The SEC’s Division of Corporation Finance recently granted no-action relief to Twitter for its restricted stock unit, or RSU, program allowing the company to issue RSUs to its employees, officers and directors without registering the RSUs under Section 12(g) of the Securities Exchange Act of 1934, as amended (Exchange Act).1 Although it does not break new ground (the SEC issued a similar no-action letter for Facebook in 2008),2 it serves as a reminder that private companies with RSU programs should carefully structure their programs to come within the Twitter and Facebook fact patterns and should consider applying for no-action relief to avoid registration and reporting requirements that would otherwise result under the Exchange Act.
Generally, Section 12(g) of the Exchange Act and Rule 12(g)(1) promulgated thereunder require every issuer with total assets of more than $10 million and a class of equity securities held of record by 500 or more persons to register that class of equity securities under the Exchange Act. Without the requested relief, Twitter was concerned that it would become subject to the registration and reporting requirements of the Exchange Act when it reached 500 or more record holders of its RSUs.3
The SEC granted the no-action relief on the following facts presented:
- the recipients of the RSUs were limited to employees, directors and consultants;
- recipients paid no consideration for the RSUs, other than continued employment or services, or for the shares issuable under the RSUs;
- RSUs were not transferable, except upon death, and could not be pledged or shorted;
- the shares of common stock subject to the RSUs were not issuable until either a change in control of the company or the company’s IPO, and absent either, the RSUs would expire 10 years after the date of grant;
- the conversion of the RSUs into shares of common stock was automatic upon one of the events described above and, accordingly, holders were not required to make any investment decisions with respect to the RSUs;
- RSUs did not confer upon the holder any voting, dividend, liquidation or other rights of shareholders;
- there was no forfeiture of the RSU’s upon termination of employment (although further vesting would cease);
- the company agreed to provide holders the same type of information and at the same frequency required for option plans exempt from Section 12(g) registration under Rule 12h-1(f) (1)(vi) (generally, information about risks of the investment and fi nancial statements); and
- there was no trading market for the RSUs.
As is normal for no-action letters, the SEC limited the relief to the facts presented. We recommend that any private company with a RSU program that would like to avoid Exchange Act registration and reporting if the number of its RSU holders reaches 500 or more tailor its program to fi t within the facts of Twitter and Facebook letters as closely as possible and request no-action relief from the SEC.