Report text available as:

  • TXT
  • PDF   (PDF provides a complete and accurate display of this text.) Tip ?

115th Congress    }                                    {        Report
                        HOUSE OF REPRESENTATIVES
 1st Session      }                                    {        115-71




 March 29, 2017.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed


Mr. Hensarling, from the Committee on Financial Services, submitted the 

                              R E P O R T

                             together with

                             MINORITY VIEWS

                        [To accompany H.R. 1343]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 1343) to direct the Securities and Exchange 
Commission to revise its rules so as to increase the threshold 
amount for requiring issuers to provide certain disclosures 
relating to compensatory benefit plans, having considered the 
same, report favorably thereon without amendment and recommend 
that the bill do pass.

                          PURPOSE AND SUMMARY

    Introduced by Representative Hultgren on March 2, 2017, 
H.R. 1343, the Encouraging Employee Ownership Act of 2017, 
amends the Securities and Exchange Commission (SEC) Rule 701, 
originally adopted in 1988 under Section 3(b) of the Securities 
Act of 1933 (Securities Act) and last updated in 1999. Under 
current law, if an issuer sells, in the aggregate, more than $5 
million of securities in any consecutive 12-month period, the 
issuer is required to provide additional disclosures to 
investors, such as risk factors, the plans under which 
offerings are made, and certain financial statements. H.R. 1343 
requires the SEC to increase that threshold from $5 million to 
$10 million, and index the amount for inflation every five 
years. Identical legislation has been introduced by Senators 
Pat Toomey and Mark Warner, and support for this effort to 
update Rule 701 can be found in the SEC's Government-Business 
Forum on Small Business Capital Formation Final Reports for 
2001, 2004, 2005, and 2013.


    In 1988, exercising its authority to grant exemptions, the 
SEC issued Rule 701 to allow private companies to sell 
securities to employees for compensatory purposes. In 1999, the 
SEC added disclosure requirements for sales exceeding $5 
million in a 12-month period. SEC Rule 701 permits private 
companies to offer their own securities as part of written 
compensation agreements to employees, directors, general 
partners, trustees, officers, or certain consultants without 
having to comply with federal securities registration 
requirements. Rule 701 exempts sales offerings to employees for 
compensatory purposes from registration if total sales (not 
offerings) of stock during a twelve-month period do not exceed 
the greater of: (i) $1 million; (ii) 15% of the issuer's total 
assets; or (iii) 3.15% of all the outstanding securities of 
that class. Regardless of the formula elected, Rule 701 
restricts the aggregate offering price of securities subject to 
outstanding offers and the amount sold in the preceding 12 
months to no more than $5 million dollars.
    In addition, the Jumpstart Our Business Startups (JOBS) Act 
(P.L. 112-106) contains a provision that updated Section 12(g) 
of the Securities Exchange Act of 1934 to amend the employee 
registration exemptions. These exemptions assist privately-held 
companies that want to provide their employees with the option 
to purchase the company's securities to increase employee 
ownership. To complement these changes to the 12(g) employee 
registration exemptions, Rule 701 should be updated by raising 
the $5 million threshold requirement because the disclosures 
make it more expensive for companies to compensate their 
employees with the company's stock. In addition, these 
disclosure requirements put private companies at risk of 
disclosing confidential financial information.
    By providing greater relief from these disclosure 
requirements, H.R. 1343 allows the employees of privately-held 
businesses ranging from relatively new start-ups to mature 
companies to take full advantage of the JOBS Act 12(g) employee 
shareholder provisions. Increasing the Rule 701 threshold gives 
private companies more flexibility to reward and, importantly, 
retain employees with a company's securities. Furthermore, 
private companies will be better able to keep valuable 
employees without having to use other methods to compensate 
them, such as borrowing money or selling securities. Updating 
Rule 701 also could encourage companies to offer incentives to 
their employees, for example through deferred compensation 
    In testimony at an April 29, 2015, Subcommittee on Capital 
Markets and Government Sponsored Enterprises hearing, Shane 
Kovacs, the Executive Vice President and Chief Executive 
Officer of PTC Therapeutics, Inc., testifying on behalf of the 
Biotechnology Industry Organization (BIO), noted that:

          For companies like PTC, biotech emerging growth 
        companies, we're in a position where we need to attract 
        talent. We need to attract talent from other companies 
        that may be larger and better capitalized and able to 
        compensate with cash compensation more than maybe we 
        could afford as a small, growing company. And 
        therefore, we have to incentivize employees with stock 
        and options in the company which has growth potential. 
        And certainly as a private company or public company we 
        need to do that. And for a private company I can 
        imagine that raising the threshold from $5 million to 
        $10 million in terms of the value that you're going 
        give to employees, without having to put together some 
        large disclosure statement on the company and all that 
        incremental costs, I don't foresee that raising that 
        bar from $5 million to $10 million would really be any 
        real impact to the--putting the employees at risk. In 
        fact, I would almost think the employees would applaud 
        that because it would enable the companies to give more 
        equity in the company to them in the form of 

