Company Name: American Bar Association (ABA)
Public Availability Date: September 6, 1988

INQUIRY LETTER

American Bar Association
750 North Lake Shore Drive
Chicago, Illinois 60611

August 18, 1988

Mary E. T. Beach, Esq.
Associate Director
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549

Dear Ms. Beach:

At the August 9, 1988 workshop in Toronto on Rule 701, several interpretive questions were discussed of general interest to the private bar. On behalf of the Subcommittee on Employee Benefits and Executive Compensation of the ABA Business Law Section's Federal Securities Law Committee, I would like to solicit the staff's views with regard to those questions.

1. Page 5 of 1933 Act Release 6768 promulgating Rule 701 indicates that the $500,000 minimum in subparagraph (b) (5) is intended to apply on a rolling 12 month basis. The Rule itself, however, can be read to require that the $500,000 minimum be treated as a single lifetime exemption. Our understanding is that the position taken in the Release reflects the views of the Commission and the staff. We would appreciate confirmation of that understanding.

2. Rule 701(b)(5)(ii) provides that the number of shares of a class shall include shares of that class issuable upon exercise of options and conversion of convertible securities. It is our understanding that the staff reads that subparagraph to refer only to options, subparagraph to refer only to options, warrants and rights and convertible securities that are currently exercisable or convertible as opposed to those that may become exercisable or convertible in the future. We would appreciate confirmation of that understanding. This issue is of some importance because in many venture capital transactions, the venture capitalists hold a separate class of senior securities that are convertible, in the holders' discretion, into the class of stock subject to employee options.

3. Rule 701(b)(3) requires the issuer, its parent or majority-owned subsidiary to provide each participant in a compensatory benefit plan with a copy of the plan. We request the staff to take the position that for plans subject to the reporting and disclosure requirements of Title I of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), this requirement will be satisfied by providing each participant with a copy of the summary plan description and the summaries of material modifications required by Title I of ERISA, and by making a copy of the plan available to participants for inspection and copying.

Title I of ERISA requires a summary plan description and a summary of material modifications to the plan to be delivered to each participant and beneficiary of the plan. Summary plan descriptions and summaries of material modifications must be distributed free of charge and must be written in a style calculated to be understood by the average plan participant. Department of Labor regulations set out the types of information that must be included in summary plan descriptions. Generally, this includes eligibility requirements, a description of how the benefits are calculated, when they vest, when and to whom benefits are paid, and the events, if any, that can cause the benefits to be forfeited. Material changes to any of these items must be disclosed in a summary of material modifications. Although plan participants do not automatically receive a copy of the plan itself, a copy of the plan is available to them for inspection and copying.

Plans subject to Title I of ERISA are almost always tax-qualified and therefore contain numerous complex and intricate provisions designed to assure tax compliance. These provisions are typically not written in a manner designed to be understood by participants. Further, plans subject to Title I of ERISA are lengthy (70 or 80 pages is not unusual) and they must be amended often to maintain their tax qualified status. Copies of the plan itself are rarely, if ever, distributed to participants. Moreover, for most employers, plan communication is a function of the human resources department, which typically is not knowledgeable about the requirements of the securities laws. It would be contrary to the spirit of simplicity embodied in Rule 701 if the availability of the Rule were lost because the human resources department failed to deliver a copy of the plan itself (or an amendment) to participants even though the employer had fully complied with Title I of ERISA by distributing summary plan descriptions and summaries of material modifications. We also note that for shares offered and sold pursuant to a registration statement on Form S-8, there is no requirement to distribute copies of the plan to participants. It would be anomalous to impose this burden on employers relying on Rule 701.

We believe that distributing summary plan descriptions and summaries of material modifications to participants and making a copy of the plan available as required by Title I of ERISA provides participants with adequate information about the plan and is consistent with the spirit of Rule 701.

If you would like to discuss any of the foregoing interpretive requests with the undersigned (617-423-6100) or other members of the Subcommittee, please let me know. I would appreciate it if you would send a copy of your reply to me at my office (c/o Ropes & Gray, 225 Franklin Street, Boston, Massachusetts 02110).

Sincerely,

Donald W. Glazer
Co-Chairman,
Subcommittee on
Employee Benefits
and Executive
Compensation

STAFF REPLY LETTER

September 6, 1988

RESPONSE OF THE OFFICE OF SMALL BUSINESS POLICY
DIVISION OF CORPORATION FINANCE

Re: Rule 701
Incoming letter dated August 18, 1988

We have the following views with respect to your inquiries.

(1) As suggested in the Robert R. Tufts interpretive letter dated May 24, 1988, the $500,000 test is always available in any 12-month period. This $500,000 amount should not be treated as a single lifetime exemption.

(2) For purposes of the calculation in Rule 701(b)(5)(ii), outstanding securities of the class do not include those securities which may be acquired through the exercise of options, warrants or rights which are not presently exercisable, or through the conversion of presently non-convertible securities; when these securities become exercisable or convertible, subsequent calculations may consider such securities. Inclusion of securities issuable pursuant to Rule 701 at any time would be inappropriate.

(3) The requirement for delivery of the written plan set forth in Rule 701(b)(3) may be satisfied for plans subject to the reporting and disclosure requirements of Title I of ERISA through the delivery to each participant of a copy of the summary plan description and summaries of material modifications required by ERISA and by making a copy of the plan available for copying and inspection.

Sincerely,

Richard K. Wulff, Chief
Office of Small Business Policy