[Federal Register Volume 83, Number 142 (Tuesday, July 24, 2018)]
[Rules and Regulations]
[Pages 34940-34944]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-15730]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 230

[Release No. 33-10520; File No. S7-17-18]
RIN 3235-AM39


Exempt Offerings Pursuant to Compensatory Arrangements

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission is adopting an 
amendment to its regulations under the Securities Act of 1933 (the 
``Securities Act''), which provide an exemption from registration for 
securities issued by non-reporting companies pursuant to compensatory 
arrangements. As mandated by the Economic Growth, Regulatory Relief, 
and Consumer Protection Act (the ``Act''), the amendment revises a rule 
to increase from $5 million to $10 million the aggregate sales price or 
amount of securities sold during any consecutive 12-month period in 
excess of which the issuer is required to deliver additional 
disclosures to investors.

DATES: 
    Effective date: July 23, 2018.
    Comment date: Comments regarding the collection of information 
requirements within the meaning of the Paperwork Reduction Act of 1995 
should be received on or before August 23, 2018.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/final.shtml); or
     Send an email to [email protected]. Please include 
File Number S7-xx-18 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE, 
Washington, DC 20549-1090.
All submissions should refer to File Number S7-17-18. This file number 
should be included on the subject line if email is used. To help us 
process and review your comments more efficiently, please use only one 
method. The Commission will post all comments on the Commission's 
internet website (http://www.sec.gov/rules/final.shtml). Comments are 
also available for website viewing and printing in the Commission's 
Public Reference Room, 100 F Street NE, Washington, DC 20549, on 
official business days between the hours of 10:00 a.m. and 3:00 p.m. 
All comments received will be posted without change; we do not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: Anne M. Krauskopf, Senior Special 
Counsel, and Adam F. Turk, Special Counsel, Office of Chief Counsel, 
Division of Corporation Finance, at (202) 551-3500.

SUPPLEMENTARY INFORMATION: We are adopting an amendment to 17 CFR

[[Page 34941]]

230.701 (Rule 701) \1\ under the Securities Act.\2\
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    \1\ Unless otherwise noted, all references to statutory sections 
are to the Securities Act, and all references to rules under the 
Securities Act are to title 17, part 230 of the Code of Federal 
Regulations [17 CFR part 230].
    \2\ 15 U.S.C. 77a et seq.
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I. Background

    Rule 701 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 exemption covers securities offered or sold under a 
plan or agreement between a non-reporting company \3\ and the company's 
employees, officers, directors, partners, trustees, consultants, and 
advisors.\4\
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    \3\ Only issuers that are not subject to the reporting 
requirements of Section 13 [15 U.S.C. 78m] or 15(d) [15 U.S.C. 
78o(d)] of the Securities Exchange Act of 1934 (``Exchange Act'') 
and are not investment companies registered or required to be 
registered under the Investment Company Act of 1940 [15 U.S.C. 80a-1 
et seq.] are eligible to rely on Rule 701.
    \4\ The rule applies to compensatory arrangements established by 
the issuer, its parents, its majority-owned subsidiaries and 
majority-owned subsidiaries of the issuer's parent.
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II. Rule Amendment

    As mandated by Section 507 of the Act,\5\ we are amending Rule 
701(e) \6\ to increase from $5 million to $10 million \7\ the aggregate 
sales price or amount of securities sold during any consecutive 12-
month period in excess of which the issuer is required to deliver 
additional disclosure to investors. As amended, Rule 701(e) will 
otherwise continue to operate in the same manner as it currently 
does.\8\ Specifically, the additional disclosures required by Rule 
701(e) \9\ will not be required for sales up to $10 million in the 12-
month period. If aggregate sales during that period exceed $10 million, 
however, the issuer must deliver those additional disclosures a 
reasonable period of time before the date of sale to all investors in 
the 12-month period. Issuers that have commenced an offering in the 
current 12-month period will be able to apply the new $10 million 
disclosure threshold immediately upon effectiveness of the amendment.
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    \5\ Public Law 115-174, 132 Stat. 1296 (2018).
    \6\ 17 CFR 230.701(e).
    \7\ Section 507 of the Act also requires that every five years 
we index for inflation such aggregate sales price or amount of 
securities sold to reflect the change in the Consumer Price Index 
for All Urban Consumers published by the Bureau of Labor Statistics, 
rounding to the nearest $1 million.
    \8\ Concurrent with the adoption of this amendment to Rule 701, 
we are issuing a concept release requesting public comment on 
various other issues relating to Rule 701. See Release No. 33-10521 
(Jul. 18, 2018).
    \9\ These disclosures consist of:
     A copy of the summary plan description required by the 
Employee Retirement Income Security Act of 1974 (``ERISA'') [29 
U.S.C. 1104-1107] or, if the plan is not subject to ERISA, a summary 
of the plan's material terms;
     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 [17 CFR 239.90] under Regulation A [17 CFR 
230.251 through 230.263].
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III. Procedural Matters

