[Federal Register Volume 64, Number 44 (Monday, March 8, 1999)]
[Rules and Regulations]
[Pages 11095-11103]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-5296]



[[Page 11095]]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 230

[Release No. 33-7645; File No. S7-5-98]
RIN 3235-AH21


Rule 701--Exempt Offerings Pursuant to Compensatory Arrangements

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``we'' or 
``Commission'') is adopting amendments to Rule 701 under the Securities 
Act of 1933, which provides an exemption from registration for 
securities issued by non-reporting companies pursuant to compensatory 
arrangements. These amendments make Rule 701 more useful and eliminate 
unnecessary restrictions. We are removing the $5 million aggregate 
offering price ceiling and setting the maximum amount of securities 
that may be sold in a 12-month period to a more appropriate, flexible 
limit related to the size of the issuer. The amendments also require 
specific disclosure from issuers that sell more than $5 million worth 
of securities in a 12-month period, and harmonize the definition of 
consultant and advisor to the one contained in Form S-8, the short-form 
registration statement form for the offer and sale of employee benefit 
plan securities.

EFFECTIVE DATE: April 7, 1999.

FOR FURTHER INFORMATION CONTACT: Richard K. Wulff (202-942-2950), 
Office of Small Business, Division of Corporation Finance, Securities 
and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549.

SUPPLEMENTARY INFORMATION: We are adopting amendments to Rule 701 \1\ 
under the Securities Act of 1933 (``Securities Act'').\2\
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    \1\ 17 CFR 230.701.
    \2\ 15 U.S.C. 77a et seq.
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I. Executive Summary and Background

    In 1988, we adopted Rule 701 under the Securities Act \3\ to allow 
private companies to sell securities to their employees without the 
need to file a registration statement, as public companies do. The rule 
provides an exemption from the registration requirements of the 
Securities Act for offers and sales of securities under certain 
compensatory benefit plans or written agreements relating to 
compensation. The exemptive scope covers securities offered or sold 
under a plan or agreement between a non-reporting (``private'') company 
(or its parents or majority-owned subsidiaries) and the company's 
employees, officers, directors, partners, trustees, consultants and 
advisors.
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    \3\ Release No. 33-6768 (April 14, 1988) [53 FR 12918].
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    When we adopted the rule, we determined that it would be an 
unreasonable burden to require these private companies, many of which 
are small businesses, to incur the expenses and disclosure obligations 
of public companies when their only public securities sales were to 
employees. Further, these sales are for compensatory and incentive 
purposes, rather than for capital-raising. To accommodate these 
companies, we used the maximum extent of the authority we had at that 
time under Section 3(b) of the Securities Act \4\ to exempt offers and 
sales of up to $5 million per year.
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    \4\ 15 U.S.C. 77c(b).
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    Currently, the amount of securities subject to outstanding offers 
in reliance on Rule 701, plus the amount of securities offered or sold 
under the rule in the preceding 12 months, may not exceed the greatest 
of $500,000, or an amount determined under one of two different 
formulas. One formula limits the amount to 15% of the issuer's total 
assets measured at the end of the issuer's last fiscal year. The other 
formula restricts the amount to no more than 15% of the outstanding 
securities of the class being offered. Regardless of the formula 
elected, Rule 701 restricts the aggregate offering price of securities 
subject to outstanding offers and the amount sold in the preceding 12 
months to no more than $5 million.
    Over the years, our staff has monitored the use of the rule. The 
staff concluded that the rule has been popular for both small 
businesses and larger private companies. However, the $5 million limit 
appears to have become unnecessarily restrictive in light of inflation, 
the increased popularity of equity ownership as a retention and 
incentive device for employees, and the growth of deferred compensation 
plans.
    In October 1996, Congress enacted the National Securities Markets 
Improvement Act of 1996 (``NSMIA''),\5\ which, for the first time, gave 
us the authority to provide exemptive relief in excess of $5 million 
for transactions such as these. The legislative history of NSMIA stated 
specifically that we should use this new authority to lift the $5 
million ceiling on Rule 701.\6\ In February 1998, we proposed a number 
of revisions to increase the flexibility and usefulness of Rule 701, as 
well as to simplify and clarify the rule.\7\
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    \5\ Pub. L. 104-290, 110 Stat. 3416 (October 11, 1996).
    \6\ Both Committee Reports specifically highlighted the current 
$5 million limit contained in Rule 701 and sought prompt Commission 
action to raise that ceiling to ``not less than $10 million.'' H.R. 
Rep. No. 104-622 at 38; S. Rep. No. 104-293 at 16.
    \7\ Release No. 33-7511 (February 27, 1998) [63 FR 10785] 
(``Rule 701 Proposing Release''). We received 33 letters of comment 
on the proposals. You may inspect and copy the comment letters in 
our Public Reference Room in File No. S7-5-98. Comments that were 
submitted electronically are available on our website (http://
www.sec.gov).
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    Today, we announce revisions to the rule that:
    (1) remove the $5 million aggregate offering price ceiling and, 
instead, set the maximum amount of securities that may be sold in a 
year at the greatest of:

--$1 million (rather than the current $500,000);
--15% of the issuer's total assets; or
--15% of the outstanding securities of that class;

    (2) require the issuer to provide specific disclosure to each 
purchaser of securities if more than $5 million worth of securities are 
to be sold;
    (3) do not count offers for purposes of calculating the available 
exempted amounts; \8\
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    \8\ Note, however, that the rule now requires issuers to count 
as sales the securities underlying the options at the time of the 
option grant based upon the exercise price.
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    (4) harmonize the definition of consultants and advisors permitted 
to use the exemption to the narrower definition of Form S-8; \9\
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    \9\ 17 CFR 239.16b. Form S-8, a simplified form for registering 
sales to employees, is available only to public companies subject to 
the reporting requirements of the Securities Exchange Act of 1934 
[15 U.S.C. 78a et seq.] (``Exchange Act''). See also the release 
relating to revisions to Form S-8 we are adopting today, Release No. 
33-7646. (``S-8 Adopting Release'').
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    (5) amend Rule 701 to codify current and more flexible 
interpretations; and
    (6) simplify the rule by recasting it in plain English.
    Together, these changes will add greater flexibility for companies 
to compensate sell securities their employees with securities and, at 
the same time, will provide that essential information be delivered to 
employees in appropriate situations and in a timely manner. The vast 
majority of commenters on the Rule 701 Proposing Release supported the 
proposed amendments, particularly the lifting of the $5 million 
aggregate offering price ceiling and the removing of offers from the 
ceiling calculation. A number of commenters, however, expressed 
concerns about the proposed disclosure requirements, particularly as 
they relate to foreign private issuers.
    We have considered these comments and we believe that we have 
struck an

