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Securities Exchange Act of 1934 —
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| Re: | Abetterwayhome Corp. ("Company") Incoming letter dated January 28, 2004 |
Based on the facts presented, the Division will not raise any objection if the Company does not comply with the registration requirements of Section 12(g) of the Securities Exchange Act of 1934 (the "Exchange Act"), with respect to options granted and to be granted pursuant to the Company's 2003 Stock Option Plan in the manner and subject to the terms and conditions set forth in your letter. This position will remain in effect until the earlier of (i) the Company effecting a cancellation or exchange of outstanding options pursuant to the provision of the Plan addressing such cancellations; (ii) the date at which the Company otherwise becomes subject to the Exchange Act registration or reporting requirements with respect to any other class of its securities; or (iii) a sale of the Company.
This position is based on the representations made to the Division in your letter. Any different facts or conditions might require the Division to reach a different conclusion. Further, this response only represents the Division's position on enforcement action and does not purport to express any legal conclusion on the question presented.
Sincerely,
Anne M. Krauskopf
Special Counsel
January 28, 2004
Via Federal Express
Office of the Chief Counsel
Division of Corporation Finance
United States Securities and Exchange Commission
450 South Fifth Street, N.W.
Washington, D.C. 20549
Re: Abetterwayhome Corp.
Ladies and Gentlemen:
On behalf of Abetterwayhome Corp., a Delaware corporation (the "Company"), we hereby apply for an exemption or request no-action relief under Section 12(h) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), from the registration requirements of Section 12(g) of the Exchange Act with respect to stock options to be granted under the Abetterwayhome Corp. 2004 Stock Option Plan (the "Plan"). This letter replaces the previous letter to the Office of the Chief Counsel dealing with the same topic dated August 7, 2003.
The Company was incorporated in 2000 and, through its wholly owned operating subsidiary, HomeBanc Mortgage Corporation, a Delaware corporation ("HomeBanc"), is engaged in the retail origination, processing, underwriting, closing and sale of residential first- and second-lien mortgages into the secondary market. HomeBanc has approximately 1,100 employees in the United States. Currently, the Company does not have any employees and HomeBanc is the Company's only subsidiary; however, certain employees of HomeBanc serve as officers and directors of the Company. The Company, through HomeBanc, had more than $10 million in total assets at December 31, 2002, the last day of its most recently completed fiscal year.
The Company's authorized capital stock currently consists of 1,000 shares of Common Stock, par value $0.01 per share (the "Common Stock"). All of the Common Stock is issued and outstanding and held by HBMC Holdings, LLC, a Delaware limited liability company ("HBMC"). HBMC is majority-owned by GTCR Fund VII, L.P., a private equity investment fund. Currently, HBMC does not have any employees and the Company is HBMC's only subsidiary; however, certain employees of HomeBanc serve as officers and managers of HBMC.
Subject to the Company's receipt of the relief requested herein, the Company will alter its capital structure (the "Recapitalization") such that the Company's authorized capital will consist of 147,750,000 shares of Class A Common Stock, par value $0.01 per share (the "Class A Common Stock"), and of 2,250,000 shares of Class B Common Stock, par value $0.01 per share (the "Class B Common Stock"). The Class A Common Stock will be entitled to preferential dividends and, in addition, will be entitled to be paid, before any distribution or payment is made upon the Class B Common Stock, an amount equal to the capital contributed with respect to the Class A Common Stock. After such preferential payments, the Class A Common Stock and the Class B Common Stock collectively will be entitled to any dividends, distributions or payments based on the number of shares of Class A Common Stock and Class B Common Stock outstanding.
Following the Recapitalization, the Company will have a total of 147,750,000 shares of Class A Common Stock outstanding and 2,250,000 shares of Class B Common Stock reserved for issuance under the Plan. The Class A Common Stock will be held only by HBMC. The Recapitalization creates the Class A Common Stock and the Class B Common Stock to implement certain economic rights agreed to among the relevant parties and creates a larger number of shares to facilitate the logistics of the Plan.
We are of the opinion that based on relevant precedent that neither the Class A Common Stock nor the Class B Common Stock is part of the same class of securities as options granted under the Plan. Accordingly, the scope of relief we are requesting on behalf of the Company does not include the Class A Common Stock or the Class B Common Stock.
