For RELEASE Tuesday, July 13, 1965 SECURITIES D. 20549

For RELEASE Tuesday, J u l y 13, 1965

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C.

20549

SECURITIES ACT. OF 1933 Release NO. 4790

EMPLOYEE STOCK PURCHASE PLANS

Questions frequently arise with respect to the necessity for the r e g i s t r a t i o n under t h e S e c u r i t i e s A c t of 1933 of s e c u r i t i e s of the employer company o r an a f f i l i a t 1e/ purchased through an employee s t o c k purchase plan which i s i n substance the equivalent of a customer's account w i t h a broker f o r t h e purchase of shares on t h e open market. A s i m i l a r problem may e x i s t with r e s p e c t t o plans for the purchase o f s e c u r i t i e s by persons who a r e not technically employees of the i s s u e r o r a n a f f i l i a t e . Of course, where t h e employer o r an a f f i l i a t e d i r e c t l y o r i n d i r e c t l y s u p p l i e s t h e s e c u r i t i e s for purchase by employees under t h e plan, t h e r e g i s t r a t i o n p r w i s f o n s o f Section 5 of t h e A c t would c l e a r l y be a p p l i c a b l e absent an a p p r o p r i a t e exemption.

The q u e s t i o n presented is whether t h e r e i s an "ettenupt or o f f e r t o dispose o f , o r s o l i c i t a t i o n of an o f f e r to buy, a s e c u r i t y o r i n t e r e s t i n a s e c u r i t y , f o r value," as r e f e r r e d to- i n the d e f i n i t i o n of " o f f e r f o r sale" i n Section 2(3) of t h e S e c u r i t i e s Act-of 1933, by t h e i s s u e r of such security or underwriter for such issuer or an a f f i l i a t e . I n accordance with long-established interpretation by the Canmission, a s o l i c i t a t i o n of an o f f e r t o buy a s e c u r i t y by o r on behalf of an i s s u e r o r a n a f f i l i a t e of t h e i s s u e r of t h a t s e c u r i t y i s deemed t o be s u b j e c t t o t h e r e g i s t r a t i o n provisions of the Act notwithstanding t h a t the s e c u r i t i e s a r e not owned by t h e i s s u e r o r an a f f i l i a t e but a r e purchased on t h e exchange o r th$ over-the-counter market by t h e designated a g e n t f o r the account of p a r t i c i p a t i n g employees.

S o l i c i t a t i o n of an O f f e r t o Buy

Some p a r t i c i p a t i o n by the employer company o r a n a f f i l i a t e w i l l e x i s t i n almost every such plan, but the nature and extent of such

-1/ The term " a f f i l i a t e " i s used h e r e i n a s defined i n Rule 405, as follows: "An ' a f f i l i a t e ' o f , o r a person ' a f f i l i a t e d ' with, a specified person, is a person that directly, or indirectly through one o r more intermediaries, c o n t r o l s , o r i s c o n t r o l l e d by or i s under common c o n t r o l with, t h e person specified.

p a r t i c i p a t i o n v a r i e s substantially i n d i f f e r e n t plans. I n sane cases, t h e r e i s s u f f i c i e n t p a r t i c i p a t b r i by the employer company or a n a f f i l i a t e to c o n s t i t u t e a s o l i c i t a t i o n of an offer t o buy, s o t h a t r e g i s t r a t i o n i s required under the Act. A S e t e m i n a t i o n whether r e g i s t r a t i o s i s re quired, t h e r e f o r e , w i l l turn'upon the degree and type of p a r t i c i p a t i o n by such persons i n the p a r t i c u l a r programe

P a r t i c i p a t i o n by t h e employer or an a f f i l i a t e w i l l be considered t c be s u f f i c i e n t P y Bhnnlted, and w i l l not r e q u i r e r e g i s t r a t i o n , where a l l c ~ u n b c : a t k o n s 02 a s o l i c i t i n g character a r e furnished by and i n t h e name of a broker or o t h e r agent of t h e empBoyees, and i f t h e employer company ow an a f f i l i a t e performs no more t h a n t h e following functions:

1. The employer company or an a f f i l i a t e announces t h e

existence of t h e plan.

