By: Cydney Posner

An article in today's WSJ reports on a letter from the SEC accepting as a mechanism to derive "market" values for employee stock options an auction system designed by Zions Bancorp of Salt Lake City. The new instrument, Employee Stock Option Appreciation Rights Securities (ESOARS), is designed to permit companies to value stock options at "real" (presumably lower) market prices as opposed to hypothetical (presumably higher) prices derived from models such as Black-Scholes. Cisco and others have tried to create market mechanisms, but the SEC has previously rejected them. The article reports that Zions created securities that mimic the stock options granted to its employees and sold the securities to sophisticated investors in a public auction last June. The market value for the options derived from the bidding was roughly half the value of its options as calculated by academic models. The SEC is reported to have signed off on the mechanism with some "tweaks." The SEC cautions that auctions based on the Zions approach will each have to be analyzed to determine whether a market value is actually generated, taking into account issues such as the quantity of securities offered relative to market demand and the number and type of bidders. Click here for a link to the Zions press release. Zions plans to leverage its efforts by advising other public companies about the use of ESOARS and acting, through a sub, as auction agent. Zions has a patent pending on its ESOARS design and market pricing mechanism. Additional information about ESOARS can be found at www.ESOARS.com. 

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