Company Name: American Bar Association (ABA)
Public Availability Date: July 25, 2000 

[LETTER OF INQUIRY 1]

June 14, 2000

Office of Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

Attention: Anne M. Krauskopf

Re: Request for Interpretive Letter on
Section 423 Employee Stock Purchase Plans

Dear Ms. Krauskopf:

When members of the Securities and Exchange Commission Staff met with representatives of the American Bar Association's Joint Committee on Employee Benefits and Subcommittee on Employee Benefits of the Committee on Federal Regulation of Securities of the Business Law Section in separate meetings in May 2000, the Staff was asked several questions by representatives of these committees regarding the application of the Securities Act of 1933, as amended (the "1933 Act") to employee stock purchase plans under Section 423 of the Internal Revenue Code of 1986, as amended (the "Code").

We are writing to request that the Staff confirm that the automatic enrollment of an employee in a registrant's Section 423 employee stock purchase plan prior to the registrant's initial public offering ("IPO") in the manner set forth below, with any subsequent purchase of the registrant's common stock being made in reliance on a Form S-8 Registration Statement ("Form S-8"), would not violate Section 5 of the 1933 Act. We are also requesting that the Staff confirm that an employee's authorizing payroll deductions prior to the first payroll date after the Company's IPO in the manner described below would not violate Section 5 of the 1933 Act.

Description of Section 423 Plan

For purposes of this request, we will describe the relevant terms of a Section 423 employee stock purchase plan that is commonly used by registrants, which will be referred to as the "Plan," and will refer to a registrant as the "Company."

General. The Plan is set forth in a written document, which specifies the persons eligible to participate in the Plan and the method for determining the price and number of shares purchasable. Rights under the Plan are not transferable and may be exercised only by the employee participant who receives them. The Plan has been approved by the Company's shareholders.

Offering Periods. The Plan is implemented by overlapping 24-month Offering Periods, which commence on January 1 and July 1 of each year (the "Offering Periods"). However, in the case of the first Offering Period (the "Initial Offering Period"), the period begins on the date both the Plan and the Form S-8 filed with respect to the Plan become effective. Generally, each Offering Period is divided into four sequential six-month purchase periods ("Purchase Periods"). In the case of the Initial Offering Period, all or some of the Purchase Periods may be of less than six-month duration.

Initial Offering Period. With respect to the Initial Offering Period, employees of the Company are enrolled in the Plan automatically. Enrollment in the Initial Offering Period does not involve any commitment on the part of the employee and, in particular, does not require that the employee elect a specified level of payroll deductions. Rather, employees will be automatically enrolled to the extent of 15% of their compensation (or whatever maximum lesser level as set under the Plan). However, if an employee was to purchase any shares of the Company's common stock within the Initial Offering Period, the employee would do so by a lump sum cash payment prior to the end of the Offering Period. If, following the date on which the Form S-8 becomes effective, the employee desires to change to payroll deductions as a manner of payment, or elects to purchase common stock in amounts that are less than 15% of their compensation, such employee will be required to complete a payroll deduction election form. (It should be noted that, with respect to subsequent Offering Periods, an employee will be required to elect a specified level of payroll deductions at the same time that the employee enrolls in such subsequent Offering Periods.)

Purchase Price. Shares are automatically purchased on the last day of each purchase period (a "Purchase Date") during an Offering Period unless a participant withdraws from the Offering Period prior to such purchase date. (See "Withdrawal" below.) The purchase price per share at which shares are sold in an offering under the Plan is the lower of 85% of the fair market value of a share of common stock on the date of commencement of the 24-month Offering Period (the "Entry Price") or 85% of the fair market value of a share of common stock on the purchase date (the "Exit Price"). In the case of the Initial Offering Period, the Entry Price is equal to the price at which the Company's common stock is initially offered for sale by the Company's underwriters in the IPO.

Payroll Deductions. Except as set forth above in the case of the Initial Offering Period, the purchase price of the shares to be purchased on a given purchase date is accumulated by payroll deductions over the purchase period that ends on such purchase date. The payroll deductions must be within specified limitations and may not exceed 15% of an employee's compensation. An employee may discontinue his or her participation in the Plan by withdrawing from the Plan (see "Withdrawal" below) at any time prior to the end of the Offering Period and may change his or her level of payroll deductions during the Offering Period by increasing (within the specified limits) or decreasing (including decreasing to zero) the rate of payroll deductions. An employee may not make additional contributions (other than the specified level of payroll deductions) to his or her account under the Plan during the Offering Period. After the end of the Offering Period, the employee is automatically enrolled in the next Offering Period, which commences on the day after the fourth and last purchase date of the prior Offering Period.

