69–006 

115TH CONGRESS REPORT " ! HOUSE OF REPRESENTATIVES 1st Session 115–71 

ENCOURAGING EMPLOYEE OWNERSHIP ACT OF 2017 

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 following 

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 


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Forum on Small Business Capital Formation Final Reports for 

2001, 2004, 2005, and 2013. 

BACKGROUND AND NEED FOR LEGISLATION

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 arrangements. 

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 


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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 compensation. 

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. 

HEARINGS

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, 2015. 

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 faVerDate Sep 11 2014 02:21 Mar 30, 2017 Jkt 069006 PO 00000 Frm 00003 Fmt 6659 Sfmt 6602 E:\HR\OC\HR071.XXX HR071

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vorably 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. 


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COMMITTEE OVERSIGHT FINDINGS

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. 

PERFORMANCE GOALS AND OBJECTIVES

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. 

NEW BUDGET AUTHORITY, ENTITLEMENT AUTHORITY, AND TAX

EXPENDITURES

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. 

CONGRESSIONAL BUDGET OFFICE ESTIMATES

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 Rabent. 

Sincerely, 

MARK P. HADLEY

(For Keith Hall, Director). 

Enclosure. 


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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 inflation. 

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 governments. 

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 Act. 

ADVISORY COMMITTEE STATEMENT

No advisory committees within the meaning of section 5(b) of the 

Federal Advisory Committee Act were created by this legislation. 

APPLICABILITY TO LEGISLATIVE BRANCH

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. 


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DUPLICATION OF FEDERAL PROGRAMS

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. 

DISCLOSURE OF DIRECTED RULEMAKING

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 years. 

SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION

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. 

CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

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. 


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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. 


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For all of these reasons, we oppose H.R. 1343. 

MAXINE WATERS. 

GWEN MOORE. 

AL GREEN. 

MICHAEL E. CAPUANO. 

JOYCE BEATTY. 

Æ 


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