The Advisors' Blog

– Liz Dunshee

Yesterday, the SEC continued its active year by announcing proposed changes to Form S-8 and Rule 701. The amendments suggested by the 156-page proposing release are responsive to comments that the Commission received on its 2018 concept release. Here are the highlights from the SEC’s Fact Sheet (we’ll be posting memos in our “Form S-8″ Practice Area):

With respect to Rule 701, the proposed amendments would:

• Revise the additional disclosure requirements for Rule 701 exempt transactions exceeding $10 million, including how the disclosure threshold applies, the type of financial disclosure required, and the frequency with which it must be updated;

• Revise the time at which such disclosure is required to be delivered for derivative securities that do not involve a decision by the recipient to exercise or convert in specified circumstances where such derivative securities are granted to new hires;

• Raise two of the three alternative regulatory ceilings that cap the overall amount of securities that a non-reporting issuer may sell pursuant to the exemption during any consecutive 12-month period; and

• Make the exemption available for offers and sales of securities under a written compensatory benefit plan established by the issuer’s subsidiaries, whether or not majority-owned.

With respect to Form S-8, the proposed amendments would:

• Implement improvements and clarifications to simplify registration on the form, including:

o Clarifying the ability to add multiple plans to a single Form S-8;

o Clarifying the ability to allocate securities among multiple incentive plans on a single Form S-8; and

o Permitting the addition of securities or classes of securities by automatically effective post-effective amendment.

• Implement improvements to simplify share counting and fee payments on the form, including:

o Requiring the registration of an aggregate offering amount of securities for defined contribution plans;

o Implementing a new fee payment method for registration of offers and sales pursuant to defined contribution plans; and

o Conforming Form S-8 instructions with current IRS plan review practices.

• Revise Item 1(f) of Form S-8 to eliminate the requirement to describe the tax effects of plan participation on the issuer.

With respect to both Rule 701 and Form S-8, the proposals would:

• Extend consultant and advisor eligibility to entities meeting specified ownership criteria designed to link the securities to the performance of services; and

• Expand eligibility for former employees to specified post-termination grants and former employees of acquired entities.

There’s More! SEC Proposes Temporary Expansion of Compensatory Offerings to Gig Workers

The SEC saved the more interesting – and controversial – part of its “compensatory offering” modernization for an entirely separate proposal – which would, for a temporary five-year period and subject to a number of conditions, permit companies to provide equity compensation to gig workers who provide services (not goods) to the company (or as the SEC calls them, “platform workers”). Commissioners Hester Peirce & Elad Roisman issued a statement in support of the proposal. Commissioners Allison Herren Lee & Caroline Crenshaw dissented – and they were careful to point out that they did support the other proposal.

Here’s the highlights from the SEC’s Fact Sheet:

Under the amendments, an issuer would be able to use the Rule 701 exemption to offer and sell its securities on a compensatory basis to platform workers who, pursuant to a written contract or agreement, provide bona fide services by means of an internet-based platform or other widespread, technology-based marketplace platform or system provided by the issuer if:

• the issuer operates and controls the platform, as demonstrated by its ability to provide access to the platform, to establish the principal terms of service for using the platform and terms and conditions by which the platform worker receives payment for the services provided through the platform, and by its ability to accept and remove platform workers participating in the platform;

• the issuance of securities to participating platform workers is pursuant to a compensatory arrangement, as evidenced by a written compensation plan, contract, or agreement, and is not for services that are in connection with the offer or sale of securities in a capital-raising transaction, or services that directly or indirectly promote or maintain a market for the issuer’s securities;

• no more than 15% of the value of compensation received by a participating worker from the issuer for services provided by means of the platform during a 12-month period, and no more than $75,000 of such compensation received from the issuer during a 36-month period, shall consist of securities, with such value determined at the time the securities are granted;

• the amount and terms of any securities issued to a platform worker may not be subject to individual bargaining or the worker’s ability to elect between payment in securities or cash; and

• the issuer must take reasonable steps to prohibit the transfer of the securities issued to a platform worker pursuant to this exemption, other than a transfer to the issuer or by operation of law.

The proposed amendments would also permit an Exchange Act reporting company to make registered securities offerings to its platform workers using Form S-8. The same conditions proposed for Rule 701 issuances would apply to issuances to platform workers on Form S-8, except for the proposed transferability restriction.

The proposed amendments would not permit the issuance of securities for platform worker activities relating to the sale or transfer of permanent ownership of discrete, tangible goods. Depending on the results of the initial expanded use of Rule 701 and Form S-8, if adopted, the Commission could consider expanding eligibility to other activities, such as selling goods or other non-service providing activities in the future.

The proposed amendments would require companies that sell securities to gig workers to furnish information to the SEC at 6-month intervals, to help the Commission decide whether the rule changes should expire, be extended or be made permanent.

Both proposals will be subject to a 60-day comment period following their publication in the Federal Register. Time will tell whether the next SEC Chair will carry either of these proposals across the finish line.