[Federal Register Volume 85, Number 239 (Friday, December 11, 2020)]
[Proposed Rules]
[Pages 80232-80271]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-26390]



[[Page 80231]]

Vol. 85

Friday,

No. 239

December 11, 2020

Part II





Securities and Exchange Commission





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17 CFR Parts 229, 230, and 239





Modernization of Rules and Forms for Compensatory Securities Offerings 
and Sales; Proposed Rule

  Federal Register / Vol. 85 , No. 239 / Friday, December 11, 2020 / 
Proposed Rules  

[[Page 80232]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 229, 230, and 239

[Release No. 33-10891; File No. S7-18-20]
RIN 3235-AM38


Modernization of Rules and Forms for Compensatory Securities 
Offerings and Sales

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
proposing for public comment amendments to Rule 701 under the 
Securities Act of 1933 (the ``Securities Act''), which provides an 
exemption from registration for securities issued by non-reporting 
issuers pursuant to compensatory arrangements, and Form S-8, the 
Securities Act registration statement for compensatory offerings by 
reporting issuers. The amendments are designed to modernize the 
exemption and registration statement in light of the significant 
evolution in compensatory offerings since the Commission last 
substantively amended these regulations, consistent with investor 
protection.

DATES: Comments should be received on or before February 9, 2021.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/proposed.shtml).

Paper Comments

     Send paper comments to Vanessa A. Countryman, Secretary, 
Securities and Exchange Commission, 100 F Street NE, Washington, DC 
20549-1090.
    All submissions should refer to File Number S7-18-20. 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/proposed.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.
    We or the staff may add studies, memoranda, or other substantive 
items to the comment file during this rulemaking. A notification of the 
inclusion in the comment file of any such materials will be made 
available on our website. To ensure direct electronic receipt of such 
notifications, sign up through the ``Stay Connected'' option at 
www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Anne M. Krauskopf, Senior Special 
Counsel, or Lisa Krestynick, Special Counsel, Office of Chief Counsel, 
Division of Corporation Finance, at (202) 551-3500.

SUPPLEMENTARY INFORMATION: We are proposing to amend 17 CFR 230.405 
(``Rule 405''), 17 CFR 230.413 (``Rule 413''), 17 CFR 230.416 (``Rule 
416''), 17 CFR 230.456 (``Rule 456''), 17 CFR 230.457 (``Rule 457''), 
17 CFR 230.701 (``Rule 701''), and 17 CFR 239.16b (``Form S-8'') under 
the Securities Act of 1933 \1\ (the ``Securities Act''), and 17 CFR 
229.601 (``Item 601'') of Regulation S-K.
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    \1\ 15 U.S.C. 77a et seq.
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Table of Contents

I. Overview
II. Rule 701
    A. Disclosure Requirements
     1. The Disclosure Requirement for the Period Preceding the 
Threshold Amount Being Exceeded
     2. Age of Financial Statements
     3. Financial Statement Content Requirements for Foreign Private 
Issuers
     4. Alternative Valuation Disclosure
     5. Disclosure Requirements for Derivative Securities
     6. Disclosure Requirements Following Business Combination 
Transactions
    B. Rule 701(d)
    C. Eligible Recipients
     1. Consultants and Advisors
     2. Former Employees
     3. Employees of Subsidiaries
III. Form S-8
    A. Addition of Plans and Securities or Classes of Securities to 
Form S-8
     1. Addition of Plans to Form S-8
     2. Securities Allocation Among Incentive Plans
     3. Addition of Securities or Classes of Securities to Form S-8
    B. Fee Calculation and Fee Payments on Form S-8 for Defined 
Contribution Plans
     1. Calculation of the Registration Fee Using the Aggregate 
Offering Price
     2. New Fee Payment Method for Sales Pursuant to Defined 
Contribution Plans
     3. Additional Requests for Comment on Counting the Shares 
Registered on Form S-8 for Defined Contribution Plans
    C. Conforming Form S-8 to Rule 701
     1. Scope of ``Former Employee''
     2. Consultants and Advisors
    D. Conforming Form S-8 Instructions With Current IRS Plan Review 
Practices
    E. Revisions to Item 1(f) of Form S-8; Tax Effects of Plan 
Participation
    F. Additional Requests for Comment About Form S-8
     1. Plan Trustee Signatures on Form S-8
     2. Bridging the IPO Gap for Employee Stock Purchase Plans
IV. General Request for Comments
V. Economic Analysis
    A. Economic Baseline
     1. Rule 701
     2. Form S-8
    B. Benefits and Costs to Proposed Amendments to Rule 701 and 
Form S-8
     1. Proposed Amendments to Rule 701(e)
     2. Proposed Amendments to Rule 701(d)
     3. Proposed Amendments to Rule 701(c) Eligible Participants
     4. Benefits and Costs to Proposed Amendments to Form S-8
    C. Anticipated Effects on Efficiency, Competition, and Capital 
Formation
    D. Reasonable Alternatives
VI. Paperwork Reduction Act.
    A. Summary of the Collection of Information
    B. Summary of the Proposed Amendments' Effects on the 
Collections of Information
    C. Incremental and Aggregate Burden and Cost Estimates for the 
Proposed Amendments
    D. Request for Comment
VII. Initial Regulatory Flexibility Act Analysis
    A. Reasons for, and Objectives of, the Proposed Action
    B. Legal Basis
    C. Small Entities Subject to the Proposed Amendments
    D. Reporting, Recordkeeping and other Compliance Requirements
    E. Duplicative, Overlapping or Conflicting Federal Rules
    F. Significant Alternatives
    G. Request for Comments
VIII. Small Business Regulatory Enforcement Fairness Act
IX. Statutory Authority

I. Overview

    We are proposing amendments to Rule 701 and Form S-8 to modernize 
the two principal means by which issuers grant securities to employees 
in compensatory transactions.\2\ Every offer

[[Page 80233]]

and sale of securities must be registered, or rely on an exemption from 
the registration requirements of Section 5 of the Securities Act.\3\ 
The Commission has long recognized that offers and sales of securities 
as compensation present different issues than offers and sales of 
securities by issuers that seek to raise capital.\4\ 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--Rule 701--for 
certain compensatory securities transactions by non-reporting issuers 
\5\ and a specialized form--Form S-8--for registering certain 
compensatory securities transactions by reporting issuers. The proposed 
amendments reflect changes in compensatory practices, including the 
types of securities offered, and are intended to modernize and simplify 
administrative requirements.
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    \2\ Rule 701 is available for compensatory transactions with 
employees, directors, general partners, trustees (where the issuer 
is a business trust), officers, or consultants and advisors, and 
their family members who acquire such securities from such persons 
through gifts or domestic relations orders. Offers and sales to 
former employees, directors, general partners, trustees, officers, 
consultants and advisors are exempted from registration by the rule 
subject to specified conditions. Form S-8 is available for 
compensatory transactions with ``employees,'' with the form defining 
``employee'' as any employee, director, general partner, trustee 
(where the registrant is a business trust), or officer. ``Employee'' 
also includes consultants and advisors, former employees, executors, 
administrators or bene[filig]ciaries of the estates of deceased 
employees, guardians or members of a committee for incompetent 
former employees, or similar persons duly authorized by law to 
administer the estate or assets of former employees, subject to 
specified conditions. For purposes of both Rule 701 and Form S-8, 
``employee'' includes insurance agents who are exclusive agents of 
the issuer, its subsidiaries or parents, or derive more than 50% of 
their annual income from those entities. See Rule 701(c) and General 
Instructions A.1(a)(1)-(3) to Form S-8.
    \3\ 15 U.S.C. 77e.
    \4\ See, e.g., Notice of Proposed Form S-8, Release No. 33-3469-
X (Apr. 12, 1953) [18 FR 2182 (Apr. 17, 1953)] and Adoption of Form 
S-8, 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.
    \5\ Only issuers that are not subject to the reporting 
requirements of Section 13 or 15(d) of the Securities Exchange Act 
of 1934 (15 U.S.C. 78m and 78o(d)) and are not investment companies 
registered or required to be registered under the Investment Company 
Act of 1940 (15 U.S.C. 80a-1 et seq.) are eligible to use Rule 701. 
See Rule 701(b). As such, the use of the term ``non-reporting 
issuer'' in this release means issuers that are not subject to the 
reporting requirements of Section 13 or 15(d) of the Exchange Act, 
and includes issuers subject to Rule 257 of Regulation A [17 CFR 
230.257].
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    In July 2018, in connection with amending Rule 701,\6\ as mandated 
by the Economic Growth, Regulatory Relief, and Consumer Protection 
Act,\7\ the Commission sought comment on ways to modernize the Rule 701 
exemption from registration, the Form S-8 registration statement, and 
the relationship between these two regulations, consistent with 
investor protection.\8\ In doing so, the Commission noted that 
significant evolution has taken place in both the types of compensatory 
offerings issuers make and the composition of the workforce since it 
last substantively amended these regulations and sought to determine 
whether and, if so, how the rules should be amended to address these 
developments. The Concept Release stated that the Commission's 
evaluation of any potential changes would focus on retaining the 
compensatory purpose of Rule 701 and Form S-8 and preventing them from 
being used for capital-raising purposes, consistent with the 
Commission's investor protection mandate. The Concept Release also 
solicited comment on how any possible rule or form amendments may 
affect an issuer's decision to become a reporting issuer. The 
Commission received many comment letters in response to the Concept 
Release.\9\
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    \6\ Exempt Offerings Pursuant to Compensatory Arrangements, 
Release No. 33-10520 (Jul.18, 2018) [83 FR 34940] (``2018 Rule 701 
Adopting Release'').
    \7\ Public Law 115-174, 132 Stat. 1296 (2018). Section 507 of 
the Act mandated that the Commission amend Rule 701 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.
    \8\ Concept Release on Compensatory Securities Offerings and 
Sales, Release No. 33-10521 (Jul. 18, 2018) [83 FR 34958] (``Concept 
Release''). Unless otherwise noted, comments cited are to the 
Concept Release and may be found at the following link: https://www.sec.gov/comments/s7-18-18/s71818.htm.
    \9\ See, e.g., letters from Airbnb, Inc. (``Airbnb''); American 
Bar Association, Business Law Section, Federal Regulation of 
Securities Committee (``ABA''); American Benefits Council 
(``Council''); Sen. Sherrod Brown, United States Senator (``Senator 
Brown''); Center for Capital Markets Competitiveness, U.S. Chamber 
of Commerce (``Chamber''); Davis Polk & Wardwell (``Davis Polk''); 
Ernest & Young LLP (``EY''); Indigo Ag, Inc. (``Indigo''); Rep. 
Patrick McHenry, United States Representative (``Representative 
McHenry''); National Association of Stock Plan Professionals 
(``NASPP''); National Employment Law Project (``NELP''); Marie P. 
Petion (``Petion''); Postmates (``Postmates''); Nick Reyes 
(``Reyes''); Brian Sament (``Sament''); Shearman & Sterling LLP 
(``Shearman''); John P. Stoelting (``Stoelting''); Sullivan & 
Cromwell LLP (``Sullivan''); Uber Technologies, Inc. (``Uber''); 
Rep. Maxine Waters, United States Representative (``Representative 
Waters''); Zachor Legal Institute (``Zachor''); and Zionist Advocacy 
Center (``Zionist'').
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    Among the Rule 701 topics covered by the Concept Release were the 
Rule 701(d) exemptive conditions, including the 12-month sales caps, 
and the Rule 701(e) disclosure requirements, including the timing and 
manner of disclosure, and how those disclosure requirements apply to 
derivative securities. Form S-8 topics covered by the Concept Release 
included ways to reduce administrative burdens, such as by permitting 
multiple plans to be registered on a single Form S-8, permitting fee 
payment on a ``pay-as-you-go'' basis, and registering tax-qualified 
plans based on a dollar amount rather than the number of shares issued. 
The comments received on those topics and the Commission's related 
proposed rule amendments are discussed in this release.
    Based, in part, on the consideration of feedback from commenters, 
with respect to Rule 701 we propose to:\10\
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    \10\ The current version of Rule 701 was adopted pursuant to the 
Commission's general exemptive authority under Section 28 of the 
Securities Act. 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''). We believe the 
proposed amendments to Rule 701 would modernize the exemption in 
light of the significant evolution in compensatory offerings since 
the Commission last substantively amended the rule, while 
maintaining important investor protections. For this reason and the 
reasons discussed below, we believe the proposed amendments to Rule 
701, if adopted, would be necessary and appropriate in the public 
interest and consistent with investor protections.
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     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 (or written 
compensation contract) established by the issuer's subsidiaries, 
whether or not majority-owned.
    With respect to Form S-8, we propose to:
     Implement improvements and clarifications to simplify 
registration on the form, including:
    [cir] Clarifying the ability to add multiple plans to a single Form 
S-8;
    [cir] Clarifying the ability to allocate securities among multiple 
incentive plans on a single Form S-8;
    [cir] 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:
    [cir] Requiring the registration of an aggregate offering amount of 
securities for defined contribution plans;
    [cir] Implementing a new fee payment method for registration of 
offers and

[[Page 80234]]

sales pursuant to defined contribution plans;
    [cir] Conforming Form S-8 instructions with current IRS plan review 
practices; and
     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 the Rule 701 exemption and the Form S-8 
registration statement, we propose to:
     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.
    To comply with current Federal Register formatting requirements, we 
also propose a ministerial amendment to Rule 701 to remove the 
Preliminary Notes and move their provisions without change to Rule 
701(a). This change does not affect the purpose or effect of these 
provisions.
    The Concept Release also discussed the scope of eligible plan 
participants, including whether persons providing services in the so-
called ``gig economy'' should be eligible to receive securities 
pursuant to Rule 701 and Form S-8. We are addressing these issues and 
the comments received on these topics in a separate companion 
release.\11\
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    \11\ Temporary Rules to Include Certain ``Platform Workers'' in 
Compensatory Offerings Under Rule 701 and Form S-8, Release No. 33-
10892 (Nov. 24, 2020).
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    We discuss the proposed amendments below. We welcome feedback and 
encourage interested parties to submit comments on any or all aspects 
of the proposed amendments. When commenting, it would be most helpful 
if you include the reasoning behind your position or recommendation.

II. Rule 701

A. Disclosure Requirements

    We are proposing to amend Rule 701(e) to revise the disclosure 
requirements for transactions exceeding $10 million, including the age 
of financial statements, and to allow issuers to provide alternative 
valuation information in lieu of financial statements. In addition, we 
are proposing to allow certain foreign private issuers \12\ to provide 
financial statements using home country accounting standards if 
financial statements prepared in accordance with generally accepted 
accounting principles in the United States (``U.S. GAAP'') or 
International Financial Reporting Standards as issued by the 
International Accounting Standards Board (``IFRS'') are not otherwise 
available. Finally, we propose to modify the timing requirement for 
providing disclosure for certain derivative securities granted to new 
hires in specified circumstances.
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    \12\ A ``foreign private issuer'' is defined in Rule 405 and 17 
CFR 240.3b-4(c) [Exchange Act Rule 3b-4(c)] 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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    Rule 701(e) currently provides that an issuer must deliver to 
investors a copy of the compensatory benefit plan or contract, as 
applicable. In addition, if the aggregate sales price or amount of 
securities sold during any consecutive 12-month period exceeds $10 
million, the issuer must deliver the following additional disclosure to 
investors a reasonable period of time before the date of sale:\13\
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    \13\ Rule 701(e).
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     A copy of the summary plan description required by ERISA 
\14\ or a summary of the plan's material terms if it is not subject to 
ERISA;
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    \14\ 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 pursuant to the compensatory plan or compensation 
contract; and
     Financial statements required to be furnished by Part F/S 
of Form 1-A \15\ 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.\16\
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    \15\ Form 1-A [17 CFR 239.90].
    \16\ Rule 701(e)(4).
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     Foreign private issuers must provide a reconciliation to 
U.S. GAAP if their financial statements are not prepared in accordance 
with U.S. GAAP or IFRS.
    This disclosure must be provided to investors a reasonable period 
of time before the date of sale. For options and other derivative 
securities, this requires the issuer to deliver disclosure a reasonable 
period of time before the date of exercise or conversion.\17\ In 
adopting Rule 701(e), the Commission made clear that if the required 
disclosure has not been provided to all investors on a timely basis, 
the issuer will lose the exemption for the entire offering.\18\
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    \17\ Rule 701(e)(6). As described in Section II.A.5, infra, for 
options and other derivative securities, the issuer's obligation 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.
    \18\ In the 1999 Adopting Release at Section II.B, the 
Commission, referencing the $5 million threshold that applied at the 
time, stated: ``Where the formula permits sales in excess of $5 
million during a 12-month period, and the issuer chooses to take 
advantage of this increased amount, the new disclosure should be 
provided to all investors before sale. This requirement will 
obligate issuers to provide disclosure to all investors if the 
issuer believes that sales will exceed the $5 million threshold in 
the coming 12-month period. 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.''
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1. The Disclosure Requirement for the Period Preceding the Threshold 
Amount Being Exceeded
    We are proposing to revise Rule 701(e) to provide that, if the 
aggregate sales price or amount of securities sold during any 
consecutive 12-month period exceeds $10 million, the issuer must 
deliver to investors the additional disclosure required by the rule 
only with respect to those sales that exceed the rule's $10 million 
threshold. One commenter who addressed the current rule characterized 
the requirement that the disclosure be provided for all sales, 
including those occurring before the threshold is exceeded, as 
``largely unworkable'' and ``a trap for the unwary.'' \19\ The same 
commenter recommended that there be a thirty-day ``grace period'' 
following the date when the threshold is exceeded, so that the issuer 
would be required to provide disclosure only for future offers or sales 
after the ``grace period.'' Another commenter suggested that crossing 
the threshold should impact the exemption's availability only for: (1) 
The securities issued that caused the threshold to be breached and for 
which disclosure was not provided; and (2) any subsequent offerings in 
the same 12-month period for which sufficient disclosure was not 
provided.\20\ This commenter further expressed the view that treating 
sales over $10 million separately from earlier sales would be 
consistent with the current operation of Rule 504 of Regulation D.\21\
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    \19\ See letter from ABA.
    \20\ See letter from Sullivan.
    \21\ See Instruction to paragraph (b)(2) of Rule 504 (``If a 
transaction under Sec.  230.504 fails to meet the limitation on the 
aggregate offering price, it does not affect the availability of 
this Sec.  230.504 for the other transactions considered in applying 
such limitation. For example, if an issuer sold $10,000,000 of its 
securities on June 1, 2021 under this Sec.  230.504 and an 
additional $500,000 of its securities on December 1, 2021, this 
Sec.  230.504 would not be available for the later sale, but would 
still be applicable to the June 1, 2021 sale.'').