[[Page 11096]]

appropriate balance between the needs of employee-investors and the 
needs of non-reporting companies. In particular, we have decided to 
impose the disclosure requirements only on sales above $5 million, 
instead of on all Rule 701 sales, as proposed. These revisions to Rule 
701 are being adopted pursuant to the exemptive authority provided to 
the Commission under Section 28 of the Securities Act.\10\
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    \10\ ``The Commission, by rule or regulation, may conditionally 
or unconditionally exempt any person, security or transaction, or 
any class or classes of persons, securities or transactions from any 
provision of this title or any rule or regulation issued under this 
title to the extent that such exemption is necessary or appropriate 
in the public interest, and is consistent with protection of 
investors.'' 15 U.S.C. 77bb. As more fully described below, we find 
that the exemption is appropriate in the public interest and is 
consistent with the protection of investors.
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II. Amendments to Rule 701

    The amendments to Rule 701 have been adopted in most respects as 
proposed, with the exceptions discussed below. The changes to the rule 
are not retroactive. Offers and sales made in reliance on Rule 701 
before the effective date will continue to be valid if they met the 
conditions of the rule before its revision.\11\ The principal changes 
are in the areas of exemptive limits, disclosure, and the treatment of 
consultants and advisors, as discussed in detail below. In addition, we 
are adopting a number of clarifying and simplifying provisions, 
including the following:
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    \11\ Offers that were being made under the Rule 701 exemption as 
it used to read may be consummated under those terms. For example, 
vested options may be exercised in reliance upon the prior version 
of Rule 701. Options issued in reliance upon the Rule 701 exemption 
(in contrast to a ``no sale'' theory) may be exercised in reliance 
upon the prior version of the rule, whether vested or unvested. See 
the interpretive letter to Richard M. Leisner (December 21, 1995).
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     Expanding the scope of the rule to exempt sales to 
employees of majority-owned subsidiaries of the issuer's parent (i.e., 
brother-sister subsidiaries);
     Providing: (1) that a private, wholly-owned subsidiary can 
use its parent's assets, whether or not the parent is a public company, 
in making the 15% of assets calculation so long as the parent fully and 
unconditionally guarantees the obligations of the subsidiary issued 
under the rule (if the guarantee does not exceed 15% of the parent's 
assets), such as in the case of many deferred compensation 
arrangements; and (2) an exemption for the parent's guarantee;
     Clarifying that sales to former employees may be completed 
under the rule if those persons were employees when the securities 
initially were offered;\12\
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    \12\ As adopted, the rule also includes former directors, 
officers, general partners, trustees, consultants and advisors.
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     Specifying the manner of considering employee/consultant 
services in calculating the aggregate sales limit; and
     Facilitating tax and estate planning by permitting the 
rule to be available for option exercises by family members of 
employees who acquire Rule 701 securities from the employee through a 
gift or a domestic relations order.\13\
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    \13\ This change is consistent with the amendments to Form S-8 
adopted today with respect to transferable securities. ``Family 
member'' is defined in Rule 701(c)(3) the same way as ``family 
member'' in General Instruction A.1(a)(5) of Form S-8 as adopted 
today in the S-8 Adopting Release.
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A. Exemptive Limits

    As proposed, we are removing the $5 million aggregate offering 
price ceiling and raising the current $500,000 level that can be sold 
in a year to $1 million.\14\ Also as proposed, the revised rule no 
longer limits the dollar amount of securities offered to employees. 
Instead, issuers will make calculations based solely on actual sales or 
amounts to be sold (as with options) in a 12-month period. Changing the 
focus from offers to sales will make it easier for issuers to determine 
the exempt amount of securities transactions, while continuing to 
assure that the transactions are not so large as to trigger the need 
for registration. We believe that these changes, in combination with 
the other changes adopted, will provide issuers the flexibility they 
need, without creating opportunities for abuse.
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    \14\ The revised rule also makes it clear, as proposed, that the 
calculations of total assets and securities outstanding are measured 
as of the issuer's most recent balance sheet date, which must be no 
older than the end of its last fiscal year.
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    With respect to equity incentives such as restricted stock and 
compensatory stock purchases, the calculations will be made as of the 
transaction date. Deferred compensation and similar plans will make 
measurements based upon the date of an irrevocable election to defer 
compensation. With respect to options, calculations will be made as of 
the date of the option's grant, without regard to whether the option is 
currently exercisable or ``vested.'' We make this change for option 
calculations in response to comments emphasizing the difficulty in 
keeping track of outstanding options, when they become exercisable and 
when they might be exercised.\15\ We believe that this method of 
determining the available exemption should make no difference from an 
investor protection point of view since the 12-month limit will still 
apply. However, this change will greatly simplify the issuer's 
oversight of outstanding offers and perhaps benefit more employees and 
others who may participate in the compensatory arrangements. The rule 
makes it clear that calculations with respect to options should be 
based on the exercise price, since the purpose is to measure the 
securities that will be sold under the exemption.\16\
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    \15\ In particular, commenters were concerned that basing 
calculations on the option exercise date could result in an 
unanticipated loss of the exemption if too many optionees exercised 
their options at the same time. Although options are offers of the 
underlying securities that can be made without limitation and are 
exempt under the revised rule, using the exercise price at the date 
of grant simplifies the calculations of the available exemption 
amount and allows issuers to avoid the administrative difficulties 
of keeping track of outstanding options.
    \16\ In the event that exercise prices are later changed or 
repriced, a recalculation will have to be made under Rule 701.
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    Rule 701 provides that the calculation of the exempt amount should 
account for the value of both consultant and employee services.\17\ A 
number of the commenters misunderstood this provision. The point of the 
revision is to clarify that compensatory arrangements should not be 
valued at ``zero'' or treated as a gift. Even when the employee or 
consultant is not required to pay additional consideration for the 
securities being issued, these securities typically would have some 
intrinsic worth, such as book value or a multiple of book value. The 
value of services exchanged for securities issued must be measured by 
reference to the value of the securities issued rather than the 
employee's salary or consultant's invoice. The rule as revised makes 
this clear.
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    \17\ Rule 701(d)(3)(i).
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B. Disclosure to Persons Covered by Rule 701

    We were concerned that eliminating the $5 million ceiling could 
result in some very large offerings of securities without the 
protections of registration, even though made pursuant to compensatory 
arrangements. We therefore proposed to impose a specific disclosure 
requirement on all transactions under the exemption. We solicited 
comment on whether some dollar amount of transactions might not require 
specified disclosure, for example, $1 million. In response to comment, 
and our consideration of reasonable alternatives, we have decided to 
require no specified disclosure requirement for sales up to $5 million. 
This formulation apparently has worked well to date. We do not

