Support Statement- 12h-1(f).2020

SUPPORTING STATEMENT
FOR THE PAPERWORK REDUCTION ACT INFORMATION COLLECTION
SUBMISSION FOR RULE 12h-1(f)

A.

JUSTIFICATION
1.

Circumstances Making the Collection of Information Necessary

Section 12(g) of the Securities Exchange Act of 1934 (the "Exchange Act") was enacted to
extend to investors in certain over-the-counter securities the same protections afforded investors
in listed securities by providing that the issuers of certain securities traded over-the-counter be
subject to the same requirements that applied to issuers of securities listed on an exchange.
Further, Section 12(g) extended the disclosure and other Exchange Act safeguards to unlisted
securities as a means to prevent fraud.
Under Section 12(g) of the Exchange Act, an issuer that has a class of equity security
(other than an exempted security) held of record by 2,000 persons, or 500 persons who are not
accredited investors and total assets in excess of $10 million at the end of its most recently ended
fiscal year must register that class of equity security with the Commission, unless there is an
available exemption from registration. Stock options, including stock options issued to
employees under stock option plans, are a separate class of equity security for purposes of the
Exchange Act.
The Commission exercised its authority under Section 12(h) (which allows the Commission
to exempt a class of securities by rules and regulations or by exemptive order from the Exchange
Act Section 12 registration requirements if it finds, by reason of the number of public investors,
amount of trading interest in the securities, the number and extent of the activities of the issuer,
income or assets of the issuer, or otherwise, that such action is not inconsistent with the public
interest or the protection of investors), Section 23, and Section 36 to adopt Rule 12h-1(f), which
provides an exemption for private, non-reporting issuers from Exchange Act Section 12(g)
registration for compensatory employee stock options issued under employee stock option plans
where certain conditions, including certain information provision conditions, are present.
The exemption requires an issuer to provide information to option holders and holders of
shares received on exercise of compensatory employee stock options. This condition requires the
issuer to provide to option holders (and holders of shares received on exercise of compensatory
employee stock options): (i) the same risk and financial information that would be required to be
provided under Securities Act Rule 701 if securities sold in reliance on Securities Act Rule 701
in a 12-month period exceeded $5 million, with the option holders and holders of shares received
on exercise of the compensatory employee stock options always having been provided required
financial statements that are not more than 180 days old.

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2.

Purpose and Use of the Information Collection

The purpose of the information collection is to provide holders of compensatory employee
stock options in private, non-reporting issuers that are relying on the exemption from Exchange Act
registration of the compensatory employee stock options appropriate disclosure and investor
protections under the federal securities laws. The exemption requires private, non-reporting issuers
to provide information to option holders and holders of shares received upon exercise of the stock
options. The information required ensures that a basic level of information is available to these
security holders. If private, non-reporting issuers relying on the exemption from Section 12(g)
registration of the compensatory employee stock options are not required to provide this
information, option holders and holders of shares received on exercise of options would not
necessarily receive important ongoing information about the issuer in which they hold securities.
3.

Consideration Given to Information Technology

The information required under Rule 12h-1 is not filed with the Commission. Rule 12h-1(f)
permits issuers to provide the required information to the option holders and holders of shares
received on exercise of compensatory employee stock options either by: (1) physical or
electronic delivery of the information; or (2) notice to the option holders and holders of shares
received on exercise of compensatory employee stock options of the availability of the
information on a password-protected Internet site and any password needed to access the
information.
4.

Duplication of Information

The information required by Rule 12h-1(f) is similar to the information that is required
under the exemption from registration provided in Securities Act Rule 701. It is likely that an
issuer that has 500 or more option holders either already is obligated to provide the same
information to option holders due to sales of securities in reliance on Securities Act Rule 701 or
already prepares and, as such, provides such information to its shareholders.
5.

Reducing the Burden on Small Entities

Generally, small entities do not satisfy the asset threshold of Section 12(g) and therefore
the exemption would not be needed by such entities until their asset size increased to more than
$10 million at the end of a fiscal year.
6.

Consequences of Not Conducting Collection

The exemption eliminates the requirement to register provided that the conditions, including
the information requirements, of the exemption are satisfied. Without the information collection,
the information about the private, non-reporting issuer would not be required to be provided to
option holders and holders of shares received on exercise of options.

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7.

Special Circumstances

There are no special circumstances.
8.

Consultations with Persons Outside the Agency

No public comments were received during the 60-day comment period prior to OMB’s
review of this submission.
9.

Payment or Gift to Respondents

No payment or gift to respondents.
10.

Confidentiality

Information provided to option holders and holders of shares received on exercise of
options pursuant to Rule 12h-1(f) is not filed with the Commission but could be subject to
confidentiality or other arrangements between and among relevant parties.
11.

Sensitive Questions

No information of a sensitive nature, including social security numbers, will be required
under this collection of information. The information collection does not collect personally
identifiable information (PII). The agency has determined that a system of records notice (SORN)
and privacy impact assessment (PIA) are not required in connection with the collection of
information.
12.

Estimate of Respondent Reporting Burden

For purposes of the Paperwork Reduction Act (“PRA”), we estimate that Rule 12h-1(f)
takes approximately 2 hours per response to comply with the collection of information
requirements and is filed by 40 respondents. We derived our burden hour estimates by
estimating the average number of hours it would take an issuer to compile the necessary
information and data, prepare and review disclosure, file documents and retain records. In
connection with rule amendments to the form, we occasionally receive PRA estimates from
public commenters about incremental burdens that are used in our burden estimates. We believe
that the actual burdens will likely vary among individual issuers based on the nature of their
operations. We further estimate that 25% of the collection of information burden is carried by
the issuers internally and that 75% of the burden of preparation is carried by outside
professionals retained by the company. Based on our estimates, we calculated the total reporting
burden to be 20 hours ((25% x 2 hours per response) x 40 responses). For administrative
convenience, the presentation of the total related to the paperwork burden hours have been
rounded to the nearest whole number. The estimated burden hours are made solely for the
purpose of the Paperwork Reduction Act.

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13.

Estimate of Total Annualized Cost Burden

We estimate that 75% of the 2 hours per response (1.5 outside hours) is prepared by outside
counsel. We estimate that it will cost $400 per hour ($400 x 1.5 hours per response) x 40
responses) for an estimated total cost of $24,000. We estimate an hourly cost of $400 for outside
legal and accounting services used in connection with public company reporting. This estimate
is based on our consultations with registrants and professional firms who regularly assist
registrants in preparing and filing disclosure documents with the Commission. Our estimates
reflect average burdens, and therefore, some companies may experience costs in excess of our
estimates and some companies may experience costs that are lower than our estimates. For
administrative convenience, the presentation of the cost total has been rounded to the nearest
dollar. The estimated cost burden is made solely for the purpose of the Paperwork Reduction
Act.
14.

Costs to Federal Government

No special filing is required to be made with the government, so no cost is attributed to the
review and processing of the information.
15.

Reason for Change in Burden

There is no change burden.
16.

Information Collection Planned for Statistical Purposes

The information collection does not employ statistical methods.
17.

Approval to Omit OMB Expiration Date

The Commission is not seeking approval to omit the expiration date.
18.

Exceptions to Certification for Paperwork Reduction Act Submissions

There are no exceptions to certification for the Paperwork Reduction Act submissions.

B.

STATISTICAL METHODS
The information collection does not employ statistical methods.