Jump to content

Top Hat Plan and Securities Registration


Guest Grumpy456

Recommended Posts

Guest Grumpy456

I do some occasional benefits consulting for a LARGE, privately-held corporation. It sponsors a top-hat plan that covers around 85 individuals--the corporation has thousands of employees. The top-hat plan was set up by a financial advisor and I don't believe it was ever reviewed by an attorney or benefits consultant.

At the time the top-hat plan was installed (around 6 years ago), the FA told the company's decision-makers that because the corporation was privately-held, there was no reason to consider whether the top-hat plan should be registered with the SEC because the SEC rules only apply to publicly-traded corporations. As a result, no analysis was ever conducted to determine whether the top-hat plan was subject to the Securities Act of 1933 or, more importantly, whether any SEC rules exempted an otherwise required registration from registration, e.g., the private offering exemption.

I am concerned! Hopefully someone can tell me unnecessarily so. . .

I am not an SEC expert, but its always been my general understanding that the Securities Act of 1933 applies to the registration of any security regardless of whether the security is offered by a publicly-traded or privately-held entity and regardless of whether the "offering" was made on a recognized securities market or privately. Of course, if an exemption applies, then no registration is necessary. The exemption I am most familiar with is the "private offering exemption" contained in Section 4(2) of the Securities Act of 1933. I am also generally aware of Rule 506's "safe harbor" relating to the private offering exemption.

If I am wrong and the SEC rules don't apply to privately-held entities, GREAT!!! I'll revise my general understanding of the rules and happily move on. However, given that the Rule 506 safe harbor places a limit of 35 "investors" and the top-hat plan here covers a lot more than that, I am concerned that the private offering exemption may be in jeopardy.

If I am right and privately-held entities are subject to the Securities Act of 1933, does anyone know how the Rule 506 35 investor limit works? For example, if there are initially 34 participants, but later 5 more are added does the exemption cease to be applicable?

Thanks so much for any thoughts. . .

Link to comment
Share on other sites

Is there any elective element to the plan, or is it all nonelective Employer money? If the former, more likely than not there is an offering of a security under the Federal securities laws (and presumably any applicable State blue sky law). The plan sponsor needs to have a securities law attorney look at this and determine how compliance (with an exemption or otherwise) may be achieved.

Link to comment
Share on other sites

The issue is whether or not the interest in the plan is a security, and if so, you must either register or satisfy an exemption. It is irrelevant whether the empoyer is publicly held or private.

Many continue to take the position that top hat plan interests are not securities that require registration or an exemption because the participants are sophisticated investors and do not need the protection of the securities laws. that being said, if you want to be conservative, you can assume they are securities (if there are voluntary employee deferrals) and explore which exemption you want to use, there are more than one--sorry can't help you with that.

Link to comment
Share on other sites

  • 5 months later...
Guest Work4Clients

Public companies often register their elective deferred compensation plans for protective reasons. For a public company the cost of registration is relatively cheap since it is a registrant for other securities. Registration costs go up significantly for a private, non-registered company. As a result, few private companies register their plans.

Unfortunately there is no clear answer to your question. Companies should consider the cost of registration versus the potential consequences of not registering and becoming subject to fines. Securities counsel will give different answers depending on his/her own interpretation and the client's appetite for risk.

Link to comment
Share on other sites

There is potentially a lot more than fines at risk here (i.e., recision, which in a stock market going down the tubes and in the context of a plan for 85 people could result in significant exposure for the employer).

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
×
×
  • Create New...