[[Page 11097]]

believe the exemption has been misused for fraudulent purposes in its 
current format. We agree with the commenters that the additional 
burdens related to mandatory financial and risk disclosure for these 
limited offerings are unnecessary.
    On the other hand, the revised rule provides no aggregate offering 
price ceiling and thus substantial amounts of securities exceeding $5 
million may be issued by large private companies. Indeed, a number of 
commenters with this profile urged the Commission to remove the ceiling 
quickly so that they can enjoy sooner the benefits of the exemption for 
their compensatory arrangements. These commenters appear to be 
comfortable with a greater disclosure requirement as the tradeoff for 
greater use of the exemptive rule. Moreover, we believe that many of 
these companies already have prepared the type of disclosure required 
in their normal course of business, either for using other exemptions, 
such as Regulation D \18\ or for other purposes. As a result, the 
disclosure requirement generally would be less burdensome for them. If 
these companies do not want to disclose the requisite information to 
their employees and others, they may continue to follow the current 
provisions of the rule and keep the amount sold below $5 million in a 
12-month period. In that case, they would continue to provide only the 
disclosure needed to satisfy the antifraud provisions of the law.\19\
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    \18\ 17 CFR 230.501 et seq.
    \19\ See Preliminary Note 1 to Rule 701.
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    We would have investor protection concerns if we removed the $5 
million ceiling without imposing specific disclosure requirements, as 
discussed below. In contrast, we believe that disclosure requirements 
are not needed for offerings below the $5 million threshold at this 
time. We have not witnessed abuse below this threshold, and therefore 
the burden of preparing and disseminating the new disclosure does not 
justify the potential benefits to employee-investors.
    Where the formula permits sales in excess of $5 million during a 
12-month period, and the issuer chooses to take advantage of this 
increased amount, the new disclosure should be provided to all 
investors before sale. This requirement will obligate issuers to 
provide disclosure to all investors if the issuer believes that sales 
will exceed the $5 million threshold in the coming 12-month period. If 
disclosure has not been provided to all investors before sale, the 
issuer will lose the exemption for the entire offering when sales 
exceed the $5 million threshold.
    The disclosure requirements are adopted as proposed. The required 
disclosure consists of:
     A copy of the compensatory benefit plan or contract;\20\
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    \20\ A copy of the compensatory benefit plan or contract must be 
given to all offerees under current Rule 701. Under the revisions, 
this will continue to be required, whether or not the specific 
disclosure requirement is triggered by exceeding the $5 million 
amount.
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     A copy of the summary plan description required by the 
Employee Retirement Income Security Act of 1974 (``ERISA'') \21\ or, if 
the plan is not subject to ERISA, a summary of the plan's material 
terms;
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    \21\ 29 U.S.C. 1104-1107.
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     Risk factors associated with investment in the securities 
under the plan or agreement; and
     The financial statements required in an offering statement 
on Form 1-A \22\ under Regulation A.\23\
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    \22\ 17 CFR 239.90. Part F/S of Form 1-A generally provides for 
unaudited financial statements. However, issuers that have audited 
financial statements must provide them, instead of unaudited ones.
    \23\ 17 CFR 230.251 et seq.
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    The type and amount of disclosure needed in a compensatory 
securities transaction differs from that needed in a capital-raising 
transaction. In a bona fide compensatory arrangement, the issuer is 
concerned primarily with compensating the employee-investor rather than 
maximizing its proceeds from the sale. Because the compensated 
individual has some business relationship, perhaps extending over a 
long period of time, with the securities issuer, that person will have 
acquired some, and in many cases, a substantial amount of knowledge 
about the enterprise. The amount and type of disclosure required for 
this person is not the same as for the typical investor with no 
particular connection with the issuer. The current standards of 
financial statement disclosure contained in Regulation A should satisfy 
our concerns for a level of disclosure that will provide basic 
protections in a compensatory transaction but may not be available as a 
result of ordinary employment or business dealings.\24\ The standard is 
well established and may be very familiar to private issuers, since 
these financial statements and risk factor disclosure requirements are 
used not only in Regulation A, but also in the private placement 
exemptions contained in Regulation D.\25\
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    \24\ As proposed and adopted, if a reporting company is relying 
on Rule 701 to guarantee the obligations of a subsidiary's 
securities sold under the rule, the issuer must deliver the parent's 
financial statements that would be required by Rule 10-01 of 
Regulation S-X (17 CFR 210.10-01) and Item 310 of Regulation S-B (17 
CFR 228.310). Rule 701(e)(5).
    \25\ See Rule 502(b)(2)(i)(A) of Regulation D [17 CFR 
230.502(b)(2)(i)(A)].
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    Compliance with the minimum disclosure standards for Rule 701 may 
not necessarily meet the antifraud standards of the securities law.\26\ 
The disclosure required will depend upon the facts circumstances.\27\
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    \26\ E.g., Section 17(a) of the Securities Act [15 U.S.C. 
77q(a)], Section 10(b) of the Exchange Act [15 U.S.C. 78j(b)], and 
Rule 10b-5 [17 CFR 240.10b-5].
    \27\ Issuers eligible to take advantage of the increased 
availability of the exemption also should be mindful of the 
requirements of the Exchange Act [15 U.S.C. 78l(g)]. Once an issuer 
exceeds 500 shareholders and $10 million in assets, it must register 
under Section 12(g) of the Exchange Act and provide full disclosure 
as a ``public'' company. See Rule 12g-1 [17 CFR 240.12g-1].
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    Some commenters expressed concern that requiring a private issuer 
to deliver disclosure documents, particularly financial statements, to 
employee-investors could result in serious harm to the company if the 
information were to come into possession of its competitors. In view of 
the substantial amounts of securities that may now be issued under Rule 
701, we believe that a minimal level of disclosure consisting of risk 
factors and Regulation A unaudited financial statements is essential to 
meet even the lower level of information needed to inform compensatory-
type investors such as employees and consultants. Private issuers can 
use certain mechanisms, such as confidentiality agreements, to protect 
competitive information. Alternatively, an issuer could elect to stay 
below the $5 million threshold to avoid these disclosure obligations.