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[[Page 80235]]

    Currently, for issuers to be able to rely on Rule 701, they must 
anticipate whether their compensatory sales could exceed $10 million at 
the outset of a 12-month period. If an issuer does not anticipate 
exceeding the $10 million threshold and, as a result, does not provide 
disclosures to all investors, then that issuer cannot exceed the $10 
million threshold without losing the exemption for all of the sales in 
that 12-month period. We understand that the ``lookback'' aspect of the 
requirement may make it unduly difficult for issuers to plan their 
compensatory programs or respond efficiently to unforeseen situations, 
such as where an issuer wants to offer equity compensation in 
connection with an unanticipated opportunity to hire new employees.
    We are proposing to amend the rule to provide that the disclosure 
required by Rule 701(e) be delivered to investors only with respect to 
sales after the $10 million threshold is exceeded and not to require 
after-the-fact disclosure for sales made in reliance on the rule during 
the 12-month period before the threshold was exceeded.\22\ The 
exemption would remain available for all sales that exceed the $10 
million threshold during the 12-month period if the issuer provides the 
required disclosure for those sales. We are not proposing to include a 
``grace period'' between the point at which the $10 million threshold 
is exceeded and the requirement to deliver the Rule 701(e) disclosure, 
given that other amendments to Rule 701(e) proposed in this release 
should make it easier for issuers to comply with the disclosure 
delivery requirement.\23\
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    \22\ Proposed Rule 701(e).
    \23\ See Sections II.A.2-6, infra.
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    Request for Comment:
    1. Should the rule be amended, as proposed, to require additional 
disclosure only for those sales during the 12-month period that exceed 
the $10 million threshold? Are there circumstances in which issuers may 
have trouble providing the information upon exceeding the threshold? If 
so, how could those difficulties be addressed?
    2. Should there be a ``grace period'' between crossing the $10 
million threshold and the requirement to provide additional disclosure 
with respect to the sales exceeding the $10 million threshold? If so, 
how long a period is appropriate? Would the other amendments proposed 
in this release that make it easier for issuers to comply with Rule 
701's disclosure delivery requirement mitigate the need for a grace 
period?
    3. Alternatively, upon crossing the $10 million threshold, should 
the issuer be required to provide the additional Rule 701(e) disclosure 
on a retrospective basis to all investors who had previously been 
granted or purchased securities during the 12-month period? Would such 
after-the fact disclosure mitigate informational asymmetry between 
investors who purchase before and investors who purchase after crossing 
the $10 million threshold? If we impose such a requirement, should the 
issuer lose the exemption for those earlier transactions if it fails to 
retrospectively provide the disclosure? Should there be a ``grace 
period'' between crossing the $10 million threshold and the requirement 
to retrospectively provide the disclosure? If so, how long a period is 
appropriate?
2. Age of Financial Statements
    We propose to conform the age of financial statement requirement 
set forth in Rule 701(e) to the corresponding requirement in Part F/S 
of Form 1-A. Rule 701(e) requires delivery of financial statements 
required to be furnished by Part F/S of Form 1-A, which prescribes the 
financial statements required for Regulation A Tier 1 and Tier 2 
offerings. In Regulation A offerings, issuers generally must include 
two years of consolidated balance sheets, statements of comprehensive 
income, cash flows, and changes in stockholders' equity.\24\ Issuers 
relying on Rule 701 may choose to provide financial statements that 
comply with the requirements of either tier.\25\
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    \24\ Tier 2 offerings require audited financial statements. See 
Part F/S of Form 1-A [17 CFR 239.90].
    \25\ Specifically, an issuer may elect to provide financial 
statements that follow the requirements of either Tier 1 or Tier 2 
Regulation A offerings without regard to whether the amount of sales 
that occurred pursuant to Rule 701 during the time period 
contemplated in Rule 701(e) would have required the issuer to follow 
the Tier 2 financial statement requirements in a Regulation A 
offering of the same amount. Rule 701 does not, and the proposals 
would not, require an issuer utilizing Rule 701 that would be 
subject to Tier 2 financial statement requirements to file with the 
Commission the current and periodic reports required by Rule 257(b) 
[17 CFR 230.257(b)].
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    Currently, the age of the financial statements must be as of a date 
no more than 180 days before the date of sale of securities relying on 
the Rule 701 exemption.\26\ This requirement, in effect, necessitates 
financial statements to be prepared on a quarterly basis, and to be 
completed within three months after the end of each quarter, in order 
to keep current information available for delivery a reasonable time 
before the date of sale so that sales may occur on an uninterrupted 
basis. One commenter \27\ recommended requiring the financial statement 
disclosure to be updated and provided only once per fiscal year, unless 
a material event results in a material change to the issuer's 
enterprise value or the value of the securities.\28\
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    \26\ See Rule 701(e)(4).
    \27\ See letter from ABA.
    \28\ This is generally the same timing that applies to updating 
valuation disclosures under the IRS Section 409A regulations. See 
Treas. Reg. Sec.  l.409A-l(b)(5)(iv)(B) (2017).
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    Moreover, under existing Rule 701, foreign private issuers are 
required to provide financial information on the same schedule as 
domestic issuers.\29\ Foreign private issuers, like domestic issuers, 
may issue securities in reliance on Rule 701 throughout the year, which 
could require them to update their financial statements more frequently 
than required for registered offerings under Form 20-F.\30\ Commenters 
expressed the view that non-reporting foreign private issuers should 
not be obligated to prepare quarterly financial statements solely to 
rely on Rule 701, but instead should be able to satisfy the 
requirements of Rule 701 by providing investors financial statements 
conforming to the requirements for annual financial statements in 
reports on Form 20-F and interim financial statements within the 
timeframe required by home country rules.\31\
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    \29\ See Rule 701(e). See also 1999 Adopting Release at Section 
II.C.
    \30\ 17 CFR 249.220f. See Item 8.A.5 of Form 20-F.
    \31\ See letters from ABA, Davis Polk, and Shearman. In 
particular, one commenter noted that foreign private issuers subject 
to Exchange Act reporting requirements can use Form S-8 for 
compensatory offerings without providing financial statements more 
frequently than required by their home jurisdiction, which puts U.S. 
employees of non-registered foreign private issuers at a 
disadvantage compared to U.S. employees of registered foreign 
private issuers. See letter from Davis Polk.
---------------------------------------------------------------------------

    We propose to amend Rule 701(e) to apply the age of financial 
statement requirements of Form 1-A, Part F/S, paragraphs (b)(3) and (4) 
at the time of sale.\32\ This proposal, which would apply to both 
domestic and foreign issuers, would conform the Rule 701(e) financial 
statement age requirements with those of Regulation A.\33\ Under the 
proposal, financial statements must be available on at least a semi-
annual basis

[[Page 80236]]

and completed within three months after the end of the second and 
fourth quarters. Issuers would no longer be required to prepare 
financial statements quarterly in order for sales to be made 
continuously pursuant to Rule 701. We believe the financial statement 
updating requirements for Rule 701 compensatory offerings need not be 
more stringent than those applicable to capital raising transactions 
under Regulation A, which may be used by the same issuers. The proposal 
also would be consistent with foreign private issuers' financial 
statement updating requirements for registered offerings on Form 20-F, 
thereby eliminating any disadvantage for non-reporting foreign private 
issuers.
---------------------------------------------------------------------------

    \32\ Proposed Rule 701(e)(4)(i).
    \33\ See Part F/S of Form 1-A.
---------------------------------------------------------------------------

    Rule 12h-1(f) \34\ under the Securities Exchange Act of 1934 \35\ 
(``Exchange Act''), which exempts from Exchange Act Section 12(g)'s 
registration requirements stock options issued under written 
compensatory stock option plans by non-reporting issuers, includes, as 
a condition to the exemption, the delivery of Rule 701(e) information 
every six months with the financial statements that are not more than 
180 days old. For ease of plan administration, we considered proposing 
to amend the age of financial statements requirements of this rule to 
remain consistent with those of Rule 701(e). However, it is unclear to 
what extent non-reporting companies continue to rely on Rule 12h-1(f) 
after the adoption of Exchange Act Rule 12g5-1(a)(8),\36\ which 
excludes from the definition of ``held of record'' for purposes of 
Section 12(g) certain securities held by persons who received them 
pursuant to employee compensation plans. Accordingly, we request 
comment below on whether we should rescind or adopt a conforming 
amendment to Rule 12h-1(f).
---------------------------------------------------------------------------

    \34\ 17 CFR 240.12h-1(f).
    \35\ 15 U.S.C 78a et seq.
    \36\ 17 CFR 240.12g5-1(a)(8). See discussion in Section II.C.1, 
infra.
---------------------------------------------------------------------------

    Request for Comment:
    4. Would the proposed amendment to the age of financial statement 
requirements ease the burden of compliance with Rule 701(e) in a manner 
consistent with investor protection, both for domestic issuers and 
foreign private issuers? Would a different age of financial statement 
requirement better promote this objective? For example, should issuers 
be required to update financial statements only once per fiscal year, 
unless there is a material change to the issuer's enterprise value or 
the value of the securities? Should issuers be permitted to rely on 
either Tier 1 or Tier 2 financial statement requirements regardless of 
the size of the offering, as proposed?
    5. Subsequent to the adoption of Exchange Act Rule 12g5-1(a)(8), to 
what extent do non-reporting issuers rely on the Rule 12h-1(f) 
exemption? If we amend Rule 701(e), should we also make conforming 
amendments to the age of financial statement requirement under Rule 
12h-1(f), assuming non-reporting issuers continue to rely on the rule? 
If non-reporting issuers no longer rely on the exemption it provides, 
should we rescind Rule 12h-1(f)?
3. Financial Statement Content Requirements for Foreign Private Issuers
    We propose to allow foreign private issuers that are eligible for 
the exemption from Exchange Act registration provided by Exchange Act 
Rule 12g3-2(b) \37\ to provide financial statements prepared in 
accordance with home country accounting standards for purposes of Rule 
701(e) disclosure without reconciliation to U.S. GAAP in certain 
circumstances. Currently, all foreign private issuers relying on the 
Rule 701 exemption must provide a reconciliation to U.S. GAAP if their 
financial statements are not prepared in accordance with U.S. GAAP or 
IFRS to satisfy their financial statement disclosure requirements under 
Rule 701(e).\38\
---------------------------------------------------------------------------

    \37\ 17 CFR 230.12g3-2(b).
    \38\ See Rule 701(e)(4).
---------------------------------------------------------------------------

    The Concept Release requested comment on whether we should amend 
any aspect of the Rule 701 financial statement requirements that apply 
to foreign private issuers other than the timing requirements.\39\ A 
few commenters addressed this topic. One commenter \40\ stated that the 
financial statement reconciliation and the need to keep it current for 
an ongoing plan is unduly costly and burdensome. Another commenter \41\ 
stated that Rule 701 should allow foreign private issuers to provide 
financial statements audited under the International Standards on 
Auditing (``ISAs'').
---------------------------------------------------------------------------

    \39\ See Concept Release at Section II.C.1.
    \40\ See letter from Shearman.
    \41\ See letter from EY.
---------------------------------------------------------------------------

    After consideration of the comments received, we propose to permit 
foreign private issuers that are eligible for the exemption from 
registration under Section 12(g) \42\ of the Exchange Act provided by 
Exchange Act Rule 12g3-2(b) to provide financial statements prepared in 
accordance with home country accounting standards to satisfy the 
financial statement disclosure requirements of Rule 701(e) if financial 
statements prepared in accordance with U.S. GAAP or IFRS are not 
otherwise available.\43\ Consistent with the current requirements, all 
other foreign private issuers would continue to be required to provide 
a reconciliation to U.S. GAAP if their financial statements are not 
prepared in accordance with U.S. GAAP or IFRS.
---------------------------------------------------------------------------

    \42\ 15 U.S.C. 78l(g).
    \43\ Proposed Rule 701(e)(4)(i).
---------------------------------------------------------------------------

    We believe it is appropriate to extend this relief to foreign 
private issuers that are eligible for the exemption from registration 
under Section 12(g) because, in other contexts, those issuers are 
currently not required to provide a reconciliation to U.S. GAAP if 
financial statements prepared in accordance with U.S. GAAP or IFRS are 
not otherwise available. Specifically, to be eligible for the exemption 
from registration under Rule 12g3-2(b), a foreign private issuer that 
is not otherwise subject to Exchange Act reporting must maintain a 
securities listing on one or more exchanges in a foreign jurisdiction 
that constitutes the primary trading market for its securities and must 
publish in English, on its website or through an electronic information 
delivery system generally available to the public in its primary 
trading market, information that satisfies specified public 
dissemination and shareholder distribution requirements.\44\ The Rule 
12g3-2(b) exemption allows a foreign private issuer to exceed the 
registration thresholds of Section 12(g) and effectively have its 
equity securities traded on a limited basis in the over-the-counter 
market in the United States. The Commission determined that such 
Section 12(g) exemptive relief was appropriate for a foreign private 
issuer that has not sought a public market in the United States and 
that makes available its non-U.S. disclosure documents.\45\ As a 
foreign private issuer eligible for the exemption under Rule 12g3-2(b) 
would not be seeking to create a public market for its securities in 
the United States through its reliance on Rule 701, we believe that the 
same level of disclosure would be appropriate.
---------------------------------------------------------------------------

    \44\ See the specific requirements of Exchange Act Rule 12g3-
2(b).
    \45\ See Exemption from Registration Under Section 12(g) of the 
Securities Exchange Act of 1934 for Foreign Private Issuers, Release 
No. 34-57350 (Feb. 19, 2008), citing Adoption of Rules Relating to 
Foreign Securities, Release No. 34-8066 (Apr. 28, 1967).
---------------------------------------------------------------------------

    The proposal would not modify the disclosure requirements of Rule 
701(e) to permit foreign private issuers to provide financial 
statements audited under ISAs, as suggested by one

[[Page 80237]]

commenter, because such an approach would require us to conduct a 
thorough evaluation of issuer financial statements audited in 
accordance with ISAs, which is beyond the scope of this rulemaking. 
Instead, the rule would continue to recognize only audits prepared in 
accordance with U.S. generally accepted auditing standards or Public 
Company Accounting Oversight Board auditing standards.
    Request for Comment:
    6. Should we permit foreign private issuers that are eligible for 
the exemption from Exchange Act registration provided by Exchange Act 
Rule 12g3-2(b) to provide financial statements prepared in accordance 
with home country accounting standards without reconciliation to U.S. 
GAAP, as proposed? Would such an accommodation provide financial 
information that is consistent with investor protection?
    7. Should the proposal be expanded to apply to any foreign private 
issuer with securities that are listed and traded in its home country, 
without regard to Exchange Act Rule 12g3-2(b) eligibility? 
Alternatively, if we do not expand the proposal to all foreign private 
issuers with securities listed and traded in its home country, should 
we amend Rule 701(e)(4) to allow issuers to present their financial 
statements in accordance with other international financial reporting 
standards, such as International Financial Reporting Standards as 
adopted by the European Union, without requiring such issuers to 
provide a reconciliation to U.S. GAAP?
4. Alternative Valuation Disclosure
    We propose to allow issuers to provide alternative valuation 
information, specifically an independent valuation report of the 
securities' fair market value as determined by an independent appraisal 
consistent with the rules and regulations under Internal Revenue Code 
Section 409A \46\ (a ``Section 409A independent valuation report''), in 
lieu of financial statements, for purposes of Rule 701(e) disclosure. 
The Concept Release solicited comment on whether we should allow 
valuation information regarding the securities in lieu of, or in 
addition to, financial statements. In particular, the Concept Release 
asked what valuation method should be used for this purpose, and 
whether ASC Topic 718 \47\ grant date fair value information or IRC 
Section 409A valuation information would be informative.
---------------------------------------------------------------------------

    \46\ 26 U.S.C. 409A (``IRC Section 409A'').
    \47\ FASB ASC Topic 718.
---------------------------------------------------------------------------

    A few commenters recommended allowing issuers to provide valuation 
information prepared for purposes of IRC Section 409A in lieu of U.S. 
GAAP financials.\48\ These commenters stated that this information 
would be a practical alternative to financial statement disclosure, as 
it is subject to an existing regulatory scheme and has independent 
economic significance. One of the commenters stated that it is less 
costly to comply with IRC Section 409A than to produce than U.S. GAAP 
financials.\49\ Another commenter stated that valuation information 
would be more useful for an employee in evaluating an equity award than 
early stage financial information and that many issuers already prepare 
IRC Section 409A valuations to determine option exercise prices and tax 
withholding.\50\ This commenter also stated that non-reporting issuers 
would be more willing to disclose valuation information than U.S. GAAP 
financial statements and observed that some issuers choose not to rely 
on Rule 701 to avoid facing competitive risks from unauthorized release 
of sensitive financial information.
---------------------------------------------------------------------------

    \48\ See letters from ABA and Sullivan.
    \49\ See letter from ABA.
    \50\ See letter from Sullivan.
---------------------------------------------------------------------------

    We propose amending Rule 701(e)(4) to permit, as an alternative to 
financial statement disclosure, the use of a Section 409A independent 
valuation report prepared in accordance with the rules and regulations 
applicable to determining the fair market value of service recipient 
stock for stock not readily tradable on an established securities 
market.\51\ The proposed alternative would apply to all issuers other 
than foreign private issuers eligible for the Rule 12g3-2(b) exemption. 
We believe that permitting this alternative is appropriate because the 
disclosure would be particularly helpful to employee investors in non-
reporting issuers, which typically do not have a significant trading 
market from which to readily derive valuation information. To provide 
employee investors with meaningful information that they can use to 
assess the manner in which fair market value was derived, the 
amendments would require the issuer to provide employees the entire 
Section 409A independent valuation report provided to the issuer.\52\ 
As noted above,\53\ the applicable rules and regulations under IRC 
Section 409A specify numerous factors to be taken into account in 
determining the fair market value of securities not readily tradeable 
on an established securities market, including but not limited to 
recent arm's length transactions involving the sale or transfer of such 
securities, and specifically provide that use of a valuation method is 
not reasonable if such valuation method does not take into 
consideration all available information material to the value of the 
company. These rules are widely-used and have independent legal 
significance under Federal tax law. We believe that a Section 409A 
independent valuation report containing a rigorous analysis of the 
factors considered in such a valuation would provide employee investors 
with appropriate financial disclosure.
---------------------------------------------------------------------------

    \51\ Proposed Rule 701(e)(4)(ii). As provided in Treasury Reg. 
1.409A-1(b)(5)(iv)(B)(1), in the case of service recipient stock 
that is not readily tradable on an established securities market, 
the fair market value of the stock as of a valuation date means a 
value determined by the reasonable application of a reasonable 
valuation method. For this purpose, a valuation is presumed to be a 
reasonable valuation if the valuation is determined by an 
independent appraisal that meets certain requirements. See Treasury 
Reg. 1.409A-1(b)(5)(iv)(B)(2)(i). The determination whether a 
valuation method is reasonable, or whether an application of a 
valuation method is reasonable, is made based on the facts and 
circumstances as of the valuation date. Factors to be considered 
under a reasonable valuation method include, as applicable, the 
value of tangible and intangible assets of the corporation, the 
present value of anticipated future cash-flows of the corporation, 
the market value of stock or equity interests in similar 
corporations and other entities engaged in trades or businesses 
substantially similar to those engaged in by the corporation the 
stock of which is to be valued, the value of which can be readily 
determined through nondiscretionary, objective means (such as 
through trading prices on an established securities market or an 
amount paid in an arm's length private transaction), recent arm's 
length transactions involving the sale or transfer of such stock or 
equity interests, and other relevant factors such as control 
premiums or discounts for lack of marketability and whether the 
valuation method is used for other purposes that have a material 
economic effect on the service recipient, its stockholders, or its 
creditors. The use of a valuation method is not reasonable if such 
valuation method does not take into consideration in applying its 
methodology all available information material to the value of the 
corporation. Under the Treasury Regulation, the use of a value 
previously calculated under a valuation method is not reasonable as 
of a later date if such calculation fails to reflect information 
available after the date of the calculation that may materially 
affect the value of the corporation (for example, the resolution of 
material litigation or the issuance of a patent).
    \52\ Proposed Rule 701(e)(4)(ii)(B).
    \53\ See n. 51, supra.
---------------------------------------------------------------------------

    To ensure appropriate investor protections, we are proposing 
certain conditions on the use of a Section 409A independent valuation 
report. First, the proposed amendments require an independent appraisal 
that is consistent with the rules and regulations under Section 409A 
applicable to determination of the fair market value of service 
recipient stock for stock not

[[Page 80238]]

readily tradable on an established securities market. Those rules and 
regulations call for an independent appraisal. The proposed amendments 
would not permit reliance on other aspects of the Section 409A rules 
that permit determination of fair value for tax purposes by other 
means. This condition would have the effect of requiring an independent 
party to prepare the appraisal and report to reduce potential risks 
that may arise from an issuer providing its own valuation.\54\ Further, 
in order to keep valuation information current, similar to Rule 701(e) 
financial statement disclosure, the proposed amendments would require 
the Section 409A independent valuation report to be as of a date that 
is no more than six months before the sale of securities in reliance on 
this exemption.\55\ This updating schedule would be comparable to the 
proposed age of financial statement requirements for Rule 701(e).
---------------------------------------------------------------------------

    \54\ To meet the requirements of Treasury Reg. 1.409A-
1(b)(5)(iv)(B)(2)(i), the valuation must be determined by an 
independent appraisal that meets the requirements of IRC Section 
401(a)(28)(C) and the Treasury Regulations thereunder. For purposes 
of IRC Section 401(a)(28)(C), the term ``independent appraiser'' 
means any appraiser meeting requirements similar to the requirements 
of the Treasury Regulations prescribed under IRC Section 170(a)(1). 
IRC Section 170(f)(11)(E) and Treasury Reg. 1.170A-17 define the 
terms ``qualified appraisal'' and ``qualified appraiser.'' In order 
to be a ``qualified appraisal,'' a valuation of property must be 
made by a ``qualified appraiser.'' See IRS Publication 561, which 
generally describes a ``qualified appraiser'' as a disinterested 
person who has earned an appraisal designation from a generally 
recognized professional appraiser organization or met specified 
minimum educational requirements, and regularly prepare appraisals 
for which he or she is paid.
    \55\ In contrast, the applicable Treasury Regulations provide 
that use of a previously calculated valuation is not reasonable if 
the value was calculated more than 12 months earlier than the date 
for which the valuation is being used, or if the valuation fails to 
reflect information available after the date of the calculation that 
may materially affect the value of the corporation. Treasury Reg. 
1.409A-1(b)(5)(iv)(B).
---------------------------------------------------------------------------

    We anticipate that providing the proposed valuation disclosure may 
be less costly, particularly because it is likely the issuer is already 
preparing such reports for purposes of complying with IRC Section 409A. 
At the same time, as commenters suggested, valuation disclosure may be 
as useful to an investor, if not more so, than financial statements in 
the particular context of evaluating the value of an equity award 
granted pursuant to Rule 701.
    Although most non-reporting issuers relying on Rule 701 are 
unlikely to have a trading market of the necessary depth and liquidity 
to justify using the IRC Section 409A valuation standard for stock 
readily traded on an established securities market, foreign private 
issuers eligible for the Rule 12g3-2(b) exemption may meet this 
criterion. In particular, such an issuer must maintain a listing of a 
class of securities on one or more exchanges in a foreign jurisdiction 
that, either singly or together with the trading of the same class of 
the issuer's securities in another foreign jurisdiction, constitutes 
the primary trading market for those securities.\56\ For this reason, 
the proposed amendments would allow Rule 12g3-2(b) eligible foreign 
private issuers to provide alternative valuation disclosure prepared 
consistent with the IRC Section 409A rules and regulations applicable 
to determining the fair market value of stock readily tradeable on an 
established securities market.\57\ To comply with this alternative 
disclosure requirement, the eligible issuer would simply disclose the 
fair market value of the stock on the most recent trading day preceding 
the date of sale.\58\
---------------------------------------------------------------------------

    \56\ Exchange Act Rule 12g3-2(b)(1)(ii).
    \57\ Proposed Rule 701(e)(4)(ii)(A).
    \58\ For stock readily tradable on an established securities 
market, the fair market value of the stock must be determined 
``based upon the last sale before or the first sale after the grant, 
the closing price on the trading day before or the trading day of 
the grant, the arithmetic mean of the high and low prices on the 
trading day before or the trading day of the grant, or any other 
reasonable method using actual transactions in such stock as 
reported by such market.'' See Treasury Reg. 1.409A-1(b)(5)(iv)(A). 
For this purpose, stock is treated as ``readily tradable'' if it is 
regularly quoted by brokers or dealers making a market in such 
stock, and the term ``established securities market'' means an 
established securities market within the meaning of Treasury Reg. 
1.897-1(m). See Treasury Reg. 1.409A-1(b)(5)(vi)(G) and 1.409A-1(k). 
Treasury Reg. 1.897-1(m) provides that the term ``established 
securities market'' means ``(1) A national securities exchange which 
is registered under section 6 of the Securities Exchange Act of 1934 
(15 U.S.C. 78f), (2) A foreign national securities exchange which is 
officially recognized, sanctioned, or supervised by governmental 
authority, and (3) Any over-the-counter market. An over-the-counter 
market is any market reflected by the existence of an interdealer 
quotation system. An interdealer quotation system is any system of 
general circulation to brokers and dealers which regularly 
disseminates quotations of stocks and securities by identified 
brokers or dealers, other than by quotation sheets which are 
prepared and distributed by a broker or dealer in the regular course 
of business and which contain only quotations of such broker or 
dealer.''
---------------------------------------------------------------------------

    Request for Comment:
    8. Should we permit a Section 409A independent valuation report to 
be provided in lieu of financial statement disclosures, as proposed? 
Would the IRC Section 409A regulations for determining the fair market 
value of stock not readily tradable on an established securities market 
generate valuation information that is easy to understand and 
appropriate to the financial disclosure needs of investors receiving 
securities under Rule 701? Would such disclosure be an acceptable 
alternative to financial statements prepared in accordance with U.S. 
GAAP or IFRS, as applicable? Would this proposal provide meaningful 
information to securities recipients while avoiding competitive risks 
from unauthorized financial statement disclosure?
    9. Should we require, as proposed, that Section 409A independent 
valuation reports be prepared pursuant to an independent appraisal for 
Rule 701(e) disclosure purposes? Taken together, would the related 
Treasury Regulations defining the terms ``independent appraiser,'' 
``qualified appraiser,'' and ``qualified appraisal'' provide adequate 
guidance for purposes of satisfying this proposed requirement? If not, 
should we provide further guidance? Would the proposed independence 
requirement add significantly to preparation costs? How would those 
costs compare to the costs of preparing the financial statements 
required by the proposed amendments?
    10. As proposed, the Section 409A independent valuation reports 
would need to be updated at six-month intervals. Would a different 
interval be more appropriate to ensure that such valuation disclosures 
provide appropriate information? If so, what interval should we 
prescribe? Would the proposed updating schedule impose significant 
costs? Would a less frequent updating schedule raise investor 
protection concerns?
    11. More specifically, would the Section 409A updating schedule 
imposed for tax purposes, calling for an independent valuation report 
to be updated if it fails to reflect information that may materially 
affect the value of the issuer and otherwise only once per fiscal year, 
result in more frequently updated information than if the issuer 
provides financial statement disclosure only on a semi-annual basis as 
proposed? Would using the tax updating schedule for Rule 701(e) 
purposes provide adequate investor protection?
    12. Should we require disclosure of the entire Section 409A 
independent valuation report, as proposed? Would requiring disclosure 
of the entire Section 409A independent valuation report result in 
disclosure of competitively sensitive information? If so, how could we 
modify the proposal to avoid this result while still providing 
investors with appropriate disclosure? Are there particular contents of 
the report that would be competitively sensitive and not meaningful to 
investors?

