Amendments Increase Attractiveness of Rule 701

The Securities and Exchange Commission has recently adopted two rule amendments that will expand the ability of foreign private issuers that are not U.S. reporting companies to provide stock-based compensation to their U.S. employees. Specifically:

• Effective March 4, 2008, the financial statements delivered to employee stock plan participants to satisfy the Rule 701 registration exemption under the Securities Act of 1933, as amended (Securities Act) for securities offered and sold under compensatory arrangements, may be prepared in accordance with, in lieu of U.S. GAAP, International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).
• Effective December 7, 2007, compensatory stock options that meet certain criteria no longer independently trigger reporting requirements under the Securities Exchange Act of 1934, as amended (Exchange Act).

However, although these rule amendments are helpful, there remains for many foreign private issuers a potential trap arising from their ordinary-course financial reporting schedule and the disclosure requirements discussed below. Specifically, foreign private issuers that report financial results on a semiannual basis will continue to face a “gap period” each year from the end of their first semester until half-year results are released when their public financial statements will not meet the requirement that they be no more than 180 days old when used in connection with the offer of stock-based compensation to U.S. employees.

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