C. Foreign Private Issuers

    In the Rule 701 Proposing Release, we especially sought comment on 
how foreign private issuers \28\ should be treated under Rule 701, 
given that more and more U.S. persons are employed by foreign 
companies. Many foreign private issuers with substantial amounts of 
securities held by U.S. persons provide only ``home country reports'' 
and do not prepare financial statements with a reconciliation to U.S. 
generally accepted accounting principles (``GAAP'') because of the Rule 
12g3-2(b) exemption from the registration requirements of the Exchange 
Act.\29\ This exemption is available even though

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the number of U.S. holders may exceed 500 and total company assets 
exceed $10 million, which ordinarily would trigger the Exchange Act 
reporting requirements.
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    \28\ This term is defined in Rule 405 [17 CFR 230.405].
    \29\ 17 CFR 240.12g3-2(b). Rule 12g3-2(b) exempts from Exchange 
Act registration securities of a foreign private issuer, if the 
issuer furnishes to us annual and other reports and other materials 
that are publicly available in its home market.
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    We solicited comment on whether non-reporting foreign private 
issuers should be subject to some annual ceiling, such as $10 million. 
Without a limit, the new calculation formula could result in the sale 
of a large amounts of securities to a many employees without such 
companies ever being required to register under the Securities Act or 
the Exchange Act. Commenters objected to a limit, noting that foreign 
private issuers typically undertake broad-based offerings to their U.S. 
employees for legitimate compensatory reasons and in order to treat all 
of their employees alike regardless of their location. Many commenters 
expressed the view that any tightening of the exemption for foreign 
private issuers would simply result in securities-based incentives not 
being offered to the U.S. employees of foreign issuers.
    We have determined not to impose any annual ceiling on foreign 
private issuers, given the compensatory nature of Rule 701 offerings 
and the detrimental effect that such a rule could have on the 
compensation packages of U.S. employees. Instead, non-reporting foreign 
private issuers will be required to provide the same disclosure as non-
reporting domestic issuers if sales under Rule 701 exceed $5 million in 
a 12-month period.\30\ Imposing this obligation on all issuers is the 
price for removal of the $5 million offering limit.
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    \30\ See Section II.B above.
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    We do not believe that any additional modification needs to be made 
at this time for foreign private issuers because they will be subject 
to the same disclosure requirements as domestic issuers. When, and if, 
we accept international accounting standards or guidelines for filing 
and reporting purposes, we would amend Rule 701 to allow these 
standards to satisfy the rule's financial statement disclosure 
obligations for foreign private issuers. For issuers making smaller 
offerings, the foreign companies may continue to follow the rule as 
they have in the past, which means that ``home country'' reports may be 
used, as necessary, to satisfy the antifraud standards. However, larger 
companies that cross the $5 million barrier will have to provide the 
disclosure required under Regulation A, which includes unaudited 
financial statements.
    Where financial statements prepared in accordance with U.S. GAAP 
are not provided, a reconciliation to such principles must be 
attached.\31\ The provisions of Regulation A suggest that a 
reconciliation is permitted only for Canadian companies. This is 
because Canadian companies are the only foreign issuers eligible to use 
that exemption. In contrast, any foreign issuer is eligible to use Rule 
701, but if it exceeds the $5 million amount it must provide financial 
statements as required by Regulation A. If U.S. GAAP financials are not 
available, the financials provided must be reconciled to U.S. GAAP. 
Although there are costs involved in preparing the reconciliation and a 
number of the commenters objected to the notion of preparing a 
reconciliation to U.S. GAAP, we believe that the minimal level of 
disclosure for these compensatory transactions is the Regulation A 
financial statements, which must be reconciled to U.S. GAAP. Foreign 
private issuers that do not wish to provide the disclosure specified 
may elect to keep their Rule 701 sales below the $5 million threshold 
for disclosure, the same as for domestic issuers.
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    \31\ See Item 17 of Form 20-F [17 CFR 249.220f].
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D. Consultants and Advisors

    Like regular employees, consultants and advisors are eligible to 
receive securities under the Rule 701 exemption. Similarly, where the 
issuer is a reporting company, consultants and advisors may receive 
securities in a transaction registered on Form S-8.\32\ Currently, the 
staff interprets the scope of eligible consultants and advisors 
differently for purposes of Rule 701 and Form S-8. The staff has 
interpreted Rule 701 to permit participation by a broader range of 
consultants and advisors, even though the words are identical in both 
Rule 701 and Form S-8.
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    \32\ General Instruction A.1(a) to Form S-8.
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    At the same time we proposed changes to Rule 701, we proposed 
changes to Form S-8 to further limit further the scope of eligible 
consultants and advisors.\33\ In many cases, the Form has been misused 
by registering shares for issuance to consultants and advisors who do 
not have sufficient connection and familiarity with, the company. In 
some cases, these persons are receiving the securities for capital-
raising, rather than compensatory, purposes and engage in public 
distributions of the company's securities.\34\
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    \33\ See Release No. 33-7506 (Feb. 17, 1998) [63 FR 9648] (``S-8 
Proposing Release'').
    \34\ For a fuller discussion of misuse of Form S-8 involving 
consultant and advisors, see the S-8 Proposing Release and the S-8 
Adopting Release. Today we also propose additional amendments to 
Form S-8, which are designed to address abuses in the use of that 
form.
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    In the Rule 701 Proposing Release, we asked how consultants and 
advisers participate in compensatory arrangements and whether we should 
restrict their participation. We also asked whether Rule 701 and Form 
S-8 should be harmonized in their treatment of these persons. We are 
concerned that persons who would misuse exemptions will develop new 
methods to abuse deregulatory safe harbors, even as we are taking steps 
to close down other avenues for abuse.
    We have determined that the flexible definition of ``consultants 
and advisors,'' particularly in the context of registered offerings on 
Form S-8, has led to abuse. We are concerned that Rule 701 could be 
similarly abused if we make changes only to Form S-8, even though Rule 
701 securities, unlike Form S-8 securities, are restricted.\35\ We are 
therefore adopting a definition of the term ``consultants and 
advisors'' in Rule 701 that will harmonize with the new definition in 
Form S-8,\36\ and narrow the scope of eligible consultants and 
advisors.
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    \35\ Ninety days after a company becomes subject to the 
reporting requirements of the Exchange Act, the restrictions lapse. 
Rule 701(g)(3). Under the revised rule, because all offers are 
exempt, and for purposes of ceiling calculations option exercise 
prices are used at the date of grant regardless of the current 
exercisability of the option, vested or unvested options will be 
exercisable in reliance upon Rule 701 even after the issuer becomes 
a public company. Cf. the interpretive letter to Richard M. Leisner 
(December 21, 1995).
    \36\ The S-8 Adopting Release adopts the ccorresponding changes 
into Form S-8. That release also provides additional guidance on 
determining the scope of eligible consultants and advisors. See S-8 
Adopting Release Section II.A.2. This guidance is applicable to Rule 
701 as well as to Form S-8.
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    As revised, securities promoters clearly will be excluded from the 
scope of persons eligible to participate under the exemption. 
Independent agents,\37\ franchisees and salespersons who do not have an 
employment relationship with the issuer no longer will be within the 
scope of ``consultant or advisor.'' \38\ A person in a de facto 
employment relationship with the issuer, such as a non-employee 
providing services that traditionally are performed by an