Purchase of Stock. By participating in the Plan, the participant is entitled to have shares placed under option to him or her, which option is exercisable cumulatively in installments on each of the four purchase dates during the Offering Period if the employee has not withdrawn from the Plan prior to the Purchase Date. The maximum number of shares subject to each installment placed under option to a participant at the beginning of an Offering Period (that is, the number of shares that is purchasable on each Purchase Date) is that number determined by dividing (x) the amount of payroll deductions accumulated in such participant's account during the applicable Purchase Period ending on such purchase date by (y) the lower of (i) the Entry Price or (ii) the Exit Price. In no event, however, may the number of shares subject to an installment exceed a maximum established by the Board of Directors in accordance with the Plan. Unless the employee's participation is discontinued prior to a Purchase Date by withdrawing from the Plan, his or her option for the purchase of shares will be exercised automatically at the end of the Purchase Period at the applicable price. (See "Withdrawal" below.)

Withdrawal. A participant's interest in a given Offering Period may be terminated at any time during a given Offering Period in whole, but not in part, by signing and delivering to the Company a notice of withdrawal from such Offering Period. Such withdrawal may be elected at any time prior to the end of the applicable Offering Period. Upon the withdrawal of an employee from the Plan, all accumulated payroll deductions in the participant's account that have not previously been applied toward the purchase of shares of common stock (on prior Purchase Dates within such Offering Period) are returned to the participant and participation in the Plan is automatically terminated. A participant's withdrawal from one Offering Period does not prevent a participant from enrolling in subsequent Offering Periods under the Plan.

Changing Offering Periods. In addition to permitting withdrawal from an Offering Period in the middle of a Purchase Period (as described above under "Withdrawal"), the Plan also permits a participant, after his or her payroll deductions have been applied toward the purchase of shares on a Purchase Date (other than the fourth and final Purchase Date) of a given 24-month Offering Period that is also the day before the commencement date of a new Offering Period, while remaining in the Plan, to discontinue participation in the original Offering Period and enter the new 24-month Offering Period that is commencing on the day after the purchase date of the original Offering Period in which the participant is discontinuing his or her participation. This is often referred to as "re-enrollment" in the Plan. Some employee stock purchase plans provide for automatic re-enrollment (absent withdrawal by the participant) in the event that the fair market value on a purchase date is lower than the fair market value at the beginning of the original Offering Period. A participant who "re-enrolls" in this manner (whether automatically or by choice) at all times remains a participant in the Plan, but has changed from one Offering Period to another Offering Period under the Plan. In this type of transaction, there are no payroll deductions that are returned to the participant, as all accumulated payroll deductions are used to purchase shares on the purchase date in the original Offering Period and payroll deductions after such purchase date are accumulated for the new Offering Period that the participant has just entered.

Request for Interpretive Relief

Stock issuable under Section 423 plans, such as the Plan, is typically registered on a Form S-8 that is filed and becomes effective immediately following the registrant's IPO. We understand that the Staff believes that, to the extent that an election is made by an employee to authorize payroll deductions prior to the date that a Form S-8 is effective, such an election will be viewed as an employee investment decision that has been made by the employee prior to the filing and effectiveness of the Form S-8 registration statement and thus would constitute a violation of the 1933 Act unless such investment election is made pursuant to an exemption from registration under the 1933 Act, such as Rule 701. However, we are of the view that no such investment election occurs if the employee is automatically enrolled in the Initial Offering Period as described above and is not asked or required to authorize payroll deductions until after the Form S-8 registration statement is effective. The automatic enrollment approach prior to the IPO is necessary in order to obtain the favorable tax treatment for the employee's purchase at the Entry Price, but at the time of automatic enrollment, there is, in practical terms, no commitment by the employee because of his withdrawal rights and the absence of payroll deductions (unless determined otherwise following the filing of a Form S-8), which run throughout the Offering Period.

