Regulation E |
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Rule 701
Exemption for Offers and Sales of Securities Pursuant to Certain
Compensatory Benefit Plans and Contracts Relating to Compensation
Preliminary
Notes
1. This
section relates to transactions exempted from the registration requirements
of section 5 of
the Act. These transactions are not exempt from the antifraud, civil liability,
or other provisions of the federal securities laws. Issuers and persons
acting on their behalf have an obligation to provide investors with disclosure
adequate to satisfy the antifraud provisions of the federal securities
laws.2. In
addition to complying with this section, the issuer also must comply with
any applicable state law relating to the offer and sale of securities.
3. An
issuer that attempts to comply with this section, but fails to do so,
may claim any other exemption that is available.4. This
section is available only to the issuer of the securities. Affiliates
of the issuer may not use this section to offer or sell securities. This
section also does not cover resales of securities by any person. This
section provides an exemption only for the transactions in which the securities
are offered or sold by the issuer, not for the securities themselves.
5. The
purpose of this section is to provide an exemption from the registration
requirements of the Act for securities issued in compensatory circumstances.
This section is not available for plans or schemes to circumvent this
purpose, such as to raise capital. This section also is not available
to exempt any transaction that is in technical compliance with this section
but is part of a plan or scheme to evade the registration provisions of
the Act. In any of these cases, registration under the Act is required
unless another exemption is available.
a. Exemption.
Offers and sales made in compliance with all of the conditions of this
section are exempt from section 5 of the Act.
b.
Issuers eligible to use
this section.
1. General.
This section is available to any issuer that is not subject to the reporting
requirements of
section 13 or
15(d) of the Securities Exchange Act of
1934 (the "Exchange Act") and is not an investment company registered
or required to be registered under the Investment Company Act of 1940.
2. Issuers
that become subject to reporting. If an issuer becomes subject to the
reporting requirements of
section 13 or
15(d) of the Exchange Act after
it has made offers complying with this section, the issuer may nevertheless
rely on this section to sell the securities previously offered to the
persons to whom those offers were made.
3. Guarantees
by reporting companies. An issuer subject to the reporting requirements
of section 13 or
15(d) of the Exchange Act may rely on this section if
it is merely guaranteeing the payment of a subsidiary's securities that
are sold under this section.
c.
Transactions exempted
by this section. This section exempts offers and sales of securities (including
plan interests and guarantees pursuant to paragraph
(d)(2)(ii) of this section) under a written compensatory benefit plan
(or written compensation contract) established by the issuer, its parents,
its majority-owned subsidiaries or majority-owned subsidiaries of the
issuer's parent, for the participation of their employees, directors,
general partners, trustees (where the issuer is a business trust), officers,
or consultants and advisors, and their family members who acquire such
securities from such persons through gifts or domestic relations orders.
This section exempts offers and sales to former employees, directors,
general partners, trustees, officers, consultants and advisors only if
such persons were employed by or providing services to the issuer at the
time the securities were offered. In addition, the term "employee"
includes insurance agents who are exclusive agents of the issuer, its
subsidiaries or parents, are or derive more than 50% of their annual income
from those entities.
1.
Special requirements
for consultants and advisors. This section is available to consultants
and advisors only if:
i. They
are natural persons;
ii. They
provide bona fide services to the issuer, its parents, its majority- owned
subsidiaries or majority-owned subsidiaries of the issuer's parent; and
iii. The
services are not in connection with the offer or sale of securities in
a capital-raising transaction, and do not directly or indirectly promote
or maintain a market for the issuer's securities.
2. Definition
of "Compensatory Benefit Plan." For purposes of this section,
a compensatory benefit plan is any purchase, savings, option, bonus, stock
appreciation, profit sharing, thrift, incentive, deferred compensation,
pension or similar plan.
3. Definition
of "Family Member." For purposes of this section, family member
includes any child, stepchild, grandchild, parent, stepparent, grandparent,
spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law,
son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including
adoptive relationships, any person sharing the employee's household (other
than a tenant or employee), a trust in which these persons have more than
fifty percent of the beneficial interest, a foundation in which these
persons (or the employee) control the management of assets, and any other
entity in which these persons (or the employee) own more than fifty percent
of the voting interests.
d.
Amounts that may be sold.
1. Offers.
Any amount of securities may be offered in reliance on this section. However,
for purposes of this section, sales of securities underlying options must
be counted as sales on the date of the option grant.
2.