[[Page 11099]]

employee,\39\ with compensation paid for those services being the 
primary source of the person's earned income, would qualify as an 
eligible person under the exemption.\40\ Other persons displaying 
significant characteristics of ``employment,'' such as the professional 
advisor providing bookkeeping services, computer programming advice, or 
other valuable professional services may qualify as eligible 
consultants or advisors, depending upon the particular facts and 
circumstances.\41\ Our staff will continue to handle questions about 
``consultant or advisor'' status on a case-by-case basis through its 
interpretive letter process, but the terms will be interpreted in the 
same manner for both Rule 701 and Form S-8.
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    \37\ In the revisions to Form S-8 adopted today, we permit 
insurance agents who are exclusive agents of the issuer, its 
subsidiaries or parents or who derive more than 50% of their annual 
income from the issuer to be considered ``employees'' under Form S-
8. We have made a corresponding change to Rule 701.
    \38\ The following interpretive letters defining eligible 
consultants or advisors under Rule 701 may no longer be relied upon, 
as of the effective date of the amendments, except to the extent 
that they have been relied upon for currently outstanding offers and 
previous sales under the provision: Golfpro, Inc. (October 3, 1989); 
Herff Jones, Inc. (November 13, 1990); Microchip Technology, Inc. 
(November 4, 1992); Optika Imaging Systems, Inc. (October 1, 1996); 
USWeb Corporation (November 7, 1996).
    \39\ However, these services must not be in connection with the 
offer or sale of securities in a capital-raising transaction, and 
must not directly or indirectly promote or maintain a market for the 
issuer's securities.
    \40\ See Foundation Health Corporation (July 12, 1993).
    \41\ Morgan Health Group, Inc. (December 18, 1995); Princeton 
Medical Managers Resources (September 12, 1997); PHM Management 
Resources, Inc. (September 16, 1997); Talbert Medical Corporation 
(September 16, 1997); Osler Health, Inc. (February 11, 1998); 
Comprehensive Health Care Corp. (April 30, 1998) are inconsistent 
with the interpretation rendered in the Foundation Health letter 
under Form S-8 and are also overturned today, although they too may 
continue to be relied upon for outstanding offers and previous 
sales. These issuers may resubmit their interpretive requests for 
staff consideration, highlighting in their submissions the type of 
arrangements between the parties that show the services, if any, 
that the physicians provide to the issuers and others to permit an 
assessment of their status under the new ``consultant and advisor'' 
provision.
---------------------------------------------------------------------------

E. Other Revisions

    Because it has become increasingly commonplace to sell stock of a 
private subsidiary to employees of a parent or affiliate subsidiary, 
and because these transactions retain the envisioned compensatory 
character, we have implemented our proposal to expand exemption 
coverage to sales to employees of majority-owned subsidiaries of the 
issuer's parent (i.e., brother-sister subsidiaries).\42\
---------------------------------------------------------------------------

    \42\ Rule 701(c). Form S-8 continues to be unavailable for 
offers and sales to employees of brother-sister subsidiaries.
---------------------------------------------------------------------------

    We also have adopted our proposal that Rule 701 should be available 
for sales, such as option exercises, by family donees of compensatory 
securities and transferees who receive these securities in divorce 
proceedings. Rule 701 is now available for immediate family members who 
have acquired such securities through a gift or a domestic relations 
order. For this purpose ``family member'' is defined as in Form S-8 to 
include any child, stepchild, grandchild, parent, stepparent, 
grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-
law, father-in-law, son-in-law, daughter-in-law, brother-in-law or 
sister-in-law, including adoptive relationships, any person sharing the 
employee's household (other than a tenant or employee), a trust in 
which these persons have more than a fifty percent beneficial interest, 
a foundation in which these persons (or the employee) control the 
management of assets, and any other entity in which these persons (or 
the employee) own more than fifty percent of the voting interests. This 
provision is consistent with the treatment of transferable securities 
under Form S-8.\43\
---------------------------------------------------------------------------

    \43\ See the S-8 Adopting Release.
---------------------------------------------------------------------------

III. Cost-Benefit Analysis

    As an aid in the evaluation of the costs and benefits of our 
original proposals, which were deregulatory in nature, we requested the 
views and other supporting information of the public. We received no 
comments in response to this request. Nonetheless, we believe that the 
rule as revised provides substantial benefits that justify any costs 
involved. A major feature of the exemption is its regulatory 
flexibility. Thus, benefits it offers include maintaining the existing 
exemption for small companies, expanding the availability of the 
exemption by applying otherwise established disclosure requirements, 
and permitting companies to preserve cash by using stock for 
compensatory purposes. The amended rule as a whole provides regulatory 
relief for companies, even larger ones, although relief with the fewest 
conditions continues to be for small issuers and others that decide to 
maintain their offerings below the $5 million ceiling.
    For every issuer, the minimum available exemptive amount has been 
increased from $500,000 to $1 million. This doubling of exemption 
should be particularly attractive to smaller companies that are unable 
to utilize the formulas effectively. In addition, we have decided not 
to require specified disclosure requirements, including financial 
statements, for sales up to $5 million. Further, we determined not to 
reinstitute a filing requirement such as Form 701 to report when the 
exemption is used.
    On the other hand, the revised rule provides no aggregate offering 
price ceiling and thus substantial amounts of securities exceeding $5 
million may be issued by large private companies. If these companies do 
not want to disclose the requisite information to their employees and 
others, they may continue to follow the current provisions of the rule 
and keep the amount sold below $5 million in a 12-month period. In that 
case, they would not have to provide the specified disclosure.
    The ability to reward and retain employees with a company's 
securities will permit companies to keep valuable employees without 
having to use other methods to compensate them, such as borrowing money 
or selling securities. Because the rule may encourage companies to 
offer incentives to their employees and others, for example through 
deferred compensation arrangements, and also facilitates interfamily 
donative transfers, it may provide benefits from the perspective of tax 
and estate planning as well.
    We have concluded that the rule amendments will not result in a 
major increase in costs or prices for consumers or individual 
industries, or significant adverse effects on competition, employment, 
investment, productivity, innovation or small business. We believe that 
persons who will rely on the rule will not have significantly increased 
costs. In fact, since the current version of the rule is essentially 
retained for offerings under the former $5 million ceiling, there 
should be no change in the costs of compliance for issuers that have 
historically used the exemption and continue to keep their offerings 
under $5 million. For issuers that are large enough to go above the $5 
million threshold and therefore are required to provide specified 
disclosure, any additional costs may not be significant. Some of the 
commenters fitting this profile stated that they either already provide 
or have the required information readily available for their employees 
and other persons.
    Some issuers, however, will face costs in availing themselves of 
the increased benefits of the rule--primarily those who decide to issue 
more than $5 million worth of securities in the 12-month period. It is 
worth noting, however, that these increased costs would be borne 
voluntarily. Issuers can perform their own cost-benefit analysis to 
decide whether to do an offering in excess of $5 million under the 
rule. Currently, issuers do not have the option to make an offering 
exceeding $5 million under Rule 701. Even in these cases, the costs of 
using Rule 701 may be lower than the costs of using another exemption 
or registering the sales. Such costs may include ``in-house'' 
preparation of disclosure documents, hiring of attorneys and 
accountants, and delivery and printing costs.

