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Christopher Seifter is a member of Gunster’s Corporate Law, Securities Law and Corporate Governance, Technology Law, and Emerging Companies Practice Groups. Christopher advises public and private companies on matters involving securities laws and regulations, corporate governance issues and practices, and general corporate law issues, as well as mergers and acquisitions.

SEC Rule 701 exempts non-reporting companies from registering securities offered or sold to employees, officers, directors, partners, trustees, consultants, and advisors under compensatory benefit plans or other compensation agreements. As discussed in an earlier post, under the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) passed by Congress in 2018, the threshold for the aggregate sales price of securities sold during any consecutive 12-month period that triggers additional disclosure requirements under Rule 701 was increased from $5 million to $10 million.   What may have gone unnoticed was that the SEC has adopted final rules to implement EGRRCPA and has published a concept release “soliciting comment on possible ways to modernize rules related to compensatory arrangements in light of the significant evolution in both the types of compensatory offerings and the composition of the workforce since the Commission last substantively amended these rules in 1999.”

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On February 19, 2019, the Securities and Exchange Commission voted to propose a new rule that would expand the availability of the “testing-the-waters” provisions that enable eligible companies to engage in certain communications to gauge institutional investor interest in a proposed IPO. Currently, only companies that qualify as “emerging growth companies” or “EGCs” are eligible to test the water. The new rule and related amendments would expand the availability of the provisions to all types of issuers, including investment companies.

The purpose of the testing-the-waters provisions is to allow potential issuers to gauge market interest in a possible initial public offering or other registered securities offering by discussing the offering with certain investors, including qualified institutional buyers (“QIBs”) and institutional accredited investors (“IAIs”), prior to filing a registration statement. SEC Chairman Jay Clayton said that “[t]he proposed rules would allow companies to more effectively consult with investors and better identify information that is important to them in advance of a public offering.” The proposed rules and related amendments are intended to give more issuers a cost-effective and flexible means of communicating with institutional investors regarding contemplated offerings and evaluating market interest.


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