Yesterday, Corp Fin posted a new CDI 271.25 regarding permissible safeguards for protection of Rule 701(e) disclosures that are furnished electronically. You may recall that Rule 701—which provides an exemption from registration under the Securities Act for offers and sales to employees, directors and consultants under compensatory benefit plans and contracts—requires companies to deliver to the employee/investor a copy of the applicable benefit plan or contract, and, if the company sells, in any consecutive 12-month period, securities with a value in excess of $5 million, the company must deliver, a reasonable period of time before the date of sale, specified other information, including financial statements and information about the risks associated with the investment, much of which is likely to contain confidential or sensitive material.
The concern raised by the CDI was the risk of unauthorized access to and disclosure of Rule 701(e) information that was delivered electronically and how companies could safeguard against that risk in a manner that would be acceptable. The staff indicated that “[s]tandard electronic safeguards, such as user-specific login requirements and related measures, are permissible.” However, if the company employs safeguards such as designating a particular “electronic disclosure medium” to be used to convey the information, either by itself or housed in a dedicated physical disclosure room, these safeguards “should not be so burdensome that intended recipients cannot effectively access the required disclosures. For example, we would expect that physical disclosure rooms would be accessible during ordinary business hours upon reasonable notice. Once access to the required information has been granted, however, the medium used to communicate the required disclosure should provide the opportunity to retain the information or have ongoing access substantially equivalent to personal retention.”
In September, at the final meeting of the SEC Advisory Committee on Small and Emerging Companies, the Committee resolved, as one of its final actions, to advise the SEC to adopt a number of recommendations for changes to Rule 701. Among these was a recommendation to increase the Rule 701(e) cap from $5 million to at least $10 million. One argument presented was that just the hiring of a key employee who receives a large equity grant can sometimes result in inadvertent compliance issues. In addition, bills entitled the ‘‘Encouraging Employee Ownership Act’’ have passed the House and, on September 12, the Senate and would now need a presidential signature to become law. Both bills would require the SEC, within 60 days after enactment, to raise the Rule 701(e) cap from $5 million to $10 million, and to index it for inflation every five years to reflect changes in the CPI. (See this PubCo post.)