October 8, 1998

Securities and Exchange Commission

450 Fifth Street, N.W.

Washington, DC 20549

Attention: Mr. Jonathan G. Katz, Secretary

Re: Proposal to Amend Rule 701 – File No. S7-5-98

Dear Ladies and Gentlemen:

This letter responds to the request of the Securities and Exchange Commission (the "Commission") in Release No. 33-7511 (February 27, 1998) (the "Release") for comments on proposals to amend Rule 701 under the Securities Act of 1933 (the "Securities Act").

These comments have been prepared by members of the Task Force on Small Business Issuers (the "Task Force") and the Subcommittee on Employee Benefits, Executive Compensation and Section 16 (the "Subcommittee") of the Committee on Federal Regulation of Securities (the "Committee") of the Section of Business Law (the "Section") of the American Bar Association (the "ABA").

A draft of this letter was circulated for comment among members of the Task Force, the Subcommittee, the Chairs and Vice Chairs of the other subcommittees and task forces of the Committee, the officers of the Committee, the members of the Advisory Committee of the Committee and the officers of the Section. A substantial majority of those who reviewed the letter in draft form have indicated their general agreement with the views expressed. However, this letter does not represent the official position of the ABA, the Section, the

Committee, the Task Force or the Subcommittee, nor does it necessarily reflect the views of all those who reviewed it.

For your convenience, the following is an outline of the comments contained below:

Page

I. Summary 3

II. Background of Rule 701 4

III. Exemptive Limits 5

A. Counting Sales Only 5

B. Valuation of Services 8

IV. Disclosure 10

V. Foreign Issuers and Rule 12g3-2(b) 12

VI. Consistency with Form S-8 14

A. General 14

B. Treatment of Former Recipients of Awards 14

C. Definition of Consultants 16

D. Treatment of Transferees 16

E. Resales After Initial Public Offering 16

VII. Deferred Compensation Plans 17

VIII. Form 701 18

I. SUMMARY

In general, we welcome and strongly support the staff’s initiative to simplify Rule 701 and expand its utility. In particular, we support use of the Commission’s expanded exemptive authority under Section 28 of the Securities Act to eliminate the $5 million offering limit.

We are concerned, however, that some of the proposed changes made to accommodate and address the use of Rule 701 by larger, well-established issuers would make reliance on the Rule impracticable for the small businesses for whom the Rule was originally written . We believe that the efforts to simplify the Rule by focusing on sales will, in actual operation, eliminate the usefulness of the dollar-based parts of the maximum offering measure and leave reliance solely on the 15% of the outstanding class measure. This is because of the frequent bunching of option exercises and the uncertainty of knowing at the time of grant that an exemption will be available at the time of sale. The problem is heightened by the inclusion of the value of services at the time of option exercise. The result will be less relief than contemplated by the proposal and even a tightening of the Rule for some issuers. We therefore are suggesting, in order to preserve the full benefits of the proposed amendments to the Rule, that the determination of the availability of the exemption under Rule 701 be made at the time of the award, which would be the time of grant for options (the most common form of equity incentive) and the time of sale for restricted stock.

Our other principal concerns fall into the following areas: (1) the inclusion of the value of services in the proposed dollar-based parts of the formula for calculating the maximum offering under the Rule makes those parts of the formula unworkable for long-term incentive awards and adds unnecessary complexity, and (2) the proposed disclosure requirements are unduly burdensome and would put small issuers at risk of making financial information available to competitors.

In addition, we believe that it would be unfortunate if the Commission sought to restrict use of the exemption by foreign private issuers and thereby discourage such issuers from making equity incentives available to U.S. employees. We also note, as we have indicated previously, that the Rule does not adequately accommodate deferred compensation arrangements that may be deemed to involve the sale of securities requiring registration. The difficulties and uncertainties proposed to be introduced for using the dollar limitations under the Rule for other awards would exacerbate the problem of using the Rule for deferred compensation arrangements. Accordingly, we renew our proposal for a separate targeted exemption for such deferred compensation arrangements of non-reporting companies. We believe this can easily be effected as part of the proposed amendments of the Rule.

