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A short, easy-to-miss section in the Economic Growth, Regulatory Relief, and Consumer Protection Act (the EGRRCPA?), signed into law by President Trump near the end of May, makes a welcome change to Rule 701. While most of the media coverage of the act has focused on its banking provisions, it includes a laundry list of other provisions (like a lot of recent legislation), one of which pertains to Rule 701.
Privately held companies typically rely on Rule 701 to issue stock through compensatory awards granted to employees. Where a company has relied on Rule 701 for the issuance of more than $5 million worth of stock in a 12-month period, the company is required to provide additional disclosures to employees, including the financial statements of the company prepared in accordance with US GAAP, risks associated with purchasing the company's stock, and a summary of the material terms of the plan.
The Economic Growth, Regulatory Relief, and Consumer Protection Act directs the SEC to increase the $5 million threshold to $10 million and further requires that this amount be indexed to inflation on a five-year basis (rounded to the nearest $1 million). So you can expect a blog entry on Rule 701 at least once every years.
The $5 million threshold has been in place since Rule 701 was adopted in 1988. Originally, Rule 701 actually capped issuances at $5 million; in 1999 the Rule was amended to merely require additional disclosures when this threshold is exceeded.
This threshold is frequently a concern for private companies, especially technology start-ups and others that grant equity broadly throughout their employee population. Anyone who has tried to buy real estate recently in California knows that $5 million in today's economy isn't what it was in 1988. According to the inflation calculator on the Bureau of Labor Statistics website, $5 million in 1988 had the buying power of close to $11 million today, which is pretty close to the new threshold.
The Act directs the SEC to draft the revisions to Rule 701 within 60 days. Until the new rules are issued, the $5 million threshold is still in effect (which means, unfortunately, this change comes a little too late for Credit Karma).
For more information on this development, see alerts by Tapestry Compliance and DLA Piper.
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