Employee Share Plans in Europe and the USA - Sorainen

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Employee Share Plans in Europe and the USAUnited States of AmericaThe United States of America1. Securities law1.1 Offer of securities: The sale of securities is regulated by both federal and statesecurities laws. The Securities Act of 1933, as amended (the "Securities Act")provides that all securities offered in the U.S. must either be (i) registered with,the Security and Exchange Commission (the "SEC"), or (ii) exempt fromregistration. Both the sale or grant and exercise of an option are considered toconstitute the offer or sale of the underlying securities.State securities laws (which also generally require that offers of securities mustbe registered or exempt) vary from state to state. Some states require certainfilings or approvals before offers or grants can be made.1.2 Regulatory issues: Generally, if the issuer is subject to, and is in compliancewith the U.S. securities law reporting requirements (i.e. its securities areregistered with the SEC), it can then register the securities on Form S-8, which isa short registration statement that applies to employee benefit plans 1 . Inaddition, a prospectus is required to be distributed to plan participants, andsummary information about the plan and the shares being offered to employeesis required to be published.At the federal level, there are various exemptions 2 from the requirement toregister the shares which might be available (although compliance with state lawregistration requirements would still be required). One of the most often usedexemptions is Rule 701 3 under the Securities Act, for "Offers and Sales ofSecurities Pursuant to Certain Compensatory Benefit Plans". To rely on thisexemption, the issuer must not be an SEC-reporting company 4 . Sales made in1234Generally speaking, registration on Form S-8 (the appropriate form for offers to employees) is onlyfeasible for companies that are already registered with the SEC, and in compliance with the SEC’speriodic reporting requirements. Such general registration is only undertaken in connection withcapital-raising or listing in the United States, and is not practicable purely for employee offers.These exemptions are subject to certain limitations on the number or value of securities offered, and/orthe number or type of participants.Rule 701 provides an exemption from the general registration requirement for compensatoryarrangements maintained by privately held employers, provided that certain conditions are met.Offers and sales may be made pursuant to a written compensatory benefit plan established by theissuer, its parents, its majority-owned subsidiaries or majority-owned subsidiaries of the issuer’s parent,for the participation of their employees, directors, general partners, trustees (where the issuer is abusiness trust), officers, or consultants and advisors and their family members acquiring the securitiesby gift or domestic relations orders.UK/1729295/03 201 September 2010
Employee Share Plans in Europe and the USAUnited States of Americareliance on Rule 701 during any consecutive 12-month period may not exceedthe greater of (i) $1 million (ii) 15% of the issuer’s total assets or (iii) 15% of theclass of securities offered. 5 Additional disclosure requirements, discussedbelow, apply when $5 million of assets have been sold under the plan in a 12-month period.Offerings to employees may also be made without registration in reliance onRule 506 of Regulation D. Under Rule 506, an offering only to persons who are"accredited investors" is exempted under the Securities Act and no disclosure isrequired 6 .It is possible to combine reliance on these two exemptions, and, for example,rely on Rule 506 for offers and sales to employees who are accredited, and Rule701 for other employees, in order to avoid additional disclosure requirements,although state-level regulation may dictate which exemption is used at thefederal level.Securities sold in the United States pursuant to an exemption from registrationare “restricted” under U.S. securities laws and cannot be easily resold in theUnited States for 12 months.1.3 Disclosure:1.3.1 Federal: Under Rule 701, an employer must disclose a copy of thecompensatory benefit plan or contract to investors. In addition, if theaggregate sales price of the amount of securities sold during any 12month period exceeds $5 million, the employer must also disclosecertain additional information 7 . Further disclosure obligations under anti-567Calculations for (ii) and (iii) are measured at the issuer's most recent annual balance sheet date (if notolder than its last fiscal year end).In order to be "accredited", offerees must: be directors, executive officers or general partners of theissuer; have had incomes of $200,000 (or joint income with spouse of $300,000) for the two mostrecent years and a reasonable expectation of reaching that level again in the current year; or have netassets (with spouse) of $1 million. In addition, up to 35 non-accredited investors may be included in aRule 506 offering, but disclosure requirements apply when any non-accredited investors are involved.Nothing needs to be supplied to the SEC (although there is a Form D, it is not a condition of RegulationD that it be filed).These additional disclosures include the following: (i) if the plan is subject to ERISA, a copy of thesummary plan description; (ii) if the plan is not subject to ERISA, a summary of the material terms ofthe plan; (iii) information about risks associated with investment in securities sold pursuant to the plan;and (iv) financial statements required by Part F/S of Form 1-A under Regulation A. The financialstatements must be prepared in accordance with either U.S. generally accepted accounting principles(U.S. GAAP) or International Financial Reporting Standards (IFRS) as issued by the IASB. Thefinancial statements must be no more than 180 days old.UK/1729295/03 202 September 2010
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Employee Share Plans in Europe and the USA - Sorainen

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