In the interest of simplification, we believe that certain aspects of Rule 701 should be made consistent with Form S-8; otherwise, the differences result in traps for the unwary which can be problematic when an issuer moves from reliance on Rule 701 to Form S-8. We also address certain specific questions raised in the Release.

II. BACKGROUND OF RULE 701

Rule 701 was adopted in 1988 in recognition of the need of private companies to have a workable exemption from registration for equity compensation arrangements that was tailored for such arrangements. In addition, the Commission recognized that private companies deserved to be in a position more nearly comparable to that of public companies which can utilize Form S-8. Rule 701, as adopted, was based on the premise that equity compensation arrangements for employees are not generally susceptible to abuse and therefore that the protections of registration or substitute detailed disclosure is not required. Because employers are motivated to provide benefits to their employees at the lowest cost and are not permitted to use Rule 701 for capital raising, the Commission concluded that the antifraud rules, as opposed to a disclosure requirement, would be sufficient. The experience with Rule 701 over the years has demonstrated that the Commission’s policy judgment was sound.

The problems with Rule 701 since its adoption have been its complexity and therefore the need for interpretation and the limitations on the amount of securities that may be issued pursuant to the Rule, created in part by the constraints of Section 3(b). With the recent grant to the Commission by Congress of broad exemptive authority, the Commission now has the opportunity to deal with these problems, and the proposed amendments are a welcome step in that direction.

III. EXEMPTIVE LIMITS

We support the use of the Commission’s recently acquired exemptive authority to increase the potential maximum amount of securities that may be sold pursuant to Rule 701 and simplify the measurement formula. There is no question that the current formula is difficult to understand and apply.

A. Counting Sales Only

We believe that the elimination of the $5 million ceiling, coupled with measuring the limitations at the time of sale would, in most cases, expand the Rule’s availability and simplify its use. However, a careful analysis shows that the Rule as proposed will not provide the full benefits envisioned by the changes and will, in fact, be more restrictive for some issuers.

There is no question that there has been confusion over the proper counting of offers (typically, option grants). First, there was the question whether outstanding options counted against the 12- month limit, even if they were granted more than 12 months before. This was answered affirmatively. That then triggered the question whether outstanding unvested options were counted. Many practitioners proceeded on the basis that options did not count until they vested. After the staff initially took the position that exercises of unvested options after a company became a reporting company were not covered by the Rule 701 exemption because the unvested options were not "offered" before the company went public, the staff clarified in Leisner ( Dec. 21, 1995), based on Bridge Information Systems, Inc. (Nov. 21, 1991), that the grant of options was covered by the Rule (and counted against the limit), whether vested or unvested, and that therefore the Rule 701 exemption was available for exercises of options that vest both before and after the issuer became a reporting company.

The shift to counting at the time of sale eliminates this complexity. However, the inability to count offers (i.e., option grants) creates its own uncertainty regarding whether an exemption will be available at the time of sale (i.e., option exercise) in reliance on the dollar-based limitation and results in a more restrictive Rule for some issuers.

Under the proposed Rule, when an issuer grants options in reliance on the dollar-based measures of the Rule, it cannot be certain that those dollar-based measures will be available at the time of sale. For example, a series of grants (even more than 12 months apart) that could be exercised at the same time would have to be kept below $1 million in total or 15% of total assets (assuming the issuer is confident that total assets will not be lower at the time of exercise). The issuer would have to stagger vesting and exercise dates in order to go above these limits, resulting in reintroducing the very complexity the proposal seeks to eliminate. The 15% of total assets test has its own uncertainties because the issuer cannot be certain of its future level of assets and therefore whether the test will be satisfied at the time of sale. Furthermore, the total assets test is not a very useful measure for many service and technology-based companies where assets are typically not significant. The uncertainty and limited usefulness of the dollar-based measures are heightened because the exercise of options is frequently bunched at the time of an initial public offering or sale of the business (even if there is staggered vesting since the exercisability of the options is usually accelerated upon these events).