The Company wishes to extend the benefits of an equity incentive program to a broad-based group (i.e., more than 500) of its and its wholly owned subsidiaries' employees without subjecting itself to the periodic public reporting and other requirements of the Exchange Act. To this end, the Company has designed the Plan, the material terms of which are described herein. The Company believes that the Plan promotes the interest of its stockholders by providing Employees with the opportunity to purchase its Class B Common Stock. By encouraging stock ownership, the Company seeks to attract, retain and motivate its Employees and encourage them to devote their best efforts to the Company's and its subsidiaries' business and financial success. Implementation of the Plan is subject to the Company's receipt of the relief requested herein.
A total of 2,250,000 shares of Class B Common Stock will be available for issuance under the Plan. The only type of award that may be made under the Plan is stock options, which may either be incentive stock options within the meaning of Section 422 of the Internal Revenue Code or nonqualified stock options. It is currently intended that only nonqualified stock options will be granted under the Plan. No awards have been granted to date.
All full or part-time employees of the Company or of any parent1 or majority-owned subsidiary2 of the Company, including employees who are also officers and directors of the Company, are eligible to receive stock option grants under the Plan (the "Employees"). The Company undertakes that so long as it is relying on no-action relief granted pursuant to this request, option grants under the Plan will be made only to employees of the Company, its parents and its majority-owned subsidiaries within the meaning of Rule 701.
The Plan gives the Plan Administrator (as defined below) discretion to determine the specific terms of each option granted thereunder, subject to the terms of the Plan. It is anticipated by the Company that all options granted under the Plan will be granted on uniform terms. Each option will be evidenced by (i) an individual option award agreement between the Company and the optionee and (ii) the Plan, which together will state the terms and conditions thereof, including the number of shares subject to the option granted, the exercise price, the option term, vesting provisions, repurchase rights and restrictions on transfer. If there is any conflict or inconsistency between the terms of the Plan and an option award agreement, the terms of the Plan control. The following is a summary of material terms of the Plan and the option award agreements to be granted under the Plan.
For purposes of this application, the Commission may rely upon the summary descriptions of the terms of the Plan contained in this letter. In reviewing this letter, you may assume that we have included all relevant, material provisions of the Plan and the related Employee option award agreements in the body of this letter. Generally, we have not discussed other provisions in the Plan or option award agreements that become operative only after the Exercisability Date has occurred and the relief granted pursuant to this request has expired. The Company undertakes that so long as it is relying on the relief granted in response to this request, it will not amend any of the material provisions of the Plan or the related option agreements described in this letter, including the restrictive provisions on transferability, exercisability and eligibility which are part of the basis for the relief requested herein, other than to change the number of shares of Class B Common Stock available for grant under the Plan or to reflect the undertakings of the Company stated herein.
The Company has provided an undertaking that so long as it is relying on the relief requested in this letter, grants of options under the Plan will be exempt from registration under Rule 701. Although we believe that the grant of options is exempt from registration under the Securities Act, we acknowledge that if 500 or more persons hold options, the Company would be required to register the options under Section 12(g) of the Exchange Act, unless exemptive or no-action relief from such requirements is granted under Section 12(h) of the Exchange Act.
As a general rule, Section 12(g) of the Exchange Act requires every issuer meeting the jurisdictional requirements of the Exchange Act having total assets of more than $1 million and a class of equity security held of record by 500 or more persons to register that class of equity security under the Exchange Act. Pursuant to its authority under Section 12(h) of the Exchange Act, the Commission has promulgated Rule 12g-1, which exempts from the registration requirements of Section 12(g) any issuer whose total assets on the last day of its most recent fiscal year did not exceed $10 million. To date, the Company has not been required to register any class of equity securities pursuant to Section 12(g) because, although it has assets in excess of $10 million, it has always had fewer than 500 holders of its equity securities at the end of each fiscal year.
Section 12(g) was added to the Exchange Act by Section 3(c) of the Securities Act Amendments of 1964, Pub. L. 88-467; 78 Stat. 565. Before the 1964 amendments, the only securities required to be registered under the Exchange Act were those listed on a national securities exchange.
