On October 19, the staff of the Division of Corporation Finance of the Securities and Exchange Commission (the Staff) issued one new Compliance and Disclosure Interpretation (C&DI) and two revised C&DIs. Revised C&DI 271.04 and new C&DI 271.24 relate to exempt offerings and sales of securities under Rule 701 of the Securities Act of 1933 (the Securities Act), while revised C&DI 532.06 addresses the holding period for restricted securities under Rule 144(d).

Revised C&DI 271.04

In the original C&DI 271.04, issued in January 2009, the Staff indicated, without further explanation, that, when a company that is not subject to Section 13 or Section 15(d) (a non-reporting company) reporting requirements pursuant to the Securities Exchange Act of 1934 (the Exchange Act) is acquired by a reporting company, and options issued by the non-reporting company in reliance on Rule 701 are assumed by the reporting company and converted into options to acquire shares of the reporting company, the reporting company does not need to register the offer and sale of the shares issuable upon the exercise of such options. In the revised C&DI 271.04, the Staff clarified the reasoning behind its interpretation by analogizing to Rule 701(b)(2), which permits an issuer to rely on Rule 701 to sell securities offered prior to the issuer’s becoming a reporting company. In this revised C&DI, the Staff notes that the reporting company that acquires the non-reporting company may similarly rely on the exemption from registration provided in Rule 701 for the exercise of the assumed options. The Staff also noted that the reporting company’s reports under the Exchange Act will satisfy any disclosure required under Rule 701(e).

New C&DI 271.24

New C&DI 271.24 addresses the offer and sale of a restricted stock unit (RSU) award under Rule 701 to an employee and the timing requirements for delivery of additional information specified in paragraphs (1) through (4) of Rule 701(e) if the issuer, during a 12-month period, sells an aggregate amount of securities (including the restricted securities) in excess of $5 million. The Staff’s interpretation indicates that, in such a circumstance, the issuer must deliver such information to investors within “a reasonable period of time before the date of the sale” of securities. The date of sale of the RSU award, for purposes of Rule 701, is the date the award is made. Consequently, the issuer must provide the additional information to investors within a reasonable period of time before the RSU award is made. The Staff also noted that, despite the fact that RSUs are typically considered derivative securities, Item 701(e)(6), which relates to the exercise or conversion of derivative securities, does not apply because the restricted securities are not exercised or converted.

Revised C&DI 532.06

In the original C&DI 532.06, issued in January 2009, the Staff stated that, “where restricted securities are issued to an employee in connection with an individually negotiated employment agreement,” the holding period under Rule 144(d) with respect to such restricted securities begins to run at the time such employee’s securities vest, assuming any conditions have been fulfilled. The Staff has now supplemented its prior guidance. In the revised C&DI 532.06, the Staff indicated that the holding period under Rule 144(d) under these circumstances begins when the recipient of such restricted securities is deemed to have paid for and assumed the full risk of economic loss with respect thereto. The Staff further explained that the economic loss associated with the securities passes to the employee:

  • for awards that require additional payment upon the exercise, conversion or settlement of the award, on the date when such additional payment is made; and
  • for full-value awards that do not require further consideration and vest based solely on the employee’s (a) continued employment with the issuer; and/or (b) satisfaction of performance metrics that are not individual performance metrics, on the date when the employment agreement becomes effective.

The complete text of the new and revised C&DIs is available here, here and here.