On July 5, the Securities and Exchange Commission proposed two exemptions from the registration requirements of Section 12(g) of the Securities Exchange Act of 1934, as amended, for compensatory employee stock options issued under employee stock option plans. The first exemption would apply to private, non-reporting issuers and the second to issuers that have registered under Section 12 of the Exchange Act the class of equity security underlying the exempted stock options. The exemptions from registration would apply to compensatory employee stock options issued under employee stock option plans that are limited to employees, directors, consultants and advisors of the issuer, its parents and majority-owned subsidiaries of the issuer or its parents. Under Section 12(g) of the Exchange Act, an issuer with 500 or more holders of record of a class of equity securities and assets in excess of $10 million at the end of its most recently ended fiscal year must register that class of equity security, unless there is an available exemption from registration. Stock options are a separate class of equity securities for purposes of the Exchange Act and there is currently no exemption from registration for compensatory employee stock options.
The first of the proposed exemptions would apply to issuers without a class of securities registered under Section 12 of the Exchange Act and not otherwise subject to the reporting requirements of Section 15(d) of the Exchange Act where all of the following conditions are present:
- eligible optionholders are limited to employees, directors, consultants and advisors of the issuer;
- transferability of compensatory employee stock options, shares received, or to be received, on exercise of those options, and shares of the same class as those underlying those options by optionholders and holders of shares received on exercise of the options is restricted; and
- risk and financial information is provided to optionholders and holders of shares received on exercise of those options that is of the type that would be required under Rule 701 of the Securities Act of 1933, as amended, if securities sold in reliance on Rule 701 exceeded $5 million in a 12-month period.
- The proposed exemption would not extend to the class of securities underlying the compensatory stock options.
The exemption from registration applicable to Exchange Act reporting issuers would be available only where the options were issued pursuant to a written compensatory stock option plan and the class of persons eligible to receive or hold the options is limited to those participants permitted under Rule 701. The proposed exemption would not include any information conditions, other than those arising from the registration of the class of equity securities underlying the options. Comments to the proposed rule are due by September 10.