Sales. The aggregate
sales price or amount of securities sold in reliance on this section during
any consecutive 12-month period must not exceed the greatest of the following:
i. $1,000,000;
ii. 15%
of the total assets of the issuer (or of the issuer's parent if the issuer
is a wholly-owned subsidiary and the securities represent obligations
that the parent fully and unconditionally guarantees), measured at the
issuer's most recent annual balance sheet date (if no older than its last
fiscal year end); or
iii. 15%
of the outstanding amount of the class of securities being offered and
sold in reliance on this section, measured at the issuer's most recent
annual balance sheet date (if no older than its last fiscal year end).
3.
Rules for calculating
prices and amounts.
i. Aggregate
sales price. The term aggregate sales price means the sum of all cash,
property, notes, cancellation of debt or other consideration received
or to be received by the issuer for the sale of the securities. Non-cash
consideration must be valued by reference to bona fide sales of that consideration
made within a reasonable time or, in the absence of such sales, on the
fair value as determined by an accepted standard. The value of services
exchanged for securities issued must be measured by reference to the value
of the securities issued. Options must be valued based on the exercise
price of the option.
ii. Time
of the calculation. With respect to options to purchase securities, the
aggregate sales price is determined when an option grant is made (without
regard to when the option becomes exercisable). With respect to other
securities, the calculation is made on the date of sale. With respect
to deferred compensation or similar plans, the calculation is made when
the irrevocable election to defer is made.
iii. Derivative
securities. In calculating outstanding securities for purposes of
paragraph
(d)(2)(iii) of this section, treat the securities underlying all currently
exercisable or convertible options, warrants, rights or other securities,
other than those issued under this exemption, as outstanding. In calculating
the amount of securities sold for other purposes of
paragraph
(d)(2) of this section, count the amount of securities that would
be acquired upon exercise or conversion in connection with sales of options,
warrants, rights or other exercisable or convertible securities, including
those to be issued under this exemption.
iv. Other
exemptions. Amounts of securities sold in reliance on this section do
not affect "aggregate offering prices" in other exemptions,
and amounts of securities sold in reliance on other exemptions do not
affect the amount that may be sold in reliance on this section.
e.
Disclosure that must
be provided. The issuer must deliver to investors a copy of the compensatory
benefit plan or the contract, as applicable. In addition, if the aggregate
sales price or amount of securities sold during any consecutive 12-month
period exceeds $5 million, the issuer must deliver the following disclosure
to investors a reasonable period of time before the date of sale:
1. If
the plan is subject to the Employee Retirement Income Security Act of
1974 ("ERISA") (29 U.S.C. 1104-1107), a copy of the summary
plan description required by ERISA;
2. If
the plan is not subject to ERISA, a summary of the material terms of the
plan;
3. Information
about the risks associated with investment in the securities sold pursuant
to the compensatory benefit plan or compensation contract; and
4. Financial
statements required to be furnished by Part F/S of Form 1-A (Regulation
A Offering Statement) under
Regulation
A. Foreign private issuers as defined in
Rule
405 must provide a reconciliation to generally accepted accounting
principles in the United States (U.S. GAAP) if their financial statements
are not prepared in accordance with U.S. GAAP (Item 17 of Form 20-F. The
financial statements required by this section must be as of a date no
more than 180 days before the sale of securities in reliance on this exemption.
5. If
the issuer is relying on paragraph (d)(2)(ii)
of this section to use its parent's total assets to determine the amount
of securities that may be sold, the parent's financial statements must
be delivered. If the parent is subject to the reporting requirements of
section 13 or 15(d) of the Exchange Act, the financial statements of the
parent required by
Rule
10-01 of Regulation S-X and
Item
310 of Regulation S-B, as applicable, must be delivered.
6. If
the sale involves a stock option or other derivative security, the issuer
must deliver disclosure a reasonable period of time before the date of
exercise or conversion. For deferred compensation or similar plans, the
issuer must deliver disclosure to investors a reasonable period of time
before the date the irrevocable election to defer is made.
f. No
integration with other offerings. Offers and sales exempt under this section
are deemed to be a part of a single, discrete offering and are not subject
to integration with any other offers or sales, whether registered under
the Act or otherwise exempt from the registration requirements of the
Act.
g.
Resale limitations.
1. Securities
issued under this section are deemed to be "restricted securities"
as defined in
Rule
144.
2. Resales
of securities issued pursuant to this section must be in compliance with
the registration requirements of the Act or an exemption from those requirements.
3. Ninety
days after the issuer becomes subject to the reporting requirements of
section 13 or
15(d) of the Exchange Act, securities issued under this
section may be resold by persons who are not affiliates (as defined in
Rule 144) in reliance on Rule 144, without compliance with paragraphs
(c),
(d),
(e) and
(h) of Rule 144, and by affiliates without compliance
with paragraph (d) of Rule 144.
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