Previously, under Section 12(g), an issuer with 500 holders of record of a class of equity security (including stock options) and assets in excess of $10 million at the end of its most recently ended fiscal year was required to register that class of equity security, unless there was an available exemption from registration. The SEC has recently adopted two exemptions from Exchange Act Section 12(g) registration for compensatory stock options.
The first exemption provides an exemption for private non-reporting issuers from Exchange Act Section 12(g) registration for compensatory employee stock options issued under employee stock option plans. The exemption for compensatory employee stock options of non-reporting issuers applies only to compensatory employee stock options that are issued under a written compensatory stock option plan that is limited to employees, directors, consultants and advisors of the issuer, its parent or majority-owned subsidiaries of the issuer or its parent. The options must be subject to certain transferability restrictions similar to those currently provided under Securities Act Rule 701. The options cannot be subject to a put or call requirement.
As part of the exemption, private non-reporting issuers are required to periodically provide the same risk and financial information to option holders that would be required to be provided under Rule 701 if the securities sold under Rule 701 in a 12 month period exceeded $5 million. This information would include delivering financial statements every six months that are not more than 180 days old. The financial statements do not have to be audited unless an issuer has prepared audited financial statements for other purposes. The information may be delivered physically or electronically or by providing option holders with access to a password-protected Web site. Issuers may require that option holders execute a confidentiality agreement in order to receive the information.
The second change made by the SEC provides an exemption for companies that report under Exchange Act Section 13 or Section 15(d) from Section 12(g) registration for compensatory employee stock options. The exemption is available only where the options are issued pursuant to a written compensatory stock option plan to persons eligible to receive or hold compensatory employee stock options under an issuer’s Form S-8 or to those participants permitted under Securities Act Rule 701. The exemption does not require that the issuer be current in its Exchange Act reporting.
Both exemptions apply only to stock options and not to other forms of compensatory equity awards like restricted stock units or stock appreciation rights. The exemptions also apply only to the compensatory employee stock options and not to the securities issued or to be issued on exercise of the options.
If a private non-reporting issuer becomes ineligible to rely on the exemption, the issuer has 120 calendar days from the date it became ineligible to rely on the exemption to file a registration statement to register under Section 12(g) the class of compensatory employee stock options. For a reporting issuer that becomes ineligible to rely on the exemption, the issuer will be permitted up to 60 calendar days to file a registration statement to register the stock options.