speaking proposals. If you’re a service provider, the questions your own clients are asking you can also be a great source of ideas. And, whether you’re a provider or an issuer, think about what you do well–your best presentation topic is the one you are most comfortable with.
3. Be clever and get to the point! Don’t underestimate the importance of a compelling title and description that gets right to the point. We receive over 150 proposals–those that stand out are more likely to be accepted.
4. Be practical! We’re looking for sessions where attendees will walk away with a list of strategies, tools, and action items that they can take back to the office and implement.
5. Don’t stop at one! Every firm can submit up to three proposals–increase your odds by maxing out your submissions. Even better, network with colleagues to see if they have proposals you could participate in. The more proposals you are included on, the better your chances of getting selected to speak.
6. Be a good speaker! If invited to speak, submit your materials on time, submit more than just the minimum required materials, cover the topics in your proposal thoroughly, keep your panel running on time and on topic, and be an engaging presenter. When it comes to our Conference speakers, we believe that past performance IS indicative of future performance. Speakers that don’t submit materials on time or that are on poorly organized panels aren’t likely to be invited back.
Register Now for Early-Bird Savings If you aren’t submitting a speaking proposal but plan on attending the Conference, register by April 13 for the early-bird rate. This rate won’t be extended, so don’t dawdle!
I’m happy as I write today’s blog to say that I hope this may be my last blog in a long while on this topic. Who would’ve thought that something as benign as a social security withholding rate could create so much buzz.
Last Friday, Congress passed an extension of the payroll tax cut that will keep the social security withholding rate at 4.2% for the rest of 2012. President Obama has said he will sign the bill as soon as he returns home from a trip to the western U.S., so it looks like a done deal.
What You Need to Know
• All social security withholding for 2012 will be at the rate of 4.2%, subject to the annual maximum of $110,100. Essentially, we are back to “business as usual” – the end result being that this year’s withholding mechanics will be no different than any other year from a social security perspective.
• Since the social security withholding rate will be the same for the entire calendar year, any concern about monitoring the annual maximum on a manual basis (the issue being that with two different withholding rates in effect for a calendar year, the annual maximum would be virtually different for every employee) has been eliminated.
• While the social security rate for 2012 will be set at 4.2%, remember this is considered a temporary tax cut. As a result, the issue of withholding rates will rise again as we draw near 2013, because the payroll tax cut is now set to expire on 12/31/12.
Obama hasn’t signed the bill yet, but has stated that he will. So, it appears that, finally, we can put this issue to bed for now.
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so we keep an ongoing “to do” list for you here in our blog.
Attend local NASPP chapter meetings in Austin, Phoenix, Sacramento, and the Twin Cities. Barbara Baksa, the NASPP’s Executive Director, and Larry Reynolds of E*TRADE will be presenting on cost-basis reporting at the Sacramento meeting. Be sure to say hello!
As I write this week’s blog, I was hoping to have something “final” to say about the status of the payroll tax cut and its future. It would be really nice to put this topic behind us. Well, the answer’s not final yet, but there is news this week. Emerging Wednesday was word on the street that leaders of Congress have finally reached an agreement that will extend the payroll tax cut through the end of the year.
Cut to the Chase
I’ve blogged about this extensively, so I won’t recap all of the variables here. In short, the tax cut that resulted in the current social security tax withholding rate of 4.2% is anticipated to be extended through the end of the year. I don’t know about you, but I am exhaling a big sigh of relief for all of the issuers and their vendor partners. I didn’t envy the possibility of having to figure out how to deal with two different withholding rates in a calendar year. If this likely resolution stands, then the issue of multiple social security withholding rates will cease to exist, at least for 2012.
If and when the payroll tax cut extension transpires, we’ll post more info here and on our Facebook page. Now is a great time to “Like” us on Facebook if you haven’t already.
Some Interesting Feedback
On a separate note, last week I blogged about the artist, contracted by Facebook to paint their corporate offices, who stands to make a reported half billion dollars in stock option gains when Facebook goes public. You may recall that I threw a poll in for fun, wanting to know if you felt the potential stock option gains were justified. I expected some strong responses, and an overwhelming response I got! 93% of respondents either loved the concept of his risk/reward outcome or felt it was a simply an outcome that was rightly possible from the start. Only 7% thought it was a ridiculous scenario. I hadn’t planned to blog about the results of the poll, but the fact that the results were so much in support of the big potential payout got me thinking. What I like about the poll feedback is that it reminds me that we are professionals who “get” stock compensation. Stock compensation, particularly stock options, is a risk/reward proposition from the get-go. You’re granted stock options at a strike price, and then there are no guarantees. We’ve seen years of underwater stock options – so we’re well aware that stock prices can fall and options can be worthless. The flip side is that the stock price can appreciate and the stock options can have value. As stock plan professionals, I know we’re always rooting for the appreciation scenario; that’s the whole idea behind granting stock options. And, let’s admit it, it’s much more fun to administer a stock plan with options that are “in the money” than those that have no hope of ever having value. Somehow the energy that comes from people “cashing in” and reaping rewards for their hard work is much different than the empty feelings associated with worthless compensation.