    The Administrative Procedure Act (``APA'') generally requires an 
agency to publish notice of a proposed rulemaking in the Federal 
Register and provide an opportunity for public comment.\10\ This 
requirement does not apply, however, if the agency ``for good cause 
finds . . . that notice and public procedure are impracticable, 
unnecessary, or contrary to the public interest.'' \11\ As discussed 
above, Section 507 of the Act directs the Commission, not later than 60 
days after the date of enactment, to amend Rule 701(e) to increase from 
$5 million to $10 million the aggregate sales price or amount of 
securities sold during any consecutive 12-month period in excess of 
which the issuer is required to deliver additional disclosures to 
investors. Because the amendment is necessary to conform Rule 701(e) to 
the requirements of the Act, and involves no exercise of agency 
discretion, we find that notice and public comment are unnecessary.\12\ 
The APA also generally requires that an agency publish an adopted rule 
in the Federal Register 30 days before it becomes effective.\13\ This 
requirement, however, does not apply if the agency finds good cause for 
making the rule effective sooner.\14\ For the same reasons as we are 
forgoing notice and comment, we find good cause to make the rules 
effective immediately upon publication in the Federal Register. In 
addition, we find that the amendment relieves a restriction in our 
rules.\15\
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    \10\ See 5 U.S.C. 553(b).
    \11\ Id.
    \12\ This finding also satisfies the requirements of 5 U.S.C. 
808(2), allowing the amendment to become effective notwithstanding 
the requirement of 5 U.S.C. 801 (if a federal agency finds that 
notice and public comment are impractical, unnecessary, or contrary 
to the public interest, a rule shall take effect at such time as the 
federal agency promulgating the rule determines). The amendment also 
does not require analysis under the Regulatory Flexibility Act. See 
5 U.S.C. 604(a) (requiring a final regulatory flexibility analysis 
only for rules required by the APA or other law to undergo notice 
and comment).
    \13\ See 5 U.S.C. 553(d).
    \14\ Id.
    \15\ Id.
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IV. Economic Analysis

    We are mindful of the costs imposed by and the benefits obtained 
from our rules and amendments.\16\ The discussion below addresses the 
potential economic effects of the amendment, including the likely 
benefits and costs. The Commission is adopting an amendment to 
implement the specific statutory mandate of Section 507 of the Act. The 
legislative history suggests that Section 507 of the Act was intended 
to address two concerns with the existing $5 million threshold for 
requiring additional disclosure. Namely, that the additional disclosure 
makes it more expensive for companies to compensate their employees 
with the company's stock and that this disclosure puts non-reporting 
companies at risk of disclosing confidential financial information.\17\ 
By increasing the threshold from $5 million to $10 million, we believe 
that Congress intended to alleviate some of these concerns. The costs 
and benefits of this amendment stem entirely from the statutory mandate 
of Section 507.\18\ In addition, given that the amendment implements a 
statutory mandate and involves no exercise of agency discretion, we 
believe there are no reasonable alternatives to the amendment.\19\
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    \16\ Section 2(b) of the Securities Act [15 U.S.C. 77b(b)] 
requires the Commission, when engaging in rulemaking where it is 
required to consider or determine whether an action is necessary or 
appropriate in the public interest, to consider, in addition to the 
protection of investors, whether the action will promote efficiency, 
competition and capital formation.
    \17\ See, e.g., Report of the Financial Services Committee of 
the House of Representatives to H.R. 1343 (``These exemptions assist 
privately-held companies that want to provide their employees with 
the option to purchase the company's securities to increase employee 
ownership. . . . Rule 701 should be updated by raising the $5 
million threshold requirement because the disclosures make it more 
expensive for companies to compensate their employees with the 
company's stock. In addition, these disclosure requirements put 
private companies at risk of disclosing confidential financial 
information.'').
    \18\ As the intent of this rulemaking is to implement the 
specific regulatory change mandated by Congress, this analysis 
focuses on the economic effects arising from that change.
    \19\ As noted above, concurrent with the adoption of this 
amendment, we are issuing a concept release requesting public 
comment on various other issues relating to Rule 701.
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A. Baseline

