SUPPORTING STATEMENT FOR RULE 12h-1(f)
A. Justification
1. Necessity of Information Collection
Section 12(g) of the Securities Exchange Act of 1934 (the "Exchange Act") was enacted to extend to investors in certain over-the-counter securities the same protections afforded investors in listed securities by providing that the issuers of certain securities traded over-the-counter be subject to the same requirements that applied to issuers of securities listed on an exchange. Further, Section 12(g) extended the disclosure and other Exchange Act safeguards to unlisted securities as a means to prevent fraud.
Under Section 12(g) of the Exchange Act, an issuer with 500 or more holders of record of a class of equity security and assets in excess of $10 million at the end of its most recently ended fiscal year must register that class of equity security with the Securities and Exchange Commission (the “Commission”), unless there is an available exemption from registration. Stock options, including stock options issued to employees under stock option plans, are a separate class of equity security for purposes of the Exchange Act. Accordingly, an issuer with 500 or more option holders and more than $10 million in assets is required to register that class of options under the Exchange Act, absent an available exemption. While there is an exemption from Exchange Act Section 12(g) registration for interests and participations in certain other types of employee compensation plans involving securities, currently there is no exemption for compensatory employee stock options.
The Commission has exercised its authority under Section 12(h), (which allows the Commission to exempt a class of securities by rules and regulations or by exemptive order from the Exchange Act Section 12 registration requirements if it finds, by reason of the number of public investors, amount of trading interest in the securities, the number and extent of the activities of the issuer, income or assets of the issuer, or otherwise, that such action is not inconsistent with the public interest or the protection of investors), Section 23, and Section 36 (which provides that the Commission may exempt from any person, security, or transaction, or any class or classes of persons, securities, or transactions from any provision or provisions of the Exchange Act to the extent that such exemption is necessary or appropriate in the public interest and is consistent with the protection of investors), the exemption for private, non-reporting issuers from Exchange Act Section 12(g) registration for compensatory employee stock options issued under employee stock option plans where certain conditions, including certain information provision conditions, are present.
The exemption requires an issuer to provide information to option holders and holders of shares received on exercise of compensatory employee stock options. This condition requires the issuer to provide to option holders (and holders of shares received on exercise of compensatory employee stock options): (i) the same risk and financial information that would be required to be provided under Securities Act Rule 701 if securities sold in reliance on Securities Act Rule 701 in a 12‑month period exceeded $5 million, with the option holders and holders of shares received on exercise of the compensatory employee stock options always having been provided required financial statements that are not more than 180 days old; and (ii) the issuer’s books and records, including corporate governance documents, to the same extent that they are available to other shareholders of the issuer.
2. Purposes of, and Consequences of Not Requiring, the Information Collection
The purpose of the information collection is to provide holders of compensatory employee stock options in private, non-reporting issuers that are relying on the exemption from Exchange Act registration of the compensatory employee stock options appropriate disclosure and investor protections under the federal securities laws. The exemption requires private, non-reporting issuers to provide information to option holders and holders of shares received on exercise of compensatory employee stock options. The information required ensures that a basic level of information is available to option holders and holders of shares received on exercise of options of these private, non-reporting issuers. If private, non-reporting issuers relying on the exemption from Section 12(g) registration of the compensatory employee stock options are not required to provide this information, option holders and holders of shares received on exercise of options would not necessarily receive important ongoing information about the company in which they hold securities.
3. Role of Improved Information Technology and Obstacles to Reducing Burden
The information required under Rule 12h-1 is not filed with the Commission. Rule 12h-1(f) permits issuers to provide the required information (other than the issuer’s books and records) to the option holders and holders of shares received on exercise of compensatory employee stock options either by: (i) physical or electronic delivery of the information; or (ii) notice to the option holders and holders of shares received on exercise of compensatory employee stock options of the availability of the information on a password-protected Internet site and any password needed to access the information.
4. Efforts to Identify Duplication
The information required by Rule 12h-1(f) is similar to the information that is required under the exemption from registration provided in Securities Act Rule 701. It is likely that an issuer that has 500 or more option holders either already is obligated to provide the same information to option holders due to sales of securities in reliance on Securities Act Rule 701 or already prepares and, as such, provides such information to its shareholders.
5. Effect on Small Entities
The registration requirements of Section 12(g) arise only if an issuer has more than $10 million in assets and has 500 or more holders of a class of equity security at the end of its most recently ended fiscal year. Small entities do not satisfy the asset threshold of Section 12(g) and therefore the proposed exemption would not be needed by such entities until their asset size increased to more than $10 million at the end of a fiscal year.
6. Consequences of Less Frequent Collection
The legislative intent of Section 12(g) was to require issuers that had 500 or more holders of record of an equity security and more than $10 million in assets as the end of its fiscal year to register under the Exchange Act and become subject to the periodic reporting requirements of that Act. The exemption would eliminate the required registration provided that the conditions, including the information requirements, of the proposed exemption are satisfied. Without the information collection, the information about the private, non-reporting issuer would not be required to be provided to option holders and holders of shares received on exercise of options.
7. Inconsistencies with Guidelines in 5 CFR 1320.5
Not applicable.
8. Consultation Outside the Agency
Rule 12h-1(f) was proposed for public comment. No public comments were received during the 60-day comment period prior to OMB’s review of this submission.
9. Payments or Gift to Respondents
Not applicable.
10. Assurances of Confidentiality
Information provided to option holders and holders of shares received on exercise of options pursuant to Rule 12h-1(f) is not filed with the Commission but could be subject to confidentiality or other arrangements between and among relevant parties.
11. Sensitive Questions
Not applicable.
12. Estimate of Respondent Reporting Burden
We estimate that approximately 40 private, non-reporting issuers each year rely on the exemption. We estimate that 25% of 2 hours per response (.5 hours) is prepared by the issuer for a total annual reporting burden of 20 hours (.5 hours per response x 40 responses). The burden estimate was based on the time and the cost of preparing and reviewing the information and making the information available to option holders and holders of shares received on exercise of the options. The estimated burden hours are made solely for purposes of the Paperwork Reduction Act. They are not derived from a comprehensive or even a representative survey or study of Commission rules and forms.
13. Estimate of Total Annualized Cost Burden
We estimate that 75% of the 2 hours per response (1.5 outside hours) is prepared by outside counsel. We estimate that it will cost $400 per hour ($400 x 1.5 hours per response x 40 responses) for an estimated total cost of $24,000. The estimated burden is made solely for purposes of the Paperwork Reduction Act. This cost is not derived from a comprehensive or even a representative survey or study of the cost of Commission rules and forms.
14. Estimate of Cost to Federal Government
No special filing is required to be made with the government under the proposed rule, so no cost is attributed to the review and processing of the information.
15. Explanation of Changes in Burden
Not applicable.
16. Information Collections Planned for Statistical Purposes
Not applicable.
17. Explanation as To Why Expiration Date Will Not Be Displayed
The information collection is not in a form that is published.
18. Exceptions to Certification
Not applicable.
B. Collection of Information Employing Statistical Methods
Not applicable.
| File Type | application/msword |
| File Title | _SUPPORTING STATEMENT FOR SUBMISSIONS |
| Author | U.S. |
| Last Modified By | Pearl Q Crawley |
| File Modified | 2010-08-25 |
| File Created | 2010-08-16 |