On July 18, 2018, the Securities and Exchange Commission (SEC) adopted an amendment to Rule 701 under the Securities Act. The amendment revises Rule 701(e) to increase from $5 million to $10 million the aggregate sales price or amount of securities sold during any consecutive 12-month period in excess of which the issuer is required to deliver additional disclosures to investors.

Rule 701 provides a safe harbor from registration under the Securities Act for grants of equity securities by a non-reporting company to its employees and certain other persons under the terms of a written compensatory benefit plan or written compensation contract.

Currently, Rule 701(e) states that the issuer must provide investors with a copy of the compensatory benefit plan or related contract. 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 additional disclosures as applicable within a reasonable period of time before the date of sale. These disclosures include risks associated with an investment in the securities sold under the compensatory benefit plan and certain financial information about the issuer.

As amended, Rule 701(e) will otherwise continue to operate in the same manner as it currently does. Specifically, the additional disclosures required by Rule 701(e) will not be required for sales up to $10 million in the 12-month period. If aggregate sales during that period exceed $10 million, however, the issuer must deliver those additional disclosures a reasonable period of time before the date of sale to all investors in the 12-month period.

Issuers that have commenced an offering in the current 12-month period will be able to apply the new $10 million disclosure threshold immediately upon effectiveness of the amendment.

The effective date is July 23, 2018.

To learn more about Rule 701, see Practice Note, Employee Incentive Compensation and the Role of Rule 701.