The state of Maryland recently revised their state “Blue Sky” securities law to provide for a self-executing exemption for compensatory benefit plan offerings made in connection with Rule 701 of the Securities Act of 1933, as amended (“Rule 701”).
A company that is not publicly traded in the US – generally, a company whose stock is not registered under the Securities Act of 1933, such as US private companies or non-US public companies that are not listed in the US – must generally comply with the securities laws of the state where the company is making a securities offering in addition to seeking an exemption from the registration requirements at the federal level.
Changes to the Law
Prior to October 1, 2017, Section 11-601(11) of the Maryland Securities Act required any security issued in connection with a benefit plan not qualified under § 401 of the Internal Revenue Code which provided for contributions by employees, to give 30 days advance written notice to the Maryland Attorney General’s Securities Division.
This filing also required the submission of a consent to service of process, a copy of the plan, an ongoing obligation to file material amendments to the plan, and a $400 filing fee. This means that if a non-publicly traded company wished to grant options or other equity awards to employees who are located in Maryland, it would be required to file a notice and otherwise meet the other requirements described above to rely on an exemption and avoid registration of the offering under Maryland law.
Effective October 1, 2017, Section 11-601(11) has been revised to provide for a self-executing exemption (no filing required) in connection with an investment contract or other security issued in connection with a benefit plan if no commission or other remuneration is paid in connection with the offering and (i) the plan is qualified under the Internal Revenue Code, (ii) the plan complies with Rule 701, or (iii) the security is effectively registered and sold under the Securities Act of 1933.
Based on informal conversations with the Maryland regulators, this exemption will be available only for new offerings beginning on or after October 1, 2017, so issuers that began an offering prior to this date and did not provide a timely notice filing cannot rely on the self-executing exemption.
Issuers with new offerings in Maryland that meet the Rule 701 exemption requirements at the federal level, will now be able to proceed with their employee stock offerings in Maryland without providing 30 days advance notice to the state.