59–006 

114TH CONGRESS REPORT " ! HOUSE OF REPRESENTATIVES 2d Session 114–398 

ENCOURAGING EMPLOYEE OWNERSHIP ACT OF 2015 

JANUARY 28, 2016.—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. 1675] 

[Including cost estimate of the Congressional Budget Office] 

The Committee on Financial Services, to whom was referred the 

bill (H.R. 1675) 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 26, 2015, H.R. 

1675, the Encouraging Employee Ownership Act of 2015, amend 

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. 1675 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 Forum 


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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. 1675 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 retain employees with a company’s securities and permits private companies to keep valuable employees 

without having to use other methods to compensate them, such as 

borrowing money or selling securities. Updating Rule 701 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 

as a small, growing company. And therefore, we have to 

incentivize employees with stock and options in the comVerDate Sep 11 2014 05:44 Jan 29, 2016 Jkt 059006 PO 00000 Frm 00002 Fmt 6659 Sfmt 6602 E:\HR\OC\HR398.XXX HR398

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pany 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. 1675 on April 29, 2015. 

COMMITTEE CONSIDERATION

The Committee on Financial Services met in open session on 

May 20, 2015, and ordered H.R. 1675 to be reported favorably to 

the House without amendment by a recorded vote of 45 yeas to 15 

nays (recorded vote no. FC–30), 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. An amendment offered by Representative Lynch was not agreed to by a recorded vote 

of 21 yeas to 39 nays (FC–29). The second and final recorded vote 

was on a motion by Chairman Hensarling to report the bill favorVerDate Sep 11 2014 05:44 Jan 29, 2016 Jkt 059006 PO 00000 Frm 00003 Fmt 6659 Sfmt 6602 E:\HR\OC\HR398.XXX HR398

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ably to the House without amendment. The motion was agreed to 

by a recorded vote of 45 yeas to 15 nays (Record vote no. FC–30), 

a quorum being present. 

[Please see attached vote tallies.] 


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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. 1675 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, June 19, 2015. 

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. 1675, the Encouraging 

Employee Ownership Act of 2015. 

If you wish further details on this estimate, we will be pleased 

to provide them. The CBO staff contacts are Susan Willie and Ben 

Christopher. 

Sincerely, 

KEITH HALL. 

Enclosure. 


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H.R. 1675—Encouraging Employee Ownership Act of 2015 

Under current law, public companies must disclose certain information to investors if the value of securities issued by the company 

exceeds $5 million. H.R. 1675 would direct the Securities and Exchange Commission (SEC) to raise that amount from $5 million to 

$10 million and to adjust the threshold every five years for inflation. 

CBO expects that implementing H.R. 1675 would require the 

SEC to issue new rules to adjust the disclosure threshold. Based 

on information from the SEC, CBO estimates that implementing 

H.R. 1675 would cost less than $500,000 over the 2016–2020 period. Under current law, the SEC is authorized to collect fees sufficient to offset its appropriation each year; therefore, we estimate 

that the net cost to the SEC would be negligible, assuming appropriation actions consistent with that authority. Enacting H.R. 1675 

would not affect direct spending or revenues; therefore, pay-as-yougo procedures do not apply. 

H.R. 1675 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. 

This estimate was prepared by Susan Willie and Ben Christopher. The estimate was approved by Theresa Gullo, 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. 1675 does not contain any congressional earmarks, limited 

tax benefits, or limited tariff benefits as defined in clause 9 of rule 

XXI. 

DUPLICATION OF FEDERAL PROGRAMS

Pursuant to section 3(g) of H. Res. 5, 114th Cong. (2015), the 

Committee states that no provision of H.R. 1675 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. 


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DISCLOSURE OF DIRECTED RULEMAKING

Pursuant to section 3(i) of H. Res. 5, 114th Cong. (2015), the 

Committee states that H.R. 1675 contains one directed rulemaking. 

SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION

Section 1. Short title 

This section cites H.R. 1675 as the ‘‘Encouraging Employee Ownership Act of 2015.’’ 

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. 1675 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 ON H.R. 1675 

H.R. 1675 would revise SEC’s Rule 701 by both 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. While this bill is a modest improvement from a similar bill 

that the Committee considered last year, which would have raised 

the threshold 400%, to $20 million, more fundamental concerns remain. 

Currently, if a private company provides more than $5 million 

worth of compensation in the form of stock over a twelve month period, the company must make relatively simple disclosures to its 

employees, 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 necessary for 

investors to fully understand the value of their stake in a company, 

and employees, who may be more susceptible to suggestion and coercion, deserve no less protection. In addition, to take advantage of 

the increased threshold under the bill, a company would have to 

have more than $34 million in total assets and requiring those 

companies to provide minimal disclosures cannot be seen as too 

burdensome. 

Another concern is that the bill only encourages employees to 

own more of their employer’s stock, rather than encouraging more 

employees to own their employer’s stock. Therefore, the bill could 

expose employees to concentration risk in their retirement accounts. This is made worse by the fact that the JOBS Act made it 

easier for privately-held companies to remain private by, for example, exempting employees who receive stock as a result of a compensation plan from being counted as ‘‘holders of record.’’ By allowing companies to stay private longer, if not forever, the bill would 

enable companies to encourage overinvestment by employees in a 

company that they cannot value and that may never permit them 

to sell, except back to the company. 

Some proponents of the bill cite the fear of companies in disclosing such information to employees that confidential information 

could be leaked to competitors. While this is an understandable 

concern, non-disclosure agreements and similar confidentiality 

agreements already provide an effective mechanism to address it. 


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For all of these reasons, we oppose H.R. 1675. 

MAXINE WATERS. 

AL GREEN. 

JOYCE BEATTY. 

GWEN MOORE. 

WM. LACY CLAY. 

DAVID SCOTT. 

KEITH ELLISON. 

RUBE ́ N HINOJOSA. 

EMANUEL CLEAVER. 

MICHAEL E. CAPUANO. 

JUAN VARGAS. 

DANIEL T. KILDEE. 

Æ 


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