The Facebook artist must have had some idea (in fact, in several media reports he was quoted saying that back when he took the stock options, he thought that Facebook was “ridiculous and pointless”) that accepting stock options in lieu of cash compensation was a risk/reward proposition. He took the risk, when the company was young and uncertain. I was excited that 93% of you felt that this was the ultimate appreciation scenario playing out in front of our eyes. Isn’t that what we wish could happen each and every time we granted employee stock options? Yes, that can’t be reality, but it’s sure fun to see some big payoffs for those who put their money on stock compensation payoffs – especially when cash was an alternate available choice.
One misperception I often encounter among private companies is that the rules don’t apply to them. And by “rules,” I’m referring to just about everything from tax and accounting to securities laws. A recent SEC enforcement action, however, highlights that even private companies can be the subject of SEC scrutiny.
Securities Laws: They’re not Just for Public Companies
“It would look really bad to have my 2 sons award me a whole bunch of additional stock right before a sale of the company at a stock price many times the price used to calculate my stock.” – Charles Stiefel, CEO of Stiefel Labs, in email to his sons (Stiefel and his sons were the only members of the compensation committee).
Really? Ya think?
The SEC complaint alleges that Stiefel Laboratories, a small family-owned business, undervalued its stock when buying stock back from employee shareholders and failed to disclose information to employees that would have alerted them to the fact that the price they were receiving was too low. At the time of the buybacks, the company had received purchase offers based on valuations of the company’s preferred stock that were 50% to sometimes 300% higher than the price offered to employees.
The company employed a third-party accountant to value their stock, but failed to disclose numerous key facts to the accountant, including that management was actively shopping the company for sale. The company also represented to employees that it would remain privately-held, so employees had no expectation that there would be any opportunity to sell their stock other than through the company buyback program, and the company misrepresented how the stock was valued.
The SEC is seeking disgorgement of profits, civil monetary penalties, and to bar Charles Stiefel, the CEO, from serving as an officer or director of a public company.
The Enforcement Process
The company was acquired by GlaxoSmithKline in 2009. Now, I know what you are thinking: “If the company doesn’t exist anymore, how can the SEC pursue an enforcement action against it.” I’ll admit it, I was wondering that as well. Alan Dye explained to me that when a company acquires another company, it also acquires all of that company’s liabilities, including, apparently liabilities that haven’t even come to light at the time of the acquisition. So the SEC will pursue GlaxoSmithKline in the matter. If, as part of the merger agreement, GlaxoSmithKline received representations and warranties from the folks in control of Stiefel (i.e., Charles Stiefel and other officers) that there were no violations of law and the SEC successfully proves that there was a violation of law (thus making the representations false), then GlaxoSmithKline can sue the folks that made those representations for damages.
Employees that sold their stock back to Stiefel at the depressed prices can also sue for damages, unless the SEC recovers those damages for them through disgorgement.
Don’t Cheat, Don’t Lie, Pay Attention
The first lesson here is that even private companies must comply with securities laws and can be subject to SEC enforcement. The action demonstrates how important it is for private companies to obtain qualified and accurate valuations of their stock and that they inform the practitioners performing the valuations of all relevant facts. Finally, the action demonstrates that it is important for private companies to be honest with employees about the company’s business strategy, particularly to the extent that this strategy impacts the value of the company’s stock and employees’ investment decisions. Companies that aren’t prepared to be honest with employees about valuation and strategy should probably stick to cash-based compensation.
And for acquirers of private companies, part of your due diligence should include reviewing the company’s stock valuations for reasonableness. Seems like maybe GlaxoSmithKline should have noticed that Stiefel’s valuations were significantly lower than Glaxo’s own valuation of the company.
20th Annual NASPP Conference in New Orleans I’m excited to announce that the 20th Annual NASPP Conference will be in New Orleans from October 8-11, 2012. New Orleans is always a fabulous location for us and this year’s event is sure to be fantastic. Look for information on early-bird registration later this week and submit your speaking proposal by March 2.
