Amendment to Rule 701’s Enhanced Disclosure Threshold

On July 18, 2018, the Securities and Exchange Commission (SEC) amended Rule 701(e) of the Securities Act of 1933, increasing from $5 million to $10 million the amount of securities that issuers may sell in reliance on Rule 701 during a 12-month period without triggering enhanced disclosure requirements. The amendment will become effective imminently upon its publication in the Federal Register.

Background and Application of Rule 701’s Enhanced Disclosure Threshold

US private companies and non-US public and private companies that are not publicly traded in the US typically rely on Rule 701 when offering equity awards to employees in the US under a compensatory benefit plan (or arrangement). Although the Rule 701 exemption is self-executing, it imposes several requirements, including that the following information must be provided to award recipients if the aggregate value of securities “sold” in reliance on Rule 701 during any consecutive 12-month period exceeds the enhanced disclosure threshold:

  • A summary of the material terms of the plan;
  • Information about the risks of investing in the securities sold pursuant to the plan; and
  • Certain financial statements, prepared in compliance with US GAAP (or prepared in compliance with IFRS in the case of foreign private issuers) or reconciled to US GAAP, including a current balance sheet and statements of income, cash flows and stockholders’ equity for each of the two fiscal years preceding the date of the balance sheet and for any interim period.

The financial statements must be prepared no more than 180 days before the offering or sale of securities, which effectively requires issuers offering equity on a continuous basis to update their financial statements quarterly. The disclosure requirements can be burdensome for companies that prepare these materials less frequently or that are sensitive about providing financial information.

Implementation of Amendment

Issuers in the middle of a 12-month offering period will be able to apply the new $10 million threshold to outstanding offerings as soon as the change becomes effective. Therefore, issuers currently providing disclosure because they are in excess of the $5 million threshold should evaluate whether they will continue to be subject to the disclosure requirements for both outstanding awards and upcoming grants and offerings.

Although the increased threshold will provide relief for many issuers, the need to anticipate crossing the threshold remains the same. Once the disclosure threshold is triggered, disclosure must be provided a reasonable period of time in advance of an investment decision being made by the participant, to avoid losing the Rule 701 exemption for the entire offering. For options, this means disclosure is required a reasonable period of time before the option is exercised, allowing issuers time between grant and vesting to determine whether the disclosure will need to be provided. In contrast, for restricted stock units (RSUs) and restricted stock awards, any investment decision being made by the participant takes place at the date of grant, meaning that disclosure must be provided a reasonable period of time before the grant date. The timing rules effectively require issuers of RSUs and restricted stock to anticipate in advance of a grant whether the disclosure threshold will be exceeded during the applicable 12-month period and to provide the required disclosure in advance of the grant, if necessary.

Concept Release Seeking Comment on Rule 701 and Form S-8

Concurrent with the amendment to the Rule 701 enhanced disclosure threshold, the SEC also published a concept release seeking comment on ways to modernize Rule 701 and the Form S-8 registration statement. Amongst other items, the concept release seeks comment on how to apply Rule 701 to “gig economy” workers, the timing and manner of the Rule 701 enhanced disclosure requirements, and whether additional guidance is required regarding the application of Rule 701 to RSUs. The concept release also seeks comment on several approaches to simplifying the Form S-8 registration requirements while retaining appropriate amounts of investor protection. Although specific areas for comment are identified in the release, the SEC will consider public comment on any aspect of Rule 701 and Form S-8 that commenters believe may be improved.

It remains to be seen how the SEC will act subsequent to the comment period (which lasts 60 days), but given the tone of the concept release, it appears that the SEC is willing to consider a more liberal approach towards complying with the Rule 701 and the Form S-8 requirements.


Sinead Kelly is a partner in Baker McKenzie’s Compensation practice in San Francisco. She advises on U.S. executive compensation and global equity and has practiced in the compensation field since 2005. In her practice, Sinead counsels U.S. and non-U.S. public and private companies on all aspects of equity and executive compensation plans and arrangements, including plan design, drafting, administration and governance. In this regard, Sinead advises on and assists companies with compliance with U.S. federal and state securities and tax laws relating to compensation arrangements, as well as with preparing SEC disclosures, complying with stock exchange rules and addressing non-U.S. tax and regulatory requirements. She has been repeatedly recognized by Legal 500 as a leading lawyer for Executive Compensation and Employee Benefits.