    In a statement submitted for the record of the same 
hearing, John C. Patigan, Partner and Securities Practice Group 
Leader at Nixon Peabody, stated that the current disclosure 
requirements put companies at risk of disclosing highly 
sensitive business information:

          I believe, as do others who have commented about Rule 
        701, that providing these disclosures is a significant 
        issue for many privately-held companies. In my view, 
        any assertion that the enhanced disclosures are not 
        burdensome or problematic is wrong. Many of those 
        asserting that releasing such information is not a 
        problem have never spent significant time in the 
        business world and may not appreciate how damaging the 
        release of highly confidential financial information to 
        competitors by an employee or former employee could be 
        for the company. Moreover, these exempt offerings under 
        Rule 701 differ from a company's attempt to raise 
        capital under SEC Regulation D or other private 
        placement exemptions. This distinction is critical and 
        suggests different approaches for exempt offerings 
        under Rule 701 and capital-raising transactions, which 
        is exactly what the SEC has recognized for years under 
        Rule 701.


    The Committee on Financial Services' Subcommittee on 
Capital Markets and Government Sponsored Enterprises held a 
hearing examining matters relating to H.R. 1343 on April 29, 

                        COMMITTEE CONSIDERATION

    The Committee on Financial Services met in open session on 
March 9, 2017, and ordered H.R. 1343 to be reported favorably 
to the House without amendment by a recorded vote of 48 yeas to 
11 nays (recorded vote no. FC-36), a quorum being present.

                            COMMITTEE VOTES

    Clause 3(b) of rule XIII of the Rules of the House of 
Representatives requires the Committee to list the record votes 
on the motion to report legislation and amendments thereto. The 
sole recorded vote was on a motion by Chairman Hensarling to 
report the bill favorably to the House without amendment. The 
motion was agreed to by a recorded vote of 48 yeas to 11 nays 
(Record vote no. FC-36), a quorum being present.


    Pursuant to clause 3(c)(1) of rule XIII of the Rules of the 
House of Representatives, the findings and recommendations of 
the Committee based on oversight activities under clause 
2(b)(1) of rule X of the Rules of the House of Representatives, 
are incorporated in the descriptive portions of this report.


    Pursuant to clause 3(c)(4) of rule XIII of the Rules of the 
House of Representatives, the Committee states that H.R. 1343 
will reduce the regulatory burden on private companies 
providing shares to employees for compensation by providing for 
an increase in the threshold for SEC Rule 701 from $5 million 
to $10 million and indexing such threshold for inflation every 
five years.


    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives, the Committee adopts as its 
own the estimate of new budget authority, entitlement 
authority, or tax expenditures or revenues contained in the 
cost estimate prepared by the Director of the Congressional 
Budget Office pursuant to section 402 of the Congressional 
Budget Act of 1974.

                        COMMITTEE COST ESTIMATE

    The Committee adopts as its own the cost estimate prepared 
by the Director of the Congressional Budget Office pursuant to 
section 402 of the Congressional Budget Act of 1974.


    Pursuant to clause 3(c)(3) of rule XIII of the Rules of the 
House of Representatives, the following is the cost estimate 
provided by the Congressional Budget Office pursuant to section 
402 of the Congressional Budget Act of 1974:

                                     U.S. Congress,
                               Congressional Budget Office,
                                    Washington, DC, March 23, 2017.
Hon. Jeb Hensarling,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 1343, the 
Encouraging Employee Ownership Act of 2017.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Stephen 
                                             Mark P. Hadley
                                        (For Keith Hall, Director).

H.R. 1343--Encouraging Employee Ownership Act of 2017

    Under current law, private companies must disclose certain 
information to some employees and investors who purchase 
securities issued by the company prior to their sale if the 
value of securities issued by the company exceeds $5 million 
over a twelve month period. H.R. 1343 would direct the 
Securities and Exchange Commission (SEC) to raise that amount 
to $10 million and to adjust the threshold every five years for 
    Based on an analysis of information from the SEC, CBO 
estimates that implementing H.R. 1343 would cost less than 
$500,000 to issue new rules to adjust the disclosure threshold. 
Under current law, the SEC is authorized to collect fees 
sufficient to offset its annual appropriation; therefore, CBO 
estimates that the net effect on discretionary spending would 
be negligible, assuming appropriation actions consistent with 
that authority.
    Enacting H.R. 1343 would not affect direct spending or 
revenues; therefore, pay-as-you-go procedures do not apply. CBO 
estimates that enacting H.R. 1343 would not increase net direct 
spending or on-budget deficits in any of the four consecutive 
10-year periods beginning in 2028.
    H.R. 1343 contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act and 
would not affect the budgets of state, local, or tribal 
    On March 23, 2017, CBO transmitted an estimate for S. 488, 
the Encouraging Employee Ownership Act, as reported by the 
Senate Committee on Banking, Housing, and Urban Affairs on 
March 13, 2017. The two bills are similar and CBO's estimate of 
their budgetary effects is the same.
    The CBO staff contact for this estimate is Stephen Rabent. 
The estimate was approved by H. Samuel Papenfuss, Deputy 
Assistant Director for Budget Analysis.

