[Federal Register Volume 64, Number 44 (Monday, March 8, 1999)]
[Rules and Regulations]
[Pages 11095-11103]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-5296]
[[Page 11095]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 230
[Release No. 33-7645; File No. S7-5-98]
RIN 3235-AH21
Rule 701--Exempt Offerings Pursuant to Compensatory Arrangements
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
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SUMMARY: The Securities and Exchange Commission (``we'' or
``Commission'') is adopting amendments to Rule 701 under the Securities
Act of 1933, which provides an exemption from registration for
securities issued by non-reporting companies pursuant to compensatory
arrangements. These amendments make Rule 701 more useful and eliminate
unnecessary restrictions. We are removing the $5 million aggregate
offering price ceiling and setting the maximum amount of securities
that may be sold in a 12-month period to a more appropriate, flexible
limit related to the size of the issuer. The amendments also require
specific disclosure from issuers that sell more than $5 million worth
of securities in a 12-month period, and harmonize the definition of
consultant and advisor to the one contained in Form S-8, the short-form
registration statement form for the offer and sale of employee benefit
plan securities.
EFFECTIVE DATE: April 7, 1999.
FOR FURTHER INFORMATION CONTACT: Richard K. Wulff (202-942-2950),
Office of Small Business, Division of Corporation Finance, Securities
and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549.
SUPPLEMENTARY INFORMATION: We are adopting amendments to Rule 701 \1\
under the Securities Act of 1933 (``Securities Act'').\2\
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\1\ 17 CFR 230.701.
\2\ 15 U.S.C. 77a et seq.
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I. Executive Summary and Background
In 1988, we adopted Rule 701 under the Securities Act \3\ to allow
private companies to sell securities to their employees without the
need to file a registration statement, as public companies do. The rule
provides an exemption from the registration requirements of the
Securities Act for offers and sales of securities under certain
compensatory benefit plans or written agreements relating to
compensation. The exemptive scope covers securities offered or sold
under a plan or agreement between a non-reporting (``private'') company
(or its parents or majority-owned subsidiaries) and the company's
employees, officers, directors, partners, trustees, consultants and
advisors.
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\3\ Release No. 33-6768 (April 14, 1988) [53 FR 12918].
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When we adopted the rule, we determined that it would be an
unreasonable burden to require these private companies, many of which
are small businesses, to incur the expenses and disclosure obligations
of public companies when their only public securities sales were to
employees. Further, these sales are for compensatory and incentive
purposes, rather than for capital-raising. To accommodate these
companies, we used the maximum extent of the authority we had at that
time under Section 3(b) of the Securities Act \4\ to exempt offers and
sales of up to $5 million per year.
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\4\ 15 U.S.C. 77c(b).
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Currently, the amount of securities subject to outstanding offers
in reliance on Rule 701, plus the amount of securities offered or sold
under the rule in the preceding 12 months, may not exceed the greatest
of $500,000, or an amount determined under one of two different
formulas. One formula limits the amount to 15% of the issuer's total
assets measured at the end of the issuer's last fiscal year. The other
formula restricts the amount to no more than 15% of the outstanding
securities of the class being offered. Regardless of the formula
elected, Rule 701 restricts the aggregate offering price of securities
subject to outstanding offers and the amount sold in the preceding 12
months to no more than $5 million.
Over the years, our staff has monitored the use of the rule. The
staff concluded that the rule has been popular for both small
businesses and larger private companies. However, the $5 million limit
appears to have become unnecessarily restrictive in light of inflation,
the increased popularity of equity ownership as a retention and
incentive device for employees, and the growth of deferred compensation
plans.
In October 1996, Congress enacted the National Securities Markets
Improvement Act of 1996 (``NSMIA''),\5\ which, for the first time, gave
us the authority to provide exemptive relief in excess of $5 million
for transactions such as these. The legislative history of NSMIA stated
specifically that we should use this new authority to lift the $5
million ceiling on Rule 701.\6\ In February 1998, we proposed a number
of revisions to increase the flexibility and usefulness of Rule 701, as
well as to simplify and clarify the rule.\7\
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\5\ Pub. L. 104-290, 110 Stat. 3416 (October 11, 1996).
\6\ Both Committee Reports specifically highlighted the current
$5 million limit contained in Rule 701 and sought prompt Commission
action to raise that ceiling to ``not less than $10 million.'' H.R.
Rep. No. 104-622 at 38; S. Rep. No. 104-293 at 16.
\7\ Release No. 33-7511 (February 27, 1998) [63 FR 10785]
(``Rule 701 Proposing Release''). We received 33 letters of comment
on the proposals. You may inspect and copy the comment letters in
our Public Reference Room in File No. S7-5-98. Comments that were
submitted electronically are available on our website (http://
www.sec.gov).
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Today, we announce revisions to the rule that:
(1) remove the $5 million aggregate offering price ceiling and,
instead, set the maximum amount of securities that may be sold in a
year at the greatest of:
--$1 million (rather than the current $500,000);
--15% of the issuer's total assets; or
--15% of the outstanding securities of that class;
(2) require the issuer to provide specific disclosure to each
purchaser of securities if more than $5 million worth of securities are
to be sold;
(3) do not count offers for purposes of calculating the available
exempted amounts; \8\
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\8\ Note, however, that the rule now requires issuers to count
as sales the securities underlying the options at the time of the
option grant based upon the exercise price.
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(4) harmonize the definition of consultants and advisors permitted
to use the exemption to the narrower definition of Form S-8; \9\
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\9\ 17 CFR 239.16b. Form S-8, a simplified form for registering
sales to employees, is available only to public companies subject to
the reporting requirements of the Securities Exchange Act of 1934
[15 U.S.C. 78a et seq.] (``Exchange Act''). See also the release
relating to revisions to Form S-8 we are adopting today, Release No.
33-7646. (``S-8 Adopting Release'').
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(5) amend Rule 701 to codify current and more flexible
interpretations; and
(6) simplify the rule by recasting it in plain English.
Together, these changes will add greater flexibility for companies
to compensate sell securities their employees with securities and, at
the same time, will provide that essential information be delivered to
employees in appropriate situations and in a timely manner. The vast
majority of commenters on the Rule 701 Proposing Release supported the
proposed amendments, particularly the lifting of the $5 million
aggregate offering price ceiling and the removing of offers from the
ceiling calculation. A number of commenters, however, expressed
concerns about the proposed disclosure requirements, particularly as
they relate to foreign private issuers.
