Section 12(g) of the Securities Exchange Act of 1934 and accompanying rules mandate that any company with more than $10 million and 500 or more record holders of a class of equity securities must register the class within 120 days after fiscal year end. To the chagrin of many companies, the 1934 Act registration requirement has extended to stock options as a class of equity distinct from underlying shares of common stock. Compensatory stock options are an important tool to attract, retain, and motivate employees. On November 15, 2007, the Securities and Exchange Commission adopted two amendments to 1934 Act Rule 12h-1 to exempt compensatory employee stock options issued by public and private companies.


The first amendment, Rule 12h-1(f) as proposed, benefits issuers without an existing reporting obligation under Section 15(d) or a registered class of securities under Section 12 of the 1934 Act. For these private issuers, generally the new exemption governs compensatory options issued under written plans if:

  • eligible option holders are limited to employees, officers, directors, consultants, and advisors (to the extent permitted by Rule 701 under the Securities Act of 1933) of an issuer, its parents, and majority-owned subsidiaries of the issuer or its parents and certain transferees;
  • transferability by option holders of the options, and prior to exercise, shares to be received on exercise of those options, is restricted to persons such as family members, guardians, and executors; and
  • risk and financial information is provided to option holders of the type that would be required if securities sold in reliance on Rule 701 exceeded $5 million in a 12-month period.

In perspective, this Section 12(g) exemption represents a codification of a line of SEC staff no-action letters dating back to 1992.

The second amendment, Rule 12h-1(g) as proposed, benefits issuers already providing 1934 Act reports under Section 15(d) or because of a registered class of securities under Section 12. For these public issuers, generally the new rule exemption also applies to the same extent as in the first two bullet points above. The key distinctions for employee stock options of public issuers is rooted in the availability of public information about the issuer and typically a trading market for underlying common stock to assist in evaluating the option.

Neither rule amendment extends to the class of securities underlying the exempt options. Nor does either amendment extend to (a) stock options issued in other than a non-compensatory context, or (b) compensatory grants other than options, such as stock appreciation rights. The SEC staff, however, indicated it would be receptive to no-action requests seeking exemptive relief for other non-option employee securities and, if necessary, propose expanding the rule exemption in the future.


As always, the failure to comply with the strict provisions of a Section 12 exemption may subject issuers to a 1934 Act registration obligation. Particularly for private companies, ensuring compliance to the new exemption for compensatory stock options is critical to avoid premature public exposure. While all would welcome an offering and stock as successful as Google, it is important for private companies also to recall the lesson of Google, which discovered it had issued an excessive number of employee stock options, triggering an unscheduled 1934 Act reporting obligation.

Both amendments will be effective as soon as they are published in the Federal Register. Therefore, calendaryear- end companies will be able to rely upon the exemption in making their calculations of security record holders starting as of December 31, 2007.