Rule 701 Supporting Statement.2019

SUPPORTING STATEMENT
FOR THE PAPERWORK REDUCTION ACT INFORMATION COLLECTION
SUBMISSION 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
$10 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.

2

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

There are no special circumstances in connection with Rule 701.
8.

Consultations with Persons Outside the Agency

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

No payment or gift has been provided to any respondents.
10.

Confidentiality

All documents submitted to the Commission are available to the public.
11.

Sensitive Questions

No information of a sensitive nature, including social security numbers, will be required
under this collection of information. The information collection does not collect personally
identifiable information (PII). The agency has determined that a system of records notice
(SORN) and privacy impact assessment (PIA) are not required in connection with the collection
of information.

3

12.

Estimate of Respondents Reporting Burden

For purposes of the Paperwork Reduction Act (“PRA”), we estimate that Rule 701 takes
approximately 2 hours per response to comply with the collection of information requirements
and is filed by 800 issuers. We derived our burden hour estimates by estimating the average
number of hours it would take an issuer to compile the necessary information and data, prepare
and review disclosure, file documents and retain records. In connection with rule amendments to
the form, we occasionally receive PRA estimates from public commenters about incremental
burdens that are used in our burden estimates. We believe that the actual burdens will likely vary
among individual issuers based on the nature of their operations. We further estimate that 25%
of the collection of information burden is carried by the issuer internally and that 75% of the
burden of preparation is carried by outside professionals retained by the company. Based on our
estimates, we calculated the total reporting burden to be 400 hours ((25% x 2 hours per response)
x 800 responses). For administrative convenience, the presentation of the totals related to the
paperwork burden hours have been rounded to the nearest whole number and the cost totals have
been rounded to the nearest dollar. The estimated burden hours are made 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 800 responses)
for a total cost burden of $480,000. We estimate an hourly cost of $400 for outside legal and
accounting services used in connection with public company reporting. This estimate is based
on our consultations with registrants and professional firms who regularly assist registrants in
preparing and filing disclosure documents with the Commission. Our estimates reflect average
burdens, and therefore, some companies may experience costs in excess of our estimates and
some companies may experience costs that are lower than our estimates. For administrative
convenience, the presentation of the totals related to the paperwork burden hours have been
rounded to the nearest whole number and the cost totals have been rounded to the nearest dollar.
The cost estimate is made solely for the purpose of the Paperwork Reduction Act.
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

There is no change in burden.
16.

Information Collection Planned for Statistical Purposes

The information collection does not employ statistical methods.

4

17.

Approval to Omit OMB Expiration Date

The Commission is not seeking approval to omit the expiration date.
18.

Exceptions to Certification for Paperwork Reduction Act Submissions

There are no exceptions to certification for Paperwork Reduction Act submissions.

B.

STATISTICAL METHODS
The information collection does not employ statistical methods.