[Federal Register Volume 83, Number 142 (Tuesday, July 24, 2018)]
[Proposed Rules]
[Pages 34958-34967]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-15731]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 230
[Release No. 33-10521; File No. S7-18-18]
RIN 3235-AM38
Concept Release on Compensatory Securities Offerings and Sales
AGENCY: Securities and Exchange Commission
ACTION: Concept release; request for comment.
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SUMMARY: The Securities and Exchange Commission (``Commission'') is
publishing this release to solicit comment on the exemption from
registration under the Securities Act of 1933 (the ``Securities Act'')
for securities issued by non-reporting companies pursuant to
compensatory arrangements, and Form S-8, the registration statement for
compensatory offerings by reporting companies. Significant evolution
has taken place both in the types of compensatory offerings issuers
make and the composition of the workforce since the Commission last
substantively amended these regulations. Therefore, as we amend the
exemption as mandated by the Economic Growth, Regulatory Relief, and
Consumer Protection Act (the ``Act''), we seek comment on possible ways
to modernize the exemption and the relationship between it and Form S-
8, consistent with investor protection.
DATES: Comments should be received on or before September 24, 2018.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/concept.shtml); or
Send an email to [email protected]. Please include
File Number S7-18-18 on the subject line.
Paper Comments
Send paper comments to Brent J. Fields, Secretary,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-1090.
All submissions should refer to File Number S7-18-18. This file number
should be included on the subject line if email is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
website (http://www.sec.gov/rules/concept.shtml). Comments are also
available for website viewing and copying in the Commission's Public
Reference Room, 100 F Street NE, Washington, DC 20549, on official
business days between the hours of 10:00 a.m. and 3:00 p.m. All
comments received will be posted without change. Persons submitting
comments are cautioned that we do not redact or edit personal
identifying information from comment submissions. You should submit
only information that you wish to make available publicly.
FOR FURTHER INFORMATION CONTACT: Anne M. Krauskopf, Senior Special
Counsel, and Adam F. Turk, Special Counsel, Office of Chief Counsel,
Division of Corporation Finance, at (202) 551-3500.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Overview
II. Rule 701
A. Background
B. Rule 701(c) Eligible Plan Participants
C. Rule 701(e) Disclosure Requirements
1. General
2. Timing and Manner of Rule 701(e) Disclosure
3. Options and Other Derivative Securities/RSUs
D. Rule 701(d) Exemptive Conditions
III. Form S-8
A. Background
B. Form S-8 Eligible Plan Participants
C. Administrative Burdens
D. Form S-8 Generally
IV. Conclusion
I. Overview
Under the Securities Act, every offer and sale of securities must
be registered or subject to an exemption from registration. The
Commission has long recognized that offers and sales of securities as
compensation present different issues than offers and sales that raise
capital for the issuer of the securities.\1\ Among other
considerations, the Commission has recognized that the relationship
between the issuer and recipient of securities is often different in a
compensatory rather than capital raising transaction. The Commission
has thus provided a limited exemption from registration--17 CFR 230.701
(Rule 701)--for certain compensatory securities transactions as well as
a specialized form--Form S-8--for registering certain compensatory
transactions. Both Rule 701 and Form S-8 require the issuer to make
specific disclosures. However, depending on the circumstances,
compensatory transactions also may be conducted under the Securities
Act Section 4(a)(2) exemption from registration or under a ``no sale''
theory,\2\ which would not require specific disclosures.
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\1\ See, e.g., Release No. 33-3469-X (Apr. 10, 1953) [18 FR 2182
(Apr. 17, 1953)] and Registration of Securities Offered Pursuant to
Employees Stock Purchase Plans, Release No. 33-3480 (Jun. 16, 1953)
[18 FR 3688 (Jun. 27, 1953)], each observing that the investment
decision to be made by the employee is of a different character than
when securities are offered for the purpose of raising capital.
\2\ See Changes to Exchange Act Registration Requirements to
Implement Title V and Title VI of the JOBS Act, Release No. 33-10075
(May 3, 2016) [81 FR 28689 (May 10, 2016)] at n. 82, stating ``The
``no sale'' theory relates to the issuance of compensatory grants
made by employers to broad groups of employees pursuant to broad-
based stock bonus plans without Securities Act registration under
the theory that the awards are not an offer or sale of securities
under Section 2(a)(3) of the Securities Act [15 U.S.C. 77b(a)(3)].''
Where securities are awarded to employees at no direct cost through
broad based bonus plans, the staff has taken the position generally
that there has been no sale since employees do not individually
bargain to contribute cash or other tangible or definable
consideration to such plans. Where securities are awarded to or
acquired by employees pursuant to individual employment
arrangements, however the staff has expressed the view that such
arrangements involve separately bargained consideration, and a sale
of the securities has occurred. See Employee Benefit Plans:
Interpretations of Statute, Release No. 33-6188 (Jan. 15, 1981) [29
FR 8960 (Feb. 11, 1980)] at Section II.A.5.d and n. 84.
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Equity compensation can be an important component of the employment
relationship. Using equity for compensation can align the incentives of
employees with the success of the enterprise, facilitate
[[Page 34959]]
recruitment and retention, and preserve cash for the company's
operations.\3\
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\3\ See Executive Compensation and Related Person Disclosure,
Release No. 33-8732A (Aug. 29, 2006) [71 FR53158 (Sept. 6, 2006)] at
Section II.A.1.
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Since Rule 701 and Form S-8 \4\ were last amended, forms of equity
compensation have continued to evolve, and new types of contractual
relationships between companies and the individuals who work for them
have emerged. In light of these developments, as well as the Act's
mandate to increase to $10 million the Rule 701(e) threshold in excess
of which the issuer is required to deliver additional disclosure to
investors, which we are implementing in a separate release,\5\ we
believe this is an appropriate time to revisit the Commission's
regulatory regime for compensatory securities transactions. We
therefore solicit comment on possible ways to update the requirements
of Rule 701 and Form S-8, consistent with investor protection. We also
solicit comment on what effects any revised rule or form may have on a
company's decision to become a reporting company.
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\4\ 17 CFR 239.16b.
\5\ Section 507 of the Act directs the Commission, not later
than 60 days after the date of enactment, to amend Rule 701(e) to
increase this threshold. See Public Law 115-174, sec. 507, 132 Stat.
1296 (2018). In Release 33-10520, we adopt an amendment to Rule
701(e) to implement this change.
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II. Rule 701
A. Background
In 1988, the Commission adopted Rule 701 under the Securities Act
\6\ to allow non-reporting companies to sell securities to their
employees without the need to register the offer and sale of such
securities.\7\ Only issuers that are not subject to the reporting
requirements of Section 13 \8\ or 15(d) \9\ of the Securities Exchange
Act of 1934 (``Exchange Act'') and are not investment companies
registered or required to be registered under the Investment Company
Act of 1940 \10\ are eligible to use Rule 701. The rule provides an
exemption from the registration requirements of Section 5 of the
Securities Act \11\ for offers and sales of securities under
compensatory benefit plans \12\ or written agreements relating to
compensation. In adopting the rule, the Commission determined that it
would be an unreasonable burden to require these non-reporting
companies, many of which are small businesses, to incur the expenses
and disclosure obligations of public companies where their sales of
securities were to employees.\13\ In addition to domestic non-reporting
companies, Rule 701 is also available for foreign private issuers.\14\
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\6\ 15 U.S.C. 77a et seq.
\7\ See Compensatory Benefit Plans and Contracts, Release No.
33-6768 (Apr. 14, 1988) [53 FR 12918 (Apr. 20, 1988)] (``1988
Adopting Release'').
