Michelle L. Johnson
April 23, 1998
Mr. Jonathan Katz
Securities and Exchange Commission
Re: File No. S7-5-98 - Proposed Changes to Rule 701
Dear Secretary Katz:
I am writing to comment on Release 33-7511 (the "Release") on behalf of several foreign private issuers that would like to offer securities to employees in the United States.
By way of background, it is frequently difficult for substantial foreign private issuers to offer equity compensation to employees in the United States. Multinational corporations that want to provide equity incentives to even a small number of executives in the U.S. may not be able to do so. Private placements may not be available because of the nature of the offerees and/or integration concerns. Rule 701 may be available for a limited period of time, but ultimately the $5 million limitation of current Rule 701 can become problematic (for example, if large equity incentives are provided to just a few senior executives). Registration of an offering to employees under the Securities Act of 1933, as amended (the "Securities Act") is an alternative, but is generally perceived as unattractive because of the cost and the resultant periodic disclosure obligations (including the U.S. GAAP financial statement reconciliation requirement).
The proposal to replace the $5 million annual offering limitation with the alternative formulae relating to sales as described in the Release would provide significant relief to multinational foreign private issuers who wish to provide equity incentives to their U.S. employees.
The Release requests comment on whether non-reporting foreign issuers should be subject to an annual limitation on sales, and whether Rule 12g3-2(b) should be amended to make foreign private issuers ineligible to utilize the Rule 12g3-2(b) exemption if they either sell securities under Rule 701 or sell more than some annual threshold amount under Rule 701. I believe that placing such limitations on foreign private issuers would be inappropriate. Generally, foreign private issuers who wish to rely on Rule 701 do so not to gain access to U.S. capital markets but rather to provide compensation packages to U.S. employees that are comparable to similarly situated non-U.S. employees of the same company or competitive with similarly situated U.S. employees of other companies, or both. Placing a dollar limitation on sales under Rule 701 could potentially disadvantage foreign private issuers who may be precluded from issuing equity to senior executives when privately-held U.S. competitors are not subject to any such limitation.
One portion of the Release will be particularly troublesome to foreign private issuers. The Release proposes that issuers would be required to provide the financial statements required by Part F/S of Form 1-A. Part F/S of Form 1-A requires financial statements that are prepared in accordance with U.S. GAAP (except that a Canadian issuer can file a reconciliation to U.S. GAAP). If the proposal is adopted in its current form, a non-Canadian foreign private issuer effecting an offering to U.S. employees under Rule 701 would be required to generate financial statements that are prepared in accordance with U.S. GAAP, while a foreign private issuer who is offering securities to the public pursuant to a Securities Act registration statement generally would be required only to comply with Item 17 or 18 of Form 20-F (preparation of a footnote that reconciles the home country financial statements to U.S. GAAP).
If the proposed requirement to provide financial statements is retained, a better approach might be to require foreign private issuers to provide either (1) financial statements that have been reconciled to U.S. GAAP in accordance with Item 17 or 18 of Form 20-F or (2) audited financial statements that have been prepared in accordance with the generally accepted accounting principles of the issuers home country. This approach would be consistent with the goal of not unduly burdening companies that want to offer securities to employees under Rule 701, and consistent with the current financial statement obligations set forth in Form 20-F and Rule 12g3-2(b), respectively.
Very truly yours,
THELEN, MARRIN, JOHNSON & BRIDGES LLP
Michelle L. Johnson