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SEC Registration of Nonqualified Deferral Plans

Registration Process - Public Companies

Only public companies are able to register their NQDP's with the SEC. The registration process is very straightforward, and the filing fees are quite reasonable (a plan with $1,000,000 in deferrals can expect to pay less than $300 in registration fees). The company files a registration statement on form S-8, which can be obtained from the SEC. The information required on the S-8 is similar to the information on the Summary Plan Document. The S-8 is the same form that companies use to file stock options or discounted stock plans. It is recommended that plan sponsors of registered plans provide plan participants with copies of the actual plan document and other communication materials (such as FAQ sheets, etc.).

Alternatively, if a public company is able to design an NQDP that is eligible for one of the exemptions outlined in Regulation D under the Securities Act of 1933, then registration may be avoided.

Private Companies

Private companies are not eligible to register their NQDP with the SEC. Therefore, private company plan sponsors must design an NQDP that will qualify for one of the SEC registration exemptions under (see section on Exemptions below) Regulation D under the Securities Act of 1933, then registration may be avoided.

Exemption Eligibility

General

Some offerings of securities may be exempt from registering with the SEC. In general, exempt securities must have one or more of the following characteristics to be considered exempt, they are:

  • private offerings to a limited number of persons or institutions
  • offerings of a limited size
  • intrastate offerings

The rules for exemption under the Securities Act of 1933 are quite complex and should be interpreted for plan design use only with the assistance of legal counsel. A brief description of the most frequently used exemption rules used by NQDP's appear below:

  • Rule 701 -- Exemption for Offers and Sales of Securities Pursuant to Certain Compensatory Benefit Plans and Contracts Relating to Compensation

This rule provides a registration exemption for "securities used in compensatory circumstances". The main requirements for an NQDP to be exempt under this rule are:

  1. All participants in the plan must be related to the plan sponsor in one of the following ways at the time of enrollment :

    1. employee
    2. director
    3. general partner
    4. trustee (where the plan sponsor is a business trust)
    5. officer
    6. consultant*
    7. advisor*
    8. family members of the above who receive access to the plan assets through domestic relations orders (or gifts, if the plan allows).**

    * Consultants or advisors may be in the plan only if they: 1. provide "bona-fide services" to the plan sponsor, its majority-owned subsidiaries, or parent company 2. are individuals 3. provide services that have no connection to the NQDP or its funding mechanisms.

    ** Family members may be any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relationships.

  2. The plan may not exceed the greatest of the following:

    1. The plan does not add more than $1,000,000 to it's total liability (the plans' account balances) in any 12-month period; or
    2. The plan's total liability may equal only up to 15% of the plan sponsor's total corporate assets, as measured by the plan sponsor's most recent annual balance sheet (provided that balance sheet is no older than the company's last fiscal year end).
  3. Disclosure must be provided. The plan sponsor must deliver a copy of the plan document (or contract) to participants. Also, for plans which add greater than $5,000,000 in liability within any 12-month period, the issuer must deliver the following disclosure information to plan participants:

    1. If the plan is subject to ERISA, a copy of the summary plan description
    2. If the plan is not subject to ERISA, a summary of the material terms of the plan.
    3. Information about the risks associated with participating in the plan.
    4. Financial statements.
  4. The NQDP must not be integrated with any other securities offered by the plan sponsor, such as a company stock option or purchase plan. Integration with the company's 401(k) plan is not relevant to this requirement provided that the investments offered under the company's 401(k) plan are sold and managed by an entity unrelated to the plan sponsor.
  5. The plan must not allow any payment of benefits for at least one year from the initial date of enrollment and inform participants of that fact (i.e. the plan is a "restricted" security).
  • Rule 506 -- Exemption for Limited Offers and Sales without Regard to Dollar Amount of Offering

This is a "safe harbor" for the private offering exemption of the Securities Act that places no limits on the value of the participants' account balances provided that the following standards are met:

  1. Participation is invitation-only (i.e. the "security" is not advertised or promoted through general solicitation).
  2. The plan may have an unlimited number of participants so long as all participants qualify as "accredited investors" (as defined by SEC Rule 501). In defining the term accredited investor , the SEC lists a total of eight (8) categories. However, only three of these are most relevant for NQDP's:

    1. A participant whose individual net worth, or joint net worth with spouse at the time of enrollment exceeds $1,000,000.
    2. A participant who is a director, executive officer, or general partner of the sponsoring corporation, or any director, executive officer, or general partner of a general partner of the corporation.
    3. Any participant who had an individual income in excess of $200,000 in each of the two most recent years or joint income with their spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year.
  3. The plan may also include up to 35 non-accredited participants, so long as these participants can demonstrate that they have enough investment experience to evaluate the potential value and risk of participating in the NQDP. However, the company must provide these non-accredited participants with financial information about the plan, similar to the information that would be required if the plan were to be registered with the SEC.
  4. The company must be available to answer participant's question about the plan.
  5. The company's financial statements must be certified by a independent public accountant. Companies (other than limited partnerships) who cannot provide financial statement without unreasonable effort or expense may provide their audited balance sheet (within 120 days of the plan's implementation) in lieu of financial statements.
  6. The plan must not allow any payment of benefits for at least one year from the initial date of enrollment and inform participants of that fact (i.e. the plan is a "restricted" security).
  • Rule 505 --Exemption for Limited Offers and Sales of Securities Not Exceeding $5,000,000

An NQDP may qualify for exemption under this rule if it meets all of the following conditions:

  1. The plan does not add more than $5,000,000 to it's total liability (the plans' account balances) in any 12-month period.
  2. The plan may include more than 35 participants only if these additional participants are "accredited investors" (as defined by SEC Rule 501). In defining the term accredited investor , the SEC lists a total of eight (8) categories. However, only three of these are most relevant for NQDP's:

    1. A participant whose individual net worth, or joint net worth with spouse at the time of enrollment exceeds $1,000,000.
    2. A participant who is a director, executive officer, or general partner of the sponsoring corporation, or any director, executive officer, or general partner of a general partner of the corporation.
    3. Any participant who had an individual income in excess of $200,000 in each of the two most recent years or joint income with their spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year.
  3. The plan must not allow any payment of benefits for at least one year from the initial date of enrollment and inform participants of that fact (i.e. the plan is a "restricted" security)
  4. The corporation cannot use general solicitation or advertising to recruit participants into the plan.
  5. The company's financial statements must be certified by a independent public accountant. Companies (other than limited partnerships) who cannot provide financial statement without unreasonable effort or expense may provide their audited balance sheet (within 120 days of the plan's implementation) in lieu of financial statements.

State Securities Regulations

In addition to SEC registration considerations, an NQDP may also be subject to state securities regulations. Because state and federal regulations are often but not always parallel, it is very important for plan sponsors and their attorneys to consider both state and federal regulations carefully before implementing an NQDP.

 

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