We have considered these comments and we believe that we have
struck an
[[Page 11096]]
appropriate balance between the needs of employee-investors and the
needs of non-reporting companies. In particular, we have decided to
impose the disclosure requirements only on sales above $5 million,
instead of on all Rule 701 sales, as proposed. These revisions to Rule
701 are being adopted pursuant to the exemptive authority provided to
the Commission under Section 28 of the Securities Act.\10\
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\10\ ``The Commission, by rule or regulation, may conditionally
or unconditionally exempt any person, security or transaction, or
any class or classes of persons, securities or transactions from any
provision of this title or any rule or regulation issued under this
title to the extent that such exemption is necessary or appropriate
in the public interest, and is consistent with protection of
investors.'' 15 U.S.C. 77bb. As more fully described below, we find
that the exemption is appropriate in the public interest and is
consistent with the protection of investors.
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II. Amendments to Rule 701
The amendments to Rule 701 have been adopted in most respects as
proposed, with the exceptions discussed below. The changes to the rule
are not retroactive. Offers and sales made in reliance on Rule 701
before the effective date will continue to be valid if they met the
conditions of the rule before its revision.\11\ The principal changes
are in the areas of exemptive limits, disclosure, and the treatment of
consultants and advisors, as discussed in detail below. In addition, we
are adopting a number of clarifying and simplifying provisions,
including the following:
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\11\ Offers that were being made under the Rule 701 exemption as
it used to read may be consummated under those terms. For example,
vested options may be exercised in reliance upon the prior version
of Rule 701. Options issued in reliance upon the Rule 701 exemption
(in contrast to a ``no sale'' theory) may be exercised in reliance
upon the prior version of the rule, whether vested or unvested. See
the interpretive letter to Richard M. Leisner (December 21, 1995).
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Expanding the scope of the rule to exempt sales to
employees of majority-owned subsidiaries of the issuer's parent (i.e.,
brother-sister subsidiaries);
Providing: (1) that a private, wholly-owned subsidiary can
use its parent's assets, whether or not the parent is a public company,
in making the 15% of assets calculation so long as the parent fully and
unconditionally guarantees the obligations of the subsidiary issued
under the rule (if the guarantee does not exceed 15% of the parent's
assets), such as in the case of many deferred compensation
arrangements; and (2) an exemption for the parent's guarantee;
Clarifying that sales to former employees may be completed
under the rule if those persons were employees when the securities
initially were offered;\12\
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\12\ As adopted, the rule also includes former directors,
officers, general partners, trustees, consultants and advisors.
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Specifying the manner of considering employee/consultant
services in calculating the aggregate sales limit; and
Facilitating tax and estate planning by permitting the
rule to be available for option exercises by family members of
employees who acquire Rule 701 securities from the employee through a
gift or a domestic relations order.\13\
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\13\ This change is consistent with the amendments to Form S-8
adopted today with respect to transferable securities. ``Family
member'' is defined in Rule 701(c)(3) the same way as ``family
member'' in General Instruction A.1(a)(5) of Form S-8 as adopted
today in the S-8 Adopting Release.
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A. Exemptive Limits
As proposed, we are removing the $5 million aggregate offering
price ceiling and raising the current $500,000 level that can be sold
in a year to $1 million.\14\ Also as proposed, the revised rule no
longer limits the dollar amount of securities offered to employees.
Instead, issuers will make calculations based solely on actual sales or
amounts to be sold (as with options) in a 12-month period. Changing the
focus from offers to sales will make it easier for issuers to determine
the exempt amount of securities transactions, while continuing to
assure that the transactions are not so large as to trigger the need
for registration. We believe that these changes, in combination with
the other changes adopted, will provide issuers the flexibility they
need, without creating opportunities for abuse.
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\14\ The revised rule also makes it clear, as proposed, that the
calculations of total assets and securities outstanding are measured
as of the issuer's most recent balance sheet date, which must be no
older than the end of its last fiscal year.
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With respect to equity incentives such as restricted stock and
compensatory stock purchases, the calculations will be made as of the
transaction date. Deferred compensation and similar plans will make
measurements based upon the date of an irrevocable election to defer
compensation. With respect to options, calculations will be made as of
the date of the option's grant, without regard to whether the option is
currently exercisable or ``vested.'' We make this change for option
calculations in response to comments emphasizing the difficulty in
keeping track of outstanding options, when they become exercisable and
when they might be exercised.\15\ We believe that this method of
determining the available exemption should make no difference from an
investor protection point of view since the 12-month limit will still
apply. However, this change will greatly simplify the issuer's
oversight of outstanding offers and perhaps benefit more employees and
others who may participate in the compensatory arrangements. The rule
makes it clear that calculations with respect to options should be
based on the exercise price, since the purpose is to measure the
securities that will be sold under the exemption.\16\
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\15\ In particular, commenters were concerned that basing
calculations on the option exercise date could result in an
unanticipated loss of the exemption if too many optionees exercised
their options at the same time. Although options are offers of the
underlying securities that can be made without limitation and are
exempt under the revised rule, using the exercise price at the date
of grant simplifies the calculations of the available exemption
amount and allows issuers to avoid the administrative difficulties
of keeping track of outstanding options.
\16\ In the event that exercise prices are later changed or
repriced, a recalculation will have to be made under Rule 701.
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Rule 701 provides that the calculation of the exempt amount should
account for the value of both consultant and employee services.\17\ A
number of the commenters misunderstood this provision. The point of the
revision is to clarify that compensatory arrangements should not be
valued at ``zero'' or treated as a gift. Even when the employee or
consultant is not required to pay additional consideration for the
securities being issued, these securities typically would have some
intrinsic worth, such as book value or a multiple of book value. The
value of services exchanged for securities issued must be measured by
reference to the value of the securities issued rather than the
employee's salary or consultant's invoice. The rule as revised makes
this clear.
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\17\ Rule 701(d)(3)(i).
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B. Disclosure to Persons Covered by Rule 701
We were concerned that eliminating the $5 million ceiling could
result in some very large offerings of securities without the
protections of registration, even though made pursuant to compensatory
arrangements. We therefore proposed to impose a specific disclosure
requirement on all transactions under the exemption. We solicited
comment on whether some dollar amount of transactions might not require
specified disclosure, for example, $1 million. In response to comment,
and our consideration of reasonable alternatives, we have decided to
require no specified disclosure requirement for sales up to $5 million.
