ROBS Plans - Participant Disclosures

[austin3515]

What does a small start-up need to disclose to participants about employer securities held by the Plan, in particular for those who do not have any money in the Plan. 

All participants have signed forms confirming they have been offered the opportunity to invest in the stock, but none have taken up on the offer.

Should participants be receiving income statements?  Do  we just share the valuation of a share of stock? 

[Kirsten Curry]

I supported a lot of these plans over time and can help with your questions.  What needs to be disclosed depends in part on timing. How soon after the initial ROBS transaction (401k monies being invested into Corporation) did the owner hire employees? Did your client use a ROBS Promoter? If so, the ROBS Promoter should have provided a stock/QES offering notice which details how long the stock offering has to remain open, before its closed to any new investors.  Those are a few things to look at.  I would highly recommend that the stock offering be closed to new investors after a reasonable amount of time.  Thereafter, the information that gets reported about the stock, on an ongoing basis, is generally limited to what you present to the accountholders invested in the stock (and what you report on Form 5500).

[austin3515]

But if I close the stock to new offerings won't I run afoul of BR&F? The stock is only offered to the owner?  The stock has been available for about 5 years now.

I inheritted it from a CPA I work with a lot and tell you the truth I regret it.

Thank you Kirsten!

[Patricia Neal Jensen]

A small start up with employer stock in its plan?  Oh my.

[austin3515]

It's a big thing these days.  people charge like $10,000 to set these things up so people can use retirement assets to start a business (Roll-Over for Business Start-ups).  For a lot of people without the option they cant start their business, so I get the temptation.  Lots of headaches for sure for us to administer, but I certainly see the motivation...

No one thinks the IRS's chosen acronym is a coincidence!

[austin3515]

Kirsten does your firm handle ROBS on a regular basis?  Perhaps I will refer her to you...  The more I think about this the more I want out... She really needs someone with more expertise.  I just said in my engagement letter with her "Hey you're on your own for this ROBS stuff, I'm just helping you with the 5500 and eligibility,."

If not do you know of any who do?   The people who do these decided it's probably more profitable and less risky to just set these things up and tell the clients they are on their own...

[Luke Bailey]

Kirsten, do you know what federal and state securities law exemptions they would be using for the offer of stock to rank and file? There may be some, but I'm curious about what was your experience, here.

[austin3515]

Luke, this is all covered under ERISA, for whatever that is worth.  So state law should not apply.  I don't understand why another federal law would trump what ERISA says.

Probably another important aspect of this, though a technicality, is that the participant's individually are not investing in the stock. The Trustee is holding the stock for the benefit of the participant.  That's a subtle but probably crucial distinction.

[Peter Gulia]

ERISA does not preempt any Federal law.  And ERISA does not always displace Federal securities law.  ERISA’s and a particular employee-benefit plan’s provisions might be relevant information in evaluating whether an interest is a security and, if it is, considering which exemptions from registration (or kinds of registrations) might be available.

 

Although ERISA’s preemption of State law is broad, ERISA does not preempt “any law of any State which regulates insurance, banking, or securities.”

 

That a security’s issuer is an employee-benefit plan’s sponsor might be relevant information, but might not always by itself be sufficient to meet the conditions for an exemption from registration under a Federal or State securities law.

 

That a security’s offeree, purchaser, or holder is an employee-benefit plan’s trustee might be relevant information, but might not always by itself be sufficient to meet the conditions for an exemption from registration under a Federal or State securities law.

 

Securities law sometimes looks through one or more holders to a beneficial owner, especially if in the circumstances the beneficial owner (rather than an intermediary) is the real decision-maker.

[ESOP Guy]

I am not an expert here but I have worked on the ESOPs that got set up using people's 401(k) money being rolled into the newly created ESOP and based on conversations there are security law issues. 

Not sure why there couldn't be such issues in a ROBs.  And based on those conversations I have always gotten the idea it is easier for example to use match vs 4k deferrals when taking money from a 4k plan to start an ESOP- ie using this as part of the down payment to buy the stock and borrow the rest.