The purpose of Section 3(c) of the 1964 amendments has been expressed in various ways:
All of the above authorities strongly suggest that it was the intent of Congress to require Exchange Act registration by an issuer that had "publicly traded securities" or "securities traded in the over-the-counter market," and that these securities were the subject of "active investor interest in the over-the-counter market" or "active trading markets and public interest."
Section 12(h) of the Exchange Act allows the Commission to exempt an issuer from the registration requirements of Section 12(g) if it finds, "by reason of the number of public investors, amount of trading interest in the securities, the nature and extent of the activities of the issuer, income or assets of the issuer or otherwise, that such action is not inconsistent with the public interest or the protection of investors." For the reasons discussed below, we believe it would be appropriate for the Commission to grant relief from the Section 12(g) registration requirements for options granted or to be granted under the Plan.
Section 3(a)(11) of the Exchange Act defines "equity security" to include not only any stock or similar security but also any warrant or right to subscribe for or purchase any stock or similar security. As a result, it is possible the options granted under the Plan to purchase the Company's Class B Common Stock would be deemed to be a class of equity security so that, if 500 or more persons hold the options, the Company would be subject to the registration requirements of Section 12(g), unless an exemption or other relief from these registration requirements were granted.
Assuming that the Company would become subject to the registration requirements of Section 12(g) as a result of the number of persons to hold options granted under the Plan, there would still be no public investors in the Class B Common Stock, and neither its Class B Common Stock nor the options are publicly traded. The history of the 1964 amendments makes clear that Congress did not intend Section 12(g) to require companies to register a class of equity security under these circumstances. Accordingly, we believe that it is appropriate for the Commission to grant the Company an exemption or no-action relief from the registration requirements of Section 12(g) for options granted or to be granted under the Plan.
Section 12(h) specifies a number of factors that should be considered in reviewing an application for exemption from Section 12(g). The first of these factors is the number of public investors in the issuer. Since the Company grants options under the Plan without cash or other tangible consideration, and only to Employees, optionees should not be considered public investors in the Company. In fact, the first time that these optionees will have the opportunity to become investors in the Company is when and if the options become exercisable. In addition, the Class A Common Stock initially will be held by only one stockholder, HBMC, the Company's direct parent. As a result, we believe that, with respect to the options under the Plan, the Class B Stock issuable upon exercise of such options and the Class A Common Stock, the Company currently has no public investors.
The options under the Plan will become exercisable only if and when the Company completes a Company IPO or becomes a reporting company under the Exchange Act. Thus, at the time options under the Plan become exercisable, the Company will already be subject to the reporting requirements of the Exchange Act and will have filed the appropriate Exchange Act registration statement. Accordingly, it would be able to register the Class B Common Stock issuable upon exercise of the options on Form S-8.
The second factor listed in Section 12(h) is the level of trading interest in a Company's equity securities. The Plan has been structured to prohibit the trading of options, specifically providing that options are not transferable before the Exercisability Date, even upon the death, disability or retirement of the optionee, except in limited circumstances as described herein. Transfers made in contravention of the Plan are deemed void thereunder. Accordingly, there will be no opportunity for any trading to take place or any trading interest in the options or the Class B Common Stock issuable upon exercise of such options to develop prior to the Exercisability Date. In addition, given that the Class A Common Stock initially will be held by only one stockholder, HBMC, the Company's direct parent, there will be no trading interest in the Class A Common Stock.
The last factor listed in Section 12(h) is the nature and extent of the activities of the issuer and the income or assets of the issuer. While the assets and income of the Company are not insubstantial, it remains very much a private company with currently only one holder of its voting stock. Since the Company has no public investors and no trading interest in its securities, we believe that the purposes for which Section 12(g) was enacted would not be advanced by requiring the Company to register the options granted under the Plan.
