by Cydney Posner

More new and revised CDIs from Corp Fin today.  This time, the CDIs address Rule 701 and the Rule 144(d) holding period.

Rule 701 — Exemption for Offers and Sales of Securities Pursuant to Certain Compensatory Benefit Plans and Contracts Relating to Compensation

  • Revised 271.04 provides that, when a privately held company that has issued options under Rule 701 is acquired by a public company and the public acquiring company assumes the private company’s outstanding options, the acquiring company does not need to register the offer and sale of the shares now issuable (i.e., the acquiring company’s shares) upon the exercise of the assumed options. Rule 701(b)(2) permits an issuer to rely on Rule 701 to sell securities offered prior to the issuer’s becoming a reporting company. Similarly, Corp Fin advises that a public company acquirer may rely on Rule 701 for the exercise of the assumed options. In addition, according to Corp Fin, for purposes of compliance with any disclosure that may be required by Rule 701(e), the acquirer’s Exchange Act reports would satisfy any disclosure requirement under Rule 701(e).
  • New 271.24 Under Rule 701, RSUs that settle based on conditions related to company performance and/or length of service without payment of any additional consideration by the employee are deemed to be “sold” for purposes of Rule 701 on the date of grant. Under Rule 701(e), if the issuer triggers the information requirement specified in paragraphs (1) through (4) (by selling an aggregate amount of securities (including the RSUs) during a consecutive 12-month period that exceeds $5 million), the issuer must deliver the specified information “a reasonable period of time before the date of the sale.” Accordingly, the issuer must provide the required information a reasonable time before the date that the RSU award is granted. According to Corp Fin, although RSUs are derivative securities (as their value is derived from value of the underlying common stock), they are not “exercised or converted,” and thus Rule 701(e)(6) relating to the exercise or conversion of derivative securities does not apply.

Rule 144(d) — Holding Period for Restricted Securities

  • Revised 532.06 Consistent with Question 23 of Securities Act Release No. 6099 (Aug. 2, 1979), with regard to restricted securities received under an individually negotiated employment agreement, the Rule 144 holding period commences when investment risk for the securities passes to the employee (which is the date that the employee is deemed to have paid for them). For full value awards, if the vesting of the securities is conditioned on continued employment and/or company performance (i.e., not tied to the employee’s individual performance) and the employee pays no further consideration for the securities, the commencement date would be the date of the agreement. For awards that require additional payment upon exercise, conversion or settlement, that date would be the date that payment is made.


Posted by Cydney Posner