In our June 21 post, we addressed the provisions of Section 507 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Act). Section 507 directs the US Securities and Exchange Commission (SEC) to amend Rule 701 under the Securities Act of 1933 by increasing—from $5 million to $10 million—the amount of securities that an eligible company can sell under the rule during a 12-month period without being subject to the rule’s enhanced disclosure requirements.
In response to the Act’s mandate, the SEC issued a release, Exempt Offerings Pursuant to Compensatory Arrangements, Securities Act Release No. 33-10520 (July 18, 2018), under which it adopted an amendment to Rule 701(e) to increase the enhanced disclosure threshold from $5 million to $10 million. The amendment became effective on July 23, 2018. If a company commenced an offering during the current 12-month period that was continuing on the effective date of the rule amendment, it can apply the $10 million disclosure threshold to the offering.
In its release adopting the Rule 701(e) amendment, the SEC noted that the Act also requires the SEC to index for inflation the dollar amount of the disclosure threshold every five years, rounding to the nearest $1 million. Therefore, the SEC is required to first address an inflation adjustment to the disclosure threshold amount in 2023.
The SEC also noted that if aggregate sales of company securities in a Rule 701 offering during the relevant 12-month period exceed $10 million, the company must deliver the enhanced disclosures to all purchasers in the offering a reasonable period of time before the date of sale. In this regard, the SEC previously has stated that if such disclosure has not been provided to all purchasers before sale, the company will lose the exemption for the entire offering once sales exceed the threshold for enhanced disclosure.
Please feel free to reach out to the authors or your Morgan Lewis contact to discuss how these changes might impact your company and its equity programs.