On June 23, 2016, the SEC Division of Corporation Finance (the “Division”) issued new Compliance and Disclosure Interpretations (“C&DIs”) for Securities Act Rule 701. The new C&DIs address the exemption for offers and sales of securities pursuant to certain compensatory benefit plans and contracts relating to compensation. Highlights of the C&DIs include the following:

  • An acquirer in a merger transaction that assumed the target company’s derivative securities does not need an exemption if, at the time of the grant by the target, the compensatory benefit plan under which the securities were issued permitted the assumption without the consent of the holders of the derivative securities.
  • Securities underlying the derivative securities are considered to have been sold on the date of the grant of the derivative securities. As such, so long as the target company complied with Rule 701 at the time the derivative securities assumed were originally granted, the exercise or conversion of the derivative securities would be exempt.
  • Post-merger, in determining the amount of securities that the acquirer may sell pursuant to Rule 701(d), the acquirer must include the aggregate sales price and amount of securities for which the target company claimed the Rule 701 exemption during the same 12-month period for which the acquirer is making the determination.
  • Post-merger, to calculate compliance with Rule 701(d)(2) going forward, an acquirer may use either (1) a pro forma balance sheet as of its most recent balance sheet date that reflects the merger as if it had occurred on that date, or (2) a balance sheet date after the merger that will reflect the total assets and outstanding securities of the combined entity.
  • Where an obligation to provide disclosure pursuant to Rule 701(e) is triggered, an issuer may elect to provide financial statements that follow the requirements of either Tier 1 or Tier 2 Regulation A offerings, without regard to whether the amount of sales that occurred pursuant to Rule 701 during the time period contemplated in Rule 701(e) would have required the issuer to follow the Tier 2 financial statement requirements in a Regulation A offering of the same amount.
  • For assumed derivative securities where the target company was required to provide Rule 701(e) disclosures post-merger, the acquirer would assume the disclosure obligation and would satisfy it by providing information required under Rule 701(e).
  • Post-merger, in determining whether the amount of securities the acquirer sold during any consecutive 12-month period exceeds $5 million, the acquirer must include any securities that the target company sold during the same period.

The C&DIs are available at: https://www.sec.gov/divisions/corpfin/guidance/securitiesactrules-interps.htm