[[Page 80239]]

    13. Is the proposed alternative valuation information based on IRC 
Section 409A valuation standards for stock readily tradable on an 
established securities market appropriate for Rule 12g3-2(b) eligible 
foreign private issuers? From an investor protection standpoint, would 
disclosure of the securities' fair market value alone be a sufficient 
alternative to financial statement disclosure? Would disclosure of the 
securities' fair market value provide any benefit considering the 
securities are traded in an established trading market?
    14. Are there any other circumstances in which an issuer should be 
able to provide the alternative valuation information based on market 
price in accordance with the IRC Section 409A valuation standards for 
stock readily tradable on an established securities market?
    15. Are there any other aspects of the Section 409A valuation 
regulations that would be useful for purposes of Rule 701(e) 
disclosure?
    16. Other than the independent valuation prescribed with respect to 
IRC Section 409A, are there any other securities valuation methods that 
would be appropriate to import into the Rule 701(e) disclosure 
requirements?
5. Disclosure Requirements for Derivative Securities
    We propose to amend the date by which Rule 701(e) disclosure must 
be provided for certain derivative securities. Specifically, for 
derivative securities that do not involve a decision by the recipient 
to exercise or convert, we propose to modify the date by which Rule 
701(e) disclosure must be delivered for grants to new hires in 
specified circumstances.
    Rule 701(e)(6) currently provides that if a sale involves a stock 
option or another derivative security, the issuer must deliver 
disclosure a reasonable period of time before the date of exercise or 
conversion. Adopted in 1999, this rule contemplates derivative 
securities where the sale of the underlying shares involves an 
investment decision at the time of exercise or conversion.\59\
---------------------------------------------------------------------------

    \59\ See 1999 Release, which predates issuers' utilization of 
restricted stock units and similar instruments for compensatory 
awards.
---------------------------------------------------------------------------

    Since Rule 701(e) was initially adopted, compensatory programs have 
developed that use derivative securities--such as restricted stock 
units (``RSUs'') and performance stock units (``PSUs'')--that do not 
require a decision to exercise or convert. Instead, when held to 
maturity, these instruments settle automatically in the underlying 
shares without need for any investment decision by the holder. In the 
Concept Release, the Commission observed that, because such instruments 
settle by their terms without action by the holder, the relevant 
investment decision, if there is one, likely takes place 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 or PSU award is granted.\60\
---------------------------------------------------------------------------

    \60\ See Concept Release at Section II.C.3.
---------------------------------------------------------------------------

    Commenters did not raise any concerns regarding the application of 
the existing rule to options, stock appreciation rights, or convertible 
securities. While commenters did not dispute the logic of the 
Commission's date of sale analysis for RSUs and PSUs,\61\ they 
questioned its practicability in the context of grants to new 
hires.\62\ In particular, one commenter stated that providing financial 
information to an individual who is considering whether to join the 
issuer would result in an obligation to provide sensitive financial and 
operational risk information before the individual starts 
employment.\63\
---------------------------------------------------------------------------

    \61\ See letters from Chamber and Davis Polk.
    \62\ See letters from ABA and Chamber.
    \63\ See letter from ABA.
---------------------------------------------------------------------------

    To address these practical challenges, commenters suggested several 
alternative approaches. One commenter suggested permitting issuers to 
provide the required disclosure within 30 days after employment 
commences.\64\ Another commenter recommended treating RSU settlement as 
a conversion within the meaning of Rule 701(e)(6) on the date of 
settlement, so that disclosure delivery would be required a reasonable 
period of time before settlement.\65\
---------------------------------------------------------------------------

    \64\ See letter from Chamber.
    \65\ See letter from ABA.
---------------------------------------------------------------------------

    We propose revising Rule 701(e)(6) to clarify the distinction 
between derivative securities that involve a decision to exercise or 
convert, and those that do not.\66\ If the sale involves a stock option 
or other derivative security that involves a decision to exercise or 
convert, the issuer would continue to be required to deliver disclosure 
a reasonable period of time before the date of exercise or conversion. 
If the sale involves an RSU or other derivative security that does not 
involve a decision to exercise or convert, the issuer generally would 
continue to be required to deliver disclosure a reasonable period of 
time before the date the RSU or similar derivative security is granted.
---------------------------------------------------------------------------

    \66\ Proposed Rule 701(e)(6)(i).
---------------------------------------------------------------------------

    We also propose to amend the rule's application to the grant of an 
RSU or similar derivative security made in connection with the hire of 
new employees. In such circumstances, the disclosure would be 
considered delivered a reasonable period of time before the date of 
sale if it is provided no later than 14 calendar days after the date 
the person begins employment. In our view, providing an accommodation 
for delivery 14 calendar days after commencing employment would provide 
the issuer an opportunity to address confidentiality concerns while 
providing the employee disclosure within an appropriate time period. In 
any other circumstances, the issuer would be required to deliver the 
disclosure a reasonable period of time before the date the RSU or 
similar derivative security is granted. In any case, however, the 
disclosure may be provided subject to appropriate confidentiality 
conditions. We do not propose to treat RSU settlement the same as a 
conversion because, unlike conversion, RSU settlement does not involve 
an investment decision, and, as discussed above, the requirements of 
Rule 701 contemplate disclosure delivery as part of an investment 
decision.
    Request for Comment:
    17. Does the proposal sufficiently clarify the distinction between 
derivative securities that involve a decision to exercise or convert 
and those that do not with respect to the timing of the obligation to 
deliver Rule 701(e) disclosure?
    18. Is there any basis for treating settlement of an RSU or PSU as 
a conversion under the current rule, given that the holder does not 
make any investment decision at the time of settlement? For example, 
should the decision whether to settle tax obligations arising at 
settlement by withholding shares be viewed as an investment decision?
    19. For new hires, is it appropriate to require delivery of Rule 
701(e) disclosures within 14 calendar days after a recipient's 
commencement of employment, as proposed? Would a shorter period, such 
as seven calendar days, or longer period, such as 30 calendar days, be 
more appropriate?
    20. Does the proposal adequately address issuer confidentiality 
concerns in the context of new hires, in a manner consistent with 
investor protection?
    21. Are there any circumstances in which the proposed new hire 
accommodation should not apply, such

[[Page 80240]]

as where the grant of securities is individually negotiated?
    22. Should the proposed accommodation for new hires be available 
only if the financial disclosure that will be provided consists of 
financial statements, rather than the alternative proposed Section 409A 
valuation disclosure? Does a Section 409A independent valuation report 
raise the same concerns about disclosure of sensitive financial and 
operational risk information?
    23. Are there any other categories of Rule 701 eligible 
participants for whom the proposed accommodations should apply?
    24. Would it be helpful to amend Rule 701(e) to specify that 
disclosure may be made either by physical or electronic delivery or by 
written notice of the availability of the information on a website that 
may be password-protected and of any password needed to access the 
information? Would it be helpful for the rule to specifically permit 
use of dedicated physical disclosure rooms that house the medium used 
to convey the information required to be disclosed?
6. Disclosure Requirements Following Business Combination Transactions
    To clarify the application of Rule 701 to merged entities, we 
propose to amend Rule 701(e) to address the application of the 
exemption and its disclosure delivery obligations to acquired entity 
derivative securities that the acquiring issuer assumes in a business 
combination transaction.\67\
---------------------------------------------------------------------------

    \67\ Proposed Rule 701(e)(7).
---------------------------------------------------------------------------

    In some business combination transactions, outstanding derivative 
securities issued by the acquired entity in compensatory transactions 
will not be accelerated, but will instead be assumed by the acquiring 
issuer. In these circumstances, shares of the acquiring issuer will be 
issued upon the exercise or conversion of the derivative securities, 
instead of those of the acquired entity. Under the proposal, as long as 
the acquired entity complied with Rule 701 at the time it originally 
granted the derivative securities, the exercise or conversion of those 
derivative securities that are assumed by the acquiring issuer would be 
exempt from registration, subject to the acquiring issuer's compliance, 
where applicable, with Rule 701(e). For assumed derivative securities 
for which the acquired entity was required to provide disclosure 
pursuant to Rule 701(e) and where the derivative securities are 
exercised or converted after completion of the business combination 
transaction, the acquiring issuer would satisfy that disclosure 
obligation by providing information meeting the requirements of Rule 
701(e) consistent with the timing requirements of Rule 701(e)(6).\68\ 
In other words, if the acquired entity would have been required to 
provide Rule 701(e) disclosure upon exercise or conversion of its 
derivative securities, the acquiring issuer that assumes those 
derivative securities would assume the obligation to provide Rule 
701(e) disclosure upon their exercise or conversion.
---------------------------------------------------------------------------

    \68\ Proposed Rule 701(e)(7)(ii).
---------------------------------------------------------------------------

    Following completion of a business combination transaction, in 
determining whether the amount of securities the acquiring issuer sold 
during any consecutive 12-month period exceeds $10 million, the 
acquiring issuer would consider only the securities that it sold in 
reliance on Rule 701 during that period and would not be required to 
include any securities sold by the acquired entity pursuant to the rule 
during the same 12-month period.\69\ Because the acquiring issuer 
presumably did not consider the acquired entity's Rule 701 sales 
preceding the business combination transaction in planning its own Rule 
701 transactions, taking them into account after the business 
combination transaction could in some cases result in retroactive loss 
of the exemption if the combined Rule 701 transactions exceed the $10 
million threshold. We believe that this result would be unduly 
restrictive and could create hurdles to potentially value-enhancing 
business combinations.
---------------------------------------------------------------------------

    \69\ Proposed Rule 701(e)(7)(i).
---------------------------------------------------------------------------

    Request for Comment:
    25. Would the proposal addressing acquired entity derivative 
securities assumed by an acquiring issuer sufficiently clarify the 
exempt status of and disclosure obligations applicable to exercises and 
conversions of those securities after completion of the business 
combination transaction? Are any additional clarifications needed? For 
example, is guidance needed to clarify who is the acquiring issuer in a 
business combination transaction where the acquirer is not the same 
entity for legal and accounting purposes?
    26. Following completion of a business combination transaction, in 
determining whether the amount of securities the acquiring issuer sold 
pursuant to Rule 701 during any consecutive 12-month period exceeds $10 
million, should the acquiring entity be permitted to disregard the 
securities that the acquired entity sold pursuant to the rule during 
the same 12-month period, as proposed? Are there any circumstances in 
which the acquiring entity should be required to take those acquired 
entity securities into account for purposes of the $10 million 
disclosure threshold, and how do these circumstances relate to investor 
protection?

B. Rule 701(d)

    We propose to raise two of the three alternative regulatory 
ceilings that cap the overall amount of securities that a non-reporting 
issuer may sell pursuant to Rule 701 during any consecutive 12-month 
period. Since 1999,\70\ 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: \71\
---------------------------------------------------------------------------

    \70\ See 1999 Adopting Release.
    \71\ Rule 701(d).
---------------------------------------------------------------------------

     $1 million;
     15% of the total assets of the issuer,\72\ measured at the 
issuer's most recent balance sheet date; or
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    \72\ 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.
---------------------------------------------------------------------------

     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, using the exercise price of the option, 
without regard to when it becomes exercisable.\73\ For deferred 
compensation plans, the calculation is made at the time of the 
participant's irrevocable election to defer.\74\ There is no separate 
limitation on the amount of securities that may be offered.
---------------------------------------------------------------------------

    \73\ See Rule 701(d)(3)(i)-(ii).
    \74\ See Rule 701(d)(3)(ii).
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    In proposing the current 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.'' \75\ The alternatives based on 15% of total 
assets or 15% of the outstanding amount

[[Page 80241]]

of the class of securities were intended to increase the flexibility 
and utility of the exemption.\76\ The $1 million alternative provides 
an amount that any issuer can use, regardless of size.
---------------------------------------------------------------------------

    \75\ See Employee Benefit and Compensation Contracts, Release 
No. 33-6726 (July 30, 1987) [52 FR 29033 (Aug. 5, 1987)] (``Rule 701 
Reproposing 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 
Compensatory Benefit Plans and Contracts, Release No. 33-6768 (Apr. 
14, 1988) [53 FR 12918 (Apr. 20, 1988)] (``Rule 701 Adopting 
Release'').
    \76\ See Rule 701 Adopting Release at Section I.A.(2).
---------------------------------------------------------------------------

    The Concept Release solicited comment on whether there is a 
continuing need for any annual regulatory ceiling for Rule 701 
transactions, and whether investors would be harmed if the Commission 
eliminated or raised the ceiling. One commenter stated that compliance 
with Rule 701(d) imposes costly ongoing analysis and monitoring on 
issuers without any clear benefit to them or their employees.\77\ A 
different commenter recommended raising the $1 million limit to $2 
million, to retain its utility for start-up issuers that have few 
assets and may want to issue a large percentage of current equity to 
first round employees.\78\ This commenter also recommended raising the 
15% asset cap to 25%, as modern issuers rely increasingly on human 
capital and are less asset-intensive. Another commenter recommended 
providing relief in business combination transactions where the 
acquirer assumes the target's employee benefit plans, resulting in the 
combined enterprise exceeding the aggregate offering limitations in 
Rule 701(d)(2), particularly in the first year following closing of the 
transaction.\79\
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    \77\ See letter from ABA.
    \78\ See letter from Sullivan.
    \79\ See letter from Chamber.
---------------------------------------------------------------------------

    We continue to believe that the Rule 701(d) caps are useful in 
curbing non-compensatory sales in reliance on the rule. Accordingly, 
the proposal retains the general structure of Rule 701(d)(2), providing 
that the aggregate sales price or amount of securities sold in reliance 
on Rule 701 during any consecutive 12-month period must not exceed the 
greatest of the three alternative ceilings. In light of the less asset-
intensive nature of contemporary businesses and the effects of 
inflation since the adoption of these alternatives in 1999, we believe 
that it could be beneficial to issuers and securities recipients to 
raise two of the ceilings. As proposed, the asset cap would be raised 
from 15% to 25% of the total assets of the issuer (or 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) measured at the issuer's most recent balance sheet date (if 
no older than its last fiscal year end).\80\ The alternative $1 million 
cap available to any issuer would be raised to $2 million.\81\ The 
third alternative cap--15% of the outstanding amount of the class of 
securities being offered and sold--would be retained with no changes. 
The considerations that motivate us to propose raising the alternative 
percentage of assets cap and the $1 million cap do not apply to the 
percentage of outstanding securities cap, and we continue to believe 
this cap is appropriate to prevent misuse of the exemption for capital-
raising purposes.
---------------------------------------------------------------------------

    \80\ Proposed Rule 701(d)(2)(ii).
    \81\ Proposed Rule 701(d)(2)(i).
---------------------------------------------------------------------------

    To facilitate the operation of compensatory plans following a 
merger or acquisition, we propose an amendment to provide that after 
completion of a business combination transaction, to calculate 
compliance with paragraph (d)(2) of this section, the acquiring issuer 
may use a pro forma balance sheet that reflects the transaction or a 
balance sheet for a date after the completion of the transaction that 
reflects the total assets and outstanding securities of the combined 
entity.\82\ Furthermore, in determining the amount of securities that 
it may offer pursuant to Rule 701 following a business combination 
transaction, as proposed, the acquiring issuer would not be required to 
include the aggregate sales price and amount of securities for which 
the acquired entity claimed the exemption during the same 12-month 
period. We believe that these changes would remove hurdles to 
potentially value-enhancing business combination transactions, 
consistent with investor protection.
---------------------------------------------------------------------------

    \82\ Proposed Rule 701(d)(3)(v).
---------------------------------------------------------------------------

    Request for Comment:
    27. Do the two proposed sales cap increases appropriately adjust 
the ceilings in a manner that benefits both issuers and securities 
recipients, consistent with investor protection? Should either cap be 
raised by a higher or lower amount? If so, what amount would be more 
appropriate? Should either cap remain unchanged?
    28. Should we retain the current structure of Rule 701(d) with 
three alternative sales caps? If not, how should the structure be 
changed? In particular, do the caps further the goal of facilitating 
only compensatory transactions in reliance on Rule 701? Are there 
alternative provisions that would serve this purpose?
    29. Does the cap based on 15% of the outstanding amount of the 
class of securities being offered and sold continue to play a useful 
and effective role in Rule 701? Does it prevent issuers from improperly 
relying on the rule to raise capital from employees? Have there been 
changes in the marketplace, as discussed above for the two other 
alternative caps, which suggest that this cap may inhibit beneficial 
compensatory transactions? Should this cap be raised? If so, what would 
be a more appropriate percentage?
    30. Does the proposal to permit use of a pro forma balance sheet, 
or a balance sheet for a date after the completion of the business 
combination transaction that reflects the total assets and outstanding 
securities of the combined entity, meaningfully facilitate the 
operation of compensatory plans following a business combination 
transaction? Are any other changes necessary to achieve this objective?
    31. Should we amend Rule 701(d), as proposed, to provide that 
following a business combination transaction, in determining the amount 
of securities that it may offer pursuant to Rule 701, the acquiring 
issuer need not include the aggregate sales price and amount of 
securities for which the acquired entity claimed the exemption during 
the same 12-month period?

