Encouraging Employee Ownership: Rule 701 and the Growth Act

Encouraging Employee Ownership: Rule 701 and the Growth Act

The Economic Growth, Regulatory Relief and Consumer Protection Act, which was signed into law last month, provides modifications for a number of financial regulatory requirements (see previous posts here and here). Among the changes are some relief from some investor disclosure requirements.

Rule 701

Rule 701 is a federal exemption from registration requirements for equity compensation that is issued to employees, consultants and directors under compensatory benefits plans or compensation agreements. The rule is only available to private companies; public companies cannot participate.

Rule 701 limits the sales price or amount of securities that can be sold during any consecutive 12-month period to the greater of:

  • $1 million;
  • 15 percent of the total assets of the company; or
  • 15 percent of the outstanding amount of the class of securities being offered or sold.

Section 507 of the Growth Act, titled “Encouraging employee ownership,” directs the Securities and Exchange Commission to amend Rule 701 and increase, from $5 million to $10 million, the maximum amount that can be sold during any consecutive 12-month period without the triggering the need for additional disclosures to investors.

The SEC was directed to draft rules putting these changes into place within 60 days of the Growth Act being signed into law.

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