[[Page 11100]]

Nonetheless, because there may be more securities sales to more 
investors, we believe that mandatory disclosure is necessary for 
investor protection.
    The change to the ``consultants and advisors'' definition, which is 
necessary to counteract abuses we have found with some ``compensatory'' 
arrangements, will impact use of the Rule 701 exemption and perhaps 
disadvantage some issuers in their ability to effectively use the 
provision. However, the staff will continue to consider interpretive 
requests of the term, including reconsideration of some of the letters 
we are overturning today.

IV. Exemptive Authority Findings

    We find that exempting transactions by nonreporting companies 
pursuant to compensatory benefit plans and written compensatory 
contracts from Section 5 of the Securities Act is appropriate in the 
public interest and is consistent with the protection of investors. We 
make these findings based on the reasons that we describe in this 
release. In particular, we have determined that Rule 701 has 
successfully allowed small businesses to compensate their employees 
with securities. The amendments will permit smaller businesses to issue 
up to $1 million in securities to their employees, an increase from the 
current $500,000 limit, without regard to the company's size. The 
amendments also will permit larger private companies to issue more than 
$5 million, subject to the established financial statement requirements 
of Regulation A and provision of risk factor disclosure. Our use of 
exemptive authority will allow more companies and more investors to 
benefit from this rule.
    The rule is specifically designed not to raise capital. The ability 
to reward and retain employees with a company's securities should aid 
companies by providing a mechanism to keep valuable employees without 
having to use other methods to compensate them, such as borrowing money 
or selling securities. Finally, Rule 701 provides private companies 
with some of the benefits public companies have under Form S-8.
    Furthermore, we have not found instances of abuse of Rule 701, nor 
have we become aware of investor complaints. Rather, investors have 
enjoyed the benefits of being compensated with the securities of the 
company for which they are employed or provide services. Therefore, we 
have found that Rule 701 has been consistent with investor protection 
in the past. We realize, however, that the exemption will lead to a 
greater volume of sales to a larger number of investors. We believe 
that requiring disclosure for these larger offerings will help assure 
that the use of our exemptive authority in this context is consistent 
with the protection of investors.

V. Summary of Final Regulatory Flexibility Analysis

    In accordance with 5 U.S.C. 604, we have prepared a Final 
Regulatory Flexibility Analysis (``FRFA'') regarding the proposed 
amendments.
    The analysis notes that the amendments to Rule 701 are a result of: 
(1) concerns expressed to us by practitioners; (2) feedback that the 
current dollar limitations unduly constrain the ability of many 
eligible issuers to use Rule 701; and (3) the specific Congressional 
mandate expressed in the legislative history of NSMIA. The purpose of 
the revisions is to remove unnecessary constraints. We have determined 
that the amendments will not impair investor protection.
    As the FRFA describes, from mid-1988 through mid-1993, 1,069 
companies filed 1,294 Forms 701 indicating aggregate sales of about 
$2.28 billion. On an annual basis, an average of 214 companies reported 
$456 million of sales on approximately 260 Forms 701. Based on an 
analysis of a sample of these filings, the Commission's Office of 
Economic Analysis estimates that 14% of the filings were made by small 
businesses. More current information is not available because Form 701 
has not been a required submission since 1993.
    The revisions should permit greater use of the exemption by small 
and large non-reporting issuers alike. The minimum amount that any 
issuer can raise under the exemption has been raised from $500,000 to 
$1 million. Greater availability of the exemption for employee benefit, 
deferred compensation and other plans, as well as to facilitate family 
donative transfers, should aid in tax and estate planning. We expect, 
therefore, that more companies will use the rule and that the value of 
securities sold under the exemption will be larger than it was in the 
1988-1993 period. Accordingly, for purposes of estimating the 
amendments' economic impact, we estimate that 300 companies per year 
will make sales pursuant to Rule 701 and that 42 (14%) of those 
companies will be small businesses.
    The amendments do not impose any new recordkeeping requirements or 
require reporting of additional information. Nonetheless, there is an 
impact, especially for larger private companies that choose to offer 
compensatory arrangements in excess of the current $5 million ceiling, 
as those companies will need to prepare specified disclosure and 
provide it to their participating employees. Because a number of 
commenters told us that this information is commonly maintained by this 
class of issuer (generally not small entities) in order to satisfy 
requirements for securities issuance exemptions (such as for private 
placements), loans and other purposes such as regulatory and internal 
ones, the amendments will not increase reporting, recordkeeping or 
compliance burdens, and may reduce those burdens for some companies.
    As discussed more fully in the FRFA, several possible significant 
alternatives to the amendments were considered to minimize effects on 
small entities. These included establishing different compliance or 
reporting requirements for small entities, exempting them from all or 
part of the proposed requirements, or requiring them to provide 
different disclosure, such as all Form 1-A items or the full disclosure 
requirements of Form SB-1 or SB-2. In fact, the rule as adopted is 
changed from our initial proposal, which would have required all 
entities to provide certain disclosure. As adopted, only issuers 
selling more than $5 million during a 12-month period will be required 
to provide disclosure. The FRFA also indicates that no current federal 
rules duplicate, overlap, or conflict with the proposed rule 
amendments.
    We encouraged written comments on any aspect of the Initial 
Regulatory Flexibility Analysis, but received no specific comments in 
response to our request. In particular, we sought comment on: (1) the 
number of small entities that would be affected by the proposed rule 
amendments; and (3) the determination that the proposed rule amendments 
would not increase (and in some cases may reduce) reporting, 
recordkeeping and other compliance requirements for small entities. For 
purposes of making determinations required by the Small Business 
Regulatory Enforcement Fairness Act of 1996 (``SBREFA''),\44\ we also 
requested data regarding the potential impact of the proposed 
amendments on the economy on an annual basis. We received no comments 
in response to this request either. A copy of the Final Regulatory 
Flexibility Act Analysis may be obtained from Twanna M. Young, Office 
of Small Business, Division of Corporation Finance, Securities and

[[Page 11101]]

Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549.
---------------------------------------------------------------------------