The problem is further exacerbated by the proposal to base the dollar measures on the fair market value of the securities at the time of exercise (which means including the value of services). This "spread" is unknown at the time of grant and is expected (or at least hoped) to be significant at the time of exercise. This renders both the proposed $1 million measure and the 15% of total assets measure unreliable as a basis for the exemption for stock options, the most common form of equity awards. As a result, the proposal to count only sales is likely to have little impact in practice on applying the dollar-based limitations since issuers will have to keep track of outstanding offers anyway, as is now the case. On the other hand, the need to include the value of services in measuring the amount sold to employees (as discussed in the next section) will significantly limit the amounts available under the dollar-based measures and introduce a new uncertainty. Additionally, as discussed in Section VII below, the need to count certain deferred compensation arrangements under the dollar-based measures in the absence of a separate limitation for those arrangements, makes reliance on the dollar-based measures even more difficult.

The uncertainties that will surround the dollar-based measures will leave the 15% of the outstanding class measure as the only reliable basis for the exemption. In most cases this may be sufficient and, with elimination of the $5 million cap, would expand the usefulness of the Rule for most issuers. However, because issuers will be unable to predict the timing of option exercises they will be unable to determine with certainty whether the 15% of the outstanding class measure will be available at the time of exercise of options unless they continue to track outstanding options and impose the 15% limitation at the time of grant. In addition, there are a number of cases where the issuer has exceeded or proposes to exceed 15% of the outstanding class, in reliance on the 15% of assets limit. For the reasons discussed above, in these cases the proposed Rule would be more restrictive.

We believe that the Commission’s objectives of simplifying Rule 701 and expanding the availability of the exemption, while at the same time avoiding the foregoing difficulties, can best be achieved by focusing on "awards" of equity incentives. The Commission has recognized in other contexts, such as Rule 16b-3, that the award is the meaningful event. In the context of compensatory equity arrangements, we believe that the time of award also is the meaningful event for purposes of establishing the exemption from Section 5 of the Securities Act. Awards typically take the form of restricted stock or option grants. In the case of compensatory options, there is little investment decision to be made at the time of exercise since options usually are exercised when they are in-the-money. In addition, net exercise and withholding techniques further reduce any investment risks. It is also critical that issuers be able to determine with certainty at the time of award, the only event truly within the issuer’s control, that there is an exemption available. Accordingly, we suggest that the proposed Rule be modified to measure the 15% of assets and class of securities tests at the time of the award rather than the time of sale. In the case of restricted stock and compensatory stock purchases (e.g., in 401(k) plans), the time of sale and award would be the same; in the case of options, the time of award would be the time of grant (without regard to vesting).

While we believe that the value of services should continue to be excluded from the computation of amount as discussed in the next section, use of the date of award as the time to measure the dollar-based limitations would help to mitigate the problem created by including the value of services for service providers should the Commission determine to retain this aspect of the proposal. At the time of award, only below market awards would be affected and, in the case of options, the amount to be counted would be limited to the spread at the time of grant rather than at the time of exercise.

Basing the exemption on awards made within 12 months would preserve the simplification the Commission is seeking to achieve with the proposal. Consistent with the Commission’s proposal, outstanding options would no longer need to be tracked in order to determine the availability of the exemption. In addition, each of the measures would continue to be meaningful and would afford issuers the needed flexibility to effectively utilize the Rule 701 exemption based upon the size and nature of the particular issuer; at the same time appropriate limitations on use of the exemption would be provided.

B. Valuation of Services

In the case of grants to consultants and advisers, there is a trap for the unwary under current Rule 701 that results from the requirement that the value of services be counted against the dollar limit. Under proposed Rule 701(d)(3)(i), this requirement would be extended to employees. Although not stated in the proposed Rule, we assume that this requirement is intended to be extended to others, such as directors.