\8\ 15 U.S.C. 78m.
\9\ 15 U.S.C. 78o(d).
\10\ 15 U.S.C. 80a-1 et seq.
\11\ 15 U.S.C. 77e.
\12\ A ``compensatory benefit plan'' is defined in Rule
701(c)(2) [17 CFR 230.701(c)(2)] as ``any purchase, savings, option,
bonus, stock appreciation, profit sharing, thrift, incentive,
deferred compensation, pension or similar plan.''
\13\ As the Commission stated in re-proposing Rule 701, ``The
essential concern [. . .] remains the same--many privately-held
companies have found the costs of complying with the registration
requirements of the Securities Act and the subsequent reporting
obligations under section 15(d) of the Exchange Act so burdensome
that employee incentive arrangements are not being provided by them.
As a consequence, employees must forego [sic] potentially valuable
means of compensation. The Commission historically has recognized
that when transactions of this nature are primarily compensatory and
incentive oriented, some accommodation should be made under the
Securities Act.'' See Employee Benefit and Compensation Contracts
Release No. 33-6726 (Jul. 30, 1987) [52 FR 29033 (Aug. 5, 1987)]
(``Rule 701 Proposing Release'') at Section I.
\14\ A ``foreign private issuer'' is defined in 17 CFR 230.405
(Securities Act Rule 405) as a foreign issuer other than a foreign
government, except an issuer meeting the following conditions as of
the last business day of its most recently completed second fiscal
quarter:
(i) More than 50 percent of the outstanding voting securities of
which are directly or indirectly owned of record by residents of the
United States; and
(ii) Any of the following:
(A) The majority of the executive officers or directors are
United States citizens or residents;
(B) More than 50 percent of the assets of the issuer are located
in the United States; or
(C) The business of the issuer is administered principally in
the United States.
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The rule provides an exemption from registration only for
securities issued in compensatory circumstances and is not available
for plans or schemes inconsistent with this purpose, such as to raise
capital.\15\ The exemption is available only to the issuer of the
securities, not to its affiliates, and does not cover resales of
securities by any person.\16\ The rule exempts only the transactions in
which the securities are offered or sold, and not the securities
themselves.\17\ In addition to complying with Rule 701, the issuer also
must comply with any applicable state law relating to the offer and
sale of securities.\18\
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\15\ Preliminary Note 5 to Rule 701 provides ``This section also
is not available to exempt any transaction that is in technical
compliance with this section but is part of a plan or scheme to
evade the registration provisions of the [Securities] Act. In any of
these cases, registration under the [Securities] Act is required
unless another exemption is available.''
\16\ Preliminary Note 4 to Rule 701.
\17\ Id.
\18\ Preliminary Note 2 to Rule 701.
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Since 1999,\19\ the rule has provided that the amount of securities
that may be sold in reliance on the exemption during any consecutive
12-month period is limited to the greatest of: \20\
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\19\ See Rule 701--Exempt Offerings Pursuant to Compensatory
Arrangements, Release No. 33-7645 (Feb. 25, 1999) [64 FR 11095 (Mar.
8, 1999)] (``1999 Adopting Release'').
\20\ Rule 701(d) [17 CFR 230.701(d)].
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$1 million;
15% of the total assets of the issuer,\21\ measured at the
issuer's most recent balance sheet date; or
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\21\ The relevant limit applies to the total assets of the
issuer's parent if the issuer is a wholly-owned subsidiary and the
securities represent obligations that the parent fully and
unconditionally guarantees.
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15% of the outstanding amount of the class of securities
being offered and sold in reliance on the rule, measured at the
issuer's most recent balance sheet date.
These measures apply on an aggregate basis, not plan-by-plan. For
securities underlying options, the aggregate sales price is determined
when the option grant is made, without regard to when it becomes
exercisable.\22\ For deferred compensation plans, the calculation is
made at the time of the participant's irrevocable election to
defer.\23\ There is no separate limitation on the amount of securities
that may be offered.
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\22\ See Rule 701(d)(3)(ii) [17 CFR 230.701(d)(3)(ii)].
\23\ Id.
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In all cases, the issuer must deliver to investors a copy of the
compensatory benefit plan or contract. Further, Rule 701 transactions
are subject to the antifraud provisions of the federal securities
laws.\24\
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\24\ Preliminary Note 1 to Rule 701 (``Issuers and persons
acting on their behalf have an obligation to provide investors with
disclosure adequate to satisfy the antifraud provisions of the
federal securities laws.'').
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In addition, if the aggregate sales price or amount of securities
sold during the 12-month period exceeds $5 million,\25\ the issuer must
deliver to investors a reasonable period of time before the date of
sale: \26\
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\25\ Rule 701(e) [17 CFR 230.701(e)].
\26\ Rule 701(e). This amount will change to $10 million upon
effectiveness of the final rule amendment that raises this
threshold. See n. 5, above, See also n. 49 and Section II.C.1,
below.
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A copy of the summary plan description required by
ERISA,\27\ or a summary of the plan's material terms, if it is not
subject to ERISA;
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\27\ The Employee Retirement Income Security Act of 1974 (29
U.S.C. 1001 et seq.).
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Information about the risks associated with investment in
the securities sold under the plan or contract; and
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Financial statements required to be furnished by Part F/S
of Form 1-A\28\ under 17 CFR 230.251 through 230.263 (Regulation A).
These financial statements must be as of a date no more than 180 days
before the sale of securities relying on Rule 701.\29\
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\28\ Regulation A Offering Statement [17 CFR 239.90].
\29\ Rule 701(e)(4) [17 CFR 230.701(e)(4)].
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This disclosure should be provided to all investors before sale.
For options and other derivative securities, the issuer must deliver
disclosure a reasonable period of time before the date of exercise or
conversion.\30\ If disclosure has not been provided to all investors
before sale, the issuer will lose the exemption for the entire offering
when sales exceed the $5 million threshold during the 12-month
period.\31\
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\30\ Rule 701(e)(6) [17 CFR 230.701(e)(6)]. As described in
Section II.C.3, below, for options and other derivative securities,
whether the issuer is obligated to deliver Rule 701(e) disclosure is
determined based on whether the option or other derivative security
was granted during a 12-month period in which the disclosure
threshold is exceeded. If the grant occurred during such a period,
the issuer must deliver the Rule 701(e) disclosure a reasonable
period of time before the date of exercise or conversion.
\31\ See 1999 Adopting Release at Section II.B.
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The exemption covers securities offered or sold under a plan or
agreement between a non-reporting company (or its parents, majority-
owned subsidiaries or majority-owned subsidiaries of its parent) and
the company's employees, officers, directors, partners, trustees,
consultants and advisors.\32\ Rule 701 is also available for sales,
such as option exercises, to their family members \33\ who acquire such
securities through gifts or domestic relations orders.
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\32\ Rule 701(c) [17 CFR 230.701(c)]. The rule also exempts
offers and sales to former employees, directors, general partners,
trustees, officers, consultants and advisors only if such persons
were employed by or providing services to the issuer at the time the
securities were offered.
\33\ Rule 701(c)(3) [17 CFR 230.701(c)(3)] defines ``family
member'' for this purpose.
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Consultants and advisors may participate in Rule 701 offerings only
if:
They are natural persons;
They provide bona fide services to the issuer, its
parents, its majority-owned subsidiaries or majority-owned subsidiaries
of the issuer's parent; and
The services are not in connection with the offer or sale
of securities in a capital-raising transaction, and do not directly or
indirectly promote or maintain a market for the issuer's
securities.\34\
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\34\ Rule 701(c)(1) [17 CFR 230.701(c)(1)]. Where the consultant
or advisor performs services for the issuer through a wholly-owned
corporate alter ego, the issuer may contract with, and issue
securities as compensation to, that corporate entity. Cf.,
Registration of Securities on Form S-8, Release No. 33-7646 (Feb.