    \44\ Pub. L. No. 104-121, 110 Stat. 857 (1996) (codified in 
various sections of 5 U.S.C., 15 U.S.C., and as a note to 5 U.S.C. 
601).
---------------------------------------------------------------------------

VI. Paperwork Reduction Act

    Our staff consulted with the Office of Management and Budget 
(``OMB'') and submitted the proposals for review in accordance with the 
Paperwork Reduction Act of 1995 (``the Act'').\45\ The title to the 
affected information collection is: ``Rule 701.'' The specific 
information that must be included is explained in the rule itself, and 
relates to the issuer and other information that may be associated with 
investment in securities under the plan or agreement. The information 
is needed by prospective purchasers to make informed investment 
decisions.
---------------------------------------------------------------------------

    \45\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    The proposed amendments will increase the flexibility and utility 
of Rule 701 for private companies using securities to compensate their 
employees.
    The collection of information in Rule 701 will be required in order 
for companies to use the rule for sales of their securities to their 
employees and other persons covered by the rule. The likely respondents 
to the rule are companies that previously used the rule, but were being 
constrained by its limits, and companies thatwho could not use the rule 
at all because of its limits. While we cannot predict the number of 
respondents that may use expanded Rule 701, there were 1,294 Form 701 
filings during the period from mid-1988 through mid-1993, when persons 
relying upon the exemption were required to file reports with us 
concerning their use of the exemption. On the basis of these historical 
filings under Rule 701, we estimate that approximately 300 companies 
each year will rely on the exemption. The estimated burden for 
responding to the collection of information in Rule 701 will not 
increase for most companies due to the current disclosure requirements 
in Rule 701, but may increase slightly for other companies who may not 
be currently providing risk factors and Regulation A financial 
statements to employee-purchasers. We estimate that the burden hours 
per respondent each year will be two. Therefore, we estimate an 
aggregate of 600 burden hours per year.
    The information collection requirements imposed by Rule 701 are 
mandatory to the extent that a company elects to use the Rule 701 
exemption. The information will be disclosed to third parties or the 
public. An agency may not conduct or sponsor, and a person is not 
required to respond to, a collection of information unless it displays 
a current valid OMB control number.
    We received no comments in response to our request for comment 
regarding the information collection obligation.

VII. Statutory Basis, Text of Amendments and Authority

    The amendments to our rules and forms are being adopted pursuant to 
sections 2, 3(b), 6, 7, 8, 10, 19(a) and 28 of the Securities Act.

List of Subjects in 17 CFR Part 230

    Reporting and recordkeeping requirements, Securities.

    For the reasons set out in the preamble, title 17, chapter II of 
the Code of Federal Regulations is amended as follows:

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

    1. The authority citation for part 230 continues to read as 
follows:

    Authority: 15 U.S.C. 77b, 77f, 77g, 77h, 77j, 77r, 77s, 77sss, 
78c, 78d, 78l, 78m, 78n, 78o, 78w, 78ll(d), 79t, 80a-8, 80a-24, 80a-
28, 80a-29, 80a-30, and 80a-37, unless otherwise noted.

    2. By revising Sec. 230.701 to read as follows:


Sec. 230.701  Exemption for offers and sales of securities pursuant to 
certain compensatory benefit plans and contracts relating to 
compensation.

Preliminary Notes

    1. This section relates to transactions exempted from the 
registration requirements of section 5 of the Act (15 U.S.C. 77e). 
These transactions are not exempt from the antifraud, civil 
liability, or other provisions of the federal securities laws. 
Issuers and persons acting on their behalf have an obligation to 
provide investors with disclosure adequate to satisfy the antifraud 
provisions of the federal securities laws.
    2. In addition to complying with this section, the issuer also 
must comply with any applicable state law relating to the offer and 
sale of securities.
    3. An issuer that attempts to comply with this section, but 
fails to do so, may claim any other exemption that is available.
    4. This section is available only to the issuer of the 
securities. Affiliates of the issuer may not use this section to 
offer or sell securities. This section also does not cover resales 
of securities by any person. This section provides an exemption only 
for the transactions in which the securities are offered or sold by 
the issuer, not for the securities themselves.
    5. The purpose of this section is to provide an exemption from 
the registration requirements of the Act for securities issued in 
compensatory circumstances. This section is not available for plans 
or schemes to circumvent this purpose, such as to raise capital. 
This section also is not available to exempt any transaction that is 
in technical compliance with this section but is part of a plan or 
scheme to evade the registration provisions of the Act. In any of 
these cases, registration under the Act is required unless another 
exemption is available.

    (a) Exemption. Offers and sales made in compliance with all of the 
conditions of this section are exempt from section 5 of the Act (15 
U.S.C. 77e).
    (b) Issuers eligible to use this section. (1) General. This section 
is available to any issuer that is not subject to the reporting 
requirements of section 13 or 15(d) of the Securities Exchange Act of 
1934 (the ``Exchange Act'') (15 U.S.C. 78m or 78o(d)) and is not an 
investment company registered or required to be registered under the 
Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.).
    (2) Issuers that become subject to reporting. If an issuer becomes 
subject to the reporting requirements of section 13 or 15(d) of the 
Exchange Act (15 U.S.C. 78m or 78o(d)) after it has made offers 
complying with this section, the issuer may nevertheless rely on this 
section to sell the securities previously offered to the persons to 
whom those offers were made.
    (3) Guarantees by reporting companies. An issuer subject to the 
reporting requirements of section 13 or 15(d) of the Exchange Act (15 
U.S.C. 78m, 78o(d)) may rely on this section if it is merely 
guaranteeing the payment of a subsidiary's securities that are sold 
under this section.
    (c) Transactions exempted by this section. This section exempts 
offers and sales of securities (including plan interests and guarantees 
pursuant to paragraph (d)(2)(ii) of this section) under a written 
compensatory benefit plan (or written compensation contract) 
established by the issuer, its parents, its majority-owned subsidiaries 
or majority-owned subsidiaries of the issuer's parent, for the 
participation of their employees, directors, general partners, trustees 
(where the issuer is a business trust), officers, or consultants and 
advisors, and their family members who acquire such securities from 
such persons through gifts or domestic relations orders. This section 
exempts offers and sales to former employees, directors, general 
partners, trustees, officers, consultants and advisors only if such 
persons were employed by or providing services to the issuer at the 
time the securities were offered. In addition, the term ``employee'' 
includes insurance agents who are exclusive agents of the issuer, its 
subsidiaries or

