ESOPs: The Importance of Small Company Employee Ownership

Employee Stock Ownership Plans (ESOPs) allow employees to participate in the economic performance of a company, share in corporate profits, and save for retirement.  Congress has long recognized the advantages of employee ownership by authorizing and encouraging ESOPs through favorable tax treatment.

However, current IRS regulations significantly restrict the ability of many small public companies not traded on a national securities exchange to offer ESOPs to their employees.  These outdated regulations negatively impact hundreds of qualified, U.S.-based companies on the OTCQX and OTCQB markets that collectively employ over 100,000 workers.

What is an ESOP?

An Employee Stock Ownership Plan, or an ESOP, is an important type of retirement plan recognized under IRS regulations that allows a company to offer stock ownership to their employees in a tax efficient manner.   There are approximately 6,660 ESOPs in the United States covering over 14 million employee participants.[1]

What are the benefits of ESOPs?

ESOPs provide numerous, well-documented benefits.  Companies that offer ESOPs see an increase in revenue, stock price and sales per employee.[2]  Due to improved company performance and the employee-ownership structure, employees in these companies get paid more, have 2.2 times the retirement assets, and are less likely to be laid off – ultimately serving as an important tool to combat income inequality.[3]

ESOPs enable employees to substantially increase their assets and help reduce gender and racial wealth gaps.  A 2010 study found that low-moderate income employees at companies that offer an ESOP have a median ESOP account value of $165,000, as compared to the median U.S. household savings of $17,000.[4]  Moreover, workers in ESOP-offering companies with participatory management reported that their experience with the ESOPs allowed them to improve their household financial decision-making.[5]

Requirements for OTCQX and OTCQB Companies Offering ESOPs under Current Regulations

Under current IRS regulations, additional requirements are imposed on non-exchange traded companies that offer ESOPs to their employees.  This is due to a decades-old definition of the term “established securities market” that comes from an era when non-exchange markets were paper-based and lacked transparency.   That outdated definition excludes today’s regulated, electronic non-exchange markets such as the OTCQX and OTCQB markets.   Due to this dated definition, companies traded on these markets must undertake substantial additional costs and risks in order to offer an ESOP to their employees, including conducting an expensive annual private valuation and offering a ‘put’ option to all employee participants.  These requirements are described further below:

  • Independent Appraiser Requirement

If a company’s securities are traded on an “established securities market,” the company is permitted to use the prevailing trading price on the market to value its securities. Valuations of company stock traded on the OTCQX, OTCQB or other non-exchange markets, however, must be made by an independent appraiser.  Despite having a publicly-quoted price that is recognized as a Level 1 price source for accounting purposes, current IRS regulations essentially force OTCQX and OTCQB companies to treat their stock as “private” for ESOP purposes.  An independent appraisal is costly, and results in a fixed share price that inevitably conflicts with the company’s fluctuating public trading price.

  • Put Option Requirement

Public companies with non-exchange traded stock must also provide a ‘put’ option to each employee participant, requiring that the company repurchase the ESOP securities from the participant upon request.  This presents significant financial risk to the company, further complicated by the discrepancy between the company’s public stock price and its privately appraised price.

Effects of the Current Regulations

These additional costs and inefficiencies ultimately deter many OTCQX and OTCQB companies from offering an ESOP, denying their employees the opportunity to invest in the long-term growth and success of the company.

Today, over 600 U.S.-based companies across 47 states trade on the OTCQX and OTCQB markets and employ over 100,000 individuals.[6]  These companies and their employees should not be prohibited from accessing the benefits that come with being a public company, simply due to outdated regulations.  Updating the meaning of “established securities market” would help thousands of small company employees across the U.S. participate in corporate wealth generation and save for retirement.

ESOP regulations are an area where legislators can make positive changes that modernize markets, encourage employee stock ownership and increase the benefits of being a public company.  Members of the OTCQX Advisory Council have met with Congressional representatives to discuss ESOP reform and other issues impacting smaller public companies.

Visit our website to learn more about our Public Policy Advocacy or contact Cass Sanford at if you would like to be part of our efforts to advance regulatory and legislative initiatives that can improve public markets.

[1] National Center for Employee Ownership

[2] The ESOP Association Media Kit (2018)

[3] Employee Ownership a Win-Win for Workers and Companies (2018)

[4]Rutgers – Kellogg Project on Modest Income Workers and Employee Ownership (2015)

[5] Id.

[6] Data as of August 13, 2019.

As Associate General Counsel, Cass supports regulatory and policy making initiatives at OTC Markets Group, focusing on equity market structure, online capital raising and emerging Fintech and RegTech trends. She represents the company on public panels and before regulatory and legislative groups. Prior to joining OTC Markets Group, Cass represented issuers, broker-dealers and individuals in securities litigation, financing, and various corporate and regulatory matters. Cass earned her JD from Hofstra University School of Law and received her BA from Mount Holyoke College. Cass is a member of the New York Bar.

%d bloggers like this: