by Matt Parrish
On April 5, 2012, the President signed the Jumpstart Our Business Startups Act into law. This new law significantly changes the landscape for securities offerings commonly referred to as ‘crowdfunding’. Although it has received less public attention, the new law also increases the threshold that triggers a company to register and begin periodic reporting under the Securities Exchange Act of 1934 (the “Exchange Act”). This new law should significantly increase the flexibility of equity compensation plans maintained by large, privately-held companies.
The Exchange Act previously required a company to register and file periodic public reports with the SEC if the company had greater than $10,000,000 in total assets and had a class of equity securities with 500 or more holders of record. In 2007, the SEC by rule made an exemption from the registration and periodic reporting requirements for certain compensatory stock options held by more than 500 holders. In early 2012, the SEC acknowledged a similar exemption for compensatory restricted stock units. While these exemptions provided a means by which companies could issue certain types of equity compensation to more than 500 holders, some companies found the exemption requirements and limitations undesirable and instead focused their efforts on strategies to stay below the 500 holder threshold.
Under the threshold of the new law, a company must register and begin periodic reporting under the Exchange Act if it has greater than $10,000,000 in total assets and has a class of equity securities held of record by 2,000 or more persons or by 500 or more persons who are not accredited investors. More importantly, holders that receive their securities pursuant to an employee compensation plan in a transaction exempt from registration under Section 5 of the Securities Act of 1933 will not count towards the holder threshold. With proper planning, companies should now be able to issue a class of compensatory equity securities to any number of holders. Furthermore, companies should not be limited to using stock options or restricted stock units to do so.
The new law becomes effective immediately and requires the SEC to adopt ‘safe harbor’ rules that will assist companies in structuring their employee compensation plans to take advantage of these changes.