25, 1999) [64 FR 11103 (Mar. 8, 1999)] at n. 20, (``1999 S-8
Adopting Release'') addressing such a corporate alter ego in the
Form S-8 context.
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In adopting these restrictions on the range of eligible consultants
and advisors, the Commission also provided that a person in a de facto
employment relationship with the issuer, such as a non-employee
providing services that traditionally are performed by an employee,
with compensation paid for those services being the primary source of
the person's earned income, would qualify as an eligible person under
the exemption.\35\ Such services, however, must not be in connection
with the offer or sale of securities in a capital-raising transaction,
and must not directly or indirectly promote or maintain a market for
the issuer's securities.\36\
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\35\ 1999 Adopting Release at Section II.D.
\36\ 1999 Adopting Release at n. 39. See also 1988 Adopting
Release (``Consequently, the rule has been modified to extend to
consultants and advisers who provide bona fide services to a
company, its parents or majority-owned subsidiaries.'').
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Offers and sales under Rule 701 are deemed part of a single
discrete offering and are not subject to integration with any other
offers or sales, whether registered under the Securities Act or exempt
from registration.\37\ An issuer that attempts to comply with Rule 701,
but fails to do so, may claim any other exemption that is
available.\38\ Securities issued under Rule 701 are deemed to be
``restricted securities,'' \39\ as defined in 17 CFR 230.144
(Securities Act Rule 144).
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\37\ Rule 701(f) [17 CFR 230.701(f)].
\38\ Preliminary Note 3 to Rule 701.
\39\ Rule 701(g) [17 CFR 230.701(g)]. Ninety days after the
issuer becomes subject to the reporting requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934 [15 U.S.C. 78m or
78o(d)], securities issued under Rule 701 may be resold by non-
affiliates in reliance on Rule 144 without compliance with Rules
144(c) and (d), and by affiliates without compliance with Rule
144(d).
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Section 502 of the Jumpstart Our Business Startups Act \40\ (``JOBS
Act'') amended Exchange Act Section 12(g)(5) \41\ to exclude from the
definition of ``held of record,'' for the purposes of determining
whether an issuer is required to register a class of equity securities,
securities that are held by persons who received them pursuant to an
``employee compensation plan'' in transactions exempted from the
registration requirements of Section 5 of the Securities Act. This
statutory exclusion applies solely for purposes of determining whether
an issuer is required to register a class of equity securities under
the Exchange Act and does not apply to a determination of whether such
registration may be terminated or suspended. The Commission amended the
definition of ``held of record'' in 17 CFR 240.12g5-1 (Exchange Act
Rule 12g5-1) to exclude certain securities held by persons who received
them pursuant to employee compensation plans in a transaction exempt
from, or not subject to, the registration requirements of Section
5.\42\ This amendment also established a non-exclusive safe harbor for
determining whether securities are ``held of record'' for purposes of
registration under Exchange Act Section 12(g), providing that an issuer
may deem a person to have received securities pursuant to an employee
compensation plan if the plan and the person who received the
securities pursuant to it met the plan and participant conditions of
Rule 701(c). These provisions help enable private companies to offer
securities to their employees under Rule 701 without triggering the
obligation to register the class of securities and file periodic
reports with the Commission.
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\40\ Sec. 502, 126 Stat. at 326. Section 501 of the JOBS Act
[Sec. 601, 126 Stat. at 325] amended Section 12(g)(1) of the
Exchange Act to require an issuer to register a class of equity
securities (other than exempted securities) within 120 days after
its fiscal year-end if, on the last day of its fiscal year, the
issuer has total assets of more than $10 million and the class of
equity securities is ``held of record'' by either (i) 2,000 persons,
or (ii) 500 persons who are not accredited investors. Section 601 of
the JOBS Act [Sec. 601, 126 Stat. at 326] further amended Exchange
Act Section 12(g)(1) to require an issuer that is a bank or bank
holding company, as defined in Section 2 of the Bank Holding Company
Act of 1956 [12 U.S.C. 1841], to register a class of equity
securities (other than exempted securities) within 120 days after
the last day of its first fiscal year ended after the effective date
of the JOBS Act, on which the issuer has total assets of more than
$10 million and the class of equity securities is ``held of record''
by 2,000 or more persons.
\41\ 15 U.S.C. 78l(g)(5).
\42\ See Changes to Exchange Act Registration Requirements to
Implement Title V and Title VI of the JOBS Act, Release No. 33-
10075; (May 3, 2016) [81 FR 28689 (May 10, 2016)].
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Questions have arisen about whether the current requirements of
Rule 701 would benefit from updates in light of developments since the
Commission last substantively revised the rule. Forms of equity
compensation that were not typically used at that time, particularly
restricted stock units (``RSUs''), have become common, and new types of
contractual relationships between companies and individuals involving
alternative work arrangements have emerged in the so-called ``gig
economy.'' \43\ In this release, we solicit comment on various aspects
of Rule 701
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to determine whether and if so, how, the rule should be amended to
address these concerns and developments. Our evaluation of any
potential changes will focus on retaining the compensatory purpose of
Rule 701 and avoiding potential abuse of the rule for capital-raising
purposes, consistent with the Commission's investor protection mandate.
Comments are of greatest assistance if accompanied by supporting data
and analysis of the issues addressed in those comments.
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\43\ See The Rise and Nature of Alternative Work Arrangements in
the United States, 1995-2015, Lawrence F. Katz and Alan B.Krueger,
National Bureau of Economic Research, available at http://www.nber.org/papers/w22667 (defining alternative work arrangements
as temporary help agency workers, on-call workers, contract workers,
and independent contractors or freelancers).
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B. Rule 701(c) Eligible Plan Participants
Due in large part to the internet, new types of contractual
relationships are arising between companies and individuals in the
labor markets and the workplace economy. These can involve short-term,
part-time or freelance arrangements, where the individual--rather than
the company--may set the work schedule. Typically, this involves the
individual's use of the company's internet ``platform'' for a fee to
find business, whether that involves the individual providing services
to end users, or using the platform to sell goods or lease property.
Platforms are available that offer end users such services as ride-
sharing, food delivery, household repairs, dog-sitting, and tech
support. Other platforms offer hand-made craft objects, lodging, or car
rentals. An individual who provides services or goods through these
platforms may have similar relationships with multiple companies,
through which the individual may engage in the same or different
business activities.
Individuals participating in these arrangements do not enter into
traditional employment relationships, and thus may not be ``employees''
eligible to receive securities in compensatory arrangements under Rule
701.\44\ Similarly, they also may not be consultants or advisors, or de
facto employees under Rule 701. As with traditional employees, however,
companies may have the same compensatory and incentive motivations to
offer equity compensation to these individuals. Accordingly, we solicit
comment regarding these ``gig economy'' relationships to better
understand how they work and determine what attributes of these
relationships potentially may provide a basis for extending eligibility
for the Rule 701 exemption.
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\44\ They may also not be ``employees'' for purposes of labor,
tax and other regulatory regimes.
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Our comment requests focus on what activities an individual should
need to engage in to be eligible to participate in exempt compensatory
offerings:
1. To what extent should definitions of ``employee'' under other
regulatory regimes guide our thinking on eligible participants in
compensatory securities offerings? Which regulatory regimes should we
consider for this purpose? Should any new test apply equally to all
companies, or would there be a reason to apply different tests based on
the nature of the working relationship?
