Rule 701 Supporting Statement.2014

SUPPORTING STATEMENT FOR RULE 701

A.

JUSTIFICATION
1.

Circumstances Making the Collection of Information Necessary

Absent an available exemption, the Securities Act of 1933 (the “Securities Act”)
requires that a registration statement be filed with the Commission disclosing prescribed
categories of information before the securities may be offered for sale to the public. The
securities may not be sold to the public until the registration statement becomes effective. In
addition, prospective investors must be furnished a prospectus containing the most significant
information from the registration statement. However, Congress recognized that in some
situations there may not be a need for registration and thus provided a number of exemptions
from registration. Section 28 of the Securities Act permits the Commission to “conditionally or
unconditionally exempt any person, security or transaction … from any provision … to the
extent that such exemption is necessary or appropriate in the public interest, and is consistent
with protection of investors.”
Rule 701 permits a company that is not subject to the reporting requirements under the
Section 13 or 15(d) of the Securities Exchange Act of 1934 to offer and sell its securities under a
written compensatory benefit plan established by the issuer for the participation of its employees,
directors, general partners, officers or consultants and advisors without registration under the
Securities Act. The total sales price or maximum amount of securities that may be sold during
any consecutive 12 month period must not exceed the greatest of either: $1 million; 15% of the
total assets of the issuer or its parent company if the issuer is a wholly-owned subsidiary; or 15%
of the outstanding amount of the class of securities being offered and sold in reliance on Rule
701. The issuer must deliver to investors a copy of the compensatory benefit plan or contract. In
addition, if the total sales price or amount of securities sold during any 12-month period exceeds
$5 million the issuer must deliver additional disclosure to investors a reasonable period before
the date of sale, including for example: a copy of the summary plan description required by the
Employee Retirement Income Security Act of 1974 (“ERISA”) or, if the plan is not subject to
ERISA, a summary of the material terms of the plan; and the financial statements required to be
furnished by Part F/S of Form 1-A.
2.

Purposes and Use of the Information Collection

The purpose of the Rule 701 collection is to ensure that a basic level of information is
available to investors under the compensatory plan. If companies do not provide basic risk and
financial disclosure to their investors, even when these persons have a business or employment
relationship with them, there is a danger that investment decisions will be made without
sufficient information.

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3.

Consideration Given to Information Technology

The required information is provided to the investors in the compensatory plan and is
not provided to the Commission. The information may be electronically transmitted to investors.
4.
Duplication of Information
The information required by Rule 701 is not duplicative of other required disclosure.
5.

Reducing the Burden on Small Entities

The Rule 701 exemption was designed to decrease costs and burdens for all issuers,
including small business issuers, and facilitate security offerings between issuers and their
employees.
6.

Consequences of Not Conducting Collection

The legislative intent for collection of this information requires that the information be
available prior to the making of the investment decision. It cannot be satisfied by fewer
collections.
7.

Special Circumstances

Not applicable.
8.

Consultations with Persons Outside the Agency

Before it was adopted, Rule 701 was proposed for public comment. No comments were
received on this request during the 60-day comment period prior to OMB’s approval of this
extension request.
9.

Payment or Gift to Respondents

Not applicable.
10.

Confidentiality

Not applicable.
11.

Sensitive Questions

This collection does not contain any personal identifiable Information (PII). The Privacy
Impact Assessment (PIA) is provided as a supplemental document.

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12.

Estimate of Respondents Reporting Burden

We estimate that approximately 300 companies annually rely on the Rule 701
exemption and that it takes 2 hours to prepare each response. We estimate that 25% of the 2
hours per response (0.5 hours) is prepared by the company for total annual reporting burden of
150 hours (0.5 hours per response x 300 responses). The estimated burden hours are solely for
the purpose of the Paperwork Reduction Act.
13.

Estimate of Total Annualized Cost Burden

We estimate that 75% of the 2 hours per response (1.5 hours) is prepared by outside
counsel. We estimate that it costs $400 per hour ($400 x 1.5 hours per response x 300) for a total
cost burden of $180,000. The estimated cost burden is made solely for purposes of the
Paperwork Reduction Act. The cost is not derived from a comprehensive or even a
representative survey or study of the costs of Commission rules and forms.
14.

Costs to Federal Government

No special filing is required to be made with the government under the rule, so no cost
is attributed to the review and processing of the information.
15.

Reason for Change in Burden

No change in burden.
16.

Information Collection Planned for Statistical Purposes

Not applicable.
17.

Approval to Omit OMB Expiration Date

We request authorization to omit the expiration date on the electronic version of the
form. Including the expiration date on the electronic version of the form will result in increased
costs, because the need to make changes to the form may not follow the application’s scheduled
version release dates. The OMB control number will be displayed.
18.

Exceptions to Certification for Paperwork Reduction Act Submissions

Not applicable.

B.

STATISTICAL METHODS
Not applicable.