We are requesting that the Staff (a) confirm that employees would not be viewed as making an investment election in violation of Section 5 of the 1933 Act if prior to the effective date of the Form S-8 all employees are automatically enrolled in the Initial Offering Period and are automatically granted an option to purchase common stock of the Company in one lump sum cash payment on each applicable Purchase Date in the Initial Offering Period by dividing 15% of such employee's compensation during an applicable Purchase Period by the applicable purchase price and (b) confirm that any election by employees to purchase common stock of the Company in the Initial Offering Period by payroll deductions or in amounts that are less than 15% of the employee's compensation may be made in compliance with Section 5 of the 1933 Act after the filing and effectiveness of the Form S-8 following the Company's IPO.

In light of the importance of the issues raised by our letter, we would appreciate your attention to this matter at your earliest convenience.

Please feel free to telephone Scott Spector with any questions that you may have or with respect to any additional information that you may need in responding to our request.

Very truly yours,

Scott P. Spector
Stanley Keller
Louis Rorimer
Gloria W. Nusbacher
Anne G. Plimpton
Sharon Hendricks
Ann Yvonne Walker
Keith F. Higgins

July 5, 2000

VIA FEDERAL EXPRESS

Office of Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

Attention: Anne M. Krauskopf

Re: Request for Interpretive Letter on Section 423 Employee Stock Purchase Plans

Dear Anne:

I enclose an executed copy of the Section 423 Plan letter that you, Marty Dunn and Mark Borges have previously discussed. It is my understanding that the staff will issue a favorable no-action letter upon receipt of the enclosed executed letter. I would appreciate if you could, if possible, forward a copy to me and to Lou Rorimer by Friday afternoon so that he can have copies available at the Annual Meeting of the American Bar Association in New York starting Monday. I will be out of the office on Thursday and Friday. If you have any questions, please feel free to telephone Lou at (216) 586-7224.

Thank you very much for your assistance in this matter.

Very truly yours,

Scott P. Spector

Enclosure

July 25, 2000

RESPONSE OF THE OFFICE OF CHIEF COUNSEL
DIVISION OF CORPORATION FINANCE

Re: American Bar Association

Incoming letter dated June 14, 2000

You have asked the Division's views regarding the application of Section 5 of the Securities Act of 1933 to an employee's automatic enrollment, before a company's initial public offering, in the company's employee stock purchase plan. The plan would satisfy the requirements of Section 423 of the Internal Revenue Code, and would operate in the manner described below.

The plan's initial offering period will begin on the date of filing and effectiveness of a Form S-8 registration statement with respect to the offer of company securities under the plan. On this date, the company will be subject to Section 13 or 15(d) of the Securities Exchange Act of 1934, and thus eligible to file a registration statement on Form S-8, due to the effectiveness of its initial public offering registration statement under the Securities Act.

Employee enrollment for the plan's initial offering period will take place automatically before effectiveness of the plan's Form S-8 registration statement, and will be involuntary on the part of any employee. No employee will be offered participation in the plan, nor will any employee take any action or make any commitment regarding the plan, before the company files the Form S-8.

Before the Form S-8 becomes effective, no employee will authorize payroll deduction as a form of payment under the plan. Instead, automatic enrollment will provide that purchases of company common stock for the plan's initial offering period will be made by a lump sum cash payment before the end of the offering period. Employees will be automatically enrolled in the plan to the extent of 15 percent of their eligible compensation (or other lesser maximum level set by the plan).

Following effectiveness of the plan's Form S-8 registration statement, an employee will be permitted to submit a payroll deduction election form if the employee wishes to switch to payroll deductions as the form of payment, or to participate in the plan at a lower percentage of compensation. This payroll deduction authorization may become effective as early as the first pay period starting after effectiveness of the company's initial public offering registration statement.

The Division is of the view that, for purposes of Section 5 of the Securities Act, the automatic enrollment process described above does not involve the offer or sale of a security to an employee before effectiveness of the plan's Form S-8 registration statement. The Division also is of the view that company may solicit and accept payroll deduction elections following the effectiveness of the plan's Form S-8 registration statement, as described above, without violating Section 5.

These positions are based on the representations made to the Division in your letter. Any different facts or conditions might require the Division to reach a different conclusion.

Sincerely,

Anne M. Krauskopf
Special Counsel