Including the value of services would have the effect of expanding an unnecessary and unworkable problem. In addition, by measuring the dollar-based limits at the time of sale rather than award, the amount required to be counted is likely to be significantly greater. In the case of options, the proposal would require including the spread at the time of exercise (the difference between then fair market value and the option exercise price); restricted stock awards which are often made at low or no cost would have to be counted at full value. The Rule should be drafted so as to make it possible for the issuer to control and plan for compliance. However, since there is no way for the issuer to know the timing of an option exercise, there is no way to predict or plan for the amount to be included in advance. Further, if this provision is included in the Rule, further guidance would be needed on how services should be valued. It is easy to value, as now required, the cash amount employees pay but it is extremely difficult to determine the overall value of equity awards in a private company where there is no market for the securities. As applied to employees, the requirement to value services becomes even more uncertain than it is with respect to consultants; how should the value be measured in the case of incentive stock options under Section 422 of the Internal Revenue Code (where there is no tax on exercise but only upon sale) or in the case of purchases pursuant to an employee stock purchase plan under Section 423 of the Internal Revenue Code (which permits a 15% discount for non-discriminatory broad-based plans)?

This proposal is not consistent with the Commission’s long-standing position that the value of services is not treated as consideration for purposes of determining whether or not a sale of securities has occurred (See Release No. 33-6188). It is not clear what regulatory purpose is served by a requirement that the value of services be counted against the dollar maximum. This would be a more appropriate focus if the regulatory purpose were disclosure (which, in the case of reporting companies, is covered by Regulation S-K Item 402(d)). In the context of Rule 701, the regulatory purpose is presumably to put a meaningful limit on the number of shares that may be issued. As a policy matter, it is imperative that an issuer be able to ascertain, at the time of award (the only event within the issuer’s control), that the applicable limit will not be exceeded. It is also important that the exemption be easy to apply – the overwhelming majority of issuers relying on Rule 701 are not experienced in the application of the securities laws. If one of the goals of the proposed amendments is to simplify the Rule, the complexity involved in a requirement to value services should be removed for all awards. This requirement makes corporate planning unnecessarily complicated and difficult.

Should the Commission decide to require the value of services to be included in the aggregate sales price in the case of employees as well as consultants and advisors, as noted above measuring the value of the underlying security on the time of award rather than sale (i.e., exercise) would somewhat mitigate the problems that would be created. In addition, we believe that the last sentence of proposed Rule 701(d)(3) should be clarified so that there is no implication that non-elective bonus arrangements would need to be registered under the Securities Act or counted under the Rule 701 limit. As noted above, it has been the longstanding position of the staff that the value of services are not treated as consideration for purposes of determining whether or not a sale of securities has occurred, and this "no sale" position historically has been relied upon in appropriate cases involving bonus arrangements where the employee has no election as to whether to receive cash or defer the amount of the bonus.

IV. DISCLOSURE

The proposal to require issuers to deliver written risk factors and specified financial information as a condition to the exemption under Rule 701 would introduce a radical change in the exemption and would limit, in some cases severely, the Rule’s utility. The Commission acknowledges in the Release that it is not aware of any "widespread abuses" in connection with the delivery of appropriate financial and other information in connection with sales under Rule 701. Indeed, the proposing Release cites no abuses at all. Absent clear evidence that the antifraud rules are not providing sufficient protection to recipients of securities under Rule 701, we believe it would be burdensome and potentially harmful to add an informational disclosure requirement to the Rule without any clear corresponding benefit to recipients.

