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| Securities Lawyer's Deskbook
of Cincinnati College of Law
General Rules and Regulations
Securities Act of 1933
Rule 701 -- Exemption for Offers and Sales of Securities Pursuant to Certain Compensatory Benefit Plans and Contracts Relating to Compensation
- This section relates to transactions exempted
from the registration requirements of section 5
of the Act. 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.
- 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.
- An issuer that attempts to comply with this
section, but fails to do so, may claim any other exemption that is available.
- 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.
- 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
- Exemption. Offers and sales made in compliance with
all of the conditions of this section are exempt from section 5 of the Act.
- Issuers eligible to use this section.
- 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") and is not an investment company registered or required
to be registered under the Investment Company Act of 1940.
- 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 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.
- Guarantees by reporting companies. An issuer subject
to the reporting requirements of section 13 or 15(d) of the Exchange Act may rely
on this section if it is merely guaranteeing the payment of a subsidiary's securities
that are sold under this section.
- 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 parents, are or derive more than 50% of their annual income from those entities.
- Special requirements for consultants and advisors.
This section is available to consultants and advisors only if:
- They are natural persons;
- They provide bona fide services to the issuer,
its parents, its majority- owned subsidiaries or majority-owned subsidiaries of the
issuer's parent; and
- 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.
- 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.
- 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.
- Amounts that may be sold.
- 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.
- 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:
- 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
- 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).
- Rules for calculating prices and amounts.
- 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.
- 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.
- 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.
- 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.
- 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:
- 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;
- If the plan is not subject to ERISA, a summary of
the material terms of the plan;
- Information about the risks associated with investment
in the securities sold pursuant to the compensatory benefit plan or compensation
- Financial statements required to be furnished by Part F/S of Form 1-A (Regulation A Offering Statement) under Regulation A (Rules 230.251 through 230.263). Foreign private
issuers as defined in Rule 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 or International Financial Reporting Standards as issued by the
International Accounting Standards Board (Item 17 of Form 20-F. 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.
- 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, the financial
statements of the parent required by Rule 10-01
of Regulation S-X and Item 310 of Regulation
S-B, as applicable, must be delivered.
- 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.
- 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.
- Resale limitations.
- Securities issued under this section are deemed to
be "restricted securities" as defined in Rule 144.
- Resales of securities issued pursuant to this section
must be in compliance with the registration requirements of the Act or an exemption
from those requirements.
- Ninety days after the issuer becomes subject to
the reporting requirements of section 13 or 15(d) of the Exchange Act, securities
issued under this section may be resold by persons who are not affiliates (as
defined in Rule 144) in reliance on Rule 144, without compliance with paragraphs
(c), (d), (e) and (h) of Rule 144, and by affiliates without compliance with paragraph
(d) of Rule 144.
53 FR 12921, Apr. 20, 1988; 64 FR 11095, 11101, Mar. 8, 1999, as corrected and
amended at 64 FR 61497, 61498, Nov. 12, 1999; 73 FR 986, 1009, Jan. 4, 2008.
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