Private company - pay fees in stock and allow fees to be deferred

[Guest crs]

1. If a director in a private company defers his fees (which could be paid in cash or company stock at the director's election) in the form of phantom shares, but the account of phantom shares will eventually be paid to the director in cash, not shares, is the arrangement subject to the '33 Act registration requirements?

2. If a private company pays its director fees in company stock, am I correct in thinking that the shares have to be registered under the '33 Act or meet an exemption like Rule 701?

Thanks in advance!

[Kirk Maldonado]

1. A private company's stock, by definition, is not registered under the Securities Act of 1933.

All sales of company stock, whether private or public, are subject to the registration requirements of the 1933 Act. However, there are a number of exemptions from the requirement that the sale of stock be registered.

2. Accordingly, you are correct in assuming that the payment of shares to a director (which would be treated as a sale of those shares to the director) must either be registered under the 1933 Act or there must be an applicable exemption from registration.

Don't forget that you also have to comply with applicable state securities laws. This is often overlooked.

[Guest crs]

Thanks for your response. So if directors defer fees, there isn't any "sale" that would subject the arrangement to the '33 Act's registration requirements?

I know the applicable exemption would be Rule 701, but if the arrangement isn't subject to the requirement to register in the first place, we don't want to worry about compliance with Rule 701.

[QDROphile]

A director who could receive fees currently but chooses to defer payment is buying an investment contract with the otherwise current compensation. For securities law purposes, it is as if the director got paid and then bought a bond of the company. It is a sale. The same principle applies for 401(k) plans and elective deferrals. The participant is investing in the company's ability to pay at a later date. You should get expert advice before you make any decisons.

[Kirk Maldonado]

Although I wouldn't have worded the same way as QDROphile, I concur in the result he reaches.