Fun fact: Did you know that NASPP’s comment letter on the SEC’s 2018 concept release is mentioned 17 (seventeen!) times in this year’s Rule 701 and Form S-8 modernization proposal? The SEC even quotes our letter at least once.
In light of our success with the concept release, we have submitted a comment letter on the SEC’s proposal to update Rule 701 and Form S-8. We feel it is important to represent the interests of our members when given the opportunity to do so. Here is a summary of our comments.
When companies rely on Rule 701 to issue more than $10 million worth of stock in a 12-month period, they are required to provide additional disclosures to employees. These disclosures include the company’s financial statements. We support the following SEC proposals for the additional disclosures:
For RSU awards, we suggest allowing companies to provide the additional disclosures when the grant paperwork is distributed to employees (rather than, in advance of issuance of the grant, as is currently required), provided that employees will have at least 30 days to accept the grant.
The amount of securities companies can issue over a 12-month period in reliance on Rule 701 is currently limited to the greater (i) $1 million worth, (ii) 15% of the company’s assets, or (iii) 15% of the currently outstanding securities. We support the SEC’s proposal to increase amount (i) to $2 million and amount (ii) to 25% of the company’s assets. We also suggest indexing the $2 million cap to inflation.
We do not support the SEC’s proposal to eliminate Form S-8 and allow public companies to rely on Rule 701 instead. We are concerned that this will impose onerous resale restrictions on employees, could force public companies to comply with state blue sky laws, and would impose additional (and duplicative) disclosure requirements on public companies.
We support allowing companies to register multiple plans on a single Form S-8 and allowing companies to register additional plans and additional share authorizations via an immediately effective post-effective amendment to Form S-8.
We support the SEC’s proposed expansions to the eligible recipients of securities under Rule 701 and Form S-8. We also suggest that the SEC expand Rule 701 to cover securities issued to investment firms in compensation for service on a company’s board of directors.
Lastly, in response to a suggestion we made in our earlier comment letter on the SEC’s 2018 concept release on Rule 701 and Form S-8, the SEC solicited comments on how it might make it easier for companies to implement an ESPP in conjunction with an IPO. We offer two alternative solutions.
Reliance on Rule 701: We suggest that companies could initially rely on Rule 701 to allow employees to enroll in the ESPP in advance of the IPO, if the SEC will permit the following:
Communication in Advance of Form S-8 Filing: As an alternative, we suggest that companies be allowed to communicate with employees about the plan and employees be allowed to enroll in the plan in advance of the IPO, if the following conditions are met:
We thank NASPP Executive Advisory Committee members Thomas Welk of Cooley and Art Meyers of Gunster for their assistance with the NASPP’s comment letter.
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