This formulation apparently has worked well to date. We do not
[[Page 11097]]
believe the exemption has been misused for fraudulent purposes in its
current format. We agree with the commenters that the additional
burdens related to mandatory financial and risk disclosure for these
limited offerings are unnecessary.
On the other hand, the revised rule provides no aggregate offering
price ceiling and thus substantial amounts of securities exceeding $5
million may be issued by large private companies. Indeed, a number of
commenters with this profile urged the Commission to remove the ceiling
quickly so that they can enjoy sooner the benefits of the exemption for
their compensatory arrangements. These commenters appear to be
comfortable with a greater disclosure requirement as the tradeoff for
greater use of the exemptive rule. Moreover, we believe that many of
these companies already have prepared the type of disclosure required
in their normal course of business, either for using other exemptions,
such as Regulation D \18\ or for other purposes. As a result, the
disclosure requirement generally would be less burdensome for them. If
these companies do not want to disclose the requisite information to
their employees and others, they may continue to follow the current
provisions of the rule and keep the amount sold below $5 million in a
12-month period. In that case, they would continue to provide only the
disclosure needed to satisfy the antifraud provisions of the law.\19\
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\18\ 17 CFR 230.501 et seq.
\19\ See Preliminary Note 1 to Rule 701.
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We would have investor protection concerns if we removed the $5
million ceiling without imposing specific disclosure requirements, as
discussed below. In contrast, we believe that disclosure requirements
are not needed for offerings below the $5 million threshold at this
time. We have not witnessed abuse below this threshold, and therefore
the burden of preparing and disseminating the new disclosure does not
justify the potential benefits to employee-investors.
Where the formula permits sales in excess of $5 million during a
12-month period, and the issuer chooses to take advantage of this
increased amount, the new disclosure should be provided to all
investors before sale. This requirement will obligate issuers to
provide disclosure to all investors if the issuer believes that sales
will exceed the $5 million threshold in the coming 12-month period. If
disclosure has not been provided to all investors before sale, the
issuer will lose the exemption for the entire offering when sales
exceed the $5 million threshold.
The disclosure requirements are adopted as proposed. The required
disclosure consists of:
A copy of the compensatory benefit plan or contract;\20\
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\20\ A copy of the compensatory benefit plan or contract must be
given to all offerees under current Rule 701. Under the revisions,
this will continue to be required, whether or not the specific
disclosure requirement is triggered by exceeding the $5 million
amount.
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A copy of the summary plan description required by the
Employee Retirement Income Security Act of 1974 (``ERISA'') \21\ or, if
the plan is not subject to ERISA, a summary of the plan's material
terms;
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\21\ 29 U.S.C. 1104-1107.
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Risk factors associated with investment in the securities
under the plan or agreement; and
The financial statements required in an offering statement
on Form 1-A \22\ under Regulation A.\23\
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\22\ 17 CFR 239.90. Part F/S of Form 1-A generally provides for
unaudited financial statements. However, issuers that have audited
financial statements must provide them, instead of unaudited ones.
\23\ 17 CFR 230.251 et seq.
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The type and amount of disclosure needed in a compensatory
securities transaction differs from that needed in a capital-raising
transaction. In a bona fide compensatory arrangement, the issuer is
concerned primarily with compensating the employee-investor rather than
maximizing its proceeds from the sale. Because the compensated
individual has some business relationship, perhaps extending over a
long period of time, with the securities issuer, that person will have
acquired some, and in many cases, a substantial amount of knowledge
about the enterprise. The amount and type of disclosure required for
this person is not the same as for the typical investor with no
particular connection with the issuer. The current standards of
financial statement disclosure contained in Regulation A should satisfy
our concerns for a level of disclosure that will provide basic
protections in a compensatory transaction but may not be available as a
result of ordinary employment or business dealings.\24\ The standard is
well established and may be very familiar to private issuers, since
these financial statements and risk factor disclosure requirements are
used not only in Regulation A, but also in the private placement
exemptions contained in Regulation D.\25\
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\24\ As proposed and adopted, if a reporting company is relying
on Rule 701 to guarantee the obligations of a subsidiary's
securities sold under the rule, the issuer must deliver the parent's
financial statements that would be required by Rule 10-01 of
Regulation S-X (17 CFR 210.10-01) and Item 310 of Regulation S-B (17
CFR 228.310). Rule 701(e)(5).
\25\ See Rule 502(b)(2)(i)(A) of Regulation D [17 CFR
230.502(b)(2)(i)(A)].
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Compliance with the minimum disclosure standards for Rule 701 may
not necessarily meet the antifraud standards of the securities law.\26\
The disclosure required will depend upon the facts circumstances.\27\
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\26\ E.g., Section 17(a) of the Securities Act [15 U.S.C.
77q(a)], Section 10(b) of the Exchange Act [15 U.S.C. 78j(b)], and
Rule 10b-5 [17 CFR 240.10b-5].
\27\ Issuers eligible to take advantage of the increased
availability of the exemption also should be mindful of the
requirements of the Exchange Act [15 U.S.C. 78l(g)]. Once an issuer
exceeds 500 shareholders and $10 million in assets, it must register
under Section 12(g) of the Exchange Act and provide full disclosure
as a ``public'' company. See Rule 12g-1 [17 CFR 240.12g-1].
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Some commenters expressed concern that requiring a private issuer
to deliver disclosure documents, particularly financial statements, to
employee-investors could result in serious harm to the company if the
information were to come into possession of its competitors. In view of
the substantial amounts of securities that may now be issued under Rule
701, we believe that a minimal level of disclosure consisting of risk
factors and Regulation A unaudited financial statements is essential to
meet even the lower level of information needed to inform compensatory-
type investors such as employees and consultants. Private issuers can
use certain mechanisms, such as confidentiality agreements, to protect
competitive information. Alternatively, an issuer could elect to stay
below the $5 million threshold to avoid these disclosure obligations.
C. Foreign Private Issuers
In the Rule 701 Proposing Release, we especially sought comment on
how foreign private issuers \28\ should be treated under Rule 701,
given that more and more U.S. persons are employed by foreign
companies. Many foreign private issuers with substantial amounts of
securities held by U.S. persons provide only ``home country reports''
and do not prepare financial statements with a reconciliation to U.S.
generally accepted accounting principles (``GAAP'') because of the Rule
12g3-2(b) exemption from the registration requirements of the Exchange
Act.\29\ This exemption is available even though
[[Page 11098]]
the number of U.S. holders may exceed 500 and total company assets
exceed $10 million, which ordinarily would trigger the Exchange Act
reporting requirements.