NASPP followers on Twitter and Facebook knew the dates and location of the Conference last Friday. Follow the NASPP on Facebook and Twitter to make sure you don’t miss our next big announcement.
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.
I had a couple of people ask me this week about the future of the Payroll Tax cut and whether Congress has made any progress in determining the future of the cut in anticipation of the expiration of the temporary extension on February 29, 2012. A quick search of my Google Alerts turned up the latest and greatest on this, and a few other topics. So for this week’s blog, I’ll hit on a couple of updates and interesting tidbits from the news.
Where Does the Payroll Tax Cut Stand?
It’s February (already!), and that question is understandably resurfacing. If you’re just emerging from winter hibernation, I’m talking about the future of the present reduced social security withholding rate of 4.2% (see earlier blogs on this topic). Unless Congress acts by the end of the month, the social security withholding rate will revert back to 6.2% on March 1, 2012. The current news on this topic is that there is no real news. Negotiations in Congress seem to be almost exactly where they were back in December – gridlocked over some sticking points. The issues are broader than just the cut in social security withholding – things like unemployment insurance benefits are also part of the mix. As one CEO of a large payroll company put it, “I have no opinion about whether or not the payroll tax cuts should be extended. Those decisions are for our elected representatives to make, if they can be convinced to make them. However, I do have two important questions. Do the members of the House and Senate know enough about how payroll works to understand the way in which their stifling indecision and last-minute changes are unnecessarily adding costs to American businesses, creating anxiety for American workers and adding complexity to our tax system?” I’ll second that. The clock is ticking and there are only 20 days left until the temporary extension expires, so stay tuned for more on this topic. We’ll address any changes or issues as the deadline draws nearer.
An Artist, a Social Network and an IPO: Oh My!
While I don’t have much to say about the general Facebook IPO buzz (yet!), one thing crossed my radar this week and I just couldn’t resist a mention. What caught my attention was a story (which turned into many stories) about an artist who seemingly stands to make millions in the Facebook IPO, all because he accepted stock options in lieu of a reported $60,000 in cash as compensation for painting the corporate headquarters during the company’s infancy. Did I mention he stands to reap not just millions, but hundreds (yes, with an “s”) of millions (estimates put the value of his stock options as much as $500 million)? Now, it seems certain that there will be many employee stock option millionaires once Facebook makes its public trading debut. That’s been expected, so it’s not such big news. Stories like that of this artist tend to infiltrate the media, because they capture the essence of what captivates many about the American dream. Work hard, take some risks, make good decisions, have a bit of luck, get rich. Or, at least build a respectable future. The story of this artist has all the makings of a movie – a rough start, including jail time, for this guy who reportedly turned his life around and became a very successful artist in his own right. Then, add in a Facebook IPO and all of his hard work (and then some) will pay off in a way only dreams can. I don’t want to devalue all of the employees who work incredibly hard day in and day out, earning their stock options bit by bit. What I enjoy about these stories on a very general level is that even though they are one-in-a-million, they keep our dreams about stock options and other forms of risk/reward compensation alive. It’s great publicity for stock options as a vehicle. Sure, it may not happen to everyone, but it does remind us that stock options (and other forms of equity compensation) can be a great compensation tool. While the returns may be greater in a company like Facebook, the reality is that it doesn’t need to take a multi-billion dollar IPO to reap positive rewards from stock benefits. There are many “success” stories.
I’m throwing in a poll this week for fun, and would love to see where you stand.
With the impending Facebook IPO crowding out just about any other news in my Google alert these days, I’ve got private companies on my mind. I don’t have anything to add on the Facebook IPO, but there has been an interesting development recently relating to accounting standards for private companies.
Debate Rages Over Private Company Accounting There is apparently a heated debate in the accounting community (specifically between the Financial Accounting Foundation, which oversees the FASB, and the American Institute of Certified Public Accountants) over whether the FASB should have oversight of accounting standards for private companies. So much so that the AICPA put together the Blue-Ribbon Panel on Standard Setting for Private Companies (is that the BRPSSPC? what exactly is a blue-ribbon panel, anyway? I thought it was something related to 4H or maybe beer…) to evaluate the matter and make recommendations. In response to the panel’s recommendations, the FAF has proposed creating the Private Company Standards Improvement Council, which would review current US GAAP to determine whether exceptions or modifications should be made for private companies.
