On October 19th, the Division of Corporation Finance released three new and revised Compliance and Disclosure Interpretations (C&DIs) concerning the Securities Act. Revised C&DI 271.04 and new C&DI 271.21 relate to exempt offerings and sales of securities under Rule 701 of the Securities Act while revised C&DI 532.06 relates to the holding period for securities issued under Rule 144 of the Securities Act.

The revised Rule 701 interpretation (C&DI 271.04) clarifies that issuers reporting under the Exchange Act are not required to register the offer and sale of shares issuable upon the exercise of options where the issuance of such shares became the obligation of the reporting issuer following its acquisition of a private company not previously subject to the reporting requirements under the Exchange Act.

Revised C&DI 271.04 reverses the staff’s prior interpretation with respect to Rule 701 and logically extends the exemption for sales of securities by non-reporting companies under Rule 701(b)(2) to a reporting company’s issuance of securities upon exercise of options assumed from an acquired private company issuer. The interpretation also clarifies that disclosures appearing in the acquirer’s Exchange Act reports will satisfy the disclosure requirements triggered by Rule 701(e).

The staff’s prior interpretation is reproduced below:

Question 271.04

Question: A company that is not subject to the reporting requirements of Exchange Act Section 13 or 15(d) issued options in reliance on Rule 701. This company is acquired by another company, which is subject to the reporting requirements of Exchange Act Section 13(a) or 15(d) and assumes the private company’s outstanding options so that they become exercisable for shares of the acquiring company. May the acquiring company rely on Rule 701(b)(2) to exempt their exercise?

Answer: No. [Jan. 26, 2009]

The new Rule 701 interpretation (C&DI 271.24) deals with exempt offers and sales of restricted stock units (RSUs) awards to employees and the timing requirements for delivery of the additional information specified in paragraphs (1) through (4) of Rule 701(e) triggered if the issuer sells an aggregate amount of securities (including the RSUs) in excess of $5 million over a 12-month period. The interpretation specifies that under such circumstances, the issuer is obligated to deliver the required information “a reasonable period of time before the date of the sale” and provides that “[f]or the sale of an RSU award that relies on Rule 701 for exemption, the date of sale is the date it is granted.” As a result, for grants of RSUs in reliance on Rule 701, an issuer must provide the required information a reasonable time before the date the RSU award is granted. The new interpretation also clarifies that despite the fact that RSUs are typically considered derivatives, Item 701(e)(6) (relating to the exercise or conversion of derivative securities) does not apply because such RSUs do not need to be exercised or converted.

The third C&DI issued by Corp Fin (C&DI 532.06) revises the staff’s prior interpretive response with respect to the holding period for restricted securities issued pursuant to a written agreement under Rule 144(d) and, specifically, when such holding period begins to run. Under the prior interpretation (issued January 2009), the staff indicated that “where restricted securities are issued to an employee in connection with an individually negotiated employment agreement” such employee’s holding period “begins to run at the time the securities vest, assuming any conditions, such as continued employment, have been fulfilled.”

The newly revised C&DI 532.06 cites to the applicability of Question 23 of Securities Act Release No. 6099 (Aug. 2, 1979) and its reference to holding periods under Rule 144(d) as beginning when “the person who will receive the securities is deemed to have paid for the securities and thereby assumed the full risk of economic loss with respect to them.” The interpretation further clarifies that for restricted securities received by an employee pursuant to an “individually negotiated employment agreement,” the holding period “commences when investment risk for the securities passes to the employee,” as follows:

  • “For full value awards, if the vesting of the securities is conditioned solely on continued employment and/or satisfaction of performance conditions that are not tied to the employee’s individual performance and the employee pays no further consideration for the securities, that date would be the date of the agreement;” and
  • “For awards that require additional payment upon exercise, conversion or settlement, that date would be the date on which such payment is made.”

The staff’s prior interpretation is reproduced below:

532.06 Question 22 of Securities Act Release No. 6099 (Aug. 2, 1979), dealing with the holding period under Rule 144(d) for restricted securities under an employee benefit plan, does not apply where restricted securities are issued to an employee in connection with an individually negotiated employment agreement. The employee’s holding period begins to run at the time the securities vest, assuming any conditions, such as continued employment, have been fulfilled. [Jan. 26, 2009]