2. Would the application of Rule 701 to consultants and advisors in
any circumstances cover the alternative work arrangements described
above?
3. What, if any, services should an individual participating in the
``gig economy'' need to provide to the issuer to be eligible under Rule
701? Do these individuals in fact provide services to the issuer, or
instead to the issuer's customers or end users? Should this fact make
any difference for purposes of Rule 701 eligibility?
4. Should we consider a test that identifies Rule 701 eligible
participants as individuals who use the issuer's platform to secure
work providing lawful services to end users?
a. Are any other factors necessary to establish any level of
control by the issuer, such as requiring the work to be assigned by the
issuer? Or is it necessary that the issuer control what the individual
charges end users for services, such as by setting hourly rates or ride
fares? Should a written contractual relationship between the issuer and
individual be necessary? Why or why not?
b. Does it matter whether the individual goes through a vetting or
screening process by the issuer to use the platform?
c. Does it matter whether the issuer controls when and how the
individual receives monetary compensation for the services provided?
5. Would it be sufficient for an individual to use the issuer's
platform to sell goods, to earn money from leasing real estate or
personal property, or to conduct a business activity? Would the
individual be considered to be providing a service to either or both
the company and its end-users or customers? Does it matter whether that
business activity provides a service typically provided by an employee
or is of a more entrepreneurial nature? How do the answers to these
questions affect whether there is a sufficient nexus between the
individual and the issuer to justify application of the exemption for
compensatory transactions?
6. Should it make a difference whether the end user pays the issuer
for the goods or leased property, and the issuer then provides a
monetary payment to the individual, or the end user pays the individual
directly, who then pays a fee to the issuer?
Our comment requests also focus on whether a potential eligibility
test should consider the individual's level of dependence on the
issuer, or, conversely, the issuer's degree of dependence on the
individuals:
7. For example, should it matter what percentage of the
individual's earned income is derived from using the issuer's platform?
If so, should this be based on earned income during the last year, a
series of consecutive years, or current expectations? Should there be a
minimum percentage? How should this be verified? How should such a test
be applied where the individual provides services to multiple
companies? How would the issuer be able to determine how much of an
individual's income is derived from using the issuer's platform?
8. Alternatively, where the individual provides services, should
eligibility be based on information objectively verifiable by the
issuer, such as amount of income earned, or percentage of time or
number of hours worked?
9. Where use of the platform relates to leasing a property, should
the test focus on how frequently the property is available, how often
it actually is leased, the revenues generated by the property, or other
factors?
10. Should the test focus on the extent to which the individual
uses the issuer's platform to obtain business on a regular basis?
Should it consider the duration of time over which the individual has
so used the issuer's platform?
11. Should the test instead focus on the extent to which the
issuer's business is dependent on individuals' use of the issuer's
platform? If so, why, and how should that dependence be measured?
12. What test or tests would leave an issuer best positioned to
determine whether it could rely on Rule 701?
We are mindful that extending eligibility to individuals
participating in the ``gig economy'' could increase the volume of Rule
701 issuances. In this regard:
13. Would revising the rule have an effect on a company's decision
to become a reporting company? Would such revisions encourage companies
to stay private longer?
14. Would investors be harmed if the exemption is expanded to
individuals participating in the ``gig economy,'' potentially resulting
in higher levels of equity ownership in the hands of persons who would
not be shareholders of record for purposes of triggering
[[Page 34962]]
Exchange Act registration and reporting?
15. Should the amount of securities issuable pursuant to Rule 701
to individuals participating in the ``gig economy'' in a 12-month
period be subject to a separate ceiling rather than the current Rule
701(d) ceilings? If so, how should that ceiling be designed and
measured?
16. Should additional disclosures be provided? If so, what and
when?
Employers have many reasons for compensating employees with
securities. These can include aligning the company's interests with
those of employees', retaining staff, and offering higher compensation
than the company may be able to pay in cash or other benefits.
17. Do companies utilizing ``gig economy'' workers issue securities
as compensation to those individuals? If so, how prevalent is this
practice?
18. How might companies benefit from the ability to offer
securities to a broader range of individuals by expanding Rule 701
eligibility to individuals participating in the ``gig economy''?
19. What effect would the use of Rule 701 for ``gig economy''
companies have on competition among those companies and newer companies
and more established companies vying for the same talent?
The ``gig economy'' has enabled even very small companies to
conduct cross-border operations.
20. Do existing regulations affect the ability of employers to use
Rule 701 to compensate overseas employees through securities?
21. To the extent that U.S. companies would seek to use Rule 701 to
compensate non-U.S. based workers in a ``gig economy'' model, would
there be any competitive effects?
C. Rule 701(e) Disclosure Requirements
1. General
When Rule 701 was originally adopted in 1988,\45\ the Commission
relied on Section 3(b) of the Securities Act \46\ to exempt offers and
sales of up to $5 million per year. In 1999, the Commission amended
Rule 701 to reflect that the National Securities Markets Improvement
Act of 1996 (``NSMIA'') \47\ had given the Commission authority to
provide exemptive relief in excess of $5 million for transactions such
as these.\48\
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\45\ See 1988 Adopting Release.
\46\ 15 U.S.C. 77c(b).
\47\ Public Law 104-290, 110 Stat. 3416 (1996).
\48\ 1999 Adopting Release at Section II.A.
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The 1999 adoption of the $5 million disclosure threshold reflected
concern that eliminating the overall $5 million ceiling on the annual
amount of securities sold during a 12-month period ``could result in
some very large offerings of securities without the protections of
registration, even though made pursuant to compensatory arrangements.''
\49\ Because the Commission had not witnessed abuse of Rule 701 in
offerings below the prior $5 million ceiling, it did not believe
imposing the burdens of preparing and disseminating additional
disclosure for these smaller offerings would justify potential benefits
to employee-investors. In contrast, large non-reporting companies could
issue substantial amounts of securities exceeding $5 million. Based on
comments received, the Commission believed that many of these companies
already prepared the same types of disclosure in their normal course of
business, such as for using other exemptions, so that the disclosure
requirement generally would be less burdensome for them. If these
companies did not want to provide the new disclosures, the Commission
noted that they could keep the amount sold below $5 million in the 12-
month period.\50\
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\49\ 1999 Adopting Release at Section II.B. In adopting this
requirement, the Commission stated it would have investor protection
concerns in the context of offerings of securities with an aggregate
sales price or amount of securities sold during the 12-month period
exceeding $5 million without imposing specific disclosure
requirements. The Commission noted that, ``[m]oreover, we believe
that many of these companies already have prepared the type of
disclosure required in their normal course of business, either for
using other exemptions, such as Regulation D or for other
purposes.''
\50\ Id.
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Inflation since 1999 \51\ has made it more likely for non-reporting
issuers, regardless of size, to cross this threshold in a 12-month
period. In circumstances where the required disclosure is inadvertently
not provided to all investors before the $5 million threshold is
crossed, issuers may not rely on the exemption. Accordingly, the
current structure of the rule results in issuers needing to anticipate,
up to 12 months before exceeding the $5 million threshold, the
possibility that they may do so, and to supply plan participants with
the additional disclosures for that period.
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\51\ Based on data provided by the U.S. Department of Labor,
Bureau of Labor Statistics, $5 million in 1999 dollars would be
approximately $7.5 million in 2018.