So long as the Company is relying on the relief granted pursuant to this request, it undertakes to: (1) deliver to each optionee under the Plan, within a reasonable time prior to the time that such optionee terminates his or her employment with the Company or one of its majority-owned subsidiaries (by way of retirement at normal retirement age, or otherwise) and so long as it receives reasonable notice of the upcoming termination, all relevant information with respect to the options granted that is material to the decision whether to terminate employment and thereby forfeit the options; (2) provide to each optionee under the Plan, on a continuing basis, annual audited financial statements of the Company and its consolidated subsidiaries for periods after this request is granted, prepared in accordance with generally accepted accounting principles, quarterly unaudited financial statements of the Company and its consolidated subsidiaries for periods beginning after the date this request is granted in a format consistent with the Company's general accounting and financial reporting practices, and such other information as is provided generally to all of the Company's stockholders; and (3) make available to each optionee upon request the Company's books and records, including corporate governance documents, to the same extent it is obligated to make such books and records available to the Company's stockholders. The foregoing undertaking is subject, in the case of confidential or non-public information, to the optionee's signing an appropriate confidentiality agreement.
The above described information requirements will terminate once the Company becomes a reporting company under the Exchange Act, at which time the Company will comply with the information requirements contained in the Exchange Act and the rules promulgated thereunder.
The Commission staff has previously granted no-action relief to other applicants in a number of situations which, for analytical purposes, we believe are in all material respects the same as the Company's current situation, including DataCard Corporation (October 15, 2002), SI International, Inc. (February 4, 2002), Mitchell International Holding, Inc. (December 21, 2000), General Roofing, Inc. (April 5, 2000), Kinko's, Inc. (November 24, 1999) and BSG Corporation (August 1, 1995). We note in particular the following factual similarities between the Company's circumstances and those of the other applicants:
We note that the Commission staff has announced that it would supplement its position developed in the no-action letters cited above (the "No-Action Letters") as to the granting of exemptive relief from the registration of employee stock options under Section 12(g), and has described the additional circumstances under which it will grant such exemptive relief with respect to options granted under plans that have less restrictive features than the Plan and the plans described in the No-Action Letters. Division of Corporation Finance Current Issues and Rulemaking Projects Quarterly Update, March 31, 2001 (the "Update"). Examples of these less restrictive features include allowing options to be immediately exercisable, allowing non-employee consultants to receive option grants, allowing options to be transferred in limited circumstances and allowing options to be retained by employees after their employment is terminated. Since the Plan is more restrictive, with each of its salient features corresponding to features of some or all of the plans discussed in the No-Action Letters, the Company is seeking relief consistent with the conditions under which relief has been granted in the No-Action Letters.
Because of the absence of public investors and trading interest in the Company's securities, we believe that neither the public interest nor the protection of investors would be furthered by requiring the Company to meet the registration requirements of the Exchange Act. We respectfully request that you issue an order pursuant to Section 12(h) of the Exchange Act, or otherwise take a no-action position, relieving the Company from registering under Section 12(g) of the Exchange Act the options it may issue in the future under the Plan. We further request that this order or grant of no-action relief remain in effect until the earliest of: (i) such time as the Company becomes or is required to become a reporting company under the Exchange Act, whether in connection with a registration statement filed under the Securities Act or otherwise under the Exchange Act, (ii) the Company effecting a cancellation or exchange of outstanding options pursuant to the provision of the Plan addressing such cancellations or (iii) a Sale of the Company. After the termination of no-action relief granted pursuant to this request, if there are more than 500 holders of the Class B Common Stock (including each holder of an option granted under the Plan as a security holder for purposes of this calculation), the Company will register under Section 12(g) of the Exchange Act, and file a Securities Act registration statement for, the Class B Common Stock issuable upon the exercise of the options. If 500 or more persons become holders of record of the Class B Common Stock, the Company will register its Class B Common Stock under the Exchange Act.
In accordance with Release No. 33-6269 (available December 5, 1980), seven additional copies of this letter are enclosed. If for any reason you do not concur with our conclusions, we would appreciate the opportunity to confer with members of the Commission staff by telephone prior to any written response to this letter. If you need any additional information regarding this letter, or if we may otherwise be of assistance, please telephone the undersigned at 312-861-2118.
Very truly yours,
KIRKLAND & ELLIS LLP
___________________
Michael H. Weed
1 Within the meaning of Section 424(e) of the Internal Revenue Code.
2 Within the meaning of Section 424(f) of the Internal Revenue Code.
3 The DataCard Corporation, SI International, Inc. and BSG Corporation letters included within their scope employees of majority-owned subsidiaries.
http://www.sec.gov/divisions/corpfin/cf-noaction/abetterwayhome013004.htm
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