The Employee Ownership Update
April 18, 2011
House Members Introduce Pro-ESOP LegislationOn March 29, Congressman Ron Kind (D-WI) introduced the "Promotion and Expansion of Private Employee Ownership Act of 2011." The bill is cosponsored by Reps. David G. Reichert (R-WA), Charles W. Boustany, Jr. (R-LA), Earl Blumenauer (D-OR), Erik Paulsen (R-MN), and Bill Pascrell (D-NJ).
The bill would:
- allow owners of stock in an S corporation to have the same opportunity as owners of C corporation stock currently have to defer taxation on gains made from the sale to a qualifying ESOP;
- permit lenders to S corporations with 50% or more ownership through an ESOP to exclude 50% of the interest from the loan if used to acquire stock for the ESOP;
- set up an office in the Department of the Treasury to provide technical assistance to S corporations with ESOPs; and
- provide that companies that are 50% or more owned by an ESOP that were previously qualified under one of the various Small Business Administration set-aside programs (the most important of these are for minority- and woman-owned companies) to continue to qualify if, after the ESOP gaining 50% or more ownership, the workforce remains substantially the same.
IPO Market Decline Spurring Secondary Private Markets: SEC Considers Relaxing 500-Shareholder RuleIn the past few years, the number of venture-capital backed IPOs has dropped to 50 or fewer, and total IPOs now are about 100 per year, down from about 500 in the 1990s. Many IPOs are not startup companies, but companies that are being spun off from established companies. The average company completing an IPO is also much larger than was the case a decade ago. While the numbers are on an upward trend so far this year, a still-uncertain economy is having a dampening effect. More important, there is a greater reticence among entrepreneurs to go public given the stronger regulatory requirements of the Sarbanes-Oxley Act and the expectations of public shareholders for quarter-to-quarter results.
The rise of secondary markets has made that reluctance easier to sustain. These markets provide a way for investors and employees to get liquidity for their shares absent an IPO. Companies such as SharesPost and SecondMarket allow investors to buy and sell shares in private transactions. SecondMarket lists 140 companies whose stock it has created markets for on its Web site; SharesPost says it has brokered $500 million in transactions.
The rules for these markets mean that only "accredited investors," primarily meaning people and institutions rich and/or sophisticated enough to take the risks, can buy shares on them. So the enormous wealth these companies may create may be largely captured by a very small number of people.
Many, but not all, of the firms whose shares are traded on these markets limit sales of exercised equity awards for current employees, or restrict them altogether. A few large private companies like Facebook and Zynga charge employees hefty fees when they sell their shares on private markets. Still, the markets make it possible for employees in these companies who do end up with shares when they leave to cash them in rather than wait for an uncertain IPO or eventual sale of the company. Most of the companies on the SecondMarket list are believed to make equity awards broadly available to employees.
Earlier this year, Goldman Sachs withdrew an effort to attract U.S. investors to buy Facebook stock through these markets after media and SEC scrutiny questioned whether the approach they were taking was a way to get around the current rules that any company with 500 or more shareholders and more than $10 in assets is a de facto public company and must register its stock. Goldman then limited the offer to less-regulated foreign investors.
Now the SEC is looking into whether the 500-shareholder rule should be changed to some larger number and whether the rules for who is allowed to invest in such transactions should be changed as well (it is not clear if this would ease or restrict the kinds of investors who would be eligible). The idea behind the existing rules is to protect unsophisticated investors from poor investments. Presumably, the SEC will look into whether and how that should change. For an interesting column questioning the need for the change, go to this link.
Principal 10 Best Companies for Employee Financial Security Applications Now OpenPrincipal Financial sponsors an annual award for the 10 best companies for employee financial security. Companies must have fewer than 1,000 employees. The awards look primarily at health insurance (the most important factor) and retirement benefits, but also give some consideration to other insurance programs, wellness initiatives, and the way financial security issues are communicated. Salaries are not a factor. ESOP companies have often been winners in the past. I have been a judge for the awards for several years, but would need to recuse myself on any company I could identify that was a member (the submissions are anonymous, however).
To apply for the award, go to this link.
My New Role at the NCEO—and My Last Employee Ownership Update ColumnApril 13 marked my last day as executive director of the NCEO and my first as senior staff member. Loren Rodgers, our new executive director, will be taking over this column, but I will still be writing a periodic column of my own for the Web site that will be less about news and more about ideas on employee ownership.
The transition from my role as director has been planned for many years. It seemed best to me to set a time when everyone knew a transition would occur so that it would be done in an orderly way. The board and staff and I are all entirely comfortable with how the process went. Loren will be a great director. My position here is largely unpaid, but my passion for what we do is what drives me, and I intend to continue here four days a week for the indefinite future working on a variety of projects.
This "job" (hobby is more descriptive) has been a pure joy for me. The people in the employee ownership community are inspiring in their commitment to creating more equitable workplaces and a more equitable society. Our board has been a tremendous source of support. Most of all, the staff I work with every day is simply extraordinary. Not only are they the very best at their jobs we could possibly hope for, but they are people with exceptional commitment and integrity. If for no other reason, I would want to keep working here just because I like them all so much.
Thanks for all your support of what we do. I look forward to continuing to work with you.