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\28\ This term is defined in Rule 405 [17 CFR 230.405].
\29\ 17 CFR 240.12g3-2(b). Rule 12g3-2(b) exempts from Exchange
Act registration securities of a foreign private issuer, if the
issuer furnishes to us annual and other reports and other materials
that are publicly available in its home market.
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We solicited comment on whether non-reporting foreign private
issuers should be subject to some annual ceiling, such as $10 million.
Without a limit, the new calculation formula could result in the sale
of a large amounts of securities to a many employees without such
companies ever being required to register under the Securities Act or
the Exchange Act. Commenters objected to a limit, noting that foreign
private issuers typically undertake broad-based offerings to their U.S.
employees for legitimate compensatory reasons and in order to treat all
of their employees alike regardless of their location. Many commenters
expressed the view that any tightening of the exemption for foreign
private issuers would simply result in securities-based incentives not
being offered to the U.S. employees of foreign issuers.
We have determined not to impose any annual ceiling on foreign
private issuers, given the compensatory nature of Rule 701 offerings
and the detrimental effect that such a rule could have on the
compensation packages of U.S. employees. Instead, non-reporting foreign
private issuers will be required to provide the same disclosure as non-
reporting domestic issuers if sales under Rule 701 exceed $5 million in
a 12-month period.\30\ Imposing this obligation on all issuers is the
price for removal of the $5 million offering limit.
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\30\ See Section II.B above.
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We do not believe that any additional modification needs to be made
at this time for foreign private issuers because they will be subject
to the same disclosure requirements as domestic issuers. When, and if,
we accept international accounting standards or guidelines for filing
and reporting purposes, we would amend Rule 701 to allow these
standards to satisfy the rule's financial statement disclosure
obligations for foreign private issuers. For issuers making smaller
offerings, the foreign companies may continue to follow the rule as
they have in the past, which means that ``home country'' reports may be
used, as necessary, to satisfy the antifraud standards. However, larger
companies that cross the $5 million barrier will have to provide the
disclosure required under Regulation A, which includes unaudited
financial statements.
Where financial statements prepared in accordance with U.S. GAAP
are not provided, a reconciliation to such principles must be
attached.\31\ The provisions of Regulation A suggest that a
reconciliation is permitted only for Canadian companies. This is
because Canadian companies are the only foreign issuers eligible to use
that exemption. In contrast, any foreign issuer is eligible to use Rule
701, but if it exceeds the $5 million amount it must provide financial
statements as required by Regulation A. If U.S. GAAP financials are not
available, the financials provided must be reconciled to U.S. GAAP.
Although there are costs involved in preparing the reconciliation and a
number of the commenters objected to the notion of preparing a
reconciliation to U.S. GAAP, we believe that the minimal level of
disclosure for these compensatory transactions is the Regulation A
financial statements, which must be reconciled to U.S. GAAP. Foreign
private issuers that do not wish to provide the disclosure specified
may elect to keep their Rule 701 sales below the $5 million threshold
for disclosure, the same as for domestic issuers.
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\31\ See Item 17 of Form 20-F [17 CFR 249.220f].
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D. Consultants and Advisors
Like regular employees, consultants and advisors are eligible to
receive securities under the Rule 701 exemption. Similarly, where the
issuer is a reporting company, consultants and advisors may receive
securities in a transaction registered on Form S-8.\32\ Currently, the
staff interprets the scope of eligible consultants and advisors
differently for purposes of Rule 701 and Form S-8. The staff has
interpreted Rule 701 to permit participation by a broader range of
consultants and advisors, even though the words are identical in both
Rule 701 and Form S-8.
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\32\ General Instruction A.1(a) to Form S-8.
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At the same time we proposed changes to Rule 701, we proposed
changes to Form S-8 to further limit further the scope of eligible
consultants and advisors.\33\ In many cases, the Form has been misused
by registering shares for issuance to consultants and advisors who do
not have sufficient connection and familiarity with, the company. In
some cases, these persons are receiving the securities for capital-
raising, rather than compensatory, purposes and engage in public
distributions of the company's securities.\34\
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\33\ See Release No. 33-7506 (Feb. 17, 1998) [63 FR 9648] (``S-8
Proposing Release'').
\34\ For a fuller discussion of misuse of Form S-8 involving
consultant and advisors, see the S-8 Proposing Release and the S-8
Adopting Release. Today we also propose additional amendments to
Form S-8, which are designed to address abuses in the use of that
form.
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In the Rule 701 Proposing Release, we asked how consultants and
advisers participate in compensatory arrangements and whether we should
restrict their participation. We also asked whether Rule 701 and Form
S-8 should be harmonized in their treatment of these persons. We are
concerned that persons who would misuse exemptions will develop new
methods to abuse deregulatory safe harbors, even as we are taking steps
to close down other avenues for abuse.
We have determined that the flexible definition of ``consultants
and advisors,'' particularly in the context of registered offerings on
Form S-8, has led to abuse. We are concerned that Rule 701 could be
similarly abused if we make changes only to Form S-8, even though Rule
701 securities, unlike Form S-8 securities, are restricted.\35\ We are
therefore adopting a definition of the term ``consultants and
advisors'' in Rule 701 that will harmonize with the new definition in
Form S-8,\36\ and narrow the scope of eligible consultants and
advisors.
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\35\ Ninety days after a company becomes subject to the
reporting requirements of the Exchange Act, the restrictions lapse.
Rule 701(g)(3). Under the revised rule, because all offers are
exempt, and for purposes of ceiling calculations option exercise
prices are used at the date of grant regardless of the current
exercisability of the option, vested or unvested options will be
exercisable in reliance upon Rule 701 even after the issuer becomes
a public company. Cf. the interpretive letter to Richard M. Leisner
(December 21, 1995).
\36\ The S-8 Adopting Release adopts the ccorresponding changes
into Form S-8. That release also provides additional guidance on
determining the scope of eligible consultants and advisors. See S-8
Adopting Release Section II.A.2. This guidance is applicable to Rule
701 as well as to Form S-8.
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As revised, securities promoters clearly will be excluded from the
scope of persons eligible to participate under the exemption.