C. Eligible Recipients

1. Consultants and Advisors
    We propose to extend Rule 701 consultant and advisor eligibility to 
entities meeting specified ownership criteria designed to assure that 
the securities compensate the performance of services. Currently, 
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.\83\
---------------------------------------------------------------------------

    \83\ Rule 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 Form S-8 Adopting Release'') addressing 
such a corporate alter ego in the Form S-8 context.
---------------------------------------------------------------------------

    Some commenters on the Concept Release addressed whether 
participation should be limited to natural persons and corporate alter 
egos, as currently permitted, or expanded to include entities. One 
commenter noted that staff has not objected to treating personal 
services businesses as corporate alter egos of natural persons with 
respect to the ability to participate in Form S-8

[[Page 80242]]

offerings under existing employee, consultant and advisor categories, 
where such businesses are wholly-owned by (or jointly owned with the 
spouse of) the natural person who provides services to the issuer.\84\ 
The commenter suggested that we expand eligible corporate alter egos to 
include entities wholly-owned by multiple natural person service 
providers or the management of the entities. Other commenters noted 
that service providers may be organized as entities in order to provide 
legal benefits such as tax and estate planning and stated that these 
providers should not have to choose between such benefits and receiving 
equity compensation.\85\
---------------------------------------------------------------------------

    \84\ See letter from Davis Polk.
    \85\ See letters from Chamber and Indigo.
---------------------------------------------------------------------------

    While we acknowledge these points, we are concerned that opening up 
Rule 701 eligibility to entities that are more broadly held than the 
corporate alter ego of an individual consultant could undermine the 
compensatory nature of the exemption by permitting securities to be 
issued to passive investment vehicles rather than individuals who 
perform services for the issuer. This concern is amplified by the fact 
that a person who receives securities pursuant to the plan and 
participant conditions of Rule 701(c) is not considered a holder of 
record for purposes of Exchange Act Section 12(g) registration. 
Specifically, Section 502 of the Jumpstart Our Business Startups Act 
\86\ (``JOBS Act'') amended Exchange Act Section 12(g)(5) \87\ to 
exclude from the definition of ``held of record,'' for 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.\88\ To implement this statutory amendment, the Commission amended 
the definition of ``held of record'' in Exchange Act Rule 12g5-1 \89\ 
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.\90\ 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). It is 
therefore important in expanding eligible participants under Rule 
701(c) not to include passive investment vehicles that properly should 
be record holders for purposes of triggering Section 12(g) registration 
and the protections of Exchange Act reporting.
---------------------------------------------------------------------------

    \86\ 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.
    \87\ 15 U.S.C. 78l(g)(5).
    \88\ 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.
    \89\ 17 CFR 240.12g5-1.
    \90\ 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)] (``JOBS Act Release''), 
adopting Exchange Act Rule 12g5-1(a)(8).
---------------------------------------------------------------------------

    The proposed amendments seek to strike a balance between, on the 
one hand, allowing service providers flexibility to obtain the legal 
benefits of organizing as entities and, on the other hand, preventing 
Rule 701 securities from being issued to passive investment vehicles 
that would not be record holders, by expanding consultant or advisor 
eligibility to an entity, subject to the following conditions:
     Substantially all of the activities of the entity involve 
the performance of services; and
     Substantially all of the ownership interests in the entity 
are held directly by:
    [cir] No more than 25 natural persons, of whom at least 50 percent 
perform such services for the issuer through the entity;
    [cir] The estate of a natural person specified above; and
    [cir] Any natural person who acquired ownership interests in the 
entity by reason of the death of a natural person specified above.\91\
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    \91\ Proposed Rule 701(c)(1)(iii). These conditions are loosely 
modeled on, but have a different focus than, the Internal Revenue 
Code definition of a ``qualified personal service corporation. See 
26 U.S.C. 448(d)(2).
---------------------------------------------------------------------------

    The proposal seeks to expand eligibility for consultant entities 
while helping to ensure that compensatory securities are issued only to 
entities through which services are provided that are owned by those 
service providers. We believe that the proposed conditions are 
appropriate to help achieve this objective. In particular, 
substantially all of the ownership interests would need to be held 
directly by no more than 25 natural persons, at least 50 percent of 
whom provide services to the issuer, and by the estates and heirs of 
those natural persons. An entity that satisfies these conditions would 
also--like a natural person--need to satisfy the existing requirements 
for consultant and advisory eligibility by providing bona fide services 
that 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.\92\
---------------------------------------------------------------------------

    \92\ Rule 701(c)(1)(ii) and (iii), proposed to be re-designated 
as Rule 701(c)(1)(i) and (ii), respectively.
---------------------------------------------------------------------------

    Request for Comment:
    32. Should we extend consultant and advisor eligibility to entities 
meeting specified ownership criteria designed to link the securities to 
the performance of services for the issuer, as proposed?
    33. Does the proposed standard for consultant and advisor entity 
eligibility appropriately balance a consultant's needs to obtain the 
legal benefits of entity organization with the rule's purpose to exempt 
from Securities Act registration offerings of securities issued in 
compensatory circumstances? \93\
---------------------------------------------------------------------------

    \93\ See Proposed Rule 701(a)(5), formerly Preliminary Note 5 to 
Rule 701.
---------------------------------------------------------------------------

    34. The proposed standard would require that substantially all of 
the ownership interests of the entity be held by no more than 25 
natural persons, of whom at least 50 percent perform services for the 
issuer through the entity, their estates, and natural persons who 
acquired ownership interests due to their death. Are the proposed 
conditions appropriate? Are there different or additional conditions we 
should consider? Should the rule specify criteria defining what 
``substantially all'' would mean for this purpose? For example, should 
95 percent ownership be required to establish ``substantially all''? 
\94\
---------------------------------------------------------------------------

    \94\ Regulation Reg. Sec. 1.448-1T(e)(5)(i)(D) defines 
``substantially all'' as 95% or more for purposes of a ``personal 
service corporation'' as defined in IRC Section 448(d)(2).
---------------------------------------------------------------------------

    35. To ensure that securities are issued to compensate persons who 
provide services to the issuer and not to

[[Page 80243]]

passive investors, is it necessary to specify a maximum number of 
natural person owners for an entity to be eligible, as proposed? Should 
the number be larger or smaller? \95\ Should the entity's eligibility 
to receive securities be conditioned on at least 50 percent of those 
natural person owners performing services for the issuer, as proposed? 
Should that percentage be larger or smaller?
---------------------------------------------------------------------------

    \95\ In this regard, we note that to qualify for S corporation 
status, a corporation may have no more than 100 shareholders. See 
generally IRC Sections 1361(a)(2) and 1361(b).
---------------------------------------------------------------------------

    36. To assure that a compensatory purpose is maintained, would it 
be necessary to further restrict ownership by persons who acquire the 
securities by reason of the death of a current or former service 
provider to a two-year period beginning on the date of death, as in the 
Internal Revenue Code definition of a qualified personal service 
corporation?
    37. As noted above, a person who receives securities pursuant to 
the plan and participant conditions of Rule 701(c) is not considered a 
holder of record for purposes of Exchange Act Section 12(g) 
registration. How should this provision influence the limitations we 
place on those persons eligible to receive Rule 701 securities? Are any 
other restrictions or conditions needed to ensure that Rule 12g5-
1(a)(8) excludes from the definition of held of record securities 
received as compensation for services that the recipients provided to 
the issuer?
2. Former Employees
    We are proposing to expand Rule 701 eligibility for former 
employees to specified post-termination grants and to former employees 
of acquired entities. Rule 701 currently exempts offers and sales to 
former employees, directors, general partners, trustees, officers, or 
consultants and advisors only if such persons were employed by or 
providing services to the issuer at the time the securities were 
offered.
    In response to the Concept Release, one commenter stated that Form 
S-8 should be available to register new grants to former employees that 
are made as compensation for prior service during the 12-month period 
after retirement or termination.\96\ Another commenter suggested 
expanding eligible participants to include former employees of an 
acquired issuer that were granted equity awards in an acquisition in 
exchange for securities issued as compensation while such former 
employees were still employed by the acquired issuer.\97\
---------------------------------------------------------------------------

    \96\ See letter from Sullivan.
    \97\ See letter from Davis Polk.
---------------------------------------------------------------------------

    We believe that expanding Form S-8 eligibility to encompass former 
employees as suggested by commenters could benefit both issuers and 
securities recipients by facilitating compensatory transactions 
consistent with the purposes of the form.\98\ We believe that this 
rationale applies equally to Rule 701 and Form S-8. Accordingly, we 
propose to expand the eligibility of former employees under Rule 701 to 
include offers and sales to:
---------------------------------------------------------------------------

    \98\ See Section III.C.1, infra.
---------------------------------------------------------------------------

     Persons who were employed by or providing services to the 
issuer, its parents, its subsidiaries, or subsidiaries of the issuer's 
parent and who are issued securities after resignation, retirement, or 
other termination as compensation for services rendered during a 
performance period that ended within 12 months preceding such 
termination; and
     former employees of an entity that was acquired by the 
issuer if the securities are issued in substitution or exchange for 
\99\ securities that were issued to the former employees of the 
acquired entity on a compensatory basis while such persons were 
employed by or providing services to the acquired entity.
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    \99\ Consistent with Exchange Act Rule 12g5-1(a)(8)(i)(B), we 
are using the language ``in substitution or exchange for'' to cover 
the various methods by which issuer securities may be received in 
place of acquired entity securities that were issued in compensatory 
transactions, such as upon exercise or conversion of those 
securities. See JOBS Act Release at Section III.B.3.
---------------------------------------------------------------------------

    The proposal also would define ``employee'' for purposes of Rule 
701 to include executors, administrators, and beneficiaries of the 
estates of deceased employees, guardians or members of a committee for 
incompetent former employees, or similar persons duly authorized by law 
to administer the estate or assets of former employees. This amendment 
would conform to the corresponding provision relating to former 
employee eligibility in Form S-8.\100\
---------------------------------------------------------------------------

    \100\ General Instruction A.1(a)(3) to Form S-8, which as 
discussed in Section III.C.1, infra, would similarly be amended to 
expand eligibility for former employees and former employees of an 
entity acquired by the issuer.
---------------------------------------------------------------------------

    Request for Comment:
    38. Should we make Rule 701 available for new offers and sales to 
former employees as compensation for their service while employed by 
the issuer in the preceding 12 months, as proposed? Would expanding the 
exemption in this way facilitate compensatory transactions consistent 
with the purpose of the rule? To what extent do issuers grant awards on 
such a retrospective basis? Does ``following resignation, retirement, 
or other termination'' clearly describe the relationship of the award 
to former employment? Should the rule specifically address any other 
scenarios, such as expiration of the term of employment?
    39. Should Rule 701 be available to a former employee of an 
acquired entity for securities substituted or exchanged for acquired 
entity securities issued as compensation for the former employee's work 
for the acquired entity, as proposed? Would this be consistent with the 
underlying rationale that the Rule 701 exemption is available based on 
the compensatory relationship with the issuer?
    40. Would amending the rule, as proposed, to extend eligibility to 
executors, administrators, and beneficiaries of employees' estates and 
others duly authorized by law to administer the estates or assets of 
former employees facilitate the administration of compensatory plans 
relying on the exemption? If not, how should this proposal be modified 
to facilitate that objective?
3. Employees of Subsidiaries
    In an effort to harmonize Rule 701 and Form S-8, we also propose to 
amend Rule 701(c) by substituting the term ``subsidiaries'' \101\ for 
``majority-owned subsidiaries.'' The proposed amendment would make the 
exemption available for offers and sales of securities under a written 
compensatory benefit plan (or written compensation contract) 
established by the issuer, its parents, its subsidiaries, or 
subsidiaries of the issuer's parent.\102\ Like Form S-8, Rule 701 would 
be available for the issuance of issuer securities to employees of its 
subsidiaries, without regard to whether those subsidiaries are 
majority-owned.\103\ We are not aware of

[[Page 80244]]

any reason to limit Rule 701 to employees of majority-owned 
subsidiaries. Expanding Rule 701 eligibility in this manner could 
facilitate the continued operation of compensation programs when non-
reporting issuers transition to reporting status and are only eligible 
to use Form S-8 rather than Rule 701.
---------------------------------------------------------------------------

    \101\ Rule 405 defines ``subsidiary'' for purposes of the 
Securities Act as an affiliate controlled by such person directly, 
or indirectly through one or more intermediaries. Rule 405 defines 
``control'' as the possession, direct or indirect, of the power to 
direct or cause the direction of the management and policies of a 
person, whether through the ownership of voting securities, by 
contract, or otherwise.
    \102\ Under the proposal, ``subsidiary'' would replace 
``majority-owned subsidiary'' in each place in Rule 701(c) where 
``majority-owned subsidiary'' currently appears.
    \103\ The term ``majority-owned subsidiary'' is defined as a 
subsidiary more than 50 percent of whose outstanding securities 
representing the right, other than as affected by events of default, 
to vote for the election of directors, is owned by the subsidiary's 
parent and/or one or more of the parent's other majority-owned 
subsidiaries. See Rule 405.
---------------------------------------------------------------------------

    By broadening the exemption to include all subsidiaries, as 
defined, rather than only those that are majority-owned, the proposal 
would, among other things, expand eligibility to subsidiaries 
consolidated by the issuer as variable interest entities, such as 
physicians employed by medical practices controlled by the issuer.\104\
---------------------------------------------------------------------------

    \104\ In the 1999 Adopting Release at Section at Section II.D, 
n. 41, the Commission rejected a view expressed by the staff in 
certain no-action letters that such physicians were eligible as 
consultants or advisors in light of the narrower definition of 
consultant or advisor adopted in that release. Under Financial 
Accounting Standards Board Accounting Standards Codification 
Subtopic 810-10, Consolidation--Overall, a medical practice is often 
a variable interest entity. An issuer that has a controlling 
financial interest in such a medical practice generally would 
consolidate it. As a result, physicians employed by the medical 
practice would become eligible as employees of the issuer's 
subsidiary.
---------------------------------------------------------------------------

    Request for Comment:
    41. Should we harmonize the Rule 701 and Form S-8 eligibility 
requirements by broadening the Rule 701 exemption to include all 
subsidiaries, as proposed? Would the proposal facilitate a non-
reporting issuer's transition to reporting issuer status and its 
subsequent registration of compensatory offerings on Form S-8?
    42. Unlike Form S-8, the Rule 701 exemption currently is available 
to majority-owned subsidiaries of the issuer's parent rather than only 
subsidiaries of the issuer itself.\105\ Should we amend Form S-8 to 
further harmonize the scope of Rule 701 and Form S-8 by making Form S-8 
available to employees of all subsidiaries of the issuer's parent? Are 
there any other harmonizing amendments we should consider?
---------------------------------------------------------------------------

    \105\ See Form S-8, General Instruction A.1.(a).
---------------------------------------------------------------------------

    43. Are there any reasons not to extend Rule 701 eligibility to 
persons employed by subsidiaries that are consolidated by the issuer as 
variable interest entities? For example, are there any reasons not to 
extend Rule 701 eligibility to physicians employed by medical practices 
controlled by the issuer, based on their employment by a subsidiary of 
the issuer?

III. Form S-8

    Form S-8 was originally adopted in 1953, as a simplified form for 
the Securities Act registration of securities to be issued pursuant to 
employee stock purchase plans.\106\ Form S-8 is available for the 
registration of securities to be offered under any employee benefit 
plan to an issuer's employees or employees of its subsidiaries or 
parents.\107\ Registration on Form S-8 is used for many different types 
of employee benefit plans, including Internal Revenue Code Section 
401(k) plans and similar defined contribution retirement savings plans, 
employee stock purchase plans, nonqualified deferred compensation 
plans, and incentive plans that provide for issuance of options, 
restricted stock, or RSUs. The form may be used by any issuer that is 
subject, at the time of filing, to the 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.\108\ Form S-8 is not available for 
shell companies.\109\
---------------------------------------------------------------------------

    \106\ See generally Registration of Securities Offered Pursuant 
to Employees Stock Purchase Plans, Release No. 33-3480 (June 16, 
1953) [18 FR 3688 (June 27, 1953)].
    \107\ ``Employee benefit plan'' is defined in Securities Act 
Rule 405.
    \108\ See Form S-8, General Instruction A.1.
    \109\ ``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, General Instruction A.1 to Form 
S-8 provides that it then becomes eligible to use Form S-8 60 days 
following the filing of Form 10-equivalent information with the 
Commission.
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    Over time, the Commission has made revisions to the Form S-8 
requirements to simplify the use of the form and streamline the form's 
requirements where such simplification is consistent with investor 
protection.\110\ In the Concept Release, the Commission asked whether 
Form S-8 registration is still necessary, and if so, how the Commission 
could further streamline Form S-8 registration. Among other things, the 
Concept Release solicited comment on the potential elimination of Form 
S-8 in favor of allowing Exchange Act reporting issuers to use the Rule 
701 exemption and whether Form S-8 incentivized issuers to remain 
current in their Exchange Act reporting obligations. Commenters who 
addressed this issue generally supported eliminating the form, while 
expressing some reservations.\111\ One commenter stated that the 
principal advantage of such an approach would be the elimination of 
compliance costs associated with filing and maintaining an effective 
Form S-8.\112\ A few other commenters indicated that keeping Form S-8 
is not necessary to provide an incentive for reporting issuers to 
remain current in their Exchange Act reporting obligations.\113\
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    \110\ See, e.g., 17 CFR 230.462(a) (allowing Form S-8 to go 
effective automatically without review by the staff or other action 
by the Commission); Item 3 and General Instruction G of Form S-8 
(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); 17 CFR 230.428(a)(1) (providing 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); Rule 416(c) and Rule 
457(h)(2) (providing for registration of an indeterminate amount of 
plan interests and providing that there is no separate fee 
calculation for registration of plan interests, respectively); and 
General Instruction E to Form S-8 (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).
    \111\ See letters from ABA, Davis Polk, and NASPP.
    \112\ See letter from ABA.
    \113\ See letters from NASPP and ABA.
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    At the same time, commenters noted a number of potential 
disadvantages with eliminating Form S-8. One commenter stated that 
reporting issuers would find it a significant disadvantage if failure 
to register on Form S-8 would subject an issuance of employee benefit 
plan shares to registration under state blue sky laws.\114\ A different 
commenter stated that reporting issuers would not migrate to Rule 701 
if securities issued under the exemption would be restricted 
securities, as defined in Rule 144, and observed that, unlike Rule 701 
offerings, securities issued as part of an offering registered on Form 
S-8 are not ``restricted securities'' as defined in Rule 144.\115\
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    \114\ See letter from NASPP.
    \115\ See 17 CFR 230.144(a)(3)(ii) and letter from Chamber.
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    In evaluating this potential change, we considered these and other 
disadvantages that would result from eliminating Form S-8 and allowing 
reporting issuers to use Rule 701, such as:
     Employees' loss of the information required in Part I of 
Form S-8 that is part of the prospectus that must be provided to them; 
and
     Employees' potential loss of the protections provided by 
Section 11 and, in some cases, Section 12(a)(2) liability in the case 
of material misstatements or omissions.\116\
---------------------------------------------------------------------------

    \116\ See 15 U.S.C. 77k and 77l(a)(2).
---------------------------------------------------------------------------

    On balance, we believe that Form S-8 continues to provide a useful 
and effective means of registering securities to be issued in 
compensatory offerings under the Securities Act. Accordingly, we are 
proposing amendments to the

[[Page 80245]]

form and related rules that maintain the current non-reporting issuer-
reporting issuer distinction between Rule 701 and Form S-8, but we are 
proposing amendments to simplify the use of Form S-8. The proposed 
amendments should significantly reduce the compliance burdens of filing 
and maintaining an effective Form S-8, while retaining the protection 
that registration under the Securities Act provides to investors. 
Finally, we are proposing amendments that would harmonize the 
requirements of Rule 701 and Form S-8.
    Request for Comment:
    44. Should we eliminate Form S-8? If so, what exemption or other 
registration statement should the Commission replace it with? What 
should the requirements and conditions of such exemption or 
registration statement be? If such an approach were adopted, what other 
steps should the Commission take to preserve companies' ability to 
offer equity-based compensation to employees (e.g., preemption of state 
blue sky laws) and to protect investors?

A. Addition of Plans and Securities or Classes of Securities to Form S-
8

1. Addition of Plans to Form S-8
    To maximize the utility of Form S-8 for legitimate compensatory 
purposes, we are clarifying and proposing changes to our rules and to 
Form S-8 to provide additional flexibility for compensatory offerings, 
similar to provisions available to issuers in capital raising shelf 
offerings. The Concept Release solicited comment on whether we should 
permit an issuer to register on a single form the offers and sales 
pursuant to all employee benefit plans that it sponsors. One commenter 
stated that there is not currently an explicit requirement under Form 
S-8 that only shares under a single employee benefit plan may be 
registered on a specific registration statement but nonetheless 
recommended that the Commission clarify this point in any amendments to 
the form.\117\ Other commenters were generally supportive of permitting 
offers and sales of securities pursuant to multiple plans to be 
registered on a single Form S-8.\118\
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    \117\ See letter from ABA.
    \118\ See letters from Council, Davis Polk and NASPP.
---------------------------------------------------------------------------

    We are clarifying that issuers may add additional plans to an 
existing Form S-8. Specifically, issuers may file an automatically 
effective post-effective amendment to a previously filed Form S-8 to 
add employee benefit plans where the new plan does not require the 
authorization and registration of additional securities for offer and 
sale.\119\ For example, assume an issuer has an effective Form S-8 that 
registers sales of common stock to be issued under the issuer's 2010 
equity compensation plan and has recently adopted a new 2020 equity 
compensation plan to replace the 2010 plan that does not authorize 
additional securities. Upon effectiveness of the 2020 plan, no further 
awards may be granted pursuant to the 2010 plan and any shares covered 
by an award under the 2010 plan are now duly authorized for issuance 
under the 2020 plan. In order to sell under the 2020 plan, the issuer 
may register the securities to be offered and sold pursuant to the new 
plan on a new Form S-8. Alternatively, under the current requirements 
of Form S-8 or Rule 428,\120\ the issuer could file an automatically 
effective post-effective amendment to the previously filed Form S-8 to 
add employee benefit plans, such as the 2020 plan in the example. The 
post-effective amendment to include the additional plan would be 
required to disclose any material change in the plan of distribution, 
including that a new plan is being added to an existing Form S-8.\121\ 
This post-effective amendment would need to describe how shares that 
will not be issued under the previous plans may become authorized for 
issuance under the current plans. The post-effective amendment also 
must identify all covered plans on the cover page and describe, if 
applicable, how the shares that were registered for previous offerings 
on the Form S-8 pursuant to other plans have instead become authorized 
for issuance under the newly added plan.\122\
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    \119\ After discussing these clarifications, we discuss the 
proposed amendments regarding plans that authorize additional 
securities in Section III.A.2, infra.
    \120\ 17 CFR 230.428.
    \121\ See 17 CFR 230.464 and Rule 456. Item 9 of Form S-8 
requires an issuer to make the undertaking set forth in Item 
512(a)(1)(iii) of Regulation S-K in a post-effective amendment. The 
undertaking in Item 512(a)(1)(iii) states that the registrant will 
include any material information with respect to the plan of 
distribution not previously disclosed in the registration statement 
or any material change to such information in the registration 
statement to disclose a material change in the plan of distribution. 
For example, in certain circumstances, a material change may be the 
identification on the registration statement cover page of a new 
plan that is being added to an already existing Form S-8.
    \122\ Id. This would include, for example, if the 2010 plan 
included outstanding options that expired unexercised and the 
underlying shares became authorized for issuance under the 2020 
plan. Using other aspects of the proposed amendments, if necessary, 
issuers would also be able to add securities to an existing Form S-8 
as described below. See Section III.A.3, infra.
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    At the time of the filing of any post-effective amendment to Form 
S-8, the issuer must continue to meet the requirements of the 
form.\123\ The issuer would also add the signatures and file the 
required opinions of counsel with the post-effective amendment. The 
issuer would thereafter deliver or cause to be delivered in accordance 
with Rule 428(b)(2)(i) the documents identified in Rule 428(a) as part 
of the prospectus that describes the new plan.
---------------------------------------------------------------------------