The Commission has properly asked commenters to address the differences between a disclosure regime for compensatory purposes and one for capital-raising purposes. Those differences are critical; it is not necessary to impose an investor protection regime on compensatory arrangements that are not typically approached as investments. When an issuer is raising capital, it has every incentive to try to obtain the highest price for its securities. A disclosure regime that requires an issuer to provide up-to-date financial information, at least to those persons without a minimum threshold of financial sophistication, helps to balance the scales between the issuer and the investor. By contrast, in a bona fide compensatory arrangement, the issuer is looking principally to provide a benefit to the person receiving the securities, not to maximize its proceeds from the sale. Disclosure is not as significant in these circumstances. As any initial public offering candidate that recently has gone through a "cheap stock" inquiry can attest, the Commission staff does not typically point to instances where issuers have sold securities to employees at prices in excess of fair market value. The incentives for abuse just are not there. Moreover, employees of smaller companies who receive awards are more likely to know about the condition of their company than employees of larger companies, making a mandatory disclosure regime less necessary in this context.

The burdensome nature of a disclosure obligation should not be minimized, particularly one that requires issuers to provide financial information. Most private issuers keep confidential their financial condition and results of operations. Having to provide this information to employees (and often former employees) as a condition to the exemption risks having this information come into the possession of a company’s competitors. For example, a disgruntled employee may quit immediately after exercising options or may exercise options (which typically remain exercisable for a defined period following termination of employment) after quitting. Requiring that these employees be provided with financial information could result in serious injury to the company, one that it would be naïve to think could be avoided with a confidentiality agreement. This risk would discourage equity awards to employees. These disadvantages clearly outweigh the limited advantages of providing recipients of compensatory awards with disclosure. Rather, it is appropriate in these circumstances to let the antifraud rules govern the disclosure that may be required under the circumstances. It is not necessary to impose this requirement as a condition to the exemption.

If notwithstanding our views, the Commission decides to require financial information in connection with Rule 701 sales, it should consider requiring this information only if sales under Rule 701 exceed $5 million during any 12-month period. For these purposes, "sales" should mean when the employees make tangible payment for the securities (e.g., at the time of option exercise). This financial information would, in essence, be the "price" issuers would pay for the removal of the $5 million offering limit. Issuers that are selling that volume of securities to employees are more likely to have the financial information available and thus the requirement would likely be less burdensome on them. Alternatively, an issuer could elect to keep within that amount to avoid the disclosure burdens. If the Commission does not accept this suggestion to limit any new disclosure requirements to offerings in excess of $5 million, it should certainly exempt offerings of less than $1 million, since offerings up to this amount under Rule 504 would not be subject to an information requirement.

We do not believe in any case that any particular information need accompany sales to executive officers or directors of an issuer. These individuals are accredited investors under Rule 501 and an issuer would not be required to provide any specific information to them in an offering under Regulation D. None should be required under Rule 701.

The Commission has asked whether other informational requirements, such as those in Rule 502, Form SB-1 or Form SB-2, might be more appropriate for Rule 701. As we have discussed above, we do not believe that any informational requirements are necessary as a condition to the exemption, but if the Commission elects to require this information, the requirements in Form 1-A appear to be the least burdensome.

Finally, it should be noted that one class of issuers that we believe would find the requirement to provide financial statements as set forth in the proposed Rule especially burdensome is foreign private issuers. These issuers use Rule 701 to allow their U.S. employees to enjoy the benefits of their global equity programs. However, their financial statements are usually not prepared in accordance with U.S. generally accepted accounting principles and hence would not comply with Form 1-A. Even a reconciliation to U.S. generally accepted accounting principles, which has been permitted for Canadian employers using Form 1-A, would require significant additional costs and burdens, and would make some of these issuers reluctant to offer equity to their U.S. employees. Under the circumstances of Rule 701, there appears to be little reason to exclude foreign private issuers from the benefits of the Rule if they provide home country information to employee benefit plan participants.

