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CALIFORNIA CORPORATE & SECURITIES LAW

Should Tweener Corporations Include This Provision In Their Equity Compensation Plans?

I have previously commented on the phenomenon of what I call the “tweener” corporation.  See Will The Rise Of Tweener Corporations Increase Focus On California’s Annual Report Statute?  These are corporations that are not quite private and not quite publicly traded.  One of the advantages of not being subject to the reporting requirements of the Securities Exchange Act is the supposed ability to keep financial and other information confidential from competitors and others.   This advantage, however, could be put at risk by the adoption of an equity compensation plan for employees and others.

Because tweener companies are not subject to the Exchange Act’s reporting requirements, they are not eligible to register on Form S-8 securities offered under their compensation plans.  Although other exemptions from registration may be available, many companies choose to rely on Rule 701.  The SEC adopted Rule 701 for the specific purpose of facilitating offerings of securities to employees and others pursuant to compensation plans, but it later added a “catch” for larger companies.  As amended in 1999, Rule 701 imposes specific financial disclosure requirements if the aggregate sales price or amount of securities sold during any consecutive 12-month period exceeds $5 million. Among other things, these companies must provide financial statements required to be furnished by Part F/S of Form 1-A (Regulation A Offering Statement).

Does this mean that tweener corporations have lost the ability to keep their financial information confidential?  The SEC’s answer is “no”. According to the SEC, issuers concerned about confidentiality have two choices:

Private issuers can use certain mechanisms, such as confidentiality agreements, to protect competitive information. Alternatively, an issuer could elect to stay below the $5 million threshold to avoid these disclosure obligations.

Release No. 33-7645 (Feb. 25, 1999).  Issuers choosing the former option may want to include a confidentiality provision in the plan, the award agreement, or both.

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