2. The employer company makes payxoll deductions a t the

request of employees f c r t h e purpose of p a r t i c i p a t i n g

i n the plan.

3. The names and addresses of employees a r e made a v a i l a b l e t o t h e broker o r other agent f o r d i r e c t ccmununications by it t o such employees regarding t h e plan, This may zake the ?om of addressing the carran?'tr~Fcstionto be s e n t by t h e broker ox o t h e r agent, t h e i n c l u s i o n of the b r o k e r g s eaanmunicatfon w i t h t h e announcement by the employer eumpany, o r t h e holding of an i n i t i a l meeting of employees a t the cmpany's premises.

4. The employer company or a n a f f i l i a t e pays no more t h a n i t s expense of payroll deductions and the reasonable fees and charges of the broker o r other agent for brokerage commissions and bookkeeping and custodial expenses.

Any d e v i a t i o n from t h e s e standards may r e q u i r e r e g i s t r a t i o n .

The Commission w i l l from time t o time re-assess t h e above standards t o determine whether under these conditions employees a r e i n f a c t being s o l i c i t e d by employer companies o r a f f i l i a t e s t o purchase any o f , t h e i r securities.

The P l a n P a r t i c i p a t i o n s a s a Separate S e c u r i t y

The a b w e discussion presupposes t h a t t h e plan involves minimal d i f f e r e n c e s from t h e manner i n which s e c u r i t i e s a r e acquired i n ordinary brokerage transactions and t h a t t h e r i g h t s and obligations of t h e employee

and the broker w i l l be consistent with t h e ordinary broker-client r e l a t i o n s h i p , which might include the leaving of t h e s e c u r i t i e s i n t h e custody of the broker or o t h e r person performing t h e same c u s t o d i a l function. Where s u b s t a n t i a l variatkons e x i s t , however, such as l h i t a t i s n s on the r i g h t of t h e employee t o withdrew %roant h e p l a n or t o withdraw s e c u r i t i e s held i n custody, t h e granting of management dfsc r e t i o n t o someone o t h e r than t h e employee, the accumularion of sums f o r m a t e r i a l periods of time before investment, t h e paymenr o f s p e c i a l f e e s or charges such a s a front-end load, o r the diminution of h i s righ&s o r privileges a s a shareholder, a separate s e c u r i t y may be created which w i l l be required t o be r e g i s t e r e d under t h e S e c u r i t i e s Act of 1933 and t h e i s s u e r of which may be an investme t company r e q u i r e d t o r e g i s t e r under t h e Investment Company A c t of 1940.-27

Furthermore, such plans commonly involve such p a r t i c i p a t i o n by t h e employer o r an a f f i l i a t e as t o amount to.a s o l i c i t a t i o n of a n o f f e r t o buy t h e s e c u r i t i e s of the employer company or an a f f i l i a t e within t h e meaning of t h e S e c u r i t i e s Act of 1933 and thus r e q u i r e r e g i s t r a t i o n of such securities as well.

Finally, reference i s made t o the provisions f o r c i v i l l i a b i l i t y and criminal sanction for fraud i n the s a l e of s e c u r i t i e s i n Sections 12(2) and 17 of t h e S e c u r i t i e s Act of 1933 and S e c t i o n 10(b), and Rule lob-5 thereunder, of the S e c u r i t i e s Exchange Act of 1934, which a r e applicable t o transactions-in securities notwithstanding the availability of exemption ?rum r e g i s t r a t i o n . Consequently, i t i s a n t i c i p a t e d t h a t employee s t o c k purchase plans not s u b j e c t t o r e g i s t r a t i o n w i l l be l i m i t e d t o the s e c u r i t i e s of companies about which information i s g e n e r a l l y available.

-2/ Provision i n t h e plan f o r reinvestment of dividends on a v o l u n t a r y b a s i s , such a s is commonly provided i n t h e Monthly Investment P l a n s of t h e New York Stock Exchange, w i l l not of i t s e l f c r e a t e a s e p a r a t e security,

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