    \123\ See 17 CFR 230.464.
---------------------------------------------------------------------------

    We believe that clarifying the ability to add plans to an existing 
Form S-8 via an automatically effective post-effective amendment will 
reduce the administrative burdens to the extent issuers previously 
believed that the filing an entirely new Form S-8 for each new plan was 
required. This approach also will help facilitate the use of a single 
Form S-8 for all employee benefit plans, if the issuer chooses to do 
so. In addition, it will reduce the problems associated with fee 
transfers between multiple registration statements that have registered 
ongoing offers and sales that cannot be terminated (e.g., outstanding 
options that require continuous ongoing registration of the underlying 
shares).\124\ Similar to permitting the allocation of securities 
between plans on Form S-8, which we discuss below, we do not believe 
that amendments to the current disclosure requirements of Form S-8 or 
Rule 428 are required to implement the proposed clarification. We are 
proposing, however, a minor modification to the cover page of Form S-8 
to clarify that the full title of multiple plans may be listed.\125\
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    \124\ See Rule 457(p). Under current rules, the issuer may be 
unable to avail itself of Rule 457(p) to transfer the fees 
previously paid for plans on other Forms S-8 because Rule 457(p) 
permits filing fees to be transferred only after the registered 
offering has been completed or terminated or the registration 
statement has been withdrawn. As a result, in our example, the 
issuer would not be able to transfer the fees associated with any 
remaining shares under the 2010 plan until it completes or 
terminates the 2010 plan offering registered on the existing Form S-
8.
    \125\ See proposed amendments to the Cover Page of Form S-8.
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    Request for Comment:
    45. Is the clarification regarding the ability of issuers to 
register offers and sales of securities pursuant to multiple plans on a 
single Form S-8 sufficient, or is additional guidance needed? Should we 
instead amend Form S-8 to prohibit issuers from adding plans to an 
existing Form S-8?
    46. Would registering multiple plans on a single Form S-8 work well 
in practice? For example, would registering incentive plans on the same 
Form S-8 as a 401(k) plan or other defined contribution plan cause 
administrative difficulties or investor

[[Page 80246]]

confusion? Would issuers use this feature principally to update and 
refresh their incentive compensation plans?
    47. Are there additional or different disclosures that should be 
required when a plan is added to an existing Form S-8?
2. Securities Allocation Among Incentive Plans
    In addition to clarifying the ability to add additional plans using 
a post-effective amendment, as discussed in Section III.A.1 above, we 
are clarifying that issuers are not required to allocate registered 
securities among incentive plans and may use a single Form S-8 for 
multiple incentive plans.\126\ Although we do not believe that 
amendments to the current disclosure requirements of Form S-8 or Rule 
428 are necessary to permit an issuer's use of a single Form S-8, we 
are proposing several related clarifying amendments.\127\
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    \126\ We note that this clarification regarding allocation of 
securities will not apply to defined contribution plans if the 
amendments are adopted as proposed. Forms S-8 registering securities 
to be offered and sold pursuant to defined contribution plans will 
be deemed to have registered an indeterminate amount of securities 
to be offered and sold pursuant to those plans. See Section III.B.1, 
infra and Proposed Rule 416(d).
    \127\ See proposed changes to the Cover Page of Form S-8.
---------------------------------------------------------------------------

    For issuers utilizing this flexibility, the initial registration 
statement would be required to list the types of securities covered by 
the registration statement and identify the plan or plans pursuant to 
which the issuer intended to issue securities as of that date.\128\ The 
full title of each plan would be required to be listed on the face of 
the registration statement on the appropriate line.\129\ The Part I 
information delivered pursuant to Rule 428 with respect to each plan 
would be required to be specific to that plan. If any Part II 
information relates specifically to one plan, the issuer would be 
required to disclose that relationship clearly. The registration 
statement would not need to assign or allocate the securities to 
particular incentive plans. In this way, the form may be used to create 
a pool of registered shares that may be issued under the issuer's 
various incentive plans as necessary. However, issuers would need to 
track their offers and sales of securities to ensure they have 
sufficient capacity registered in order to fulfill the needs of the 
various incentive plans identified on the form.
---------------------------------------------------------------------------

    \128\ See id.
    \129\ Id.
---------------------------------------------------------------------------

    In the Concept Release, the Commission solicited comment on whether 
the ability to file a single Form S-8 with respect to multiple plans 
and pay filing fees based on the aggregate dollar amount of securities 
to be registered would effectively reduce administrative burdens. 
Commenters were generally supportive of the Commission permitting the 
use of a single Form S-8 to register securities to be issued under 
multiple plans.\130\ One commenter stated that a single ``omnibus'' 
Form S-8 registration statement would reduce administrative burdens of 
registering transactions for multiple plans.\131\ According to another 
commenter, issuers find it to be a ``frustrating limitation'' that 
currently the pools of securities registered for offer and sale 
pursuant to separate plans on separate Forms S-8 cannot be used 
interchangeably.\132\ Other commenters stated that while it may not be 
practicable for issuers to include all plans in a single Form S-8, they 
would benefit from combining at least some with similar 
characteristics,\133\ with one of these commenters noting that 401(k) 
plans are administered separately from long-term incentive plans.\134\
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    \130\ See letters from ABA, Council, Davis Polk, NASPP and 
Shearman.
    \131\ See letter from ABA.
    \132\ See letter from NASPP.
    \133\ See letter from Davis Polk.
    \134\ See letter from NASPP.
---------------------------------------------------------------------------

    We believe that clarifying the ability to use Form S-8 to create a 
pool of registered shares that may be issued under the issuer's various 
incentive plans will promote efficiency and flexibility because it will 
eliminate any doubt about whether authorized but unissued shares under 
a plan that expires would be immediately available for issuance under 
another authorized plan.\135\ In addition, this clarification will 
reduce administrative burdens for those issuers that now believe they 
must use a separate Form S-8 for each plan. Specifically, issuers using 
a single Form S-8 to register the offer and sale of shares issuable 
pursuant to multiple plans simultaneously could avoid collecting 
signatures for multiple, independent Form S-8 filings and multiple 
consents of auditors and other experts whose reports are incorporated 
by reference.\136\ In addition, issuers are required to file the 
consent of auditors with respect to audit opinions appearing in 
Exchange Act reports that are incorporated into Securities Act 
registration statements.\137\ In such a situation, issuers using a 
single Form S-8 registration statement would only need to inform the 
auditors that there is a single Form S-8 into which the auditor's 
opinion is being incorporated by reference (along with any other 
outstanding registration statements on other forms).
---------------------------------------------------------------------------

    \135\ Exchange listing rules generally require shareholder 
approval of incentive plans. See NYSE Listed Company Manual Section 
303A.08 (Shareholder Approval of Equity Compensation Plans), and 
NASDAQ Listing Rule 5635(c) (Equity Compensation).
    \136\ See Item 17 CFR 229.601(b)(23) of Regulation S-K Footnote 
5 to the Item 601 Exhibit Table.
    \137\ General Instruction G.2 to Form S-8 provides that 
registrant information shall be updated by the filing of Exchange 
Act reports, which are incorporated by reference in the registration 
statement and the Section 10(a) prospectus. See also Footnote 5 to 
the Exhibit Table in Item 601 of Regulation S-K, and the Note to the 
Required Information in Form 11-K. Auditor consents typically make 
reference to each registration statement into which the consent is 
incorporated.
---------------------------------------------------------------------------

    Furthermore, we note that when shares are offered pursuant to a 
plan previously identified on the Form S-8, issuers must continue to 
prepare and deliver a plan-specific prospectus, according to current 
requirements, and thus investors would continue to receive the same 
information as is currently required for any Form S-8 offering.\138\ 
Issuers also retain the option to register securities to be issued 
pursuant to individual incentive plans on separate Forms S-8.
---------------------------------------------------------------------------

    \138\ See 17 CFR 230.428 and Part I of Form S-8.
---------------------------------------------------------------------------

    Request for Comment:
    48. Is the clarification regarding the ability of issuers to 
allocate securities among incentive plans on a single Form S-8 
sufficient, or is additional guidance needed? Should we instead adopt 
amendments to prohibit allocation of securities among incentive plans?
    49. Would allocation of securities among incentive plans on a 
single Form S-8 result in a more efficient process of registration?
    50. Would allocation of securities among incentive plans result in 
disclosure that is confusing to investors?
    51. Are there additional or different amendments (other than the 
proposed changes to the cover page of Form S-8) that we should make to 
facilitate the allocation of securities among various incentive plans?
3. Addition of Securities or Classes of Securities to Form S-8
    In addition to adding plans to a Form S-8, from time-to-time, 
issuers may find that they need to add additional securities to the 
registration statement as well. Accordingly, after considering the 
comments received on the Concept Release, we are proposing amendments 
to Rule 413 that would permit issuers to add securities to an existing 
Form S-8 by filing an automatically effective post-effective amendment.
    The Concept Release solicited comment on whether issuers should be

[[Page 80247]]

able to add securities to an existing Form S-8 by automatically 
effective post-effective amendment. As certain commenters noted, Rule 
413 currently does not permit an issuer to register the offer and sale 
of additional securities by means of a post-effective amendment, and 
therefore an issuer must instead file a new Form S-8 to register the 
offer and sale of those securities.\139\ A few commenters supported 
enabling an issuer to add securities to its existing Form S-8 by 
automatically effective post-effective amendment.\140\ One of these 
commenters stated that this would be necessary in order to allow a 
single Form S-8 to cover securities offered under new plans established 
by the issuer and new authorizations of shares under then-existing 
plans.\141\ Another commenter supported this approach noting that it 
would create a pool of shares that could be issued under the issuer's 
various benefit plans as necessary.\142\
---------------------------------------------------------------------------

    \139\ See letter from Sullivan; Rule 413; and Form S-8, General 
Instruction E.
    \140\ See letters from Davis Polk and NASPP.
    \141\ See letter from Davis Polk.
    \142\ See letter from NASPP.
---------------------------------------------------------------------------

    We are proposing to amend Rule 413 to permit issuers to register 
the offer and sale of additional securities or classes of securities on 
Form S-8 by post-effective amendment.\143\ Under the proposed 
amendments, an issuer that has an effective registration statement for 
a previous incentive plan, would no longer be required to file a new 
Form S-8 to register the offering of additional shares under an 
existing or new incentive plan.\144\ Instead, the issuer could file an 
automatically effective post-effective amendment to the existing Form 
S-8 to register the offer and sale of the additional securities.\145\ 
Similarly, if an issuer were to adopt a new employee benefit plan which 
made available a new class of security on a compensatory basis,\146\ 
the issuer would only be required to file an automatically effective 
post-effective amendment to its existing Form S-8 to add the new plan 
and the new class of security to the registration fee table and any 
additional disclosure \147\ that would be required to inform investors 
about the new class of securities.\148\ However, issuers adding new 
classes of securities in this manner would be required to satisfy all 
of the requirements of the form upon filing the post-effective 
amendment. This would include either filing the information required by 
Item 4. Description of Securities in the post-effective amendment to 
Form S-8 or incorporating such information by reference if the class 
has already been registered pursuant to Section 12 of the Exchange 
Act.\149\
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    \143\ See Proposed Rule 413(c).
    \144\ The registration of the offer and sale of additional 
securities pursuant to proposed Rule 413(c) could be accomplished in 
the same automatically effective post-effective amendment used to 
add a new plan to a registration statement, as described in Section 
III.A.1, supra.
    \145\ As proposed, the current method of registering additional 
shares of the same class on Form S-8 by filing a new registration 
statement pursuant to General Instruction E of the form also would 
remain available for use in registering additional securities.
    \146\ An issuer adopting a new plan that did not include a new 
class of security may be able to amend the registration statement in 
the manner described in Section III.A.1, supra, to the extent that 
the new plan did not require the addition of new securities.
    \147\ As discussed in Section III.A.1, supra, adoption of a new 
plan to be included in the registration statement would require 
disclosure of a material change in the existing plan of 
distribution, as well as other information.
    \148\ See, e.g., Item 4 Form of Form S-8, Description of 
Securities.
    \149\ See Item 3(c) of Form S-8.
---------------------------------------------------------------------------

    Proposed Rule 413(c) would provide additional flexibility in that 
issuers registering compensatory offerings on Form S-8 would not need 
to predict how many securities would be required to fulfill obligations 
under each individual plan or even the types of securities that might 
be authorized for issuance pursuant to a plan in the future. For 
example, assume an issuer has an existing Form S-8 on file and intends 
to adopt a new incentive plan that would include awards in the form of 
issuer stock, stock options, restricted stock, stock appreciation 
rights or other share-based awards. Upon taking the necessary steps to 
approve the incentive plan and obtaining any necessary approvals to 
register the offer and sale of shares to be issued pursuant to the 
plan, the issuer could file an automatically effective post-effective 
amendment to its existing registration statement to name the newly 
authorized incentive plan on the cover page and provide all of the 
disclosures required by Rule 428 and Form S-8 for the new plan.\150\ In 
the same post-effective amendment, the issuer could add the securities 
associated with the plan to the registration statement by listing the 
securities in the Calculation of Registration Fee table and checking 
the proposed new checkbox on the cover page of the amended Form S-8 to 
indicate that the sale of the newly included securities is registered 
pursuant to proposed Rule 413(c).\151\ If this issuer later takes the 
necessary steps to increase the number of shares issuable under the 
plan, a new post-effective amendment could be filed that would register 
the offer and sale of the additional securities.\152\ Similarly, if an 
issuer takes the necessary steps to adopt a new plan to include a new 
class of securities such as preferred stock, the issuer could file a 
post-effective amendment to the existing Form S-8 to add both the new 
class of securities and new plan to the registration statement 
simultaneously.\153\
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    \150\ See Section III.A.1, supra.
    \151\ See Proposed Rule 413(c) and the proposed checkbox on Form 
S-8.
    \152\ Id.
    \153\ See Section III.A.1, supra, and Proposed Rule 413(c).
---------------------------------------------------------------------------

    Alternatively, assume an issuer that has maintained a 401(k) 
employee savings plan for several years decides to add its common stock 
as an investment option for employee contributions to the plan. As a 
result, both the 401(k) plan interests and the employer stock to be 
offered as an investment option would become subject to Securities Act 
registration requirements.\154\ The ability to add new plans to an 
existing Form S-8 used in combination with proposed Rule 413(c), would 
permit both the plan interests and the issuer's stock to be added to 
the issuer's existing Form S-8 for an already-existing plan.\155\ The 
issuer would be required to file a post-effective amendment, which 
would include the offer and sale of any shares of employer stock and 
plan interests required to be registered,\156\ and the types of 
information described in the previous example.
---------------------------------------------------------------------------

    \154\ The proposed amendments would not eliminate the 
requirement to register plan interests as separate securities. 
Nevertheless, where a registration statement on Form S-8 relates to 
securities to be offered pursuant to an employee benefit plan, 
including interests in such plan that constitute separate securities 
required to be registered under the Securities Act, such 
registration statement is deemed to register an indeterminate amount 
of such plan interests. No separate fee is required with respect to 
the registered plan interests. See Rule 416(c) and Rule 457(h)(2). 
Furthermore, the proposed amendments would not eliminate the 
requirement to file an Exchange Act annual report on Form 11-K [17 
CFR 249.311] with respect to those plan interests.
    \155\ See Proposed Rule 413(c).
    \156\ If all of the amendments proposed today are adopted, in 
this circumstance, for the 401(k) plan, the issuer would be deemed 
to register an indeterminate amount of defined contribution plan 
securities on the registration statement. See Section III.B.1, 
supra, and Proposed Rule 416(d).
---------------------------------------------------------------------------

    Request for Comment:
    52. Should we permit issuers to add securities to an existing Form 
S-8 registration statement by means of automatically effective post-
effective amendments, as proposed?
    53. Are there concerns associated with allowing issuers to register 
the offer and sale of additional securities or classes of securities by 
post-effective amendment to an existing Form S-8 instead of on a new 
registration statement?

[[Page 80248]]

    54. Would the interplay between adding new plans and registering 
the offer and sale of new securities by post-effective amendment to 
Form S-8 cause problems for particular types of issuers or plans? If 
so, please explain how.
    55. If we adopt proposed Rule 413(c) for the registration of the 
offer and sale of additional securities on Form S-8, should we rescind 
current General Instruction E, which permits the filing of a new, 
abbreviated registration statement to register the offer and sale of 
additional securities of the same class relating to a plan for which a 
Form S-8 registration statement is already effective?

B. Fee Calculation and Fee Payments on Form S-8 for Defined 
Contribution Plans

    As described below, we are proposing changes that we believe should 
ease potential challenges for issuers with respect to timing and 
calculation of fees for offerings of securities pursuant to defined 
contribution plans on Form S-8. First, we propose to amend Rule 457 to 
require registration based on the aggregate offering price of all the 
securities registered. Second, we are proposing a new fee payment 
method that would require issuers to pay the fee for all sales made 
pursuant to defined contribution plan offerings during a given fiscal 
year no later than 90 days after the issuer's fiscal year end. We are 
also soliciting additional comments on the topic of fee calculation to 
determine whether we should clarify how issuers should count shares or 
amounts offered and sold pursuant to defined contribution plans.
    Several commenters noted difficulties currently involved with 
administering the registration of offers and sales pursuant to defined 
contribution plans and offered solutions that the commenters believed 
would reduce complexity and cost of compliance while retaining investor 
protection.\157\ For defined contribution plans, when employees elect 
to invest in issuer securities, the plan may acquire additional shares 
from the issuer, buy shares on the open market, or allocate shares 
divested by other plan participants to fulfill the purchase.\158\ As 
securities are sold to employees pursuant to the plan, issuers are 
required to account for the number of shares sold against the specified 
number of shares registered on the Form S-8. As described by one 
commenter, the issuer must estimate the number of shares to register on 
the original Form S-8, balancing the costs of registering a potentially 
excess number of securities for which fees have been paid,\159\ but 
that may go unsold against the possibility that the issuer could 
inadvertently violate Section 5 if the number of shares sold exceeds 
the number registered under the plan.\160\
---------------------------------------------------------------------------

    \157\ See letters from ABA, Davis Polk, Shearman and Sullivan.
    \158\ For a discussion of sales and registration of securities 
to be issued pursuant to employee benefit plans, see generally 
Employee Benefit Plans: Interpretations of Statute, Release No. 33-
6188 (Feb. 1, 1980) [45 FR 8960 (Feb. 11, 1980)] (``1980 Employee 
Benefit Plans Release''), and Employee Benefit Plans, Release No. 
33-6281 (Jan. 15, 1981) [46 FR 8446 (Jan. 27, 1981)] .
    \159\ We note that registration fee payments pursuant to Section 
6(b)(1) of the Securities Act [15 U.S.C. 77f(b)(1)] are not 
refundable. See 17 CFR 230.111.
    \160\ See letter from Sullivan.
---------------------------------------------------------------------------

    We believe the proposed rules should help resolve many of the 
share-counting difficulties that arise when registering shares to be 
offered and sold pursuant to defined contribution plans such as 401(k) 
plans. For this purpose, we propose to define a ``defined contribution 
plan'' as ``an employee benefit plan (as defined in Sec.  230.405) that 
provides for specified or determinable contributions by the employee, 
employer, or both to an individual account for each employee 
participant where the amount of benefits paid depends, in addition to 
the level of contributions, on the return on the investment.'' \161\
---------------------------------------------------------------------------

    \161\ Proposed amendment to Rule 405.
---------------------------------------------------------------------------

    Request for Comment:
    56. As proposed, would the definition of ``defined contribution 
plan'' properly encompass the types of plans that would benefit from 
the fee calculation and payment methods outlined below? Should the 
definition be revised? If so, should it be broader or narrower?
1. Calculation of the Registration Fee Using the Aggregate Offering 
Price
    One commenter recommended that the Commission permit registration 
of a dollar amount corresponding to an indeterminate number of shares 
because tracking dollar inflows to issuer stock funds would be less 
onerous than tracking the number of shares that remain available.\162\ 
The commenter noted that because defined contribution plans are 
unitized plans whose participants own units of a fund that holds issuer 
stock, plan administrators frequently experience difficulty tracking 
the number of shares of issuer stock that have been offered and sold 
under a Form S-8.\163\ As proposed, issuers relying on the new rules 
would be deemed to register an offering amount corresponding to an 
indeterminate number of securities that would be available for offer 
and sale through the issuer's defined contribution plans. Currently, 
issuers may be calculating the registration fee based on the maximum 
aggregate offering price of all the securities (e.g., common stock, 
debt securities, convertible debt securities, preferred stock, and 
warrants) listed in the ``Calculation of Registration Fee'' table.\164\ 
We are proposing amendments to Rule 457 and Form S-8 to require that 
the registration fee for a defined contribution plan be calculated in a 
similar way, based on the aggregate offering price of all the 
securities sold.\165\ Upon the yearly calculation and payment of the 
registration fee within 90 days of the issuer's fiscal year end, as 
described below,\166\ issuers that had registered an indeterminate 
number of securities on the Form S-8 for defined contribution plans 
would need to calculate their registration fee in accordance with 
proposed Rule 457(h)(4) by multiplying the aggregate offering price of 
securities sold during the fiscal year by the fee payment rate in 
effect on the date of the fee payment, and then pay such fee in 
accordance with the proposed requirements of Rule 456(e).
---------------------------------------------------------------------------

