On November 6, the Division of Corporation Finance (Division) of the Securities and Exchange Commission issued Compliance and Disclosure Interpretation (C&DI) 271.25 to address permissible safeguards for protection of Rule 701(e) electronic disclosures. Rule 701 provides an exemption from registration under the Securities Act of 1933 for offers and sales of securities under written compensatory benefit plans and contracts to an issuer’s employees, directors, consultants and advisors. Rule 701(e) requires an issuer relying on the Rule 701 exemption to deliver to each investor a copy of the applicable benefit plan or contract. In addition, if the issuer sells securities with a value in excess of $5 million during any consecutive 12-month period, then, a reasonable period of time before the date of sale, the issuer must deliver additional information listed in Rule 701(e) (including financial statements and information about the risks associated with the investment), which requirement may be satisfied by an issuer delivering such information electronically.

As the disclosure required under Rule 701(e) is likely to include sensitive information, the Division acknowledged in C&DI 271.25 that issuers that deliver such information electronically are permitted to use “[s]tandard electronic safeguards, such as user-specific login requirements and related measures . . ..” The Division noted, however, that, if an issuer uses a particular “electronic disclosure medium” to deliver such information, either alone or in addition to other safeguards, the safeguards should not be so burdensome that intended recipients cannot effectively access the required disclosures.

The complete text of the new C&DI is available here.