Unexpected (But Welcome) Changes To Rule 701

As noted in our earlier post Pre-IPO Companies can have disclosure obligations too, a recent Rule 701 enforcement action by the SEC has served as a reminder of the pitfalls that exist for private companies with increasing valuations and robust equity compensation programs. Happily, some relief is on the way based on a provision included in the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act. The Act directs the SEC to increase the Rule 701(e) disclosure threshold from $5 million to $10 million.

As a reminder, Rule 701 is the exemption from registration most commonly used by companies to grant equity to employees under compensatory benefit plans. Although companies can generally stay below the limitations on the aggregate amounts that may be sold under Rule 701 during any twelve-month period, a company with an increasing valuation can quickly bump up against the existing requirement to provide disclosure to plan recipients if more