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As noted above, in a separate release, the Commission is amending
Rule 701(e) to implement the Act's mandate to increase from $5 million
to $10 million the aggregate sales price or amount of securities sold
during any consecutive 12-month period in excess of which the issuer is
required to deliver additional disclosures to investors.\52\ Because
the amendment does not otherwise revise Rule 701(e), the rule will
continue to operate in the same manner as it has under the previous $5
million threshold.
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\52\ See n. 5, above.
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While the adopted amendment may provide non-reporting issuers
flexibility in further utilizing the exemption, it does not address
some of the concerns we have heard regarding Rule 701(e). In
particular, although the threshold is higher, the need to anticipate
the consequences of crossing it remains.\53\ Concern also has been
expressed that some non-reporting companies are not necessarily
familiar with Regulation A financial disclosure and that compliance can
be burdensome, especially for companies first utilizing Rule 701.\54\
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\53\ U.S. Securities and Exchange Commission Advisory Committee
on Small and Emerging Companies, Recommendation Regarding Securities
Act Rule 701 (Sept. 21, 2017) (``Advisory Committee
Recommendation''), available at: https://www.sec.gov/info/smallbus/acsec/acsec-rule-701-recommendation-2017-09-21.pdf. Among other
things, the Advisory Committee Recommendation expresses concern that
crossing the disclosure threshold could result in the loss of the
exemption for earlier Rule 701 transactions in the same 12-month
period for which the Rule 701(e) disclosure was not provided a
reasonable time before sale.
\54\ Advisory Committee Recommendation.
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In light of these concerns, we request comment:
22. Should Rule 701(e) continue to require more disclosure for a
period that precedes the threshold amount being exceeded? If so, should
the consequence for failure to deliver continue to be loss of the
exemption for the entire offering?
23. To what extent are non-reporting companies that issue
securities in an amount that would exceed the new threshold already
preparing forms of financial disclosure, such as in connection with 17
CFR 230.500 through 230.508 (Regulation D) or Regulation A?
24. Alternatively, should the consequence for failing to provide
the disclosure be loss of the exemption only for transactions in
offerings that occur after the threshold is crossed and for which
disclosure was not provided?
a. If disclosure is required only for transactions that occur after
the $10 million threshold is crossed, should disclosure be required for
all transactions immediately following that event, or should an
interval of time be provided to permit the disclosure to be prepared
before it must be delivered? If
[[Page 34963]]
so, how long should that time interval be?
b. Should the disclosure subsequently also be made available to
investors in transactions that occurred before the $10 million
threshold is crossed?
25. Alternatively, should there instead be a grace period, such
that if the threshold is crossed, the issuer has an opportunity to
provide the required disclosure before losing the exemption for the
entire offering?
26. Should we provide a regulatory option whereby all Rule 701(e)
information would be disclosed to all investors, so that all would
receive equal information and there would be no risk of losing the
exemption in the manner there is today? Should we provide a different
regulatory alternative that would provide all investors all Rule 701(e)
information other than the financial statement disclosure?
Part F/S of Form 1-A prescribes that financial statements are
required for Regulation A Tier 1 and Tier 2 offerings. In Regulation A
offerings, companies include two years of consolidated balance sheets,
statements of income, cash flows, and changes in stockholders'
equity.\55\ Issuers relying on Rule 701 may choose to provide financial
statements that comply with the requirements of either Tier. This
information must be provided as of a date no more than 180 days before
the date of sale. As a result, for issuers seeking to maintain current
information, this has the effect of requiring financial statements to
be available on at least a quarterly basis, and to be completed within
three months after the end of each quarter, for sales to be permitted
continuously. The Commission, in adopting the current version of Rule
701, stated that because of the pre-existing relationship a compensated
individual has with the issuer, the disclosures provided in Rule 701(e)
are appropriate.\56\ It also noted that the ``amount and type of
disclosure required for this person is not the same as for the typical
investor with no particular connection with the issuer.'' \57\
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\55\ 17 CFR 210.1-01 through 201.12-29. Tier 2 offerings require
audited financial statements. See Part F/S of Form 1-A [17 CFR
239.90].
\56\ 1999 Adopting Release at Section II.B.
\57\ Id.
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27. Should the type of information provided depend on who is the
recipient of the securities? For example, should more disclosure be
provided to the types of recipients described in Section II.B. above?
Why or why not? If so, what, specifically, should be added to the
disclosures and why?
28. Should this disclosure be updated less frequently than
currently required? For example, should we require updates once a year
unless an event results in a material change to the company's
enterprise value or value of the securities issued? \58\ Should the
frequency of disclosure depend on who is the recipient of the
securities? For example, should the frequency be greater for recipients
described in Section II.B, above? Why or why not? If so, what is the
appropriate frequency and why?
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\58\ Advisory Committee Recommendation.
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29. Should we consider other alternatives to the Regulation A
financial statements, such as the issuer's most recent balance sheet
and income statement as of a date no more than 180 days before the sale
of securities?
30. Should we provide a regulatory option that would provide
valuation information regarding the securities in lieu of, or in
addition to, financial statements? If so, what valuation method should
be used? Would ASC Topic 718 \59\ grant date fair value information be
informative? Would Internal Revenue Code Section 409A \60\ valuation
information be informative? If so, would issuers be able to determine
Section 409A valuations regardless of whether the offering involves
securities other than options?
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\59\ FASB ASC Topic 718.
\60\ 26 U.S.C. 409A.
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Under existing Rule 701, foreign private issuers are required to
provide financial information on the same schedule as domestic
issuers.\61\ Foreign private issuers may issue securities in reliance
on Rule 701 throughout the year, which could lead them to update their
financial statements more frequently than required under Form 20-F.\62\
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\61\ 1999 Adopting Release at Section II.C.
\62\ 17 CFR 249.220f. See Item 8A.5 of Form 20-F.
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31. Because foreign private issuers that are subject to the
Exchange Act reporting requirements generally are not required to
submit quarterly financial statements, should non-reporting foreign
private issuers that rely on Rule 701 be subject to the condition to
provide quarterly financial statements if they are continuing to sell
securities throughout the year? Why or why not?
32. Should we amend any other aspect of the Rule 701 financial
statement requirements that apply to foreign private issuers? If so,
what should we amend and why?
2. Timing and Manner of Rule 701(e) Disclosure
Rule 701(e) requires the prescribed disclosure to be delivered ``a
reasonable period of time before the date of sale.'' However, the rule
does not prescribe the manner or medium in which disclosure should be
delivered. We are aware that non-reporting companies are sensitive to
maintaining the confidentiality of financial information so that it
does not fall into the hands of competitors.
To determine if the rule needs further clarification, we request
comment:
33. Do we need to clarify what it means to deliver disclosure ``a
reasonable period of time before the date of sale''? Should that mean
any time before sale such that the recipient has an opportunity to
review the disclosure? Should any new standard further clarify that the
disclosure provided to the recipient must remain current during that
time?
34. Should we specify a different time for providing disclosure? If
so, when should that be and why?
35. Should we also specify the manner or medium in which disclosure
should be delivered? Should we specify how to deliver information
electronically? Should we require a method for confirming receipt of
the information? If so, what vehicles would best give effect to the
purpose of disclosure without undermining issuers' confidentiality
concerns?
36. Should the rule specify that confidentiality safeguards should
not be so burdensome that intended recipients cannot effectively access
the required disclosures?
3. Options and Other Derivative Securities/RSUs
For options and other derivative securities, whether the issuer is
obligated to deliver Rule 701(e) disclosure is based on whether the
option or other derivative security was granted during a 12-month
period during which the disclosure threshold is exceeded.\63\ If so,
the issuer must deliver Rule 701(e) disclosure a reasonable period of
time before the date of exercise or conversion.\64\
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\63\ Rule 701(d)(3)(ii) provides that the aggregate sales price
for options is determined when an option grant is made (without
regard to when it becomes exercisable). Use of this measure for both
Rule 701(d) and (e) simplifies the operation of the rule.