[[Page 11102]]

parents, are or derive more than 50% of their annual income from those 
entities.
    (1) Special requirements for consultants and advisors. This section 
is available to consultants and advisors only if:
    (i) They are natural persons;
    (ii) They provide bona fide services to the issuer, its parents, 
its majority-owned subsidiaries or majority-owned subsidiaries of the 
issuer's parent; and
    (iii) The services are not in connection with the offer or sale of 
securities in a capital-raising transaction, and do not directly or 
indirectly promote or maintain a market for the issuer's securities.
    (2) Definition of ``Compensatory Benefit Plan.'' For purposes of 
this section, a compensatory benefit plan is any purchase, savings, 
option, bonus, stock appreciation, profit sharing, thrift, incentive, 
deferred compensation, pension or similar plan.
    (3) Definition of ``Family Member.'' For purposes of this section, 
family member includes any child, stepchild, grandchild, parent, 
stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, 
mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-
law, or sister-in-law, including adoptive relationships, any person 
sharing the employee's household (other than a tenant or employee), a 
trust in which these persons have more than fifty percent of the 
beneficial interest, a foundation in which these persons (or the 
employee) control the management of assets, and any other entity in 
which these persons (or the employee) own more than fifty percent of 
the voting interests.
    (d) Amounts that may be sold. (1) Offers. Any amount of securities 
may be offered in reliance on this section. However, for purposes of 
this section, sales of securities underlying options must be counted as 
sales on the date of the option grant.
    (2) Sales. The aggregate sales price or amount of securities sold 
in reliance on this section during any consecutive 12-month period must 
not exceed the greatest of the following:
    (i) $1,000,000;
    (ii) 15% of the total assets of the issuer (or of the issuer's 
parent if the issuer is a wholly-owned subsidiary and the securities 
represent obligations that the parent fully and unconditionally 
guarantees), measured at the issuer's most recent annual balance sheet 
date (if no older than its last fiscal year end); or
    (iii) 15% of the outstanding amount of the class of securities 
being offered and sold in reliance on this section, measured at the 
issuer's most recent annual balance sheet date (if no older than its 
last fiscal year end).
    (3) Rules for calculating prices and amounts. (i) Aggregate sales 
price. The term aggregate sales price means the sum of all cash, 
property, notes, cancellation of debt or other consideration received 
or to be received by the issuer for the sale of the securities. Non-
cash consideration must be valued by reference to bona fide sales of 
that consideration made within a reasonable time or, in the absence of 
such sales, on the fair value as determined by an accepted standard. 
The value of services exchanged for securities issued must be measured 
by reference to the value of the securities issued. Options must be 
valued based on the exercise price of the option.
    (ii) Time of the calculation. With respect to options to purchase 
securities, the aggregate sales price is determined when an option 
grant is made (without regard to when the option becomes exercisable). 
With respect to other securities, the calculation is made on the date 
of sale. With respect to deferred compensation or similar plans, the 
calculation is made when the irrevocable election to defer is made.
    (iii) Derivative securities. In calculating outstanding securities 
for purposes of paragraph (d)(2)(iii) of this section, treat the 
securities underlying all currently exercisable or convertible options, 
warrants, rights or other securities, other than those issued under 
this exemption, as outstanding. In calculating the amount of securities 
sold for other purposes of paragraph (d)(2) of this section, count the 
amount of securities that would be acquired upon exercise or conversion 
in connection with sales of options, warrants, rights or other 
exercisable or convertible securities, including those to be issued 
under this exemption.
    (iv) Other exemptions. Amounts of securities sold in reliance on 
this section do not affect ``aggregate offering prices'' in other 
exemptions, and amounts of securities sold in reliance on other 
exemptions do not affect the amount that may be sold in reliance on 
this section.
    (e) Disclosure that must be provided. The issuer must deliver to 
investors a copy of the compensatory benefit plan or the contract, as 
applicable. In addition, if the aggregate sales price or amount of 
securities sold during any consecutive 12-month period exceeds $5 
million, the issuer must deliver the following disclosure to investors 
a reasonable period of time before the date of sale:
    (1) If the plan is subject to the Employee Retirement Income 
Security Act of 1974 (``ERISA'') (29 U.S.C. 1104-1107), a copy of the 
summary plan description required by ERISA;
    (2) If the plan is not subject to ERISA, a summary of the material 
terms of the plan;
    (3) Information about the risks associated with investment in the 
securities sold pursuant to the compensatory benefit plan or 
compensation contract; and
    (4) Financial statements required to be furnished by Part F/S of 
Form 1-A (Regulation A Offering Statement) (Sec. 239.90 of this 
chapter) under Regulation A (Secs. 230.251 through 230.263). Foreign 
private issuers as defined in Sec. 230.405 must provide a 
reconciliation to generally accepted accounting principles in the 
United States (U.S. GAAP) if their financial statements are not 
prepared in accordance with U.S. GAAP (Item 17 of Form 20-F 
(Sec. 249.220f of this chapter)). The financial statements required by 
this section must be as of a date no more than 180 days before the sale 
of securities in reliance on this exemption.
    (5) If the issuer is relying on paragraph (d)(2)(ii) of this 
section to use its parent's total assets to determine the amount of 
securities that may be sold, the parent's financial statements must be 
delivered. If the parent is subject to the reporting requirements of 
section 13 or 15(d) of the Exchange Act (15 U.S.C. 78m or 78o(d)), the 
financial statements of the parent required by Rule 10-01 of Regulation 
S-X (Sec. 210.10-01 of this chapter) and Item 310 of Regulation S-B 
(Sec. 228.310 of this chapter), as applicable, must be delivered.
    (6) If the sale involves a stock option or other derivative 
security, the issuer must deliver disclosure a reasonable period of 
time before the date of exercise or conversion. For deferred 
compensation or similar plans, the issuer must deliver disclosure to 
investors a reasonable period of time before the date the irrevocable 
election to defer is made.
    (f) No integration with other offerings. Offers and sales exempt 
under this section are deemed to be a part of a single, discrete 
offering and are not subject to integration with any other offers or 
sales, whether registered under the Act or otherwise exempt from the 
registration requirements of the Act.
    (g) Resale limitations. (1) Securities issued under this section 
are deemed to be ``restricted securities'' as defined in Sec. 230.144.
    (2) Resales of securities issued pursuant to this section must be 
in compliance with the registration

[[Page 11103]]

requirements of the Act or an exemption from those requirements.
    (3) Ninety days after the issuer becomes subject to the reporting 
requirements of section 13 or 15(d) of the Exchange Act (15 U.S.C. 78m 
or 78o(d)), securities issued under this section may be resold by 
persons who are not affiliates (as defined in Sec. 230.144) in reliance 
on Sec. 230.144, without compliance with paragraphs (c), (d), (e) and 
(h) of Sec. 230.144, and by affiliates without compliance with 
paragraph (d) of Sec. 230.144.

    Dated: February 25, 1999.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-5296 Filed 3-5-99; 8:45 am]
BILLING CODE 8010-01-U