The Economic Growth Regulatory Relief and Consumer Protection Act, which was signed into law by President Trump on May 24, 2018, directs the US Securities and Exchange Commission (SEC) to amend a significant provision of Rule 701. Rule 701 is the federal exemption from registration that most US private companies rely on when granting or selling equity based compensation to their employees, consultants and advisors. Rule 701(e) requires certain heightened disclosure requirements, including financial statements of the issuer prepared in accordance with generally accepted accounting principles (GAAP), risk factors and a summary of material terms of the plan, when the aggregate sale price or amount of securities sold or granted during any consecutive 12 month period exceed $5 million. These items must be provided in a reasonable time before the date of any sale or grant. This $5 million threshold had not been revised since 1999 and, since such date, companies have been staying private longer and growing to significantly higher valuations.

The new law requires the SEC to increase the $5 million threshold to $10 million. It also requires the SEC to index for inflation the aggregate sale price or amount every five years to reflect the change in the Consumer Price Index. The increase to this threshold had previously been proposed by the SEC’s Advisory Committee on Small and Emerging Companies along with numerous other Rule 701 reforms in September 2017. The increase in the threshold should ease the disclosure burden for many smaller companies.

Notably, the SEC had engaged in enforcement activity in recent months for companies in violation of the disclosure requirements of Rule 701(e). On March 12, 2018, the SEC brought an enforcement action against Credit Karma for issuing approximately $13.8 million of stock options to employees without providing the requisite financial statements and other required disclosure. In a settled proceeding, the SEC imposed a $160,000 fine for such violation. The SEC is required to revise Rule 701(e) within 60 days of the enactment of the law.

In addition to the Rule 701 changes above, the Economic Growth, Regulatory Relief and Consumer Protection Act focused on certain regulatory exemptions from the Dodd Frank Act for smaller financial institutions and also amended certain securities law provisions related to capital formation.