July 18, 2018

SEC Raises Disclosure Exemption Threshold on Certain Compensatory Benefit Plans

Steven Lofchie Commentary by Steven Lofchie

The SEC adopted an amendment that will raise the disclosure threshold for non-reporting companies that offer securities to employees and other service providers through compensatory benefit plans. The amendment will become effective on the date of its publication in the Federal Register.

The SEC is raising the threshold in accordance with the Economic Growth, Regulatory Relief and Consumer Protection Act. Under Rule 701, certain issuers offering compensatory benefit plans are currently exempt from providing risk-factor disclosures and financial statements to investors, provided the aggregate sales price or amount of securities sold during any 12-month period does not exceed $5 million. The cap now will be increased to $10 million.

The SEC also issued a Concept Release seeking comments on possible ways to "modernize compensatory securities offerings and sales." The Concept Release specifically seeks comments on further adjustments to Rule 701, as well as Form S-8, which is the registration statement that companies use for compensatory offerings.

As explained in a Fact Sheet, the SEC is particularly interested in:

  • how "gig economy" employment arrangements may inform the consideration of expanding eligibility for disclosure exemptions;
  • possible revisions to the timing and manner of delivery requirements under Rule 701(e); and
  • additional streamlining of Form S-8.

Comments on the Concept Release must be submitted within 60 days of publication in the Federal Register.

Commentary

It is not unusual for the Democratic Commissioners to vote in dissent of SEC rule proposals and adoptions; in fact, they have done so routinely. However, in virtually all, or perhaps all, cases, the dissents have always been because the Democratic Commissioners favored the adoption of stronger rules (as in the case of Regulation Best Interest) or opposed the liberalization of existing rules (as in the case of  ).

What is seemingly odd about these dissents is that the two Democratic Commissioners dissent from a proposal that would have a liberalizing effect because they argue that it is not broad enough; that the exemption is limited to certain types of gig workers and it should include all gig workers.  What makes the dissents even odder is that each of Representative Maxine Waters, Chair of the House Financial Services Committee, and Senator Sherrod Brown, who sits on the Senate Banking Committee, sent comment letters to the SEC strongly opposing the SEC proposal.  

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