\64\ Rule 701(e)(6).
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This approach simplifies the operation of Rule 701 for options and
other derivative securities for which the recipient must make an
investment decision to exercise or convert. However, because
instruments such as RSUs settle by their terms without the recipient
taking such an action, the relevant investment decision for the RSU, if
there is one, likely takes place
[[Page 34964]]
at the date of grant. Consequently, the issuer's obligation to provide
Rule 701(e) disclosure would apply a reasonable period of time before
the date the RSU award is granted. Concern has been expressed, however,
that disclosure of financial information before an RSU is granted could
compel disclosure to recipients at a time when they are negotiating
their employment contracts before joining the company.
In light of this concern, we request comment:
37. Should Rule 701 be amended to specifically address when
disclosure is required for RSUs? If so, when should Rule 701(e)
disclosure be required for an RSU? Should we revisit the concept of
``convert or exercise'' as providing the relevant date for disclosure?
For new hires who receive RSUs, should we require that disclosure be
provided within 30 days after commencing employment? If not, when
should Rule 701(e) disclosure be required for RSUs issued to new hires?
38. Should we clarify that RSUs should be valued for Rule 701
purposes based on the value of the underlying securities on the date of
grant? If not, how should they be valued?
39. Are there any other instruments that should be specifically
addressed in the rule?
D. Rule 701(d) Exemptive Conditions
Questions have arisen whether the current 12-month sales cap of the
greater of 15% of the total assets of the issuer or 15% of the total
outstanding amount of the class of securities being offered and sold in
reliance on the rule, subject to the annual availability of a $1
million cap if greater than either of these tests, is unduly
restrictive, particularly for smaller and start-up companies that may
be more dependent on equity compensation to attract and retain
necessary talent.\65\ Each of the 15% amounts is measured as of the
issuer's most recent balance sheet date, if no older than its last
fiscal year end.\66\ In proposing the original version of the rule, the
Commission explained that the purpose of a 12-month cap is to
``assur[e] that the exemption does not provide a threshold that small
issuers could use to raise substantial capital from employees.'' \67\
The alternatives based on 15% of total assets or 15% of the outstanding
amount of the class of securities were intended to increase the
flexibility and utility of the exemption.\68\ The $1 million
alternative provides an amount that any issuer can use, regardless of
size.
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\65\ Advisory Committee Recommendation. But see, e.g., Edward M.
Zimmerman, Late Stage Startups Trip SEC Rule 701 Long Before IPO,
Forbes (Aug. 2, 2016) (stating that ``[b]ecause the test [provided
in Rule 701(d)] is analyzed on the basis of a 12-month period,
because the test excludes Exempt Issuances and because founders and
investors have significant business reasons for limiting the
dilutive impact of compensatory equity awards, startups rarely come
near the Rule 701(d) thresholds.'').
\66\ Rules 701(d)(2)(ii) and (iii).
\67\ See Rule 701 Proposing Release. As originally adopted, the
rule permitted the amounts of securities offered and sold annually
to be the greatest of $500,000, 15% of total assets of the issuer,
or 15% of the outstanding securities of the class, subject to an
absolute limit of $5,000,000 derived from Securities Act Section
3(b). See 1988 Adopting Release.
\68\ See 1988 Adopting Release at Section I.A.(2).
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Recently, however, concern has been expressed that because there is
no longer any statutorily imposed ceiling on the exemption,\69\
compliance with an annual regulatory ceiling requires an on-going
analysis with no clear benefit.\70\ At the same time, the implications
of qualifying for the Rule 701 exemption have expanded, as securities
held by persons who receive them in transactions exempted by Rule 701
are excluded from the definition of ``held of record,'' for the
purposes of determining whether an issuer is required to register a
class of equity securities under the Exchange Act.
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\69\ NSMIA enacted Securities Act Section 28 [15 U.S.C. 77z-3],
giving the Commission general exemptive authority. Because the
Commission relied on this authority in the 1999 Adopting Release,
the Securities Act Section 3(b) absolute limit of $5,000,000 no
longer applies to Rule 701.
\70\ Advisory Committee Recommendation.
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In light of these factors, we request comment:
40. Is there a continuing need for any annual regulatory ceiling
for Rule 701 transactions? Why or why not? Would investors be harmed if
the ceiling is eliminated or raised significantly? Does an annual
ceiling provide benefits in curbing potential abuse of the rule for
non-compensatory sales? If so, how?
41. If a ceiling is retained, should it be raised? If so, what
threshold would be appropriate, and why? Would compliance be easier if
issuers are permitted to measure the 15% alternatives as of last fiscal
year-end, rather than at the issuer's most recent balance sheet date?
III. Form S-8
A. Background
Form S-8 was originally adopted in 1953, as a simplified form for
the registration of securities to be issued pursuant to employee stock
purchase plans.\71\ It retains certain disclosure obligations. For
example, it requires that employees receiving securities as
compensation receive public company disclosure to which the full
spectrum of Securities Act protections apply. In addition, reporting
company securities received pursuant to Form S-8 registration are
generally not restricted.\72\ As described below, from time to time the
Commission has amended Form S-8 to streamline its operations, such as
by providing immediate effectiveness upon filing and updating of the
registration statement through incorporation by reference.\73\ Form S-8
is available solely to register compensatory sales of securities to
``employees,'' including consultants and advisors and de facto
employees. The form is not available for the registration of securities
offered for the purpose of raising capital.\74\
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\71\ Registration of Securities Offered Pursuant to Employees
Stock Purchase Plans, Release No. 33-3480 (Jun. 16, 1953) [18 FR
3688 (Jun. 27, 1953)].
\72\ In addition, General Instruction C to Form S-8 permits
registrants to file a resale prospectus for control securities, and
restricted securities issued under any employee benefit plan of the
issuer that were acquired by the selling security holder prior to
the filing of the Form S-8.
\73\ See e.g., Registration and Reporting Requirements for
Employee Benefit Plans, Release No. 33-6867 (June 6, 1990) [55 FR
23909 (June 13, 1990)] (``1990 Adopting Release'').
\74\ The abbreviated disclosure format of Form S-8 reflects the
Commission's historic distinction between offerings made to
employees for compensatory and incentive purposes and offerings made
for capital-raising purposes. See 1990 Adopting Release.
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Form S-8 is available for the registration of securities to be
offered under any employee benefit plan \75\ to a registrant's
employees or employees of its subsidiaries or parents. Form S-8
registration is utilized for many different types of employee benefit
plans, including Internal Revenue Code Section 401(k) \76\ plans and
similar defined contribution retirement savings plans, employee stock
purchase plans, nonqualified deferred compensation plans, and incentive
plans that issue options, restricted stock, or RSUs. The form may be
used by any issuer that is subject, at the time of filing, to the
periodic reporting requirements of Section 13 or 15(d) of the Exchange
Act and has filed all reports required during the preceding 12 months
or such shorter period that it was subject to those requirements.\77\
Form S-8 is not available for shell companies.\78\
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\75\ ``Employee benefit plan'' is defined in Securities Act Rule
405 and includes the same restrictions on the scope of eligible
consultants and advisors as set forth in Rule 701.
\76\ 26 U.S.C. 401(k).
\77\ See General Instruction A.1 to Form S-8.
\78\ ``Shell company'' is defined in Securities Act Rule 405.