Independent agents,\37\ franchisees and salespersons who do not have an
employment relationship with the issuer no longer will be within the
scope of ``consultant or advisor.'' \38\ A person in a de facto
employment relationship with the issuer, such as a non-employee
providing services that traditionally are performed by an
[[Page 11099]]
employee,\39\ with compensation paid for those services being the
primary source of the person's earned income, would qualify as an
eligible person under the exemption.\40\ Other persons displaying
significant characteristics of ``employment,'' such as the professional
advisor providing bookkeeping services, computer programming advice, or
other valuable professional services may qualify as eligible
consultants or advisors, depending upon the particular facts and
circumstances.\41\ Our staff will continue to handle questions about
``consultant or advisor'' status on a case-by-case basis through its
interpretive letter process, but the terms will be interpreted in the
same manner for both Rule 701 and Form S-8.
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\37\ In the revisions to Form S-8 adopted today, we permit
insurance agents who are exclusive agents of the issuer, its
subsidiaries or parents or who derive more than 50% of their annual
income from the issuer to be considered ``employees'' under Form S-
8. We have made a corresponding change to Rule 701.
\38\ The following interpretive letters defining eligible
consultants or advisors under Rule 701 may no longer be relied upon,
as of the effective date of the amendments, except to the extent
that they have been relied upon for currently outstanding offers and
previous sales under the provision: Golfpro, Inc. (October 3, 1989);
Herff Jones, Inc. (November 13, 1990); Microchip Technology, Inc.
(November 4, 1992); Optika Imaging Systems, Inc. (October 1, 1996);
USWeb Corporation (November 7, 1996).
\39\ However, these services must not be in connection with the
offer or sale of securities in a capital-raising transaction, and
must not directly or indirectly promote or maintain a market for the
issuer's securities.
\40\ See Foundation Health Corporation (July 12, 1993).
\41\ Morgan Health Group, Inc. (December 18, 1995); Princeton
Medical Managers Resources (September 12, 1997); PHM Management
Resources, Inc. (September 16, 1997); Talbert Medical Corporation
(September 16, 1997); Osler Health, Inc. (February 11, 1998);
Comprehensive Health Care Corp. (April 30, 1998) are inconsistent
with the interpretation rendered in the Foundation Health letter
under Form S-8 and are also overturned today, although they too may
continue to be relied upon for outstanding offers and previous
sales. These issuers may resubmit their interpretive requests for
staff consideration, highlighting in their submissions the type of
arrangements between the parties that show the services, if any,
that the physicians provide to the issuers and others to permit an
assessment of their status under the new ``consultant and advisor''
provision.
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E. Other Revisions
Because it has become increasingly commonplace to sell stock of a
private subsidiary to employees of a parent or affiliate subsidiary,
and because these transactions retain the envisioned compensatory
character, we have implemented our proposal to expand exemption
coverage to sales to employees of majority-owned subsidiaries of the
issuer's parent (i.e., brother-sister subsidiaries).\42\
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\42\ Rule 701(c). Form S-8 continues to be unavailable for
offers and sales to employees of brother-sister subsidiaries.
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We also have adopted our proposal that Rule 701 should be available
for sales, such as option exercises, by family donees of compensatory
securities and transferees who receive these securities in divorce
proceedings. Rule 701 is now available for immediate family members who
have acquired such securities through a gift or a domestic relations
order. For this purpose ``family member'' is defined as in Form S-8 to
include any child, stepchild, grandchild, parent, stepparent,
grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-
law, father-in-law, son-in-law, daughter-in-law, brother-in-law or
sister-in-law, including adoptive relationships, any person sharing the
employee's household (other than a tenant or employee), a trust in
which these persons have more than a fifty percent beneficial interest,
a foundation in which these persons (or the employee) control the
management of assets, and any other entity in which these persons (or
the employee) own more than fifty percent of the voting interests. This
provision is consistent with the treatment of transferable securities
under Form S-8.\43\
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\43\ See the S-8 Adopting Release.
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III. Cost-Benefit Analysis
As an aid in the evaluation of the costs and benefits of our
original proposals, which were deregulatory in nature, we requested the
views and other supporting information of the public. We received no
comments in response to this request. Nonetheless, we believe that the
rule as revised provides substantial benefits that justify any costs
involved. A major feature of the exemption is its regulatory
flexibility. Thus, benefits it offers include maintaining the existing
exemption for small companies, expanding the availability of the
exemption by applying otherwise established disclosure requirements,
and permitting companies to preserve cash by using stock for
compensatory purposes. The amended rule as a whole provides regulatory
relief for companies, even larger ones, although relief with the fewest
conditions continues to be for small issuers and others that decide to
maintain their offerings below the $5 million ceiling.
For every issuer, the minimum available exemptive amount has been
increased from $500,000 to $1 million. This doubling of exemption
should be particularly attractive to smaller companies that are unable
to utilize the formulas effectively. In addition, we have decided not
to require specified disclosure requirements, including financial
statements, for sales up to $5 million. Further, we determined not to
reinstitute a filing requirement such as Form 701 to report when the
exemption is used.
On the other hand, the revised rule provides no aggregate offering
price ceiling and thus substantial amounts of securities exceeding $5
million may be issued by large private companies. If these companies do
not want to disclose the requisite information to their employees and
others, they may continue to follow the current provisions of the rule
and keep the amount sold below $5 million in a 12-month period. In that
case, they would not have to provide the specified disclosure.
The ability to reward and retain employees with a company's
securities will permit companies to keep valuable employees without
having to use other methods to compensate them, such as borrowing money
or selling securities. Because the rule may encourage companies to
offer incentives to their employees and others, for example through
deferred compensation arrangements, and also facilitates interfamily
donative transfers, it may provide benefits from the perspective of tax
and estate planning as well.
We have concluded that the rule amendments will not result in a
major increase in costs or prices for consumers or individual
industries, or significant adverse effects on competition, employment,
investment, productivity, innovation or small business. We believe that
persons who will rely on the rule will not have significantly increased
costs. In fact, since the current version of the rule is essentially
retained for offerings under the former $5 million ceiling, there
should be no change in the costs of compliance for issuers that have
historically used the exemption and continue to keep their offerings
under $5 million. For issuers that are large enough to go above the $5
million threshold and therefore are required to provide specified
disclosure, any additional costs may not be significant. Some of the
commenters fitting this profile stated that they either already provide
or have the required information readily available for their employees
and other persons.