    \162\ See letter from Shearman.
    \163\ Id.
    \164\ See Rule 457(o).
    \165\ See Proposed Rule 457(h)(4) and proposed Note 3 under 
Calculation of Registration Fee. We understand that issuers may have 
previously used existing Rule 457(o) to calculate registration fees 
based on the maximum aggregate offering price of the securities 
registered on Form S-8 for defined contribution plans. If these 
amendments are adopted, all issuers registering shares to be offered 
and sold pursuant to defined contribution plans, including issuers 
previously using 457(o) to calculate registration fees, would 
thereafter make use of Rule 416(d) to register an indeterminate 
amount of securities to be offered and sold pursuant to defined 
contribution plans and Rules 457(h)(4) and 456(e) to calculate and 
pay the required fee, respectively. Where necessary, issuers should 
refer to such fee calculation in the ``Calculation of Registration 
Fee Table'' in the Form S-8 registration statement or post-effective 
amendment to Form S-8 filed to pay the required fee.
    \166\ See Section III.B.2, infra.
---------------------------------------------------------------------------

    Under the proposed amendments, an issuer would calculate the fee 
based, in part, on the funds that plan participants have allocated via 
their payroll deductions to the purchase of issuer stock. Similarly, if 
an issuer contributes shares of issuer stock to satisfy its obligation 
to make matching contributions, the dollar amount of the matching 
obligation satisfied would be aggregated with the overall offering 
amount for the purpose of calculating the fees owed.
    We believe that a fee calculation based on the aggregate offering 
amount of securities sold pursuant to defined contribution plans could 
simplify plan administration by eliminating the need

[[Page 80249]]

to track offers and sales of individual shares of issuer stock within 
unitized plans and should reduce the risks of violating Section 5 by 
allowing offers and sales to be accounted for and paid for based on a 
known aggregate offering dollar amount after contributions are made to 
the issuer stock fund. For plans that are not defined contribution 
plans, such as incentive plans, we believe that issuers will continue 
to register a maximum number of securities issuable under the plan that 
are covered by the registration statement as is currently contemplated 
by Rule 457(h)(1). An issuer may rely on these provisions on the same 
registration statement if the fee table clearly explains how the 
registration fees are being calculated. For example, the proposed 
amendments would permit an issuer to use Rule 457(h)(1) to register the 
offer and sale of a specific number of securities that will be 
allocated to incentive plans and also to use proposed Rule 457(h)(4) to 
register the offer and sale of an indeterminate amount of securities 
pursuant to defined contribution plans on a single Form S-8. 
Alternatively, issuers may continue to file separate Forms S-8 for 
plans of different types.
    Request for Comment:
    57. Should we amend Rule 457 and Form S-8 to require registration 
based on the aggregate offering price of all the securities registered 
pursuant to defined contribution plans, as proposed?
    58. For defined contribution plans, would registration of the offer 
and sale of an aggregate amount of securities mitigate difficulties in 
counting registered offers and sales?
    59. Should the proposed fee calculation method be optional for 
issuers registering the offer and sale of shares to be issued pursuant 
to defined contribution plans?
    60. Should we adopt a transition period for the proposed amendments 
to Rule 457 and Form S-8? If so, how long should the transition period 
be?
    61. Should the proposed requirement to calculate registration fees 
based on an aggregate offering amount of securities be required only 
for defined contribution plans? Are there other types of plans whose 
administration would be simplified by a similar fee calculation?
    62. Would there be difficulties in using separate registration and 
fee instructions (e.g., Rule 457(h)(1) and proposed Rules 416(d) and 
456(e)) on a single Form S-8? If so, would additional guidance on how 
the instructions apply be helpful?
    63. Would issuers register the offer and sale of shares for defined 
contribution plans on the same registration statement as that used for 
other types of plans?
    64. If an issuer wishes to use a single Form S-8 for all plans, 
would the proposed rules create difficulties for issuers that seek to 
register and pay fees for sales pursuant to incentive plans on the same 
form for which defined contribution plans are registered?
2. New Fee Payment Method for Sales Pursuant to Defined Contribution 
Plans
    As discussed in the previous section, issuers may face difficulties 
with respect to calculating the number of securities that have been 
sold pursuant to defined contribution plans. In addition to the new fee 
calculation method described above, we are proposing a modernized 
approach to registration fee payment that would provide for the 
registration on Form S-8 of offers and sales of an indeterminate amount 
of securities of the issuer to be issued pursuant to defined 
contribution plans.\167\ As proposed, the issuer would subsequently pay 
the securities registration fees on a delayed basis, in arrears.
---------------------------------------------------------------------------

    \167\ See Proposed Rules 416(d) and 456(e).
---------------------------------------------------------------------------

    In general, Form S-8 issuers today are required under the 
Securities Act to pay a registration fee to the Commission at the time 
of filing a registration statement, which is not refunded if the issuer 
does not sell the related securities.\168\ As noted by one commenter, 
for defined contribution plans, the current fee payment method results 
in issuers estimating the potential number of future sales off the 
registration statement, both with respect to the initial employee 
deferrals and subsequent investment elections, based on historical 
usage and expected future participation and election rates.\169\ 
Because this calculation and fee payment must occur at the time the 
registration statement is filed, issuers may over- or underestimate the 
number of securities to be offered and sold pursuant to the 
registration statement.
---------------------------------------------------------------------------

    \168\ Section 6(b)(1) of the Securities Act [15 U.S.C. 
77f(b)(1)]. In some cases, unused filing fees may be carried forward 
to a new registration statement. See Rule 457(p) and the limitations 
described in note 124, supra.
    \169\ See letter from Sullivan.
---------------------------------------------------------------------------

    In order to alleviate these difficulties, several commenters 
suggested that for securities to be issued pursuant to a plan, issuers 
should be permitted to register the offer and sale of an indeterminate 
amount of securities initially and then pay a periodic fee based on the 
total sales over a given period.\170\ Commenters that supported the 
registration of the offer and sale of an indeterminate amount of shares 
suggested different methods of calculating the fee owed for 
registration. One suggested a fee payment based on the size of the 
issuer (e.g., market capitalization).\171\ Some commenters suggested an 
issuer should measure usage by totaling the sales that occurred during 
the prior fiscal year and pay the fee based on the amount of shares 
offered and/or sold on an annual basis,\172\ such as at the time of the 
filing of the Form 10-K.\173\ Other commenters supported a pay-as-you-
go fee payment system similar to that which currently exists for well-
known seasoned issuers (``WKSIs'') by which WKSIs are able to pay 
filing fees on an as-needed basis rather than when the registration 
statement is initially filed.\174\ Several commenters recommended a 
cure provision to remedy inadvertent or nominal errors, enabling 
issuers to pay the registration fee after the original due date if the 
issuer makes a good faith effort to pay the fee on a timely basis and 
then pays the fee within a certain number of business days after the 
original due date.\175\ One commenter suggested that this type of fee 
payment method could be optional for issuers that have difficulty 
estimating the amount of securities to be offered and sold pursuant to 
the registration statement and calculating the fee under the current 
system.\176\
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    \170\ See letters from ABA, Chamber, Davis Polk, Postmates, and 
Sullivan.
    \171\ See letter from Davis Polk.
    \172\ See letters from ABA and Sullivan.
    \173\ See letter from ABA.
    \174\ See letters from Chamber and Council. See also the 
definition of well-known seasoned issuer in Rule 405.
    \175\ See letters from ABA, Council and Davis Polk.
    \176\ See letter from Sullivan.
---------------------------------------------------------------------------

    Consistent with our goal of further simplifying registration on 
Form S-8 and in order to help alleviate the difficulties that currently 
exist when registering the offer and sale of securities pursuant to 
defined contribution plans, we are proposing a new fee payment method 
for defined contribution plans. We have proposed the annual fee payment 
method because we believe it would permit issuers to accurately 
determine how many shares were sold pursuant to defined contribution 
plans in the covered period after-the-fact, and therefore should 
eliminate the problem of inadvertently registering the offer and sale 
of too many or too few shares in these offerings. Under the new method, 
when registering the offer and sale of shares pursuant to defined 
contribution plans, issuers would be deemed to have registered the 
offer and sale of an indeterminate amount of securities

[[Page 80250]]

pursuant to the plan.\177\ We believe the proposed amendments would 
therefore eliminate the need for issuers to estimate the number of 
shares that will be sold pursuant to the registration statement and 
avoid the possibility that an issuer would inadvertently sell more 
shares than it had estimated. The amendments also would eliminate the 
need for issuers to register additional offers and sales under these 
plans either by using a new registration statement or proposed Rule 
413(c).
---------------------------------------------------------------------------

    \177\ See supra note 165.
---------------------------------------------------------------------------

    Under the proposed annual fee payment method, any fees associated 
with sales made pursuant to a defined contribution plan in a given 
fiscal year would be required to be paid within 90 calendar days after 
the plan's fiscal year end.\178\ We believe 90 days after the closing 
of the plan's fiscal year should provide issuers ample opportunity to 
calculate the total amount of the shares sold and the associated fee. 
An issuer would pay the fee by filing an automatically effective post-
effective amendment to the Form S-8 registration statement. This post-
effective amendment need only contain the cover page of the 
registration statement, including the calculation of the registration 
fee table, and the required signatures. In any such post-effective 
amendment, an issuer would also be required to check a newly proposed 
box on the post-effective amendment cover page to indicate that the 
amendment is being filed to pay filing fees using the method required 
by Rule 456(e).\179\ This post-effective amendment would only be used 
for the purpose of the payment of fees and not for any other purpose 
such as adding plans or securities to the registration statement as 
proposed elsewhere in this release.\180\
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    \178\ See Proposed Rule 456(e).
    \179\ The Commission has recently proposed amendments that would 
modernize filing fee disclosure and payment methods. The proposed 
amendments would revise most fee-bearing forms, schedules, 
statements, and related rules to require each fee table and 
accompanying disclosure to include all required information for fee 
calculation in a structured (i.e., tagged) format. As proposed, the 
amendments would add the option for fee payment via Automated 
Clearing House (``ACH'') and eliminate the option for fee payment 
via checks and money orders. We expect that improvements in the 
payment validation process made possible by the proposed tagging of 
the fee table and accompanying information with pre-submission 
validation by the filer would provide more certainty to issuers that 
the proper filing fee has been paid. See Filing Fee Disclosure and 
Payment Methods Modernization, Release No. 33-10720 (Oct. 24, 2019) 
[84 FR 71580]. To the extent these changes are adopted, we expect 
that technical changes may be required to conform the new method 
proposed here to the other changes being proposed.
    \180\ See Proposed Rule 456(e)(1).
---------------------------------------------------------------------------

    Issuers would continue to rely on the applicable provision of Rule 
457 to calculate the fee to be paid. As described earlier, if the 
proposed amendments are adopted, the applicable provision for defined 
contribution plans would be Rule 457(h)(4). Consistent with current 
requirements, issuers would be required to clarify their fee 
calculation by providing specific details relating to the fee 
calculation in notes to the Calculation of the Registration Fee table, 
including references to the applicable provisions of Rule 457, if the 
basis of the calculation is not otherwise evident from the information 
presented in the table.\181\ If necessary, this would include 
specifying whether the issuer is relying on existing Rule 457(h)(1) or 
is otherwise registering the offer and sale of an indeterminate number 
of securities pursuant to a defined contribution plan and will pay the 
fees after fiscal year-end using proposed 457(h)(4) and Rules 456(e) 
for the calculation and payment of the fees, respectively.
---------------------------------------------------------------------------

    \181\ See Note 2 to the Calculation of Registration Fee Table.
---------------------------------------------------------------------------

    In addition, proposed Rule 456(e) would include provisions designed 
to clarify the status of defined contribution plan securities where the 
fee is paid in accordance with the proposed rule as well as other 
provisions designed to ease the administration of the fee payments in 
certain circumstances. These proposed provisions include:
     Instruction 1 to Rule 456(e)--on how to count the 90-day 
period after the end of a fiscal year;
     Rules 456(e)(2) and (e)(3)--addressing the treatment of 
the offerings for purposes of Securities Act Sections 5 and 6(a).
     Rule 456(e)(4)--addressing when an issuer ceases 
operations or enters into a merger or other transaction between the 
sale of securities on Form S-8 and when the registration fees are due; 
and
     Rule 456(e)(5)--on the amount of interest due for late 
payments.
    As proposed in Rule 456(e)(4), if an issuer ceases operations 
whether upon the merger, liquidation, or sale of substantially all 
issuer's assets, the plan's fiscal year would be deemed to end on the 
date of the merger, liquidation, or sale of substantially all issuer's 
assets for the purposes of Rule 456(e). Ninety days after such date, 
the issuer would be required to make a final payment for its securities 
that were sold pursuant to the defined contribution plan as of the 
plan's last fiscal year-end.
    The fee payment method we are proposing today would be mandatory 
for issuers that register the offer and sale of shares pursuant to 
defined contribution plans, as we believe the after-fiscal year-end fee 
calculation would be easier for both issuers and the staff to 
administer. The proposed rule would not affect the amount of fees owed 
by issuers for previously registered defined contribution plan 
offerings on Form S-8 that paid the fee upon filing. If the rule is 
adopted as proposed, when the rule becomes effective, all newly filed 
registration statements on Form S-8 for offerings pursuant to defined 
contribution plans would be deemed to register the offer and sale of an 
indeterminate amount of employer securities, and the filing fee for 
those registration statements would be paid not later than 90 days 
after the plan's fiscal year end.
    Request for Comment:
    65. Should we adopt a new registration fee payment method that 
would require issuers to pay the fee for all sales made pursuant to 
defined contribution plan offerings during a given fiscal year no later 
than 90 days after the plan's fiscal year-end, as proposed?
    66. Would the proposed registration fee payment method help to 
address administrative issues regarding the difficulty of keeping track 
of offers and sales registered pursuant to defined contribution plans?
    67. Would the proposed fee payment method be workable in practice? 
If not, what changes should we make to render it more workable?
    68. Is 90 days after the plan's fiscal year-end an appropriate 
period of time in which to calculate the required fee payment? If not, 
would a shorter or longer period be more appropriate?
    69. Instead of paying the fee 90 days after the plan's fiscal year-
end, should the rule be revised to require payment 90 days after the 
issuer's fiscal year-end? Should the payment due date be tied to some 
other date?
    70. Given that these proposed rules are designed to prevent 
inaccuracies in estimating the amounts to be offered and sold under, 
and the calculation of registration fees for, defined contribution 
plans, should we consider adopting an ``insignificant deviations'' 
provision for immaterial or unintentional failures to comply with the 
proposed rules?
    71. Should the proposed fee payment method be optional rather than 
mandatory?
    72. Should the new registration fee payment method be limited to 
certain classes of issuers (e.g., WKSIs or issuers with a proven 
compliance record)?
    73. Are there other types of plans for which the new fee payment 
method would be beneficial? For example, should this payment method 
apply to

[[Page 80251]]

nonqualified deferred compensation plans?
    74. Instead of requiring the registration fees for defined 
contribution plans to be paid on an annual basis, as proposed, should 
we permit all issuers registering securities for defined contribution 
plans on Form S-8 to make registration fee payments on a pay-as-you-go 
basis, as WKSIs are permitted to do for capital-raising offerings 
today? Should we adopt a pay-as-you-go fee payment procedure for other 
types of plans?
    75. As proposed, the payment of the fee would require the filing of 
an automatically effective post-effective amendment to Form S-8 not 
later than 90 days after the plan's fiscal year-end. Are there any 
problems with using this existing form type for the fee payment? In the 
alternative, should we instead require the fee payment with a different 
form or should we adopt a new form dedicated to the payment of the 
fees? If so, what information should that form require?
    76. If we were to require that filing fee information be tagged, is 
there a reason fee-tagging should not be required in the proposed post-
effective amendments to Form S-8?
    77. In the case of a merger, liquidation, or sale of substantially 
all of an issuer's assets, would the proposal to deem the closing of 
the plan's fiscal year to be the date of such transaction work well in 
practice? Are there better ways to ensure correct payment of fees in 
these situations?
    78. Is a transition period needed to implement the proposed fee 
payment method? If so, what would be an appropriate transition period? 
For example, should we delay the effective date of the new fee payment 
method by one year?
    79. If the new fee payment method is adopted as proposed, are there 
any other rules or guidance we should adopt to ensure the fee payment 
rules work effectively?

3. Additional Requests for Comment on Counting the Shares Registered on 
Form S-8 for Defined Contribution Plans

    We believe that the rules proposed today will aid issuers in paying 
accurate and timely fees when registering the offer and sale of 
securities pursuant to defined contribution plans. Below, we address 
some of the additional challenges associated with counting securities 
to be offered and sold pursuant to a registration statement on Form S-8 
for defined contribution plans. One commenter requested clarification 
of how sales and purchases should be tracked and how any netting of 
shares affects the amount of offers and sales that should be 
registered.\182\ Difficulties in estimating the number of shares to be 
offered and sold may arise, for example, when employees participating 
in a defined contribution plan divest their holdings in the issuer 
stock fund, and the divested shares are used to satisfy another 
employee's investment in the issuer stock fund pursuant to the plan.
---------------------------------------------------------------------------

    \182\ See letter from Council.
---------------------------------------------------------------------------

    Currently, Section 5 of the Securities Act requires registration of 
the offer and sale of the securities to the investing employee under 
the plan because it is a separate transaction from the initial offer 
and sale of the securities to the divesting employee. Although current 
practice may vary, because each offer and sale of a security needs to 
be registered or exempt from registration,\183\ we preliminarily 
believe that when employees divest and other employees invest in issuer 
securities within the plan, an issuer should not ``net'' or ``offset'' 
these plan transactions against each other in determining the number of 
shares to deduct from the total number of shares to be offered and sold 
pursuant to the Form S-8. If such securities become available for a 
subsequent sale, after their earlier sale pursuant to a registration 
statement, we preliminarily believe the fact that those shares may be 
the ``same'' shares that were part of a previous, registered 
transaction does not negate the fact that the subsequent sale involves 
a different transaction by the issuer and the plan.
---------------------------------------------------------------------------

    \183\ See Sections 5(a) and 5(c) of the Securities Act of 1933 
[15 U.S.C. 77e(a) and (c)].
---------------------------------------------------------------------------

    We are requesting additional input from commenters that would help 
us clarify how sales of shares pursuant to defined contribution plans 
should be counted for purposes of the Securities Act. In addition, if 
we adopt the changes to the fee payment calculation rules \184\ 
described above, as proposed, issuers will not be able to ``net'' or 
``offset'' employee investments against employee divestments when 
calculating the fees owed for sales made pursuant to the defined 
contribution plan. We are requesting additional comments on whether 
this would be an appropriate result.
---------------------------------------------------------------------------

    \184\ See Proposed Rules 456(e) and 457(h)(4).
---------------------------------------------------------------------------

    Request for Comment:
    80. Does counting the sales of securities pursuant to a defined 
contribution plan on a gross basis, as described above, cause 
difficulty in administering defined contribution plans? Would 
Commission guidance indicating that ``netting'' or ``offsetting'' is 
not permitted eliminate or further mitigate this difficulty?
    81. Should we permit the netting or offsetting of sales made within 
the defined contribution plan so that securities that were made 
available due to employee divestment from the issuer stock fund and 
sold pursuant to employee investment elections would not be counted 
against the number of securities for which sales were registered on 
Form S-8?
    82. Should we adopt the new fee payment method described above 
without netting or offsetting as proposed? Alternatively, if we adopt 
the new fee payment method, should we permit the netting or offsetting 
of sales made within the defined contribution plan to apply to the 
payment of fees for defined contribution plans?
    83. Should we provide additional guidance on this topic in the 
adopting release or elsewhere?