    The baseline for our economic analysis is the disclosure 
requirement of Item 701(e) prior to the amendment being adopted, which 
required an issuer to deliver additional disclosures to investors if 
the aggregate sales price or amount of securities sold during any 
consecutive 12-month period exceeded $5 million. The amendment will 
affect non-reporting companies that rely on Rule 701 to offer 
securities to plan

[[Page 34942]]

participants pursuant to compensatory benefit plans. In particular, the 
amendment will affect non-reporting companies that issue, or seek to 
issue, between $5 million and $10 million in a 12-month period. Non-
reporting companies that issue less than $5 million or more than $10 
million in a 12-month period will not be affected by the amendment. The 
Commission lacks data on non-reporting companies that rely on, or seek 
to rely on, Rule 701 to offer securities pursuant to compensatory 
benefit plans. We can approximate the number of growth companies with 
external financing needs using data on companies conducting exempt 
securities offerings under Regulation D, Regulation A, and Regulation 
Crowdfunding. This group may be likely to rely on Rule 701 for the 
purpose of offering competitive compensation packages to attract and 
retain key individuals. Based on filings in 2017, we estimate there are 
approximately 16,491 non-reporting companies conducting exempt 
offerings of unregistered securities under the aforementioned 
exemptions.\20\ Some of these companies may currently be too small to 
offer securities in compensatory benefit plans that would fall in the 
$5 million to $10 million range over a 12-month period, but could 
potentially be able to do so in the future if they successfully grow 
their businesses. We do not have access to equivalent data for non-
reporting foreign private issuers, who also can rely on Rule 701 to 
offer securities pursuant to compensatory benefit plans.
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    \20\ Based on staff analysis of EDGAR filings in calendar year 
2017, there were approximately 15,960 non-reporting operating 
companies conducting Regulation D offerings. In addition, there were 
88 newly qualified offerings under Regulation A during calendar year 
2017, excluding post-qualification amendments and withdrawn 
offerings. Finally, 443 non-reporting companies conducted offerings 
solely under Regulation Crowdfunding in 2017 (companies conducting 
both Regulation D and Regulation Crowdfunding offerings in 2017 are 
included in the number for Regulation D offerings).
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    Plan participants who make use of issuer disclosures will also be 
affected by the amendment mandated by the Act. To the extent a company 
issues more than $5 million but less than $10 million in aggregate 
sales price of securities under the rule in a 12-month period, the 
company will not be required to deliver the Rule 701(e) disclosures to 
plan participants.