V. FOREIGN ISSUERS AND RULE 12g3-2(b)

The Release raises the possibility that Rule 12g3-2(b) might be amended to limit the exemption from reporting under Section 12(g) of the Securities Exchange Act of 1934 (the "Exchange Act") for foreign private issuers that utilize Rule 701 or utilize it above a limit. We believe that such a limitation would discriminate unfairly against non-U.S. employers seeking to include their U.S. employees in global compensation programs. Moreover, to the extent any such new limitation contained an annual threshold of $5 million or less, it would severely disrupt existing employee plans already being offered in reliance on Rule 701.

Rule 701, as currently in force and as proposed, is only available in compensatory circumstances and not for "plans or schemes to circumvent this purpose, such as to raise capital." Responsible foreign private issuers are fully aware of this requirement. See, for example, Marshalls Finance Ltd. (Nov. 27, 1990). Therefore, foreign private issuers are not permitted to use Rule 701 as a method for entering the U.S. market voluntarily to raise capital. Although compensatory sales to employees may result incidentally in the return of proceeds to the issuer (as, for example, upon the exercise of stock options), the requirement of a compensatory element insures that Rule 701 is not an economically viable method for issuers to use in raising capital.

There is another important distinction between employee offerings under Rule 701 and other situations in which foreign issuers might be viewed as taking steps to enter the U.S. markets voluntarily. Securities sold under Rule 701 are "restricted securities." Thus, they cannot be freely resold by U.S. employees inside the U.S. Indeed, as a practical matter, in the absence of an active U.S. market for their securities, foreign employers routinely structure their plans to provide for resale only in their home country markets, often through a trustee located outside the U.S. As a result, there is little likelihood that a Rule 701 plan will create a U.S. market for foreign securities.

It is also important to bear in mind the significant amount of information about foreign issuers that the existing requirements of Rule 12g3-2(b) already require them to supply. Employers large enough to need the exemption provided by Rule 701 (as distinguished from Rule 506 under Regulation D) are typically listed on an internationally recognized stock exchange, which requires significant regular reports and other information. These issuers typically use Rule 701 for awards of small amounts of stock to relatively broad groups of their employees. To limit the availability of Rule 12g3-2(b) in an effort to force registration under the Exchange Act would provide little information of any value to the employees participating in these plans.

The Commission should also consider the practical implications of a change in Rule 12g3-2(b) in the light of larger policy goals. Even with its current $5 million annual limit, Rule 701 has provided a modest opportunity for foreign private issuers to include U.S. employees in their global equity plans. The Commission should be moving forward – in the direction of giving U.S. employees the same benefits as their fellow employees in other countries – rather than backwards by limiting their access to compensatory stock incentives. If foreign issuers are forced to undertake reporting under the Exchange Act in order to continue issuing shares to U.S. employees, most of them are likely to decide to refrain from offering further compensatory equity grants to these employees. The net result will be to cause U.S. employees to be treated less favorably in the global marketplace without any recognizable benefit to U.S. investors.

Perhaps most importantly, a step to restrict Rule 12g3-2(b) will run counter to the Commission’s initiatives in recent years to accommodate the application of the U.S. securities laws to foreign issuers and encourage their voluntarily entering into the U.S. markets. Such a step would send the wrong signals to foreign companies and be counterproductive.

VI. CONSISTENCY WITH FORM S-8

A. General

We generally favor consistency in the application and interpretation of Rule 701 and Form S-8 in order to avoid unnecessary complexity and traps for the unwary. Both are designed to address the same subject matter, one for private companies and the other for public companies, and they should mesh to the extent practicable. In this connection, we refer you to the letter of the American Bar Association dated April 27, 1998 relating to proposed amendments to Form S-8 (File No. S7-2-98) (the "ABA S-8 Letter").

B. Treatment of Former Recipients of Awards

We see no reason to treat former directors, general partners, trustees, consultants and advisors differently from former employees, provided that the option grants were made prior to termination of the person’s relationship with the issuer. Once it has been determined that a person’s relationship with the issuer gives them access to adequate information to make reliance on Rule 701 appropriate while the relationship continues, there is no reason to assume that these persons have less access to the appropriate information than former employees. This is particularly evident in the case of directors, general partners and trustees, who can generally be assumed to have access to significantly more information than rank and file employees. It is interesting to note that under the proposal former directors would be treated less favorably than former spouses of employees.

