Securities Laws Does the plan comply with federal and state securities laws? On the federal level, the Securities and Exchange Commission (SEC) regulates the issuance and trading of securities, as well as the activities of securities exchanges and those who work in the securities industry. In addition, most states have their own securities laws, sometimes called "Blue Sky" laws, which differ from federal law and from one state to another.
Generally, a company cannot offer or sell its securities to the public unless it has first registered those securities with the SEC, which can be time consuming and quite expensive. However, there are a number of exemptions from the registration process. A private company developing an equity compensation program involving the sale of securities to employees will want to retain a qualified attorney to determine if the planned program qualifies for one of the available exemptions.
The first question that must be addressed in this area is whether the planned equity compensation program involves the sale of securities. Stock compensation in the form of grants or contributions to ERISA-regulated employee benefit plans (such as ESOPs) generally are not considered to involve the sale of securities and therefore would not fall within the scope of federal securities registration requirements. By contrast, stock option and stock purchase plans are generally considered to involve an offer of securities for sale and would fall within the scope of the federal securities registration laws.
Once it has been determined that a program involves the sale of securities, the next question is whether exemptions from securities registration requirements are available. With several possible exemptions available, whether a company qualifies for a specific exemption generally depends on how many people will purchase the securities, how sophisticated the purchasers are as investors, how much money will be raised from the sale of securities, the manner in which information will be given to the investors, and the contents of that information.
It is important to remember that, in addition to qualifying for an exemption from the federal securities registration laws, the company needs to determine whether it qualifies for an exemption from registration in each state in which the company or any of its investors (including employee investors) are located. Although some of these state Blue Sky laws contain exemptions that mirror some of the federal exemptions, they may still want to review the merits of a particular offering. Even if an exemption from registration exists under state law, the company may still have to file a notice of sale with and pay a small fee to the state securities authority.
Companies must always comply with federal and state anti-fraud laws when issuing securities even if an exemption from registration is available. Written and oral disclosure about the company and its securities must be accurate and complete and may not be misleading due to any omissions. As a result, it is advisable for companies to restrict disclosure to written materials, instruct their officers and employees not to make oral representations, inform investors that no company representative is authorized to make oral disclosures to investors, and deliver written business and financial information to investors (both accredited and non-accredited), even if not required to obtain the benefit of a registration exemption.
Companies should understand that these exemptions are available only to issuers of securities. Once investors hold the company's securities, the investors cannot resell them without registering the resale unless a different exemption is available.
|