When a company ceases to be a shell company, by combining with a
formerly private operating business, it is required to file Form 10
equivalent information with the Commission. General Instruction A.1
to Form S-8 provides that it then becomes eligible to use Form S-8
60 days following that filing.
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[[Page 34965]]
Form S-8 does not require that a form of prospectus be filed with
the registration statement for employee benefit plan offerings.
Instead, 17 CFR 230.428 (Rule 428) specifies the documents that,
together, constitute a prospectus that meets the requirements of
Securities Act Section 10(a): \79\
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\79\ 15 U.S.C. 77j(a).
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Certain documents containing the employee benefit plan
information required by Item 1 of the Form;
the statement of availability of company information,
employee benefit plan annual reports and other information required by
Item 2 of the Form; and
the documents containing registrant information and
employee benefit plan annual reports that are incorporated by reference
in the registration statement pursuant to Item 3 of the Form.
Companies are also permitted to file a resale prospectus covering
only control securities or restricted securities acquired pursuant to
an employee benefit plan.\80\
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\80\ The resale prospectus is prepared in accordance with the
requirement of Part I of Form S-3 (or, if the registrant is a
foreign private issuer, in accordance with Part I of Form F-3) and
filed with the registration statement on Form S-8 or, in the case of
control securities, a post-effective amendment thereto. Restricted
securities must have been acquired by the holder before the Form S-8
is filed and the resale prospectus for them must be filed with the
initial Form S-8. See General Instruction C to Form S-8.
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B. Form S-8 Eligible Plan Participants
To prevent abuse of Form S-8 to register securities issued in
capital-raising transactions, in 1999 the Commission revised the
eligibility standards for ``consultants and advisors'' for the purposes
of Form S-8.\81\ In so doing the Commission sought to preclude the
issuance of securities on Form S-8 to consultants either (i) as
compensation for any service that directly or indirectly promotes or
maintains a market for the registrant's securities, or (ii) as conduits
for a distribution to the general public.\82\ At the same time, the
Commission revised the Rule 701 ``consultants and advisors'' definition
to be consistent with Form S-8.\83\ In adopting the changes, the
Commission also noted that issuers may continue to use securities
registered on Form S-8, or issued under the Rule 701 exemption, to
compensate persons with whom they have a de facto employment
relationship.\84\ We are soliciting comment regarding the continued
harmonization of the scope of ``consultants and advisors'' between Form
S-8 and Rule 701, and more broadly whether the scope of eligible
individuals should be the same under both the form and the exemption.
Specifically:
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\81\ See 1999 S-8 Adopting Release.
\82\ Since the adoption of the 1999 amendments, the Commission
has brought enforcement actions related to Form S-8 abuse,
particularly the misuse of the form for capital-raising activities
involving coordinated unregistered resales into the public market by
the purported ``consultants'' or employees acting as underwriters,
funding the company with the proceeds and denying Securities Act
protection to the genuine public purchasers. See, e.g., SEC. v.
Phan, 500 F.3d 895 (9th Cir. 2007) (holding the resale of publicly
traded stock, which had the effect of supplying the company with
capital from the public at the company's behest, could not be
covered by a Form S-8 registration statement); SEC v. East Delta
Resources Corp., No. 10-CV-0310 (SJF/wdw) 2012 WL 10975938 (E.D.N.Y.
2012) (finding violations of Sections 5 notwithstanding the
existence of a Form S-8 registration statement and consulting
agreement where the defendant's consulting role was capital-raising
and promotional and thus contrary to the eligibility requirements
for effective Form S-8 registration); and SEC v. Esposito, No. 8:08-
CV-494-T-26EAJ, 2011 WL 13186000 (M.D. Fla. June 24, 2011) (finding
defendants violated Section 5 where Form S-8 was used to register
shares received by consultant as compensation for arranging a
reverse merger).
\83\ 1999 Adopting Release at Section II.D.
\84\ See Section II.A, above.
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42. To the extent we change the application of Rule 701 by changing
the scope of individuals eligible for compensatory offerings, such as
to include individuals participating in the ``gig economy,'' \85\
should we make corresponding changes to Form S-8? Why or why not? If
the scope of individuals who are eligible for Form S-8 offerings were
expanded, would there be concerns about misuse of the form for capital-
raising activities? If so, how could we safeguard against those
concerns?
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\85\ See Section II.B, above.
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43. Would differences between the eligibility standards of Rule 701
and Form S-8 cause problems for issuers or recipients?
C. Administrative Burdens
Issuers register a specified number of company shares on Form S-8.
For registration fee purposes, if the offering price is not known, the
fee is computed based on the price of securities of the same class, in
the same manner as for other offerings at fluctuating market
prices.\86\ No additional fee is assessed for securities offered for
resale.\87\
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\86\ 17 CFR 230.457(h) and (c).
\87\ 17 CFR 230.457(h)(3).
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The Commission has sought to reduce the costs and burdens incident
to registration of securities issued through such plans, where
consistent with investor protection,\88\ for example by:
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\88\ See, e.g., Release No. 33-5767 (November 22, 1976) [41 FR
52701 (Dec. 1, 1976)], Amendments to Registration Statement Form S-8
and Related New and Amended Rules Under the Securities Act of 1933,
Release No. 33-6190 (February 22, 1980) [45 FR 13438 (Feb. 29,
1980)] (``1980 S-8 Adopting Release'') and 1990 Adopting Release.
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Allowing Form S-8 to go effective automatically without
review by the staff or other action by the Commission; \89\
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\89\ In the 1980 S-8 Adopting Release the Commission initially
provided that automatic effectiveness for Form S-8 occurred 20 days
after filing, while post-effective amendments became effective upon
filing. Now, all registration statements on Form S-8 become
effective upon filing with the Commission. See 17 CFR 230.462(a) and
1990 Adopting Release.
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allowing the incorporation by reference of certain past
and future reports required to be filed by the issuer under Section 13
or 15(d) under the Exchange Act; \90\
---------------------------------------------------------------------------
\90\ See Item 3 and General Instruction G of Form S-8.
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adopting an abbreviated disclosure format that eliminated
the need to file a separate prospectus and permitting the delivery of
regularly prepared materials to advise employees about benefit plans to
satisfy prospectus delivery requirements; \91\
---------------------------------------------------------------------------
\91\ 17 CFR 230.428(a)(1).
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providing for registration of an indeterminate amount of
plan interests and providing that there is no separate fee calculation
for registration of plan interests; \92\ and
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\92\ 17 CFR 230.416(c) and 17 CFR 230.457(h)(2), respectively.
---------------------------------------------------------------------------
providing a procedure for the filing of a simplified
registration statement covering additional securities of the same class
to be issued pursuant to the same employee benefit plan.\93\
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\93\ See General Instruction E to Form S-8.
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We remain interested in simplifying the requirements of Form S-8
and reducing the complexity and cost of compliance to issuers for
securities issuances to employees and other eligible employee benefit
plan participants while retaining appropriate investor protections. We
therefore seek comment on ways we could further reduce the burdens
associated with registration on Form S-8:
44. What effects would stem from revising the form in this way?
Would such revisions encourage more companies to become reporting
companies?
45. Should we further simplify the registration requirements of
Form S-8? For example, does registering a specific number of shares
result in Section 5 compliance problems when plan sales exceed the
number of shares registered, such as for Section 401(k) plans and
similar defined contribution retirement savings plans? If so, how
should we address this issue?