Some issuers, however, will face costs in availing themselves of
the increased benefits of the rule--primarily those who decide to issue
more than $5 million worth of securities in the 12-month period. It is
worth noting, however, that these increased costs would be borne
voluntarily. Issuers can perform their own cost-benefit analysis to
decide whether to do an offering in excess of $5 million under the
rule. Currently, issuers do not have the option to make an offering
exceeding $5 million under Rule 701. Even in these cases, the costs of
using Rule 701 may be lower than the costs of using another exemption
or registering the sales. Such costs may include ``in-house''
preparation of disclosure documents, hiring of attorneys and
accountants, and delivery and printing costs.
[[Page 11100]]
Nonetheless, because there may be more securities sales to more
investors, we believe that mandatory disclosure is necessary for
investor protection.
The change to the ``consultants and advisors'' definition, which is
necessary to counteract abuses we have found with some ``compensatory''
arrangements, will impact use of the Rule 701 exemption and perhaps
disadvantage some issuers in their ability to effectively use the
provision. However, the staff will continue to consider interpretive
requests of the term, including reconsideration of some of the letters
we are overturning today.
IV. Exemptive Authority Findings
We find that exempting transactions by nonreporting companies
pursuant to compensatory benefit plans and written compensatory
contracts from Section 5 of the Securities Act is appropriate in the
public interest and is consistent with the protection of investors. We
make these findings based on the reasons that we describe in this
release. In particular, we have determined that Rule 701 has
successfully allowed small businesses to compensate their employees
with securities. The amendments will permit smaller businesses to issue
up to $1 million in securities to their employees, an increase from the
current $500,000 limit, without regard to the company's size. The
amendments also will permit larger private companies to issue more than
$5 million, subject to the established financial statement requirements
of Regulation A and provision of risk factor disclosure. Our use of
exemptive authority will allow more companies and more investors to
benefit from this rule.
The rule is specifically designed not to raise capital. The ability
to reward and retain employees with a company's securities should aid
companies by providing a mechanism to keep valuable employees without
having to use other methods to compensate them, such as borrowing money
or selling securities. Finally, Rule 701 provides private companies
with some of the benefits public companies have under Form S-8.
Furthermore, we have not found instances of abuse of Rule 701, nor
have we become aware of investor complaints. Rather, investors have
enjoyed the benefits of being compensated with the securities of the
company for which they are employed or provide services. Therefore, we
have found that Rule 701 has been consistent with investor protection
in the past. We realize, however, that the exemption will lead to a
greater volume of sales to a larger number of investors. We believe
that requiring disclosure for these larger offerings will help assure
that the use of our exemptive authority in this context is consistent
with the protection of investors.
V. Summary of Final Regulatory Flexibility Analysis
In accordance with 5 U.S.C. 604, we have prepared a Final
Regulatory Flexibility Analysis (``FRFA'') regarding the proposed
amendments.
The analysis notes that the amendments to Rule 701 are a result of:
(1) concerns expressed to us by practitioners; (2) feedback that the
current dollar limitations unduly constrain the ability of many
eligible issuers to use Rule 701; and (3) the specific Congressional
mandate expressed in the legislative history of NSMIA. The purpose of
the revisions is to remove unnecessary constraints. We have determined
that the amendments will not impair investor protection.
As the FRFA describes, from mid-1988 through mid-1993, 1,069
companies filed 1,294 Forms 701 indicating aggregate sales of about
$2.28 billion. On an annual basis, an average of 214 companies reported
$456 million of sales on approximately 260 Forms 701. Based on an
analysis of a sample of these filings, the Commission's Office of
Economic Analysis estimates that 14% of the filings were made by small
businesses. More current information is not available because Form 701
has not been a required submission since 1993.
The revisions should permit greater use of the exemption by small
and large non-reporting issuers alike. The minimum amount that any
issuer can raise under the exemption has been raised from $500,000 to
$1 million. Greater availability of the exemption for employee benefit,
deferred compensation and other plans, as well as to facilitate family
donative transfers, should aid in tax and estate planning. We expect,
therefore, that more companies will use the rule and that the value of
securities sold under the exemption will be larger than it was in the
1988-1993 period. Accordingly, for purposes of estimating the
amendments' economic impact, we estimate that 300 companies per year
will make sales pursuant to Rule 701 and that 42 (14%) of those
companies will be small businesses.
The amendments do not impose any new recordkeeping requirements or
require reporting of additional information. Nonetheless, there is an
impact, especially for larger private companies that choose to offer
compensatory arrangements in excess of the current $5 million ceiling,
as those companies will need to prepare specified disclosure and
provide it to their participating employees. Because a number of
commenters told us that this information is commonly maintained by this
class of issuer (generally not small entities) in order to satisfy
requirements for securities issuance exemptions (such as for private
placements), loans and other purposes such as regulatory and internal
ones, the amendments will not increase reporting, recordkeeping or
compliance burdens, and may reduce those burdens for some companies.
As discussed more fully in the FRFA, several possible significant
alternatives to the amendments were considered to minimize effects on
small entities. These included establishing different compliance or
reporting requirements for small entities, exempting them from all or
part of the proposed requirements, or requiring them to provide
different disclosure, such as all Form 1-A items or the full disclosure
requirements of Form SB-1 or SB-2. In fact, the rule as adopted is
changed from our initial proposal, which would have required all
entities to provide certain disclosure. As adopted, only issuers
selling more than $5 million during a 12-month period will be required
to provide disclosure. The FRFA also indicates that no current federal
rules duplicate, overlap, or conflict with the proposed rule
amendments.
We encouraged written comments on any aspect of the Initial
Regulatory Flexibility Analysis, but received no specific comments in
response to our request. In particular, we sought comment on: (1) the
number of small entities that would be affected by the proposed rule
amendments; and (3) the determination that the proposed rule amendments
would not increase (and in some cases may reduce) reporting,
recordkeeping and other compliance requirements for small entities. For
purposes of making determinations required by the Small Business
Regulatory Enforcement Fairness Act of 1996 (``SBREFA''),\44\ we also
requested data regarding the potential impact of the proposed
amendments on the economy on an annual basis. We received no comments
in response to this request either. A copy of the Final Regulatory
Flexibility Act Analysis may be obtained from Twanna M. Young, Office
of Small Business, Division of Corporation Finance, Securities and
[[Page 11101]]
Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549.
