Rule 701: 5 Things the SEC’s Proposal Could Change
Who knows whether the changes that Rule 701 amendments that the SEC proposed last fall will go anywhere. But if they do, the recent blog from Dan Walter gives a nice summary of 5 things that pre-IPO and private companies should be aware of (and that “pre-IPO” group could be significant given what a big year it was last year for market debuts and SPACs):
They are proposing changing the crazy 12-month / $10M threshold. The current process essentially requires you to be psychic. The new rule would require disclosure of the additional financial and other information mandated by Rule 701(e) only concerning those sales that exceed the rule’s $10 million threshold in a 12-month period.
Rule 701 would cover some equity for consultants or advisers if substantially all of the activities of the entity involve the performance of services, and substantially all of the ownership interests of the entity are held directly by not more than 25 natural persons, of whom at least 50% perform such services for the issuer through the entity. Under the current rule, entities can receive grants under Rule 701 only if they are the wholly-owned “alter ego” of the service provider.
Extend the coverage of former employees receiving post-termination grants as compensation for services rendered within 12 months preceding the termination. Also covers terminated employees of an acquired entity where the securities are issued in exchange for securities of the acquired entity issued as compensation during the person’s employment with the acquired entity.
Increase the value of securities covered by Rule 701 from $1M to $2M during a consecutive 12-month period. Also, increases coverage from 15% up to 25% of the total assets of the issuer (or up to 15% of the outstanding amount of the class of securities being offered).
Companies can delay required grant date financial statement disclosures to 14 days after hire for new employees. This allows companies to grant equity for an upcoming hire, without needing to disclose the grant before the individual’s start date.
For more details on the SEC’s proposal, also see the memos that we’ve posted in our “Private Companies” Practice Area.
-Liz Dunshee, CompensationStandards.com March 11, 2021
Want to keep reading?
Great. Enter your email address and gain instant access to this article