On April 4, 2017, the House of Representatives passed H.R. 1343, entitled the Encouraging Employee Ownership Act of 2017, increasing the number of shares that can be granted as compensation by an issuer to its employees without registration.
For background, Rule 701 under the Securities Act of 1933 currently provides a mechanism for non-public companies to offer and sell their securities for the purpose of providing compensation to their own employees without the need to register those securities. The idea behind the Rule was to help small start-up companies avoid complex reporting and disclosure requirements to register their securities when their only sales were to their own employees. As a result, Rule 701 arrangements are thought of as compensatory plans, and a copy of the plan must be delivered to each employee investor. There are limits on how much may be sold in any 12-month period, but if the company believes sales under the plan will exceed $5,000,000 in a coming 12-month period, the company must disclose risk factors and certain financial statements to the employee investors.
The new legislation would double the $5,000,000 figure to $10,000,000 before a company would have to reveal financial information. Those in favor of the bill point out that the limit has not been adjusted since 1999, and the new limit would be indexed for changes in the Consumer Price Index. They also argue that the increased limit will help small companies recruit talent by being able to offer increased equity stakes. Those against the bill believe it would limit transparency and companies who wish to compensate their employees with large amounts of equity should have to disclose the risks of that equity.
The Senate will now take up the matter where an identical bill (S. 488) awaits their review.