C. Conforming Form S-8 to Rule 701

    The proposed amendments to Rule 701 include, among other things, 
changes to the scope of individuals eligible to receive shares pursuant 
to the exemption.\185\ Several commenters indicated the scope of 
eligible individuals should remain consistent for Rule 701 and Form S-8 
and recommended that, to the extent the Commission changes the scope of 
individuals eligible to receive securities under Rule 701, similar 
changes should be made to the scope of individuals eligible to receive 
securities where the offer and sale is registered on Form S-8.\186\ For 
example, one commenter stated that different eligibility standards 
would create unnecessary compliance burdens and impede the ability of 
issuers to implement consistent and beneficial equity compensation 
strategies without regard to reporting status.\187\ A different 
commenter noted that Rule 701 and Form S-8 promote the same goals 
(including recognizing the difference in the relationship between 
issuer and recipient in compensatory offerings compared to capital-
raising transactions), and given the fact that issuers transition from 
non-reporting to reporting (or vice versa), suggested the two regimes 
should be aligned to the extent practicable.\188\ In view of the 
amendments we are proposing to Rule 701, we are also proposing 
amendments to harmonize the scope of persons who are eligible to 
receive securities

[[Page 80252]]

pursuant to the Rule 701 exemption with those eligible to receive 
securities where the offer and sale is registered on Form S-8.
---------------------------------------------------------------------------

    \185\ See Sections II.C. 1 and 2, supra.
    \186\ See letters from ABA, Chamber, Davis Polk, NASPP and 
Sullivan.
    \187\ See letter from NASPP.
    \188\ See letter from Sullivan.
---------------------------------------------------------------------------

1. Scope of ``Former Employee''
    As discussed above, we are proposing to expand Rule 701 eligibility 
for former employees to specified post-termination grants and to former 
employees of acquired entities.\189\ We believe that expanding Form S-8 
eligibility to encompass former employees in these ways could benefit 
both issuers and securities recipients by facilitating compensatory 
transactions consistent with the purposes of the form.
---------------------------------------------------------------------------

    \189\ See Section II.C.2, supra.
---------------------------------------------------------------------------

    Accordingly, we propose to amend Form S-8 such that it may be used 
to register acquisitions of issuer securities by former employees as 
compensation for such a former employee's service to the issuer during 
a performance period ending within 12 months preceding the former 
employee's resignation, retirement or other termination.\190\ We are 
also proposing that former employees of an acquired entity would be 
eligible to receive securities the offer and sale of which is 
registered on the form.\191\ These individuals would be able to 
participate in an acquiring issuer's employee benefit plan with respect 
to equity awards granted in connection with the acquisition to replace 
awards issued by the target while employed there.
---------------------------------------------------------------------------

    \190\ See proposed General Instruction A.1(a)(3) of Form S-8.
    \191\ Id.
---------------------------------------------------------------------------

    Request for Comment:
    84. Should we conform the ``former employee'' eligibility 
provisions of Rule 701 and Form S-8, as proposed? Are there any unique 
considerations with respect to including former employees in 
compensatory offerings registered on Form S-8?
2. Consultants and Advisors
    As discussed above, we are proposing to amend Rule 701 to expand 
eligibility to certain consultants and advisors that have chosen to 
organize their business as an entity.\192\ Form S-8 may not be used by 
issuers offering securities to consultants who set up passive 
investment vehicles for a non-compensatory or capital raising 
purpose.\193\ Therefore, consistent with the compensatory purpose of 
Form S-8, we propose to make conforming amendments to the form with the 
same conditions as Rule 701, which we believe would prevent issuers 
from using Form S-8 to offer and sell securities to third-party 
investors who did not actually perform services for the issuer. We also 
are proposing conforming changes to the definition of ``employee 
benefit plan'' in Rule 405 \194\ to ensure that the scope of 
consultants or advisors that are eligible to participate in an employee 
benefit plan is consistent with our changes to Form S-8.\195\
---------------------------------------------------------------------------

    \192\ See Section II.C.1, supra.
    \193\ See Release 33-7646 (Feb. 25, 1999) [64 FR 11103 (Mar. 8, 
1999)] (describing the requirements adopted in Securities Act 
Release No. 6867 (June 6, 1990) [55 FR 23909]: ``To be eligible, a 
consultant must provide the issuer bona fide services not in 
connection with the offer or sale of securities in a capital-raising 
transaction'' (emphasis in original)).
    \194\ Rule 405.
    \195\ See the proposed revised definition of ``employee benefit 
plan'' in Rule 405.
---------------------------------------------------------------------------

    We believe the proposed limitations on the use of Form S-8 to offer 
and sell securities to consultants and advisors that organize as 
entities would mitigate the risk that the form would be used to 
compensate investors that do not provide bona fide services to the 
issuer or for capital-raising transactions. As is currently the case, 
the instruction would continue to condition consultant and advisor 
eligibility on the provision of bona fide services to the issuer that 
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. In addition, the 
instruction would permit use of Form S-8 to compensate those entities 
that are owned by the individuals who are actually performing services 
for the issuer.
    Request for Comment:
    85. Should we adopt the same treatment of consultants and advisors 
under Rule 701 and Form S-8? Are there any unique considerations with 
respect to including consultants or advisors organized as entities in 
compensatory offerings registered on Form S-8?

D. Conforming Form S-8 Instructions With Current IRS Plan Review 
Practices

    Item 8(b) of Form S-8 currently specifies that in lieu of providing 
an opinion of counsel regarding compliance with the requirements of 
ERISA or an Internal Revenue Service determination letter, as required 
by Item 601(b)(5)(ii) and (iii) of Regulation S-K,\196\ the issuer may 
undertake to submit the plan and any amendments to the plan to the IRS 
in a timely manner and to make all changes required by the IRS in order 
to qualify the plan. The IRS, however, is only issuing determination 
letters for amendments to previously qualified plans under very limited 
circumstances.\197\
---------------------------------------------------------------------------

    \196\ 17 CFR 229.601(b)(5)(ii) and (iii).
    \197\ See Rev. Proc. 2016-37, 2016-29 I.R.B. 136.
---------------------------------------------------------------------------

    Given the IRS's changed practice, several commenters supported 
modifying or eliminating this requirement in Form S-8.\198\ A few 
commenters stated that requiring the determination letter or legal 
opinion for plan modifications is overly burdensome on issuers and 
should be eliminated.\199\ One commenter stated that it would be 
helpful to provide guidance that those issuers that have adopted a 
prototype or volume submitter plan may satisfy the IRS determination 
letter requirement by providing a copy of the IRS letter regarding the 
prototype or volume submitter plan that was issued to the sponsor of 
the plan that the issuer adopted.\200\ The same commenter stated that 
the Item 8 undertaking should recognize the IRS correction program with 
respect to qualification of plans by having the issuer undertake to 
make corrections in order to maintain the qualification of the plan as 
required by the IRS.\201\
---------------------------------------------------------------------------

    \198\ See letters from ABA, Council, Davis Polk and Shearman.
    \199\ See letters from ABA and Council.
    \200\ See letter from ABA.
    \201\ Id.
---------------------------------------------------------------------------

    We are proposing amendments that take into account the IRS's 
changed practices for plan amendments, while continuing to protect 
investors with respect to the plan's compliance with ERISA. We propose 
to amend Item 8(b) to eliminate the requirement that issuers undertake 
to submit any amendment to the plan to the Internal Revenue 
Service.\202\ We are likewise amending Item 601(b)(5)(iii) of 
Regulation S-K to remove the requirement to file a copy of the IRS 
determination letter that the amended plan is qualified under Section 
401 of the Internal Revenue Code.\203\ The proposal would revise Item 
8(b) to permit an undertaking that issuers will maintain the plan's 
compliance with ERISA and will make all changes required to maintain 
such compliance in a timely manner. However, if the issuer does not 
provide the undertaking required by Item 8(b), as proposed to be 
revised, the requirements of Regulation S-K Item 601(b)(5)(iii) would 
continue to apply with regard to plan amendments and therefore require 
the issuer to file with respect to any amendment a legal opinion 
confirming compliance of the

[[Page 80253]]

amended provisions of the plan with the requirements of ERISA.\204\
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    \202\ See proposed Item 8(b) of Form S-8.
    \203\ See proposed Item 601(b)(5)(iii) of Regulation S-K.
    \204\ Id.
---------------------------------------------------------------------------

    In addition, in lieu of compliance with Item 601(b)(5) and 
notwithstanding the undertaking required by Item 8(b) of Form S-8, the 
proposed amendments would eliminate the issuer-specific determination 
letter or opinion requirements in Item 601(b)(5)(ii) and the opinion 
requirement in Item 601(b)(5)(iii) for those issuers that adopt a 
third-party pre-approved plan \205\ that has been approved by the IRS 
if such issuers file the IRS opinion letter \206\ issued to the pre-
approved plan's provider.\207\ Issuers relying on proposed Item 8(c) 
would not need to obtain their own determination letter from the IRS or 
otherwise provide an opinion of counsel unless the issuer makes 
revisions to the pre-approved plan that may call into question whether 
the revised plan is still qualified.
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    \205\ We note that the pre-approved program, as described in 
Rev. Proc. 2015-36, 2015-27 I.R.B. 20 provided for two types of pre-
approved plan programs: Master & prototype (``M&P'') and volume 
submitter. Those programs were merged into a single pre-approved 
program in Rev. Proc. 2017-41, 2017-29 I.R.B. 92 (``Rev. Proc. 2017-
41'').
    \206\ See Section 4.06 of Rev. Proc. 2017-41.
    \207\ See proposed Item 8(c) of Form S-8.
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    Request for Comment:
    86. Should we adopt the proposed amendments to conform the Form S-8 
requirements to current IRS practices?
    87. Do the proposed amendments provide investors adequate assurance 
of the plan's qualified status?
    88. Do the proposed amendments ease administrative burdens for 
adopters of pre-approved plans? Are there any changes to the 
requirements for adopters of these types of plans that we should 
consider?
    89. Is the undertaking for plan amendments with respect to 
maintaining ERISA qualification necessary? Are there alternative 
approaches to ensuring plan qualification under ERISA that would 
protect investors?

E. Revisions to Item 1(f) of Form S-8; Tax Effects of Plan 
Participation

    We are proposing revisions to the disclosure requirements in Form 
S-8 to eliminate the description of the tax effects, if any, on the 
issuer.\208\ One commenter asked us to reconsider the Item 1(f) 
requirement to describe the tax effect that may accrue to employees as 
a result of participating in a plan, and the tax effects, if any, on 
the issuer.\209\ In a Form S-8, investors are not making a decision 
whether to approve or disapprove a plan; rather, the investment 
decision is whether to participate in an existing plan. We are 
therefore proposing revisions to Form S-8 that would remove the 
requirement to briefly describe the tax consequences of the plan for 
the issuer.
---------------------------------------------------------------------------

    \208\ See proposed revisions to Item 1(f) of Form S-8.
    \209\ See letter from Davis Polk.
---------------------------------------------------------------------------

    With respect to the requirement to disclose the tax consequences 
for employees, the same commenter stated that tax effects depend on 
individual circumstances, which can vary among participants, especially 
for consultants in light of the new deduction for qualified business 
income under IRC Section 199A.\210\ Nevertheless, we are not proposing 
to eliminate the requirement in Form S-8 to describe the tax 
consequences to employees \211\ and to state whether or not the plan is 
qualified under Section 401(a) of the Internal Revenue Code. We 
continue to believe such disclosure could provide relevant information 
for investors as they assess the tax consequences of their 
participation in the plan. We are soliciting further comments, however, 
about the usefulness of this disclosure for investors.
---------------------------------------------------------------------------

    \210\ See letter from Davis Polk, referencing IRC Section 199A.
    \211\ General Instruction A.1(a)(1) defines ``employee'' to 
include certain consultants and advisors.
---------------------------------------------------------------------------

    Request for Comment:
    90. Should we revise the disclosure requirements in Form S-8 to 
eliminate the description of the tax effects, if any, on the issuer, as 
proposed?
    91. Are disclosures regarding the tax effects of plan participation 
useful to investors in the context of a Form S-8 registration 
statement? If so, how?
    92. Are there other ways, outside of the registration statement, 
that investors receive the same information regarding the tax 
consequences to them of plan participation, such that disclosure from 
the issuer would not provide additional or material information?
    93. Are disclosures regarding the description of tax effects of 
plan participation that may accrue to employees helpful? If not, how 
should we address this concern?

F. Additional Requests for Comment About Form S-8

1. Plan Trustee Signatures on Form S-8
    Where interests in a plan are being registered, Form S-8 requires 
the registration statement to be signed by the plan. For the plan 
signature, Form S-8 indicates that it may be signed by the trustees or 
other persons who administer the employee benefit plan. Some commenters 
stated that it is unnecessary and burdensome to require the plan 
trustee to sign the Form S-8.\212\ Instead, the commenters suggested 
the employer/sponsor of the plan whose interests are being registered 
should be able to sign Form S-8 on behalf of the plan.\213\
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    \212\ See letters from Council and Davis Polk.
    \213\ See letters from Council and Davis Polk.
---------------------------------------------------------------------------

    As noted above, we continue to believe that Form S-8 plays a useful 
and effective role in registering the offer and sale of securities 
issued in compensatory offerings under the Securities Act. This is 
true, in part, because the Securities Act registration statement 
provides employees with the liability protections of Section 11 and 
Section 12(a)(2) in the case of material misstatements or omissions of 
information contained in the registration statement or prospectus, 
respectively.\214\ Securities Act Section 11 imposes liability on every 
person who signs the registration statement.\215\ Furthermore, the plan 
and its administrators are responsible for a portion of the disclosure 
investors will receive in connection with the registered offering,\216\ 
and the signature of the plan trustee or other persons who administer 
the employee benefit plan acknowledges that responsibility. As a 
result, we are not proposing changes to the signature requirements of 
Form S-8 at this time. We are, however, soliciting additional comment 
about the legal and practical consequences of the commenters' 
recommended approach.
---------------------------------------------------------------------------

    \214\ See the signature block of Form S-8, which requires the 
trustees or other persons who administer the employee benefit plan 
to have duly caused the registration statement to be signed on its 
behalf. See also 15 U.S.C. 77k and 77l(a)(2).
    \215\ See Section 11(a)(1) of the Securities Act [15 U.S.C. 
77k(a)(1)].
    \216\ Where plan interests are being registered, Form S-8 
requires the plan, at the time of filing, either to (a) have been 
subject to Exchange Act Section 15(d) for at least 90 days and be 
current in its filings thereunder; or (b) file, concurrently with 
the filing of the Form S-8 registration statement, an annual report 
on Form 11-K for its latest fiscal year (or, if the plan has not yet 
completed its first fiscal year, for a period ending not more than 
90 days prior to the filing date). However, the requirement to file 
an annual report on Form 11-K does not apply if the plan was 
established less than 90 days prior to the Form S-8 filing date. 
Therefore, the form may be used for the initial registration of 
interests in a newly established plan.
---------------------------------------------------------------------------

    Request for Comment:
    94. Assuming that having the employer sign on behalf of the plan 
would be legally sufficient to meet the requirements in Section 11, 
such that liability would attach for plan disclosures included in the 
registration statement, could a plan legally authorize the employer to 
sign on its behalf? If so, how would this be done?

[[Page 80254]]

2. Bridging the IPO Gap for Employee Stock Purchase Plans
    It is common for issuers that are completing an initial public 
offering (``IPO'') to also implement an employee stock purchase plan 
(``ESPP''). Such stock purchase plans permit employees to purchase 
stock of their employer through payroll deductions or otherwise, 
typically at a discount to market.\217\ The stock may be acquired 
either directly from the employer or in open market purchases effected 
by the plan.
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    \217\ The offer and sale of securities pursuant to ESPPs, when 
not exempt from registration, are typically registered on Form S-8. 
See 1980 Employee Benefit Plans Release at Section II.A.5.a.
---------------------------------------------------------------------------

    A few commenters cited difficulty in implementing ESPPs for issuers 
that plan to conduct an IPO.\218\ According to one of these commenters, 
most issuers want employees to be enrolled in the ESPP on the IPO date 
to give employees the benefit of the IPO price for the first offering 
under the plan.\219\ Commenters indicated that the registration 
requirement is a ``significant obstacle'' in this process because when 
employees authorize contributions to an ESPP to be made via payroll 
deductions, such authorization is viewed as an investment decision on 
the part of the employee, even if the employee retains the right to 
withdraw contributions prior to the purchase.\220\
---------------------------------------------------------------------------

    \218\ See letters from Davis Polk and NASPP.
    \219\ See letter from NASPP.
    \220\ See letters from Davis Polk and NASPP.
---------------------------------------------------------------------------

    Where employees elect to participate in the ESPP, the pre-IPO 
enrollment of employees would constitute an offer and sale of 
securities to the participant employees, which would need to be either 
registered or exempt. One commenter noted that, without a valid 
exemption, the employer would be unable to solicit employees for 
participation in the plans prior to the IPO.\221\ Consequently, for the 
offer and sale of shares purchased under the ESPP to be covered by a 
Form S-8 registration, the Form S-8 must be effective prior to the date 
that employees authorize the payroll deductions, which cannot occur 
because the issuer is not yet a reporting company, and therefore does 
not meet the requirements to use Form S-8.\222\
---------------------------------------------------------------------------

    \221\ See letter from Davis Polk. See also Section 5(c) of the 
Securities Act.
    \222\ See General Instruction A.1. of Form S-8 requiring that 
Form S-8 eligible issuers be subject to the requirement to file 
reports pursuant to Section 13 (15 U.S.C. 78m) or 15(d) (15 U.S.C. 
78o(d)) of the Exchange Act.
---------------------------------------------------------------------------

    Commenters stated that to avoid the communication and registration 
issues, issuers implementing an ESPP that starts at the time of the IPO 
automatically enroll all of their eligible employees in their ESPPs, 
and then have employees withdraw from or confirm their enrollment 
before the first purchase is made under the ESPPs.\223\ According to 
these commenters, this is an awkward solution because it requires them 
to enroll all the employees before they can communicate about the 
plan.\224\ One commenter further stated that solving the issue of 
planning for an ESPP around the time of an IPO would remove a barrier 
that issuers face when undertaking an IPO.\225\ We are not proposing 
specific amendments at this time but are soliciting additional comments 
on how to best address this issue.
---------------------------------------------------------------------------

    \223\ See letters from Davis Polk and NASPP.
    \224\ Id.
    \225\ See letter from NASPP.
---------------------------------------------------------------------------

    Request for Comment:
    95. Would extending Rule 701 to offers to participate in an ESPP 
made before the IPO and sales pursuant to ESPPs made after the IPO 
facilitate the use of ESPPs? If so, how could we limit such exempt 
sales to IPO employee stock purchase plans?
    96. If Rule 701 were extended to reporting issuers for this 
purpose, would we also need to address the resale limitations set forth 
in Rule 701(g)? If so, how should we do so?
    97. Aside from the Rule 701 exemption, are there alternative 
solutions that we could adopt that would allow employees to participate 
in ESPPs during an IPO?
    98. Would the ability to communicate about the ESPP prior to the 
IPO without pre-IPO plan enrollment be sufficient to allow employee 
participation at the IPO price? If so, what types of communications 
should we exempt and for how long a time period prior to the IPO?

IV. General Request for Comments

    We request and encourage any interested person to submit comments 
on any aspect of our proposals, other matters that might have an impact 
on the proposed amendments, and any suggestions for additional changes. 
With respect to any comments, we note that they are of greatest 
assistance to our rulemaking initiative if accompanied by supporting 
data and analysis of the issues addressed in those comments and by 
alternatives to our proposals where appropriate.

V. Economic Analysis

    Compensatory practices, and the composition of the workforce have 
evolved significantly since the Commission last amended the Rule 701 
exemption and the Form S-8 registration statement. For example, 
businesses have become less asset-intensive, and there have been non-
trivial inflationary effects over the last 20 years. Under the current 
Rule 701 provisions, start-up non-reporting issuers may not be able to 
offer the amount of compensatory securities \226\ that would attract 
and retain human capital and provide incentives to employees. The 
proposed amendments to Rule 701 are in response to such changes in the 
business environment and intended to update the rule's provisions to 
current business environment conditions.
---------------------------------------------------------------------------

    \226\ We believe that most, if not all, issuances under Rule 701 
will be equity-based securities, although the scope of the proposed 
rules is broader than ``equity-based'' compensation.
---------------------------------------------------------------------------

    We are proposing several amendments to Rule 701, Form S-8, and 
related rules to modernize the requirements for compensatory 
transactions. We are mindful of the costs imposed by and the benefits 
obtained from our rules and the proposed amendments.\227\ The 
discussion below addresses the potential economic effects of the 
proposed amendments. These include the likely benefits and costs of the 
proposed amendments and reasonable alternatives thereto, as well as the 
potential effects on efficiency, competition, and capital formation. We 
attempt to quantify these economic effects whenever possible; however, 
due to data limitations, in many cases we are unable to do so. 
Particularly for Rule 701, we are unable to quantify the economic 
effects due to lack of data on non-reporting issuers. Where we are 
unable to provide a quantitative assessment, we provide a qualitative 
discussion of the economic effects instead.
---------------------------------------------------------------------------

    \227\ Section 2(b) of the Securities Act [15 U.S.C. 77b(b)], 
Section 3(f) of the Exchange Act [15 U.S.C. 78c(f)], and Section 
2(c) of the Investment Company Act of 1940 [15 U.S.C. 80a-2(c)] 
require us, when engaging in rulemaking that requires us to consider 
or determine whether an action is necessary or appropriate in (or, 
with respect to the Investment Company Act, consistent with) the 
public interest, to consider, in addition to the protection of 
investors, whether the action will promote efficiency, competition 
and capital formation. In addition, Section 23(a)(2) of the Exchange 
Act [15 U.S.C. 78w(a)(2)] requires us to consider the effects on 
competition of any rules that the Commission adopts under the 
Exchange Act and prohibits the Commission from adopting any rule 
that would impose a burden on competition not necessary or 
appropriate in furtherance of the purposes of the Exchange Act.
---------------------------------------------------------------------------

A. Economic Baseline

    The baseline for the economic analysis consists of the current

[[Page 80255]]

regulatory requirements applicable to issuers issuing securities to 
their employees as part of their compensation arrangements. Non-
reporting issuers are able to rely on Rule 701 to offer compensatory 
securities to their employees. Reporting issuers are able to register 
compensatory securities offerings to their employees on Form S-8.
1. Rule 701
    The proposed amendments to Rule 701 would affect many of the 
requirements associated with the exemption, including the timing and 
content of disclosure for certain offerings, the overall ceiling 
applicable to offerings under the exemption, and the eligible 
recipients of compensatory securities under Rule 701.
    We can approximate the number of growth companies with external 
financing needs using data on companies conducting exempt securities 
offerings under Regulation D, Regulation A, and Regulation 
Crowdfunding. This group may be likely to rely on Rule 701 for the 
purpose of offering competitive compensation packages to attract and 
retain individuals. Based on filings in 2019, we estimate there are 
approximately 17,837 non-reporting companies conducting exempt 
offerings of unregistered securities under the aforementioned 
exemptions.\228\ However, we do not have any data regarding the current 
utilization of the Rule 701 exemption that would allow us to quantify 
the effect of the proposed amendments. Accordingly, in the discussion 
below, we provide a qualitative assessment of the potential effects and 
encourage commenters to provide data and information that would help 
quantify the benefits, costs, and the potential impacts of the proposed 
amendments on efficiency, competition, and capital formation.
---------------------------------------------------------------------------

    \228\ Based on staff analysis of EDGAR filings in calendar year 
2019, there were approximately 17,071 non-reporting operating 
companies conducting Regulation D offerings. In addition, there were 
73 Regulation A issuers that were not Exchange Act reporting 
companies and that did not file a Form D or amendment to it. 
Finally, 693 non-reporting companies conducted offerings solely 
under Regulation Crowdfunding in 2019 (companies conducting both 
Regulation D and Regulation Crowdfunding offerings or both 
Regulation A and Regulation Crowdfunding offerings in 2019 are 
included in the number for Regulation Crowdfunding offerings).
---------------------------------------------------------------------------

