The following post is based on a publication from Paul, Weiss, Rifkind, Wharton & Garrison LLP, authored by Mark Bergman, David Huntington, Jack Lange and Hank Michael.
Private companies granting share-based compensation to their employees often will rely on Rule 701 under the Securities Act of 1933 (the “Securities Act”), particularly if the employees being granted options or restricted stock units (or other forms of compensation that otherwise would implicate the registration requirements of Section 5 of the Securities Act) do not qualify as “accredited investors.” Rule 701(e) requires an issuer to deliver, a reasonable period prior to the date of sale, financial statements, among other things, to all employees in the United States to whom the issuer sells securities in reliance on Rule 701 if the issuer sells securities in excess of $5 million in a 12-month period under Rule 701. [1] For private companies, this delivery requirement can raise concerns that their financial information may become widely disseminated (or at least obtainable by competitors). On November 6, the SEC Staff published a Compliance & Disclosure Interpretation (C&DI 271.25) setting forth additional guidance that can mitigate the effect of the delivery requirement.
