It seems like just yesterday I was blogging about the SEC exempting stock options from the 500-holder limit for private companies, but it turns out that I never blogged about that because it happened back in 2007, before we had The NASPP Blog. Time flies and here we are almost five years later and the SEC has provided broad no-action relief from the same limit for RSUs.

What the Heck?

For those of you that aren’t sure what I’m talking about, let’s take a step back. Under U.S. securities laws, private companies that have more than $10 million in assets and more than 500 holders in any company security are required to register with the SEC under the 1934 Act. Most private companies are loath to exceed this threshold because registration causes them to be subject to pretty much all the same public reporting requirements as public companies–Forms 10-Q and 10-K., Form 8-K, Section 16, the whole shebang. It’s all the onerous parts of being a public company but without the upside of raising a bunch of money in an IPO and having publicly traded securities.

Stock options are a type of security, as are RSUs. Now the rule is that the company can’t have more than 500 holders in a single class of securities, so a company could have 499 shareholders and 499 option holders and 499 RSU holders without triggering the registration requirement (so long as none of the optionees exercised their options and none of the RSUs were paid out). But if a company had, say, 501 option holders, the company could be required to register with the SEC. This is a problem for private companies with, say, more than 500 employees that want to grant stock options to all their employees.

So, in 2007, after issuing numerous no-action letters on the matter, the SEC carved out an exception providing that compensatory employee stock options don’t count for purposes of the 500-holder limit, provided the options meet certain requirements. (See the NASPP alert, “SEC Exempts Stock Options from Registration for Private Companies,” December 15, 2007).

Now RSUs, Too

The 2007 exemption, however, didn’t extend to RSUs. So, where a private company wanted to grant RSUs to more than 500 employees, the company had to either register with the SEC or request relief from the registration requirement via a no-action letter–even if the RSUs, by their terms, could not possibly ever be paid out before the IPO.

Earlier this month, however, the SEC granted no-action relief for RSUs to the law firm Fenwick & West. By granting relief to a law firm, rather than a specific company, this no-action letter serves as broad relief for all private companies that wish to offer RSUs to their employees.

The RSUs must meet certain conditions to be eligible for relief–the awards must be granted by a private company, granted to individuals providing service to the company as defined under Rule 701, and transferable under only limited circumstances. In addition, the company must disclose information relating to its financials and risk factors to employees.

But Not Stock Acquired Under RSUs and Options

The relief described above extends only to options and RSUs themselves; it doesn’t cover stock employees acquire under options or RSUs. That stock still counts towards the 500-holder limit.

More Information

See the NASPP’s alert, SEC Issues No-Action Letter on RSUs at Private Companies.

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– Barbara