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\44\ Pub. L. No. 104-121, 110 Stat. 857 (1996) (codified in
various sections of 5 U.S.C., 15 U.S.C., and as a note to 5 U.S.C.
601).
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VI. Paperwork Reduction Act
Our staff consulted with the Office of Management and Budget
(``OMB'') and submitted the proposals for review in accordance with the
Paperwork Reduction Act of 1995 (``the Act'').\45\ The title to the
affected information collection is: ``Rule 701.'' The specific
information that must be included is explained in the rule itself, and
relates to the issuer and other information that may be associated with
investment in securities under the plan or agreement. The information
is needed by prospective purchasers to make informed investment
decisions.
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\45\ 44 U.S.C. 3501 et seq.
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The proposed amendments will increase the flexibility and utility
of Rule 701 for private companies using securities to compensate their
employees.
The collection of information in Rule 701 will be required in order
for companies to use the rule for sales of their securities to their
employees and other persons covered by the rule. The likely respondents
to the rule are companies that previously used the rule, but were being
constrained by its limits, and companies thatwho could not use the rule
at all because of its limits. While we cannot predict the number of
respondents that may use expanded Rule 701, there were 1,294 Form 701
filings during the period from mid-1988 through mid-1993, when persons
relying upon the exemption were required to file reports with us
concerning their use of the exemption. On the basis of these historical
filings under Rule 701, we estimate that approximately 300 companies
each year will rely on the exemption. The estimated burden for
responding to the collection of information in Rule 701 will not
increase for most companies due to the current disclosure requirements
in Rule 701, but may increase slightly for other companies who may not
be currently providing risk factors and Regulation A financial
statements to employee-purchasers. We estimate that the burden hours
per respondent each year will be two. Therefore, we estimate an
aggregate of 600 burden hours per year.
The information collection requirements imposed by Rule 701 are
mandatory to the extent that a company elects to use the Rule 701
exemption. The information will be disclosed to third parties or the
public. An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless it displays
a current valid OMB control number.
We received no comments in response to our request for comment
regarding the information collection obligation.
VII. Statutory Basis, Text of Amendments and Authority
The amendments to our rules and forms are being adopted pursuant to
sections 2, 3(b), 6, 7, 8, 10, 19(a) and 28 of the Securities Act.
List of Subjects in 17 CFR Part 230
Reporting and recordkeeping requirements, Securities.
For the reasons set out in the preamble, title 17, chapter II of
the Code of Federal Regulations is amended as follows:
PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933
1. The authority citation for part 230 continues to read as
follows:
Authority: 15 U.S.C. 77b, 77f, 77g, 77h, 77j, 77r, 77s, 77sss,
78c, 78d, 78l, 78m, 78n, 78o, 78w, 78ll(d), 79t, 80a-8, 80a-24, 80a-
28, 80a-29, 80a-30, and 80a-37, unless otherwise noted.
2. By revising Sec. 230.701 to read as follows:
Sec. 230.701 Exemption for offers and sales of securities pursuant to
certain compensatory benefit plans and contracts relating to
compensation.
Preliminary Notes
1. This section relates to transactions exempted from the
registration requirements of section 5 of the Act (15 U.S.C. 77e).
These transactions are not exempt from the antifraud, civil
liability, or other provisions of the federal securities laws.
Issuers and persons acting on their behalf have an obligation to
provide investors with disclosure adequate to satisfy the antifraud
provisions of the federal securities laws.
2. In addition to complying with this section, the issuer also
must comply with any applicable state law relating to the offer and
sale of securities.
3. An issuer that attempts to comply with this section, but
fails to do so, may claim any other exemption that is available.
4. This section is available only to the issuer of the
securities. Affiliates of the issuer may not use this section to
offer or sell securities. This section also does not cover resales
of securities by any person. This section provides an exemption only
for the transactions in which the securities are offered or sold by
the issuer, not for the securities themselves.
5. The purpose of this section is to provide an exemption from
the registration requirements of the Act for securities issued in
compensatory circumstances. This section is not available for plans
or schemes to circumvent this purpose, such as to raise capital.
This section also is not available to exempt any transaction that is
in technical compliance with this section but is part of a plan or
scheme to evade the registration provisions of the Act. In any of
these cases, registration under the Act is required unless another
exemption is available.
(a) Exemption. Offers and sales made in compliance with all of the
conditions of this section are exempt from section 5 of the Act (15
U.S.C. 77e).
(b) Issuers eligible to use this section. (1) General. This section
is available to any issuer that is not subject to the reporting
requirements of section 13 or 15(d) of the Securities Exchange Act of
1934 (the ``Exchange Act'') (15 U.S.C. 78m or 78o(d)) and is not an
investment company registered or required to be registered under the
Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.).
(2) Issuers that become subject to reporting. If an issuer becomes
subject to the reporting requirements of section 13 or 15(d) of the
Exchange Act (15 U.S.C. 78m or 78o(d)) after it has made offers
complying with this section, the issuer may nevertheless rely on this
section to sell the securities previously offered to the persons to
whom those offers were made.
(3) Guarantees by reporting companies. An issuer subject to the
reporting requirements of section 13 or 15(d) of the Exchange Act (15
U.S.C. 78m, 78o(d)) may rely on this section if it is merely
guaranteeing the payment of a subsidiary's securities that are sold
under this section.
(c) Transactions exempted by this section. This section exempts
offers and sales of securities (including plan interests and guarantees
pursuant to paragraph (d)(2)(ii) of this section) under a written
compensatory benefit plan (or written compensation contract)
established by the issuer, its parents, its majority-owned subsidiaries
or majority-owned subsidiaries of the issuer's parent, for the
participation of their employees, directors, general partners, trustees
(where the issuer is a business trust), officers, or consultants and
advisors, and their family members who acquire such securities from
such persons through gifts or domestic relations orders. This section
exempts offers and sales to former employees, directors, general
partners, trustees, officers, consultants and advisors only if such
persons were employed by or providing services to the issuer at the
time the securities were offered. In addition, the term ``employee''
includes insurance agents who are exclusive agents of the issuer, its
subsidiaries or
[[Page 11102]]
parents, are or derive more than 50% of their annual income from those
entities.
(1) Special requirements for consultants and advisors. This section
is available to consultants and advisors only if:
(i) They are natural persons;
(ii) They provide bona fide services to the issuer, its parents,
its majority-owned subsidiaries or majority-owned subsidiaries of the
issuer's parent; and
(iii) The services are not in connection with the offer or sale of
securities in a capital-raising transaction, and do not directly or
indirectly promote or maintain a market for the issuer's securities.