B. Economic Effects of the Amendment

    The statutory mandate requires the Commission to raise the 
threshold for requiring issuers to deliver additional disclosure to 
plan participants in Rule 701 offerings from $5 million to $10 million 
in any consecutive 12-month period. This will lower the regulatory 
burden in terms of required disclosures and thereby reduce the cost of 
securities offerings in this range pursuant to compensatory benefit 
plans by affected non-reporting companies. In addition, if the 
regulatory burden under the baseline currently deters some non-
reporting companies from using this form of compensation arrangement to 
an extent that otherwise would be desired, such companies may be able 
to improve the efficiency of their employee compensation plans or 
contracts under the amendment and thereby improve company performance 
(e.g., through improved incentive provisions). Such increases in 
efficiency may permit these companies to deploy resources more 
productively. Further, these efficiency gains may be passed through to 
some plan participants through increases in the value of securities 
offered by non-reporting companies as these companies are able to avail 
themselves of the Rule 701 exemption without having to provide the 
previously required disclosure.
    The amendment may reduce the amount of information available to 
plan participants, as issuers conducting offerings in the $5 million to 
$10 million range will not be required to provide Rule 701(e) 
disclosures to investors a reasonable period of time before the date of 
sale. Less information to plan participants may in turn make it harder 
for them to accurately value the offerings, and may partially offset 
the efficiency gains noted above. To the extent non-reporting issuers 
have issued securities in reliance on Regulation A and made available 
the information required by Rule 701(e) or have issued securities in 
excess of $5 million in reliance on Rule 701 in the current 12-month 
period, and, at their option, continue to provide the disclosures 
required by Rule 701(e), there may be no loss of information to 
participants.\21\
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    \21\ Based on a review of Regulation A offering statements, 
irrespective of the offering amount sought, the staff identified 
approximately seven cases of companies that disclosed unregistered 
securities sold in reliance upon Rule 701 in the past twelve months 
in Part I of Form 1-A; however, this would not account for companies 
that have conducted a Regulation A offering and subsequently have 
relied upon Rule 701 for unregistered sales.
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    We expect the amendment to make compliance burdens the same between 
companies seeking to use Rule 701 to offer amounts up to $5 million and 
companies seeking to use Rule 701 to offer amounts between $5 million 
and $10 million. By doubling the amount of securities that can be 
offered to employees without requiring the additional disclosure under 
Rule 701(e) from $5 million to $10 million, the amendment to Rule 701 
may have competitive effects for non-reporting companies that offer or 
sell securities as compensation. Although the Commission does not 
anticipate that the amendment will have substantial competitive effects 
among firms that currently rely on Rule 701, the amendment may permit 
some smaller companies to compete with larger companies to recruit and 
retain employees by increasing the offering amount threshold for 
additional disclosure from $5 million to $10 million.
    Relatedly, companies seeking to offer amounts between $5 million 
and $10 million will experience a reduction in regulatory burden 
compared to companies wishing to offer amounts over $10 million. As 
discussed below in Section V.A, for the purposes of the Paperwork 
Reduction Act, the Commission estimates that approximately 10% of the 
16,149 non-reporting companies, or 1,600 issuers, provide information 
under Rule 701, and that approximately one-half of those issuers (800) 
will sell securities in compensatory benefit plans between $5 million 
to $10 million over a 12-month period. Using these estimates, we 
further estimate that the amendment will reduce the regulatory burden 
associated with Rule 701 by 400 hours of company personnel time and 
$480,000 in professional costs per year.
    Finally, to the extent compensatory benefit plans are used by non-
reporting companies to attract and retain persons that are in demand 
internationally, a reduction in regulatory burden due to the amendment 
of Rule 701(e) may also increase the international competiveness of the 
companies affected by the amendment.

V. Paperwork Reduction Act

A. Background and Summary

    Certain provisions of Rule 701 that will be affected by the 
amendment contain ``collection of information'' requirements within the 
meaning of the Paperwork Reduction Act of 1995 (``PRA'').\22\ The 
Commission is submitting the amendment to the Office of Management and 
Budget (``OMB'') for review in accordance with the PRA.\23\ The title 
for the affected collection of information is:
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    \22\ 44 U.S.C. 3501 et seq.
    \23\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
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    Rule 701 (OMB Control No. 3235-0522).

[[Page 34943]]

    Rule 701 provides an exemption from registration for offers and 
sales of securities pursuant to certain compensatory benefit plans and 
contracts relating to compensation. Issuers conducting employee benefit 
plan offerings in excess of $5 million in reliance on Rule 701 are 
required to provide plan participants with certain disclosures, 
including financial statement disclosures. This disclosure constitutes 
a collection of information. An agency may not conduct or sponsor, and 
a person is not required to respond to, a collection of information 
requirement unless it displays a currently valid OMB control number. 
Compliance with the information collection is mandatory. Responses to 
the information collection are not kept confidential and there is no 
mandatory retention period for the information disclosed.
    We estimate that currently approximately 1,600 issuers \24\ provide 
information under Rule 701, and that the estimated number of burden 
hours per respondent is two.\25\ Therefore, we estimate an aggregate of 
3,200 burden hours per year. The portion of the burden carried by 
outside professionals is reflected as a cost, while the portion of the 
burden carried by the issuer internally is reflected in hours. We 
estimate that 25% of the burden per response is completed by the issuer 
internally and the other 75% of burden per response is attributed to 
outside cost, using $400 as the professional cost per burden hour.\26\ 
We believe the amendment will reduce the current burden estimates 
associated with Rule 701 for issuers that sell securities in 
compensatory benefit plans in the $5 million to $10 million range over 
a 12-month period, especially for issuers that do not otherwise prepare 
the same types of disclosure in their normal course of business. We 
estimate this will impact one-half of the issuers that currently 
provide information under Rule 701, or 800 issuers.
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    \24\ See Section IV.A, above. While we estimate that there are 
16,491 non-reporting companies conducting exempt offerings of 
unregistered securities under Regulation A, Regulation Crowdfunding 
and Regulation D, some of these issuers may currently be too small 
to offer securities in compensatory benefit plans in excess of $5 
million over a 12-month period. For purposes of this PRA analysis, 
we estimate that approximately 10% of those issuers currently 
provide information under Rule 701.
    \25\ Issuers are required to provide information that is similar 
to, but not as extensive as, the information required by Form 1-SA 
[17 CFR 239.90], the semiannual report required to be filed with the 
Commission under Regulation A [17 CFR 230.251 through 230.263]. We 
believe, however, that many of these issuers already prepare the 
same types of disclosure in their normal course of business, such as 
for using other exemptions, so we estimate that the burden is two 
hours.
    \26\ We recognize that the costs of retaining outside 
professionals may vary depending on the nature of the professional 
services, but for purposes of this PRA analysis we estimate that 
such costs will be an average of $400 per hour. This estimate is 
based on consultations with several registrants, law firms and other 
persons who regularly assist registrants in preparing and filing 
periodic reports with the Commission.
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    We therefore estimate the total annual decrease in the paperwork 
burden for all affected companies to comply with the collection of 
information requirements of Rule 701, as amended, will be approximately 
1,600 hours, allocated as a decrease of 400 hours (800 issuers x 0.5 
burden hour) of company personnel time and a decrease of $480,000 of 
professional costs (800 issuers x 1.5 hours x $400 per hour).

