Employee Stock Purchase Plans (Interpretive Release 33-4790)

For RELEASE Tuesday, July 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 registration under the Securities Act of 1933 of securities of the employer company or an affiliate 1/ purchased through an employee stock purchase plan which is in substance the equivalent of a customer's account with a broker for the purchase of shares on the open market. A similar problem may exist with respect to plans for the purchase of securities by persons who are not technically employees of the issuer or an affiliate. Of course, where the employer or an affiliate directly or indirectly supplies the securities for purchase by employees under the plan, the registration prwisfons of Section 5 of the Act would clearly be applicable absent an appropriate exemption. The question presented is whether there is an "ettenupt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value," as referred to- in the definition of "offer for sale" in Section 2(3) of the Securities Act-of 1933, by the issuer of such security or underwriter for such issuer or an affiliate. In accordance with long-established interpretation by the Canmission, a solicitation of an offer to buy a security by or on behalf of an issuer or an affiliate of the issuer of that security is deemed to be subject to the registration provisions of the Act notwithstanding that the securities are not owned by the issuer or an affiliate but are purchased on the exchange or th$ over-the-counter market by the designated agent for the account of participating employees. Solicitation of an Offer to Buy Some participation by the employer company or an affiliate will exist in almost every such plan, but the nature and extent of such - 1/ The term "affiliate" is used herein as defined in Rule 405, as follows: "An 'affiliate' of, or a person 'affiliated' with, a specified person, is a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by or is under common control with, the person specified.

participation varies substantially in different plans. In sane cases, there is sufficient participatbri by the employer company or an affiliate to constitute a solicitation of an offer to buy, so that registration is required under the Act. A Setemination whether registratios is re￾quired, therefore, will turn'upon the degree and type of participation by such persons in the particular programe Participation by the employer or an affiliate will be considered tc be sufficientPy Bhnnlted, and will not require registration, where all c~unbc:atkons 02 a soliciting character are furnished by and in the name of a broker or other agent of the empBoyees, and if the employer company ow an affiliate performs no more than the following functions:

1. The employer company or an affiliate announces the

existence of the plan.

2. The employer company makes payxoll deductions at the

request of employees fcr the purpose of participating

in the plan.

3. The names and addresses of employees are made available
   to the broker or other agent for direct ccmununications by it to such employees regarding the plan, This may zake the £om of addressing the carran?'tr~Fcstionto be sent by the broker ox other agent, the inclusion of the brokergs eaanmunicatfon with the announcement by the employer eumpany, or the holding of an initial meeting of employees at the cmpany's premises.
4. The employer company or an affiliate pays no more than
   its expense of payroll deductions and the reasonable fees and charges of the broker or other agent for brokerage commissions and bookkeeping and custodial expenses. Any deviation from these standards may require registration. The Commission will from time to time re-assess the above standards to determine whether under these conditions employees are in fact being solicited by employer companies or affiliates to purchase any of,their securities. The Plan Participations as a Separate Security The abwe discussion presupposes that the plan involves minimal differences from the manner in which securities are acquired in ordinary brokerage transactions and that the rights and obligations of the employee

and the broker will be consistent with the ordinary broker-client relationship, which might include the leaving of the securities in the custody of the broker or other person performing the same custodial function. Where substantial variatkons exist, however, such as lhita￾tisns on the right of the employee to withdrew %roanthe plan or to withdraw securities held in custody, the granting of management dfs￾cretion to someone other than the employee, the accumularion of sums for material periods of time before investment, the paymenr of special fees or charges such as a front-end load, or the diminution of his righ&s or privileges as a shareholder, a separate security may be created which will be required to be registered under the Securities Act of 1933 and the issuer of which may be an investme t company required to register under the Investment Company Act of 1940.-27 Furthermore, such plans commonly involve such participation by the employer or an affiliate as to amount to.a solicitation of an offer to buy the securities of the employer company or an affiliate within the meaning of the Securities Act of 1933 and thus require registration of such securities as well. Finally, reference is made to the provisions for civil liability and criminal sanction for fraud in the sale of securities in Sections 12(2) and 17 of the Securities Act of 1933 and Section 10(b), and Rule lob-5 thereunder, of the Securities Exchange Act of 1934, which are applicable to transactions-in securities notwithstanding the availability of exemption £rum registration. Consequently, it is anticipated that employee stock purchase plans not subject to registration will be limited to the securities of companies about which information is generally available. - 2/ Provision in the plan for reinvestment of dividends on a voluntary basis, such as is commonly provided in the Monthly Investment Plans of the New York Stock Exchange, will not of itself create a separate security,