Any suggestions made by the PCSIC (is that pronounced “pic-sic”?) would be subject to approval by the FASB. The problem with this, however, is that the Blue-Ribbon Panel recommended creating a completely separate, independent entity that wouldn’t be beholden to the FASB. The AICPA seems to be vehemently opposed to any approach where the FASB still has authority over the standards for private companies, and has threatened to take their toys and go home to create their own standards setting authority if the FAF proceeds with its proposal. (See “AICPA Turns Up Volume on Call for Independent Board,” Matthew Lamoreaux, Journal of Accountancy, October 18, 2011.)
I have no idea what this might mean for how private companies account for stock compensation, but I can definitely think of a few things I’d like to change about ASC 718 if I were a private company. (Ok, heck, I can think of some things I’d like to change even if I were a public company. In fact, let’s just scrap the whole standard.) It does surprise me that when the rest of the world seems to be focused on convergence, we are actually considering bifurcating our accounting standards here in the U.S. Kind of seems like the wrong direction…
Why Can’t Public Companies Do This?
Now, I imagine some of you that work for public companies are thinking: “Hey! Wait a minute here. If private companies can ignore the FASB and create their own standards setting organization, why can’t we?” Private companies can do this because, for the most part, their financial statements aren’t filed with the SEC, which requires the statements to be prepared in accordance with GAAP as determined by the FASB. Since private companies don’t file their financial statements with the SEC, they don’t have to follow the SEC’s rules (at least with respect to financial statements–there are other securities laws they still have to comply with, more on this in a future blog). And, other than the authority vested in FASB by the SEC, there’s no law that says that FASB is the supreme ruler of GAAP. So private companies can do whatever they want with their financial statements, so long as any investors and lenders that might want to review their financials are willing to accept them. Public companies, however, are still stuck with the FASB, unless you can somehow convince the SEC to let you do what you want, too. Good luck with that.
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.
I admit it – I’m a trend watcher. I like seeing where things are headed and what’s new and/or different. So my attention was captured when I came across a recent analysis of share utilization within Fortune 500 companies. In their annual review of equity incentive practices at Fortune 500 companies, Towers Watson revealed some interesting trends. I highlight some of the findings in today’s blog.
In Case it hasn’t Been Said Enough: Full Value Awards are here to Stay
The trend has been around for a while now, and this analysis seems to reaffirm that yes, more and more companies continue to migrate towards a model that heavily incorporates and even emphasizes full-value awards. “Full-value awards now comprise 47% of the number of shares granted and 75% of the grant-date fair value of all equity awards at the typical company, compared to 29% of the shares granted and 57% of the value five years ago.” While a significant majority (75%) of the Fortune 500 companies offer a mix of equity vehicles in their compensation programs, the percentage of companies granting only full-value awards increased from 16% to 19%, while the percentage of companies granting only appreciation awards decreased from 5% to 3% in 2010. The percentage of companies not granting equity awards remained constant at 3%. For companies granting a variety of equity vehicles in 2010, the median mix was weighted 53% appreciation awards (e.g. stock options) and 47% full-value awards (e.g. restricted stock awards, restricted stock units), based on the number of shares awarded. According to Towers Watson, these figures represent a seven-percentage-point shift from 2009 to 2010 in favor of full-value awards and an 18-percentage-point shift between 2006 and 2010.These figures suggest that full-value awards are still continuing to gain in popularity and that trend seems likely to continue.
Fewer Shares Issued: A Good Sign?
Another interesting result is a decline in run rate, with a 23% reduction at the median in 2010 over 2009, and preliminary results from 2011 sampling indicating that the downward trend will continue. A full two-thirds of the Fortune 500 companies sampled reported issuing fewer shares in 2011 than in 2010. This reverses the trend seen in 2009 where many companies granted more shares in an effort to mitigate the declining value of other awards. Could it be that companies becoming more confident about market conditions and possible signs of life in the economy?
Yes, Stock Options Can Generate Money!
It was heartening to see that stock option exercises were up in 2010. According to the analysis, an aggregate of 90% more stock options were exercised in 2010 than in 2009. I’m sure much of that is attributable to more favorable market conditions, but regardless of the reason, it’s nice to see employees reaping tangible benefits from their equity awards. In addition to recognizing and addressing the perceived value that employees place upon their equity awards, some real financial benefit (aka cash in hand) is always helpful in achieving the goals of the equity programs.
There are several other fascinating bits of information in the report, but alas, I’m out of time and room to list them all. You can find the full summary in our Surveys and Studies portal by clicking here.