Employee Stock Options Plans effect on SEC Registration Requirements


Companies that have $10 million in assets and 500 shareholders of record are currently required to register with the Securities and Exchange Commission (SEC) and are thus subject, among other things, to the SEC's periodic reporting requirements.

What relationship if any do Employee Stock Options Plans have to the "500 shareholders of record" count?

Stock Options Shares SEC

asked Mar 26 '12 at 07:38
Blunders .
899 points
  • I'm thinking that if employee owns options until he converts them to shares he is not a shareholder of record. – Karlson 12 years ago
  • +1 @Karlson: Agree, that's roughly what I've read so far too reading random snippets of SEC documents. Guess it makes me wonder if that's the case, what's to stop a company from only distributing options and have the options convert on the sale of the company; meaning my understanding of the SEC shareholder filing requirements kick in a number of days after the count exceeds the max, and not during that window of time; meaning if the deal is executed during the window, playing armchair securities lawyer, seems like this filing requirement might be circumvented. – Blunders . 12 years ago
  • I don't think you can distribute options with no possibility of having them vested until company is sold. – Karlson 12 years ago
  • @Karlson: Meaning earn-outs tied to options may have conditions, but they must have a vesting date which trigger the evaluates of those conditions? Also, seems like you've answered the main question, if you're able to cite SEC code to support it, please post an answer. Thanks! – Blunders . 12 years ago

1 Answer


From Wikipedia regarding contract differences between standard (exchange traded options) and Employee stock options:

Contract differences Employee stock options have the following differences from standardized, exchange-traded options:

Exercise price : The exercise price is non-standardized and is often the current price of the company stock at the time of issue. Alternatively, a formula may be used, such as sampling the lowest closing price over a 30-day window on either side of the grant date. On the other hand, choosing an exercise at grant date equal to the average price for the next sixty days after the grant would eliminate the chance of back dating and spring loading. Often, an employee may have ESOs exercisable at different times and different exercise prices.

Quantity: Standardized stock options typically have 100 shares per contract. ESOs usually have some non-standardized amount.

Vesting: Initially if 10,000 shares are granted to employee, then all 10,000 will not be in his account. This is a four year plan in which options will increase by 2,500 every year. Some companies provide cliff vest in which first year options start with 0.
Duration (Expiration): ESOs often have a maximum maturity that far exceeds the maturity of standardized options. It is not unusual for ESOs to have a maximum maturity of 10 years from date of issue, while standardized options usually have a maximum maturity of about 30 months.

Non-transferable: With few exceptions, ESOs are generally not transferable and must either be exercised or allowed to expire worthless on expiration day. There is a substantial risk that when the ESOs are granted (perhaps 50%) that the options will be worthless at expiration. This should encourage the holders to reduce risk by hedging with listed options.

Over the counter: Unlike exchange traded options, ESOs are considered a private contract between the employer and employee. As such, those two parties are responsible for arranging the clearing and settlement of any transactions that result from the contract. In addition, the employee is subjected to the credit risk of the company. If for any reason the company is unable to deliver the stock against the option contract upon exercise, the employee may have limited recourse. For exchange-trade options, the fulfillment of the option contract is guaranteed by the Options Clearing Corp.

Tax issues: There are a variety of differences in the tax treatment of ESOs having to do with their use as compensation. These vary by country of issue but in general, ESOs are tax-advantaged with respect to standardized options.

So the way I read it is that you can have stock Options but one thing that they do have to have is vesting period after which the options can be exercised in full. Granted that the vesting can be cliff vesting, which means that you can have options become vested all at once rather then piecemeal but nonetheless at some point an employee will have a complete control and ownership of those options and will be able to exercise them. The company of course can be sold before full vesting of the options could potentially prevent an employee from ever becoming a shareholder of record.

Now as far as shareholder of record is concerned the number of shareholders is counted by the number of people registered as owners of a particular security in this case shares of company so if you own options to buy these shares you don't actually have them hence you are not a shareholder of record and hence you won't count into the number of shareholders of record SEC requires for registration.

Here is from SEC with regards to Employee Stock Option Plans. Based on what I am reading you have to have options vested after a certain period of time but nowhere does it say that you can't sell the company in the mean time. :)

Ye Standard Disclaimer: IANAL.

answered Mar 27 '12 at 03:11
1,779 points
  • +1 @Karlson: Thanks, agree that **options are not shares, and as a result, the option holder is not shareholder of record until the options vested and exercised per the grant's conditions to convert them to shares**. Also, based on my research how outstanding SEOs are dealt with if a company merges or is sold is normally defined within the SEO contract, not by the SEC; that said, this issues appears to be very dependent on the circumstances, and is likely to complex to deal with in one question. Thanks for the help figuring this out! – Blunders . 12 years ago

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