Senate Passes Increase to Rule 701 Limit

Corporate Alert

On September 12, 2017, the Senate passed the Encouraging Employee Ownership Act of 2017 (H.R. 1343) which directs the SEC to revise Rule 701 of the Securities Act of 1933 (the "Securities Act") to increase the threshold that triggers the obligation to provide expanded disclosure, including certain financial disclosure, to certain recipients of securities pursuant to Rule 701 from $5,000,000 to $10,000,000.

Rule 701 provides an exemption from the registration requirements of Section 5 of the Securities Act for the issuance of securities to employees or consultants pursuant to compensatory benefit plans or contracts. Under the current rule, if the aggregate amount of securities sold in reliance on Rule 701 during any consecutive 12-month period exceeds $5,000,000, the issuer must provide certain expanded disclosure to recipients of securities pursuant to Rule 701 during such 12-month period. This disclosure includes a summary of the material terms of the plan or contract, information about the risks associated with investment in the securities sold and certain financial statements. H.R. 1343 raises the threshold for the amount of securities that issuers can sell pursuant to Rule 701 before tripping expanded disclosure requirement from $5,000,000 to $10,000,000 and provides that the SEC shall index such threshold for inflation every 5 years.

It is expected that H.R. 1343 will become law in the near term. H.R. 1343 directs the SEC to revise Rule 701 within 60 days of enactment. The House of Representatives passed H.R. 1343 earlier this year so the bill now just awaits the signature of President Trump to become law.

By: Christine McCarthy and Katherine Hogan