                                             Table 1--Decrease in Paperwork Burden Under the Final Amendment
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                                                       Estimated
                                                       number of       Decrease in     Total decrease                         75%          Professional
                                                        affected       burden hours   in burden hours    25% Company      Professional        costs
                                                       responses       per response
                                                               (A)              (B)                (C) = (A) *(E) = (C) *      (E) = (C) *  (F) = (E) *
                                                                                                                 0.25             0.75             $400
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Rule 701(e) disclosure............................             800                2          (1,600)            (400)          (1,200)       ($480,000)
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B. Request for Comment

    We request comments in order to evaluate: (1) Whether the 
collection of information is necessary for the proper performance of 
the functions of the agency, including whether the information would 
have practical utility; (2) the accuracy of our estimate of the burden 
of the collection of information; (3) whether there are ways to enhance 
the quality, utility and clarity of the information to be collected; 
and (4) whether there are ways to minimize the burden of the collection 
of information on those who are to respond, including through the use 
of automated collection techniques or other forms of information 
technology.
    Any member of the public may direct to us any comments concerning 
the accuracy of these burden estimates and any suggestions for reducing 
the burdens. Persons who desire to submit comments on the collection of 
information requirements should direct their comments to the Office of 
Management and Budget, Attention: Desk Officer for the Securities and 
Exchange Commission, Office of Information and Regulatory Affairs, 
Washington, DC 20503, and send a copy of the comments to Brent J. 
Fields, Secretary, Securities and Exchange Commission, 100 F Street NE, 
Washington, DC 20549-1090, with reference to File No. S7-17-18. 
Requests for materials submitted to the OMB by us with regard to these 
collections of information should be in writing, refer to File No. S7-
17-18 and be submitted to the Securities and Exchange Commission, 
Office of FOIA Services, 100 F Street NE, Washington, DC 20549-0213. 
Interested persons are encouraged to send comments to the OMB by August 
23, 2018.

VI. Statutory Authority

    The amendment contained in this release is adopted under the 
authority set forth in sections 3(b), 19(a), and 28 of the Securities 
Act and section 507 of the Economic Growth, Regulatory Relief, and 
Consumer Protection Act.

List of Subjects in 17 CFR Part 230

    Reporting and recordkeeping requirements, Securities.

Text of Amendment

    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

0
1. The authority citation for part 230 continues to read in part as 
follows:


[[Page 34944]]


    Authority: 15 U.S.C. 77b, 77b note, 77c, 77d, 77f, 77g, 77h, 
77j, 77r, 77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78o-
7 note, 78t, 78w, 78ll(d), 78mm, 80a-8, 80a-24, 80a-28, 80a-29, 80a-
30, and 80a-37, and Pub. L. 112-106, sec. 201(a), sec. 401, 126 
Stat. 313 (2012), and Pub. L. 115-174, sec. 507, 132 Stat. 1296 
(2018), unless otherwise noted.
* * * * *

0
2. Section 230.701 is amended by revising the introductory text of 
paragraph (e) 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.

* * * * *
    (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 $10 
million, the issuer must deliver the following disclosure to investors 
a reasonable period of time before the date of sale:
* * * * *

    By the Commission.

    Dated: July 18, 2018.
 Brent J. Fields,
 Secretary.
[FR Doc. 2018-15730 Filed 7-23-18; 8:45 am]
 BILLING CODE 8011-01-P