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SEC Adopts Rules Exempting Compensatory Employee Stock .pdf

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					Management Alert

SEC Adopts Rules Exempting Compensatory
Employee Stock Options from Registration Under
Section 12(g) of the Exchange Act
The Securities and Exchange Commission (the “SEC”)           The new exemptions from Section 12(g) of the Exchange
has adopted two new exemptions from the registration         Act for compensatory employee stock options are
requirements of Section 12(g) of the Securities Exchange     available to private companies that are not required
Act of 1934, as amended (the “Exchange Act”), for            to file periodic reports under the Exchange Act and to
compensatory employee stock options.                         public companies that are required to file those reports.
                                                             The purpose of the new exemptions is to provide both
Section 12(g) of the Exchange Act requires a company         public and private companies guidance and certainty
with 500 or more holders of record of a class of equity      in their compensation decisions and to prevent private,
security and assets in excess of $10 million at the end of   non-reporting companies from becoming subject to the
its most recently ended fiscal year to register that class   registration and reporting requirements of the Exchange
of equity security unless an exemption from registration     Act prior to the time they have public shareholders.
is available. Stock options, including those issued to
employees under stock option plans, are treated as a         Exemption for Private, Non-reporting Companies
separate class of security for purposes of the Exchange
Act. Although Exchange Act Rule 12h-1(a) provides an         The new rules amend Exchange Act Rule 12h-1 to create
exemption from registration for interests in “stock bonus,   a new exemption from the registration requirements of
stock purchase, profit-sharing, pension, retirement,         Section 12(g) of the Exchange Act for compensatory
incentive, thrift, savings or similar plans,” there was      employee stock options issued by a private, non-reporting
previously no exemption for compensatory employee            company that does not have a class of securities
stock options. Since the early 1990s, the SEC’s Division     registered under Section 12 of the Exchange Act and is
of Corporation Finance has provided no-action letter         not subject to the reporting requirements of Section 15(d)
relief to private companies faced with registration under    of the Exchange Act. The new exemption requires:
the Section 12(g) of the Exchange Act solely due to their
compensatory employee stock options being held by            •   Compensatory employee stock options to be issued
500 or more holders of record (and having more that $10          under a written stock option plan;
million in assets), subject to meeting certain criteria.     •   Plan participants to be limited to employees, directors,
                                                                 consultants, and advisors of the issuer, its parents, or




December 2007
Management Alert




    majority-owned, direct or indirect subsidiaries of the       The exemption does not extend to any class of securities
    issuer or its parents;                                       received or to be received on exercise of the stock option.
                                                                 Thus, a company will have to apply the registration
•   A prohibition on the transfer of the options and the
                                                                 requirements of Section 12 of the Exchange Act to the
    shares received upon exercise of the options except
                                                                 class of equity security underlying the compensatory
    for one transfer in the event of a family gift, domestic
                                                                 employee stock options without regard to the exemption
    relations order, death or disability; and
                                                                 after those options are exercised. If a private, non-
•   That the issuer provides, either by physical or              reporting company becomes subject to the reporting
    electronic delivery or by available password-protected       requirements of Section 15(d) of the Exchange Act, the
    internet site, the risk and financial information required   exemption for compensatory employee stock options will
    under Securities Act Rule 701, if securities sold in         terminate immediately. At such time as the exemption
    reliance on that rule in a 12-month period exceeded          terminates or the company no longer satisfies the criteria
    $5 million, and financial statements not more than 180       of the exemption, the company would have 120 days
    days old.                                                    under the new rules to register the options.

