The Washington Department of Financial Institutions has amended its policy on the securities exemption for employee benefit plans under Washington Securities Act Section 21.20.310(10).
Rule 701. Rule 701(c) exempts securities issued in accordance with written compensatory benefit plans to “employees, directors, general partners, trustees (where the issuer is a business trust), officers, or consultants and advisors, and their family members who acquire such securities from such persons through gifts or domestic relations orders.” A written compensatory benefit plan is “any purchase, savings, option, bonus, stock appreciation, profit sharing, thrift, incentive, deferred compensation, pension or similar plan.”
The issuer may use the Rule 701(c) exemption for securities issued to consultants and advisors only if: (1) the consultants or advisors are natural persons; (2) the consultants or advisors provide bona fide securities to the issuer, its parents, its majority-owned subsidiaries or majority-owned subsidiaries of the issuer’s parents; and (3) the services are not in connection with a securities offer or sale in a capital-raising transaction, and do not directly or indirectly promote or maintain a market for the issuer’s securities.
The Washington Securities Division, moreover, interprets the Section 21.20.310(10) exemption consistent with Rule 701(c) pertaining to former employees, directors, general partners, trustees, officers, consultants, and advisors. Additionally, under Rule 701(c), the issuer may use the exemption for securities issued to these persons only if, at the time the securities were offered, these persons were employed by or providing services to the issuer, its parents, its majority-owned subsidiaries or majority-owned subsidiaries of the issuer’s parents. NOTE, HOWEVER, that securities issued to other non-employees under an employee benefit plan are not exempt under the Section 21.20.310(10) exemption.
Notice filing. For some qualified plans, a notice filing is not required to claim the Section 21.20.310(10) exemption. Issuers of other plans, however, must file a notice 30 days before offering the plan to beneficiaries in Washington.
The issuer may need to file a notice in Washington if the securities qualify for the federal Rule 701 exemption since the securities will simultaneously qualify for Washington’s Section 21.20.310(10) exemption.
Acceleration of effectiveness. For employee benefit plans that must make a notice filing, the Securities Division will waive the remainder of the 30-day waiting period as of the date the Division issues a letter acknowledging the exemption’s effectiveness. The Division typically processes an exemption filing and issues the acknowledgment several days after receiving the filing.
Late notice filing. Pertaining to a late notice filing:
- The director may upon application and for good cause (e.g., late filing) excuse the late filing if he or she finds it in the public interest to grant the relief.
- Regarding acceleration of effectiveness, the administrator may routinely accelerate the 30-day waiting period.
- Where the securities were issued before notice filing, the administrator will typically acknowledge the exemption for issuances on or after the acknowledgment issuance date.
- Concerning prior issuances, the administrator will typically take no enforcement action to assert any violation of the Washington Securities Act’s registration sections. But the Division will not express an opinion about potential civil liability in connection with those transactions.
Amended plans. Issuers that previously filed a notice under Section 21.20.310(10) should file an updated copy of the employee benefit plan if the issuer made any material changes to the plan. The issuer should submit the amended plan to the Securities Division with a cover letter identifying the existing file number.