So long as the award is made while a person is a director, general partner, trustee, consultant or adviser, the right to rely on Rule 701 should continue after termination of that status. Further, it should be made clear that if, for example, someone ceases to be an employee and becomes a director, the right to rely on Rule 701 would continue. This could be accomplished by using the same approach as Form S-8: a broad definition of "employee" (or a more generic term) that includes all of the enumerated persons; in such case a reference to a former award holder would include all of the enumerated persons. This would have the added advantage of being consistent with Form S-8, resulting in a simpler regime for issuers to understand and remember.

If, notwithstanding our views, the Commission decides to continue to distinguish among award holders whose relationship with the issuer has terminated then, at a minimum, the persons likely to have the most information prior to termination of their relationship (e.g. directors, general partners and trustees) should be treated as favorably as employees. Otherwise the illogic of the provision is a complicated trap for the unwary.

A possible alternative would be to provide that the Rule would be available for a limited time after termination of the relationship (e.g., requiring an exercise to occur within 12 months of termination of the relationship in order for Rule 701 to be available). This should not result in abuses since options typically expire within a few months after a relationship terminates (other than because of death or retirement).

C. Definition of Consultants

The definition of consultants eligible to receive awards should to the extent practicable be the same under Rule 701 and Form S-8. We believe the broader approach taken under Rule 701 is appropriate. In addition, as noted in the ABA S-8 Letter (see Section I.D.5), we do not believe it is necessary to limit the use of Rule 701 to consultants who are natural persons so long as the entity is substantially owned by its service providers.

On the other hand, we do not believe that the various safeguards proposed for Form S-8 designed to address perceived abuses with awards to consultants need to be carried over to Rule 701. As indicated in the Release, the types of potential abuses in the granting of options to consultants under Form S-8 are unlikely to be present in the case of Rule 701 because all Rule 701 grants must be made prior to a company becoming public and, therefore, there is virtually no opportunity for Rule 701 options to be used to manipulate the market. In addition, securities acquired under Rule 701 are restricted securities.

D. Treatment of Transferees

The provisions governing transferees under Rule 701 should be the same as those under Form S-8. See generally, the discussion in Section I of the ABA S-8 Letter relating to use of Form S-8 for sales to option transferees.

E. Resales After Initial Public Offering

Rule 701(c) permits securities issued under Rule 701 to be resold pursuant to Rule 144 commencing 90 days after the issuer has become a reporting company under the Exchange Act. This provision is carried forward in paragraph (g) of the Rule as proposed to be amended. The 90-day delay corresponded to the 90-day period during which Form S-8 was unavailable for a newly reporting issuer when Rule 701 was initially adopted. Form S-8 was subsequently amended to make it available immediately to a reporting company.

Notwithstanding that Rule 144 is not available until 90 days after an issuer becomes a reporting company, we believe that it would be appropriate for the resale provisions of Rule 701 to be available immediately for a reporting company in order to preserve the level playing field with Form S-8. In the absence of this change, an issuer would in all likelihood include the securities awarded while it was a non-reporting company in its initial Form S-8 registration in order to achieve the desired liquidity following its initial public offering. No purpose is served in delaying the effectiveness of the resale provision of Rule 701.

VII. DEFERRED COMPENSATION PLANS

We support the proposed changes to Rule 701 relating to the treatment of deferred compensation arrangements but we are concerned that they do not go far enough to accommodate the special nature of deferred compensation arrangements.

The ABA’s Joint Committee on Employee Benefits previously commented to the Commission on the difficulty of accommodating deferred compensation arrangements under the Rule 701 exemption and proposed a parallel rule (Rule 701-X) tailored for these arrangements. We would be happy to provide you with another copy of that proposal if it would be helpful.