The exemption for private, non-reporting companies               The exemption covers all compensatory employee stock
generally allows compensatory employee stock options             options meeting the conditions of the exemption, even
to be held by those persons described in Securities              if the compensatory employee stock options are issued
Act Rule 701(c) or their permitted transferees, which            under separate written option plans. For the purpose of
includes employees, directors, general partners, trustees,       the exemption, the compensatory employee stock options
officers, consultants and advisors only if such persons          will be considered to belong to the same class of equity
were employed by or providing services to the company            security of the issuer if the same class of securities of the
at the time the securities were offered. For purposes            issuer will be issuable on exercise of the compensatory
of Rule 701, the term “employee” includes insurance              employee stock options.
agents who are exclusive agents of the company, its
subsidiaries or parents, or derive more than 50% of their
                                                                 Exemption for Reporting Companies
annual income from those entities. The new rules also
permit option holders to receive compensation for their
                                                                 The new rules further amend Rule 12h-1 to create a
options from the company or arising from a change of
                                                                 second exemption from the registration requirements
control or other acquisition transaction after which the
                                                                 of Section 12(g) of the Exchange Act applicable to all
options no longer will be outstanding and the company no
                                                                 companies that are subject to the reporting requirements
longer will be relying on the exemption. In order to ensure
                                                                 of Sections 13 or 15(d) of the Exchange Act. This
that a company will not fail to qualify for the exemption
                                                                 exemption requires:
in the event of an impermissible transfer, the new rules
permit a company to provide that in such event, the              •   That the stock options be issued under a written
options will terminate automatically or that the company             compensatory plan; and
may repurchase the options. In order to qualify for the          •   That eligible plan participants be limited to
exemption, all of the foregoing limitations must be set              employees, directors, consultants, and advisors of the
forth in the compensatory plan pursuant to which options             issuer, its parents, or majority-owned, direct or indirect
will be granted.                                                     subsidiaries of the issuer or its parents.




2   |   Seyfarth Shaw LLP
                                                                                                     Management Alert




While the exemption for reporting companies requires            As with the exemption for private, non-reporting
that eligible plan participants be limited to the persons       companies, the exemption for reporting companies does
listed above, the exemption allows compensatory                 not extend to any class of securities received or to be
employee stock options to be held by those persons              received on exercise of the stock option. In addition, at
described in general instruction A.1.(a) of Form S-8,           such time as a reporting company no longer satisfies the
which includes employees, directors, general partners,          criteria of the exemption, the company would have 60
trustees (where the company is a business trust), officers,     days under the new rules to register the options.
consultants, advisors, and agents who are exclusive
agents of the company, its subsidiaries or parents, or          Compliance
derive more than 50% of their annual income from those
entities. For purposes of Form S-8 and the exemption            Both of the new exemptions are self-executing and are
for reporting companies, the term “employees” includes          effective as of December 7, 2007. If you want to learn
former employees as well as executors, administrators           more about the new exemptions from registration under
or beneficiaries of the estates of deceased employees,          Section 12(g) of the Exchange Act, contact the Seyfarth
guardians or members of a committee for incompetent             Shaw attorney with whom you work, or any Corporate
former employees, or similar persons duly authorized            attorney on our website, www.seyfarth.com.
by law to administer the estate or assets of former
employees. In addition, securities issued to consultants
or advisors will only be covered by the exemption for
reporting companies if they are natural persons, they
provide bona fide services, and the services are not in
connection with the offering of securities, a capital raising
transaction or market making activities.

In addition, the exemption for reporting companies will
continue to be available even if there is an insignificant
deviation from satisfying the eligibility conditions of the
exemption, provided that the number of option holders
that do not meet the eligibility condition are insignificant
both as to the aggregate number of option holders and
number of outstanding options. To be able to rely on the
exemption, including the insignificant deviation provision,
a company must have made a good faith and reasonable
attempt to comply with the conditions of the exemption.




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Attorney Advertising. This Management Alert is a periodical publication of Seyfarth Shaw LLP and should not be construed as legal advice or a legal
  opinion on any specific facts or circumstances. The contents are intended for general information purposes only, and you are urged to consult a
lawyer concerning your own situation and any specific legal questions you may have. Any tax information or written tax advice contained herein (in-
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