Rule 701 Update – Increased Threshold for Heightened Disclosure Requirements | Insights & Resources

On May 24, 2018, President Trump signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Act). While principally aimed at easing the regulatory restrictions applicable to community and regional banks, certain provisions of the Act are intended to encourage capital formation. Specifically, Section 507 of the Act directs the Securities and Exchange Commission (SEC) to increase, within 60 days, the threshold for providing additional disclosure to employees under Rule 701 of the Securities Act of 1933, as amended (the Securities Act) from aggregate sales of $5 million in any 12-month period to $10 million. Additionally, Section 507 of the Act calls for inflation adjustment of the aggregate sales price threshold every five years.

As described in our January 30, 2018, alert, Rule 701 of the Securities Act (Rule 701) is the federal exemption most frequently relied upon by private companies to exempt equity awards to their employees and other service providers from the registration requirements of the Securities Act.

Under current regulations, if the aggregate sales price of securities sold by the issuer in reliance on Rule 701 exceeds $5 million in a 12-month period then, in addition to providing recipients with a copy of the compensatory plan, the issuer must also provide additional disclosure to eligible recipients. As noted above, the Act directs the SEC to increase the $5 million threshold to $10 million and provides for automatic inflation adjustment of the aggregate sales price threshold every five years (rounded to the nearest $1 million).

Although the Act provides a welcome reprieve from the heightened disclosure requirements under Rule 701, the increased threshold described above will not become effective until the SEC first proposes and then adopts the final rule, a process that may ultimately take several months and is unlikely to be complete by the 60-day deadline of July 23, 2018. The SEC is expected to provide transition guidance regarding application of the new threshold to previously granted awards. We will continue to monitor and provide updates on the rulemaking process. In the meantime, we encourage our clients to reach out to their Goodwin team if they are approaching the current $5 million limit as those limits and the related disclosure requirements remain in place until the SEC rulemaking process is complete.