The difficulty in fitting deferred compensation arrangements under Rule 701 stems from the limitation on the amount of securities that may be offered pursuant to the Rule. This difficulty is carried through to the proposed changes to the Rule and would be exacerbated because of the uncertainties associated with the dollar-based measures as discussed above.

The 15% of outstanding class measure does not translate easily to deferred compensation arrangements. The arrangements themselves are the class. Accordingly, only the dollar-based measures will be applicable. As noted above, the asset-based measure may not be useful for many types of companies, such as service providers and technology-based companies, for which assets are not significant. In addition, to the extent that the Rule 701 limit applies to both traditional equity incentives and deferred compensation arrangements in the aggregate, the use of Rule 701 for equity incentives or for deferred compensation arrangements will reduce and potentially eliminate its availability for the other. The uncertainty that would be introduced into the Rule by the proposal to apply the measure at the time of sale would further complicate the ability to use the exemption for deferred compensation.

We therefore renew the proposal that a stand-alone exemption for deferred compensation arrangements be adopted for use by non-reporting companies who cannot use Form S-8 to register these arrangements. This would be a convenient time to address this issue given that the Rule is being revisited. We believe that the problem could easily be dealt with by adding a separate measure that would apply independently to deferred compensation arrangements. Deferred compensation arrangements requiring registration are fundamentally different than equity compensation awards and should not have to be aggregated. Public companies are able to file separate S-8 registration statements, but this flexibility is not available to non-reporting companies. The separate measure could be the greater of $5 million or 15% of total assets based on amounts actually deferred for which registration would be required. A separate disclosure requirement to identify risks related to participation in the plan could be included as a condition to using the separate measure.

With respect to the proposal to amend the Rule, paragraph (c) would make the exemption available for offers and sales to a former employee "only if the former employee was employed by the issuer at the time the securities were offered to the employee". It has become quite common for employers to permit employees to defer compensation that would otherwise be received after termination of employment (such as previously deferred amounts or severance payments) and such election might not be made until near the time the post-employment compensation would become payable. We believe that the proposal to require employment at "the time the securities were offered" is too restrictive We suggest that Rule 701 be available to former employees provided the deferred compensation obligation being offered relates back to compensation for services rendered as an employee.

VIII. FORM 701

We do not believe that Form 701 should be reinstituted. The form served little purpose and just provided a trap for losing the exemption. Given that Rule 701 is designed to accommodate small business issuers that are not necessarily versed in the securities laws, the Rule should be as self-executing as possible.

* * *

We hope that the Commission will find these comments helpful. Members of the Task Force and the Subcommittee who were involved in the drafting of this letter are available at the Commission’s convenience to discuss further any aspect of these comments.

Respectfully submitted,

____________________________________

John M. Liftin

Chair, Committee on Federal Regulation of

Securities

____________________________________

Stanley Keller

Vice-Chair, Committee on Federal Regulation of Securities

____________________________________

Jean E. Harris

Co-Chair, Task Force on Small Business Issuers

____________________________________

Louis Rorimer

Chair, Subcommittee on Employee Benefits, Executive Compensation and Section 16

Drafting Committee:

Pamela Baker

Jean E. Harris

Keith F. Higgins

Stanley Keller

Richard M. Leisner

Gloria W. Nusbacher

Anne G. Plimpton

Louis Rorimer

Susan P. Serota

Scott P. Spector

Ann Y. Walker

cc: Hon. Arthur Levitt

Chairman of the Securities and

Exchange Commission

Hon. Paul R. Carey

Commissioner

Hon. Isaac C. Hunt, Jr.

Commissioner

Hon. Norman S. Johnson

Commissioner

Hon. Laura S. Unger

Commissioner

Brian J. Lane, Esq.

Director of Division of Corporation Finance

Richard H. Walker, Esq.

General Counsel

Richard K. Wulff

Office of Small Business