(2) Definition of ``Compensatory Benefit Plan.'' For purposes of
this section, a compensatory benefit plan is any purchase, savings,
option, bonus, stock appreciation, profit sharing, thrift, incentive,
deferred compensation, pension or similar plan.
(3) Definition of ``Family Member.'' For purposes of this section,
family member includes any child, stepchild, grandchild, parent,
stepparent, grandparent, spouse, former spouse, sibling, niece, nephew,
mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-
law, or sister-in-law, including adoptive relationships, any person
sharing the employee's household (other than a tenant or employee), a
trust in which these persons have more than fifty percent of the
beneficial interest, a foundation in which these persons (or the
employee) control the management of assets, and any other entity in
which these persons (or the employee) own more than fifty percent of
the voting interests.
(d) Amounts that may be sold. (1) Offers. Any amount of securities
may be offered in reliance on this section. However, for purposes of
this section, sales of securities underlying options must be counted as
sales on the date of the option grant.
(2) Sales. The aggregate sales price or amount of securities sold
in reliance on this section during any consecutive 12-month period must
not exceed the greatest of the following:
(i) $1,000,000;
(ii) 15% of the total assets of the issuer (or of the issuer's
parent if the issuer is a wholly-owned subsidiary and the securities
represent obligations that the parent fully and unconditionally
guarantees), measured at the issuer's most recent annual balance sheet
date (if no older than its last fiscal year end); or
(iii) 15% of the outstanding amount of the class of securities
being offered and sold in reliance on this section, measured at the
issuer's most recent annual balance sheet date (if no older than its
last fiscal year end).
(3) Rules for calculating prices and amounts. (i) Aggregate sales
price. The term aggregate sales price means the sum of all cash,
property, notes, cancellation of debt or other consideration received
or to be received by the issuer for the sale of the securities. Non-
cash consideration must be valued by reference to bona fide sales of
that consideration made within a reasonable time or, in the absence of
such sales, on the fair value as determined by an accepted standard.
The value of services exchanged for securities issued must be measured
by reference to the value of the securities issued. Options must be
valued based on the exercise price of the option.
(ii) Time of the calculation. With respect to options to purchase
securities, the aggregate sales price is determined when an option
grant is made (without regard to when the option becomes exercisable).
With respect to other securities, the calculation is made on the date
of sale. With respect to deferred compensation or similar plans, the
calculation is made when the irrevocable election to defer is made.
(iii) Derivative securities. In calculating outstanding securities
for purposes of paragraph (d)(2)(iii) of this section, treat the
securities underlying all currently exercisable or convertible options,
warrants, rights or other securities, other than those issued under
this exemption, as outstanding. In calculating the amount of securities
sold for other purposes of paragraph (d)(2) of this section, count the
amount of securities that would be acquired upon exercise or conversion
in connection with sales of options, warrants, rights or other
exercisable or convertible securities, including those to be issued
under this exemption.
(iv) Other exemptions. Amounts of securities sold in reliance on
this section do not affect ``aggregate offering prices'' in other
exemptions, and amounts of securities sold in reliance on other
exemptions do not affect the amount that may be sold in reliance on
this section.
(e) Disclosure that must be provided. The issuer must deliver to
investors a copy of the compensatory benefit plan or the contract, as
applicable. In addition, if the aggregate sales price or amount of
securities sold during any consecutive 12-month period exceeds $5
million, the issuer must deliver the following disclosure to investors
a reasonable period of time before the date of sale:
(1) If the plan is subject to the Employee Retirement Income
Security Act of 1974 (``ERISA'') (29 U.S.C. 1104-1107), a copy of the
summary plan description required by ERISA;
(2) If the plan is not subject to ERISA, a summary of the material
terms of the plan;
(3) Information about the risks associated with investment in the
securities sold pursuant to the compensatory benefit plan or
compensation contract; and
(4) Financial statements required to be furnished by Part F/S of
Form 1-A (Regulation A Offering Statement) (Sec. 239.90 of this
chapter) under Regulation A (Secs. 230.251 through 230.263). Foreign
private issuers as defined in Sec. 230.405 must provide a
reconciliation to generally accepted accounting principles in the
United States (U.S. GAAP) if their financial statements are not
prepared in accordance with U.S. GAAP (Item 17 of Form 20-F
(Sec. 249.220f of this chapter)). The financial statements required by
this section must be as of a date no more than 180 days before the sale
of securities in reliance on this exemption.
(5) If the issuer is relying on paragraph (d)(2)(ii) of this
section to use its parent's total assets to determine the amount of
securities that may be sold, the parent's financial statements must be
delivered. If the parent is subject to the reporting requirements of
section 13 or 15(d) of the Exchange Act (15 U.S.C. 78m or 78o(d)), the
financial statements of the parent required by Rule 10-01 of Regulation
S-X (Sec. 210.10-01 of this chapter) and Item 310 of Regulation S-B
(Sec. 228.310 of this chapter), as applicable, must be delivered.
(6) If the sale involves a stock option or other derivative
security, the issuer must deliver disclosure a reasonable period of
time before the date of exercise or conversion. For deferred
compensation or similar plans, the issuer must deliver disclosure to
investors a reasonable period of time before the date the irrevocable
election to defer is made.
(f) No integration with other offerings. Offers and sales exempt
under this section are deemed to be a part of a single, discrete
offering and are not subject to integration with any other offers or
sales, whether registered under the Act or otherwise exempt from the
registration requirements of the Act.
(g) Resale limitations. (1) Securities issued under this section
are deemed to be ``restricted securities'' as defined in Sec. 230.144.
(2) Resales of securities issued pursuant to this section must be
in compliance with the registration
[[Page 11103]]
requirements of the Act or an exemption from those requirements.
(3) Ninety days after the issuer becomes subject to the reporting
requirements of section 13 or 15(d) of the Exchange Act (15 U.S.C. 78m
or 78o(d)), securities issued under this section may be resold by
persons who are not affiliates (as defined in Sec. 230.144) in reliance
on Sec. 230.144, without compliance with paragraphs (c), (d), (e) and
(h) of Sec. 230.144, and by affiliates without compliance with
paragraph (d) of Sec. 230.144.
Dated: February 25, 1999.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-5296 Filed 3-5-99; 8:45 am]
BILLING CODE 8010-01-U