[[Page 34966]]
46. Should Form S-8 allow an issuer to register on a single form
the offers and sales pursuant to all employee benefit plans that it
sponsors? \94\ When shares are authorized for issuance by a given plan
what information would need to be disclosed that would have been
previously omitted from the effective registration statement? \95\
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\94\ Cf. Simplification of Registration Procedures for Primary
Securities Offerings, Release No. 33-6964 (October 22, 1992) [57 FR
48970 (Oct. 29, 1992)] (adopting the unallocated shelf procedure).
See also Securities Offering Reform, Release No. 33-8591 (December
1, 2005) [70 FR 44722 (Aug. 3, 2005)] (``Securities Offering Reform
Adopting Release'').
\95\ For example, in unallocated shelf offerings conducted under
17 CFR 203.415(a)(1)(x) (Rule 415(a)(1)(x)) and 17 CFR 230.430B
(Rule 430B), prospectus supplements are filed to disclose
information that would have been previously omitted from a
prospectus filed as part of the effective registration statement.
See 17 CFR 230.424(b)(2) and Rule 430B.
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47. If we facilitate a single registration statement for all
employee benefit plan securities, should the number of shares to be
registered continue to be specified in the initial registration
statement? Alternatively, should issuers be able to add securities to
the existing Form S-8 by an automatically effective post-effective
amendment? \96\ If so, what would be the best way to implement such a
system?
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\96\ This would be analogous to how well-known seasoned issuers
are currently permitted to add other securities or even new classes
of securities at any time by post-effective amendment to an existing
automatic shelf registration statement on Form S-3. See 17 CFR
230.413(b)(1). See also, Securities Offering Reform Adopting
Release.
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48. With respect to either alternative above, would the ability to
have a single Form S-8 reduce administrative burdens given that many
issuers currently monitor and track multiple registration statements on
Form S-8? \97\ Would this be practicable where the securities to be
registered relate to different forms of plans, such as Section 401(k)
plans and incentive plans? Would it be practicable if some of the plans
involved the issuance of plan interests, which trigger the individual
plan's obligation to file an Exchange Act annual report on Form 11-K?
\98\ Would the offer and sale of shares pursuant to multiple plans
registered on the same Form S-8 create difficulties keeping track of
which registered shares are being issued pursuant to which plan? For
example, upon the expiration of a plan, would there be difficulties
transferring shares between plans?
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\97\ For example, Form S-8 filers update their registration
statement through the incorporation by reference of Exchange Act
reports. Such updates require the consent of an auditor where the
auditor's report is contained in the Exchange Act report which is
automatically incorporated by reference into a previously filed
Securities Act filing, such as a Form S-3 or Form S-8. See 17 CFR
229.601(b)(23) (Item 601(b)(23) of Regulation S-K) and 17 CFR
229.601, footnote 5 of the exhibit table (Footnote 5 of the Item 601
Exhibit Table). The primary purpose of obtaining a consent or
acknowledgement letter is to assure that the auditor is aware of the
use of its report and the context in which it is used. Where such
consents are required in an update to a registration statement, the
auditor frequently refers to all active Securities Act registration
statements. The ability to file a single Form S-8 for all securities
to be issued pursuant to employee benefit plans would mean that the
auditor's consent would refer to a single Form S-8.
\98\ 17 CFR 249.311.
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49. Well-known seasoned issuers are permitted, at their option, to
pay filing fees on a ``pay-as-you-go'' basis at the time of each
takedown off the shelf registration statement in an amount calculated
for that takedown.\99\ Should we adopt a similar ``pay-as-you-go'' fee
structure for Form S-8 pursuant to which all issuers eligible to use
Form S-8 could, at their option, pay filing fees on Form S-8 on an as
needed basis rather than when the form is originally filed? What, if
any, variations from the pay-as-you-go fee structure would be needed to
adapt it to employee benefit plan registration statements?
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\99\ See 17 CFR 230.456(b) and 17 CFR 230.457(r).
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a. For well-known seasoned issuers using the pay-as-you-go fee
structure, a cure is available that allows such issuers to pay required
filing fees after the original payment due date if the issuer makes a
good faith effort to pay the fee timely and then pays the fee within
four business days of the original fee due date.\100\ If we adopted a
pay-as-you-go fee structure for Form S-8, should we adopt a similar
cure provision? What, if any, variations from the cure provision for
well-known seasoned issuers would be needed to adapt it to employee
benefit plan registration statements?
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\100\ 17 CFR 230.456(b)(1)(i).
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50. Alternatively, should we require the payment of registration
fees on a periodic basis with respect to the securities, the offer and
sale of which were registered on Form S-8, during the prior period? How
would such a system best be implemented? How could we structure such a
system consistent with the requirements of Securities Act Section 6(c)?
\101\
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\101\ 15 U.S.C. 77f(c).
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51. Are there any other ways to reduce the administrative burdens
associated with filing and updating Form S-8? If so, please explain.
D. Form S-8 Generally
We also are soliciting comment more broadly on Form S-8 itself:
52. Does the current operation of Form S-8 present significant
challenges to the use of employee benefit plans? If so, please explain
how.
53. It has been suggested that Form S-8 registration would no
longer be necessary if the Commission were to extend the Rule 701
exemption to Exchange Act reporting companies.\102\ What would be the
advantages and disadvantages of allowing Exchange Act reporting
companies to use Rule 701 and, in turn, eliminating Form S-8? Would
permitting Exchange Act reporting companies to use Rule 701 raise any
investor protection concerns or be inconsistent with the purposes
underlying Rule 701?
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\102\ Keith F. Higgins, Is It Time to Retire Form S-8?,
Insights: Corporate and Securities Law Advisor, September 2017 at
16.
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54. Form S-8 requires issuers to remain current in their Exchange
Act reports in order to be eligible to use the form,\103\ and Form S-8
disclosure relies upon incorporation by reference \104\ and delivery
\105\ of these Exchange Act reports. Would the elimination of Form S-8
reduce an incentive for public companies to remain current in their
Exchange Act reporting obligations? If we permit reporting companies to
use Rule 701, should we require these companies to be current in their
Exchange Act reports in order to rely on the exemption?
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\103\ Item 3 of Form S-8.
\104\ Item 3 of Form S-8.
\105\ Rule 428(b)(2).
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55. Since Exchange Act reports are automatically incorporated by
reference into Form S-8, would the lack of a filed registration
statement for employee benefit plans result in reduced scrutiny of
Exchange Act filings by issuers and their representatives? \106\ Would
the potential lack of Securities Act Section 11 \107\ and Section
12(a)(2) \108\ liability for these filings as a result of the
elimination of Form S-8 have a meaningful impact on the quality of
disclosure?
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\106\ Part II, Item 3 to Form S-8.
\107\ 15 U.S.C. 77k.
\108\ 15 U.S.C. 77l(a)(2).
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56. If Form S-8 were rescinded, how would issuers be likely to
register the resale of restricted securities issued pursuant to
employee benefit plans? Would Form S-8 remain necessary as a method of
registering resales of control securities or restricted securities
acquired pursuant to an employee benefit plan? Alternatively, should
the provisions of General Instruction C to Form S-8 be moved to
Securities Act Form S-3? \109\ If so, should Form S-3 eligibility
requirements be revised for this purpose?
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\109\ 17 CFR 239.33.
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[[Page 34967]]
IV. Conclusion
We are interested in the public's opinions regarding the matters
discussed in this concept release. We encourage all interested parties
to submit comments on these topics. In addition, we solicit comment on
any other aspect of Rule 701 and Form S-8 that commenters believe may
be improved upon.
By the Commission.
Dated: July 18, 2018.
Brent J. Fields,
Secretary.
[FR Doc. 2018-15731 Filed 7-23-18; 8:45 am]
BILLING CODE 8011-01-P