A bill (H.R. 1675) seeking to increase the information disclosure threshold under SEC Rule 701 passed the U.S. House of Representatives on February 3 by a vote of 265 to 159. Rule 701 exempts from registration issuer sales or grants of securities to employees under written compensatory plans. Pursuant to Rule 701, issuers need only provide a limited amount of disclosure to employees as long as sales are less than $5 million in any twelve-month period. Once an issuer crosses that threshold, however, it must provide employees with additional disclosures such as risk factors and financial statements identical to those required in Regulation A offerings.
H.R. 1675, or the Encouraging Employee Ownership Act of 2015, proposes to increase the disclosure-triggering threshold of Rule 701 from $5 million to $10 million in any twelve-month period. This would allow companies to issue more securities to employees without having to provide the additional disclosures.
This bill has received some harsh backlash. Congresswoman and Ranking Member of the House Committee on Financial Services Maxine Waters decried the bill as “invit[ing] more Enron-style fraud onto the market.” Additionally, according to a Statement of Administrative Policy, the White House “strongly opposes” the package of bills to which the proposed amended disclosure threshold belongs. Two of the other bills included in the package have been the subject of posts earlier this week. Read my coverage of the proposed XBRL exemption here and my colleague David Jenson’s regarding a potential registration exemption for so-called “M&A brokers” here.
It will be interesting to see how the proposed changes to Rule 701 will be received by the Senate.