                       FEDERAL MANDATES STATEMENT

    The Committee adopts as its own the estimate of Federal 
mandates prepared by the Director of the Congressional Budget 
Office pursuant to section 423 of the Unfunded Mandates reform 


    No advisory committees within the meaning of section 5(b) 
of the Federal Advisory Committee Act were created by this 


    The Committee finds that the legislation does not relate to 
the terms and conditions of employment or access to public 
services or accommodations within the meaning of the section 
102(b)(3) of the Congressional Accountability Act.

                         EARMARK IDENTIFICATION

    H.R. 1343 does not contain any congressional earmarks, 
limited tax benefits, or limited tariff benefits as defined in 
clause 9 of rule XXI.


    Pursuant to section 3(c)(5) of rule XIII, the Committee 
states that no provision of H.R. 1343 establishes or 
reauthorizes a program of the Federal Government known to be 
duplicative of another Federal program, a program that was 
included in any report from the Government Accountability 
Office to Congress pursuant to section 21 of Public Law 111-
139, or a program related to a program identified in the most 
recent Catalog of Federal Domestic Assistance.


    Pursuant to section 3(i) of H. Res. 5, 115th Cong. (2017), 
the Committee states that H.R. 1343 contains one directed 
rulemaking. The rulemaking directs the Securities and Exchange 
Commission to revise section 230.701(e) of title 17, Code of 
Federal Regulations to increase its threshold from $5 million 
to $10 million, and index the amount for inflation every five 


Section 1. Short title

    This section cites H.R. 1343 as the ``Encouraging Employee 
Ownership Act of 2017.''

Section 2. Increased threshold for disclosures relating to compensatory 
        benefit plans

    This section requires the SEC, within 60 days, to amend 
Rule 701 to increase its threshold from $5 million to $10 
million and index the amount for inflation every five years.


    H.R. 1343 does not repeal or amend any section of a 
statute. Therefore, the Office of Legislative Counsel did not 
prepare the report contemplated by Clause 3(e)(1)(B) of Rule 
XIII of the House of Representatives.

                             MINORITY VIEWS

    H.R. 1343 would amend the Securities and Exchange 
Commission's Rule 701 by raising and then indexing for 
inflation the permissible aggregate sales threshold of 
securities sold without certain disclosures to employees and 
other parties as part of their compensation from $5 million to 
$10 million. We continue to be concerned that this bill fails 
to protect employee shareholders, encourage sensible employee 
stock ownership, or promote capital formation.
    Currently, private companies that compensate their 
employees with more than $5 million in company stock in a 
twelve month period must provide those employees with 
relatively simple disclosures, including two years of financial 
statements which do not need to be audited and information 
about the risks associated with investment in the securities. 
Such information is essential for employees, just like other 
investors, to understand the value of their stake in a company.
    This information may be even more important for employee-
investors since they may be more susceptible to suggestion and 
coercion, may not have the resources to otherwise know the 
value of their shares, and may not understand the nature of the 
risks associated with these private, illiquid securities that 
are not freely tradable. Indeed, rather than encouraging more 
employee's to own their employer's stock, the bill only 
encourages individual employees to own more of their employer's 
stock, exposing them to concentration risk in their retirement 
accounts. This is more troubling in the context of the 
Jumpstart Our Business Startups Act of 2012, which made it 
easier for privately-held companies to remain private by, for 
example, exempting employees who receive stock compensation 
from counting toward the threshold for public company 
reporting. Therefore, the bill would enable large private 
companies to encourage overinvestment by employees in stock 
that they cannot value and may not ever be permitted to sell, 
except back to the company.
    Some proponents of the bill cite the costs of disclosure 
and fear of confidential information being leaked to 
competitors. However, to take advantage of the increased 
threshold under the bill, a company would need to have over $34 
million in total assets. Requiring such large companies to 
provide the minimal disclosures cannot be seen as too 
burdensome. In addition, non-disclosure agreements and similar 
confidentiality agreements are already effective mechanisms to 
prevent unauthorized disclosure.
    For all of these reasons, we oppose H.R. 1343.

                                   Maxine Waters.
                                   Gwen Moore.
                                   Al Green.
                                   Michael E. Capuano.
                                   Joyce Beatty.