2. Form S-8
    The proposed amendments to Form S-8 would affect reporting issuers 
that currently offer, or seek to offer, securities pursuant to employee 
benefit plans. We estimate that 1,753 unique issuers filed 2,006 Forms 
S-8 with the Commission during calendar year 2019. The majority of 
these issuers filed one Form S-8 during 2019. There were 1,522 issuers 
filing one, 201 issuers filing two, and 30 issuers filing three or more 
Forms S-8 during 2019.
    Among the issuers that filed at least one Form S-8 during 2019, 
1,610 were domestic reporting issuers and 143 were FPIs. Among the 
domestic Form S-8 filers, approximately 41% were large accelerated 
filers, 27% were accelerated filers, and 32% were non-accelerated 
filers.\229\ In addition, we estimate that 40% of domestic Form S-8 
filers were smaller reporting companies (``SRCs''), and 28% were 
emerging growth companies (``EGCs'').\230\ Approximately 20% of 
domestic Form S-8 filers were both EGCs and SRCs. Among the FPIs that 
filed at least one Form S-8 during 2019, approximately 23% were large 
accelerated filers, 15% were accelerated filers, and 46% were non-
accelerated filers. Among these FPIs, 48% were EGCs. We further 
estimate that of the 1,753 unique issuers filing at least one Form S-8 
during 2019, at least 85% (1,523 companies) filed a Form S-8 to 
register the sale of compensatory securities for a non-retirement 
related plan.\231\
---------------------------------------------------------------------------

    \229\ Although Rule 12b-2 [17 CFR 240.12b-2] defines the terms 
``accelerated filer'' and ``large accelerated filer,'' it does not 
define the term ``non-accelerated filer.'' If an issuer does not 
meet the definition of accelerated filer or large accelerated filer, 
it is considered a non-accelerated filer.
    \230\ An ``emerging growth company'' is defined, in part, as an 
issuer that had total annual gross revenues of less than $1.07 
billion during its most recently completed fiscal year. See Rule 405 
and 17 CFR 240.12b-2. See also Rule 405; 15 U.S.C. 77b(a)(19); 15 
U.S.C. 78c(a)(80); and Inflation Adjustments and Other Technical 
Amendments under Titles I and II of the JOBS Act, Release No. 33-
10332 (Mar. 31, 2017) [82 FR 17545 (Apr. 12, 2017)].
    ``Smaller reporting company'' is defined in 17 CFR 229.10(f) as 
an issuer that is not an investment company, an asset-backed issuer 
(as defined in 17 CFR 229.1101), or a majority-owned subsidiary of a 
parent that is not a smaller reporting company and that: (i) Had a 
public float of less than $250 million; or (ii) had annual revenues 
of less than $100 million and either: (A) No public float; or (B) a 
public float of less than $700 million.
    \231\ We estimate that 712 issuers filed a form 11-K for fiscal 
year 2019. Of these issuers, 230 also filed a Form S-8 during 2019. 
We assume that Forms S-8 filed by these 230 issuers are in regard to 
a retirement related plan.
---------------------------------------------------------------------------

B. Benefits and Costs to Proposed Amendments to Rule 701 and Form S-8

1. Proposed Amendments to Rule 701(e)
    Rule 701(e) specifies the disclosure requirements for non-reporting 
issuers relying on the Rule 701 exemption to offer securities as 
compensation to employees if the aggregate sales price or amount of 
securities sold during any consecutive 12-month period exceeds $10 
million. For non-reporting issuers that exceed this threshold, the 
required disclosure includes: A copy of the summary plan description 
required by ERISA or a summary of the plan's material terms if it is 
not subject to ERISA; information about the risks associated with 
investment in the securities sold under the plan or contract; and 
financial statements required to be furnished by Part F/S of Form 1-A 
\232\ under Regulation A.\233\ Such financial statements must be as of 
a date no more than 180 days before the sale of securities relying on 
Rule 701. Moreover, the rule requires that the associated disclosures 
be delivered to all investors if the $10 million threshold is 
surpassed, and not only for the sales that exceed the $10 million 
threshold. For FPIs, Rule 701(e) requires financial statements that are 
not prepared in accordance with U.S. GAAP or IFRS to be reconciled to 
U.S. GAAP. We are proposing multiple amendments to Rule 701(e).
---------------------------------------------------------------------------

    \232\ 17 CFR 239.90.
    \233\ 17 CFR 230.251 through 230.263.
---------------------------------------------------------------------------

    The proposed amendments would change various aspects of the 
disclosure required if the aggregate sales price or amount of 
securities sold during a consecutive 12-month period under Rule 701 
exceeds $10 million. The proposed amendments would affect these 
disclosure requirements for all non-reporting issuers relying on the 
exemption, both domestic and FPIs. As proposed, such issuers would be 
required to provide financial statements that are no more than 270 days 
old (as compared to the current 180-day requirement), similar to the 
Regulation A disclosure requirement. FPIs that are eligible for the 
Rule 12g3-2(b) exemption would be able to provide such financial 
statements prepared in accordance with home country accounting 
standards without reconciliation to U.S. GAAP if financial statements 
prepared in accordance with U.S. GAAP or IFRS are not otherwise 
available. In lieu of financial statements, non-reporting issuers would 
be able to disclose a Section 409A independent valuation report, as 
described in more detail below.
    In general, these proposed amendments would lower the cost to non-
reporting issuers that rely on, or seek to rely on, the Rule 701 
exemption, particularly the associated disclosure burden. Lower costs 
related to the use of the exemption may lead to an increase in the use 
of the exemption by non-reporting issuers, to the extent that

[[Page 80256]]

the current disclosure costs discourage non-reporting issuers from 
relying on it. In the context of securities-based compensation, we 
expect that the information contained in financial statements assists 
employees in valuing their compensation packages. However, we lack 
information as to how employees use the existing financial statement 
disclosures to interpret the value of offered securities-based 
compensation or to make investment decisions. To the extent that the 
proposed disclosure requirement leads to less information about the 
value of the non-reporting issuer being available to employees, 
economic theory suggests that increased uncertainty about such value 
may weaken the expected benefits associated with the use of equity-
based pay.\234\
---------------------------------------------------------------------------

    \234\ Non-reporting issuers have more opaque information 
environments, and with few exceptions their securities are not 
traded in an active market. As such, there is more inherent 
uncertainty about their value due to elevated liquidity and 
valuation risks, as compared to reporting companies. Such 
uncertainty is likely to exist for the value of compensatory 
securities offered and may potentially attenuate the incentive 
effects of equity-based pay for non-management employees.
---------------------------------------------------------------------------

    Below, we discuss the costs and benefits of each proposed amendment 
to Rule 701(e) individually.
(a) Disclosure Requirement for the Period Preceding the Threshold 
Amount Being Exceeded
    The first proposed amendment to Rule 701(e) would limit the 
transactions that are subject to the rule's additional disclosure 
requirements when sales of securities under Rule 701 exceed $10 million 
in a 12-month period. Currently, disclosure must be provided a 
reasonable period of time before the date of sale to all investors to 
whom securities are sold during any consecutive 12-month period in 
which the $10 million threshold is exceeded. If disclosure has not been 
provided to all such investors before sale, the non-reporting issuer 
will lose its ability to rely on the exemption for the entire offering. 
The proposed amendment would require disclosure to only those investors 
receiving securities that exceed the $10 million threshold. The 
proposal would thus eliminate the ``look-back'' aspect of the 
disclosure requirement, which may facilitate non-reporting issuers' 
efforts to plan their compensatory programs or respond efficiently to 
unforeseen situations.
    This proposed amendment is likely to provide more certainty to non-
reporting issuers regarding their compliance with disclosure 
obligations under the rule. The proposed amendment also would allow 
non-reporting issuers the flexibility to offer compensatory securities 
as needed throughout the year to take advantage of opportunities to 
attract human capital, without the risk of retroactively losing the 
exemption if the required disclosure was not provided to investors 
involved in sales below the $10 million threshold. To the extent that 
the current disclosure requirement constrains non-reporting issuers 
from fully utilizing the exemption and the potential benefits that may 
accrue from the use of employee securities-based pay, the proposed 
amendment would likely loosen such constraint and allow for more 
efficient use of securities-based pay. We also expect employees to 
benefit from the proposed amendment as they would be able to further 
participate in a securities-based compensation program that might be 
currently constrained due to the existing disclosure requirements.
    We do not expect this proposed amendment to generate any costs for 
employees and issuers. However, the proposed revision could create an 
information asymmetry among employees receiving compensatory 
securities, with some employees being provided more information about 
the non-reporting issuer's value than others. This asymmetry could 
affect the value that employees with different information assign to 
such compensation (higher value generally being associated with greater 
disclosure). Consequently, the benefits from using such compensation, 
such as the alignment of incentives between employees and other 
investors, could be weaker for the group of employees that do not 
receive the prescribed disclosure. Non-reporting issuers could choose 
to voluntarily provide the disclosure to all employees, if it is net 
beneficial for the non-reporting issuer.
(b) Age of Financial Statements
    Another proposed amendment to Rule 701(e) would increase the 
maximum permissible age of the financial statements required to be 
provided to investors to harmonize the requirement with the 
corresponding requirements for capital-raising transactions under 
Regulation A. Currently, non-reporting issuers subject to the Rule 
701(e) disclosure requirement must provide financial statements that 
are dated no more than 180 days before the securities' date of sale. As 
a practical matter, such a requirement compels non-reporting issuers to 
update their financial statements on a quarterly basis in order to make 
continuous offerings in compliance with the rule. The proposed revision 
would require non-reporting issuers to provide financial statements 
that are dated less than 270 days before the securities' date of sale, 
which would permit issuers to satisfy the disclosure requirement 
through semi-annual updating of their financial statements. For non-
reporting issuers that would otherwise not prepare quarterly financial 
statements, increasing the maximum age of the financial statements to 
be provided to investors would lower the compliance costs associated 
with the rule. Such a decrease in the costs of complying with the 
rule's disclosure requirement could lead to an increase in the number 
of non-reporting issuers that rely on the exemption to compensate their 
employees or other eligible parties with securities to the extent such 
non-reporting issuers anticipate exceeding Rule 701's $10 million 
threshold for additional disclosure.
    As mentioned above, more flexibility in the use of securities-based 
compensation may increase the ability of non-reporting issuers that are 
eligible to use the exemption to attract and retain employees, among 
other potential benefits. The proposed amendment would lower compliance 
costs for non-reporting issuers that do not otherwise prepare financial 
statements more frequently than semi-annually. For example, the 
proposed amendments would lower compliance costs relative to current 
Rule 701 for Tier 2 Regulation A issuers that are not Exchange Act 
reporting companies that utilize Rule 701 to offer compensatory 
securities and thus already are required to provide financial statement 
disclosure on a semi-annual basis.
    We do not expect this proposed amendment to generate any costs for 
employees and issuers. We lack information as to how or the extent to 
which employees use these disclosures to make investment decisions, but 
to the extent that less frequent disclosure leads to less timely 
information about the value of the non-reporting issuer, increased 
uncertainty about such value may weaken the expected benefits 
associated with the use of equity-based pay.
(c) Financial Statement Content Requirements for FPIs
    A third proposed amendment would permit FPIs that are eligible for 
the exemption from Exchange Act registration provided by Exchange Act 
Rule 12g3-2(b) to provide financial statements prepared in accordance 
with home country accounting standards, if financial statements 
prepared in accordance with U.S. GAAP or IFRS are not otherwise 
available. Such FPIs

[[Page 80257]]

would experience lower compliance costs under the proposed amendment 
because they would not incur the cost of reconciling their financial 
statements in order to offer more than $10 million in securities in a 
12-month period. Also, to the extent that the cost of the required 
reconciliation to U.S. GAAP discourages Rule 12g3-2(b)-eligible FPIs 
from relying on the exemption, we expect that the proposed amendment 
would likely increase the number of such FPIs that may rely on the 
exemption in the future. Lowering the costs of compliance for such FPIs 
may increase their ability to attract and retain human capital through 
offering securities-based pay.
    With respect to costs, the proposed amendment could generate some 
uncertainty for employees or increase their cost of processing the 
information disclosed in financial statements if those employees are 
less familiar with the home country's accounting standards than U.S. 
GAAP or IFRS, or if those accounting standards do not require the 
disclosure of as much material information.\235\ However, to the extent 
that employees are more familiar with the home country's accounting 
standards, we do not expect the proposed amendment to increase their 
cost of processing the related information.
---------------------------------------------------------------------------

    \235\ It is also possible that the requirement to reconcile 
local/country GAAP financial statements to U.S. GAAP or IFRS may 
have resulted in financial statements with increased reliability, if 
an independent third party performed such exercise.
---------------------------------------------------------------------------

(d) Alternative Valuation Disclosure
    A fourth proposed amendment to Rule 701(e) would permit non-
reporting issuers to provide valuation disclosure using a Section 409 
independent valuation report. The proposal would require the Section 
409A independent valuation report to be prepared pursuant to an 
independent appraisal to reduce potential risks that may arise from an 
issuer providing its own valuation. The proposal also would require the 
Section 409A independent valuation report to be updated at six-month 
intervals. Rule 12g3-2(b)-eligible FPIs would be permitted to disclose 
the fair market value of the securities to be sold consistent with the 
Section 409A rules applicable to stock readily tradeable on an 
established securities market.\236\
---------------------------------------------------------------------------

    \236\ See Treasury Reg. 1.409A-1(b)(5)(iv)(A).
---------------------------------------------------------------------------

    To the extent that the proposed valuation disclosure is a less 
costly alternative to the applicable financial statement requirements, 
the proposed amendment is likely to lower compliance costs for at least 
some non-reporting issuers that issue securities under the Rule 701 
exemption.\237\ A decrease in compliance costs could lead to more non-
reporting issuers relying on the exemption, or to an increase in the 
amount of compensatory securities issued by non-reporting issuers that 
were discouraged to offer compensatory securities in excess of $10 
million so as to not trigger the disclosure requirement. Moreover, if 
the requirement for disclosure of financial statements presents a 
potential risk of unauthorized release of competitively sensitive 
information, the proposed alternative could reduce such risks (to the 
extent that valuation disclosure is less likely to have that 
consequence).
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    \237\ The frequency of the proposed valuation disclosure is less 
than the current financial statement disclosure requirement, which 
would lower compliance costs for non-reporting issuers. The 
requirement that such valuation reports be prepared by an 
independent party would increase the cost of the proposed disclosure 
option, to the extent that non-reporting issuers do not currently 
use an independent party to prepare such valuations for tax 
purposes.
---------------------------------------------------------------------------

    One difference in the information content of a Section 409A 
independent valuation report versus the information content of 
financial statements is that financial statements mostly provide 
information about past economic transactions as captured by applicable 
accounting standards, whereas Section 409A valuations are based on 
assumptions about future performance. It is possible that a Section 
409A independent valuation report could simplify or enhance an 
employee's understanding of the value of his or her compensation as the 
report would provide valuation information that could be more practical 
for such purpose and, depending on the valuation method applied, does 
not necessarily need to be derived from the financial statements.\238\ 
However, valuations rely on multiple assumptions, which could introduce 
some uncertainty with regard to the perceived value of compensatory 
securities. The proposed requirement that such a valuation report be 
prepared pursuant to an independent appraisal should lower the risk 
that valuation assumptions are inaccurate or opportunistic, and 
increase the reliability of such valuations.
---------------------------------------------------------------------------

    \238\ There are multiple ways a valuation could be derived, 
based on facts and circumstances specific to the issuer. Estimation 
of the sum of present value of anticipated future cash-flows is one 
method to derive a valuation, which could be based on information 
from existing financial statements and projections about anticipated 
future cash flows.
---------------------------------------------------------------------------

    Under the proposed amendment, Rule 12g3-2(b)-eligible FPIs that 
have stock readily tradeable on an established securities market would 
disclose the stock price on the most recent trading day preceding the 
date of sale to satisfy the rule's disclosure requirements. Because the 
stock price for these FPIs is readily observable and available, we 
expect the proposed amendment to lower compliance costs for these FPIs. 
Moreover, a valuation derived from the value of tradable stock on an 
established securities market is likely to represent a fair and 
objective value of the securities offered as compensation. To the 
extent that the market conditions for these FPIs lead to a fair and 
objective value, then disclosure of the stock price could increase the 
reliability of such valuation. The foreign listing of a Rule 12g3-2(b)-
eligible FPI helps assure that there is a foreign jurisdiction that 
principally regulates and oversees the trading of the issuer's 
securities and its disclosure obligations to investors, and increases 
the likelihood that the issuer's pricing determinants are located 
outside the United States. While stock price alone does not provide the 
same level of analysis as an independent valuation report, the 
combination of the home country disclosure required in connection with 
the foreign listing and the stock price typically provides a 
significant amount of information that is available for recipients of 
compensatory securities under Rule 701.
(e) Disclosure Requirements for Derivative Securities
    A fifth proposed amendment to Rule 701(e) would distinguish between 
derivative securities that involve a decision to exercise or convert, 
and those that do not, such as RSUs, for purposes of determining when 
disclosure is required to be delivered. As discussed in Section II.A.5, 
the timing of an investment decision, if any, is not universal for the 
various compensatory instruments that are derivative securities. 
Consistent with the rule's general requirement that disclosure be 
provided a reasonable period of time before the date of sale, the 
proposal would generally require delivery of disclosure to recipients 
of derivative securities under the rule at the time most relevant to 
making an investment decision.
    A stock option or similar instrument may expire without being 
exercised or converted, and accordingly, does not result in delivery of 
the underlying shares to the holder absent an affirmative investment 
decision to exercise or convert. In contrast, a restricted stock unit 
or similar instrument settles automatically in the underlying shares at 
maturity, without need for any investment decision by the holder. 
Because such instruments settle by their terms without action by the

[[Page 80258]]

holder, the relevant investment decision, if any, likely takes place at 
the date of grant.
    As proposed, if the sale involves a stock option or other 
derivative security that involves a decision to exercise or convert, 
the non-reporting issuer would continue to be required to deliver Item 
701(e) disclosure a reasonable period of time before the date of 
exercise or conversion. If the sale involves a restricted stock unit or 
other derivative security that does not involve a decision to exercise 
or convert, the proposal would require the non-reporting issuer to 
deliver disclosure a reasonable period of time before the date the 
restricted stock unit or similar derivative security is granted. 
However, if the sale involves a restricted stock unit or other 
derivative security that does not involve a decision to exercise or 
convert and is in connection with the hire of a new employee, the 
disclosure would be considered timely delivered if provided within 14 
calendar days after the date the person begins employment. The proposed 
amendment could benefit non-reporting issuers by limiting potential 
leaks of competitively sensitive information by individuals who seek, 
but do not accept, employment with the non-reporting issuer. If 
securities-based compensation is a significant component of the 
compensation offered to new hires, not providing the disclosure 
required by Rule 701(e) before such grants are awarded could limit the 
ability of securities-based compensation to attract talent. However, we 
expect non-reporting issuers to weigh this potential effect and choose 
the timing of the required disclosure in a way that maximizes their 
expected net benefit.
(f) Disclosure Requirements Following Business Combination Transactions
    A sixth proposed amendment to Rule 701(e) would clarify disclosure 
delivery obligations for the derivative securities of an acquired 
entity that the acquiring non-reporting issuer assumed in a business 
combination transaction. Where an acquired entity complied with Rule 
701 at the time it originally granted the derivative securities, the 
exercise or conversion of acquired entity derivative securities assumed 
by the acquiring non-reporting issuer would be exempt from 
registration, subject to the acquiring non-reporting issuer's 
compliance with Rule 701(e), where applicable. If the acquired entity 
was required to provide disclosure pursuant to Rule 701(e) and the 
derivative securities are exercised or converted after completion of 
the business combination transaction, the acquiring non-reporting 
issuer would assume that disclosure obligation, and would be required 
to provide information meeting the requirements of Rule 701(e) about 
itself, consistent with the timing requirements of Rule 701(e)(6), as 
amended. Further, in determining whether the amount of securities the 
acquiring non-reporting issuer sold during any consecutive 12-month 
period exceeds $10 million for purposes of triggering Rule 701(e) 
disclosure, the acquiring non-reporting issuer would need to consider 
only the securities that it sold in reliance on Rule 701 during that 
period, and would not be required to include any securities sold by the 
acquired entity pursuant to the rule during the same 12-month period. 
This proposal would clarify disclosure delivery obligations following a 
business combination transaction, and permit affected non-reporting 
issuers to plan their compensation programs with more certainty as to 
how a potential future business combination transaction would affect 
the non-reporting issuer's Rule 701(e) disclosure obligations.
2. Proposed Amendments to Rule 701(d)
    Currently, for a non-reporting issuer to be eligible to rely on 
Rule 701, total sales of securities over a consecutive 12-month period 
may not exceed the greatest of three alternatives: (i) $1,000,000 
(``dollar cap''), (ii) 15% of the issuer's total assets (``asset 
cap''), or (iii) 15% of the outstanding amount of securities of the 
class. We are proposing to amend two of these three alternative caps: 
The dollar cap would be raised to $2,000,000, and the asset cap would 
be raised to 25% of an issuer's total assets.
    The proposed increases in the dollar and asset caps would provide 
non-reporting issuers with more flexibility to structure employee 
compensation contracts. We anticipate that non-reporting issuers would 
benefit from this increased flexibility as it would allow them to 
design compensatory arrangements that may better fit their individual 
circumstances. For example, the increased flexibility would permit a 
non-reporting issuer entering a market to grant larger individual 
awards in an effort to attract talent from competitors.
    There is academic literature studying the use of forms of non-
executive employee compensation.\239\ Most of these studies focus on 
non-executive employee stock options. In general, there is evidence 
that the use of stock options in employee compensation contracts 
correlates to increases in future operating performance, higher levels 
of innovation, and firm value.\240\ The studies also find that employee 
stock options are more likely to be used by issuers that are capital-
constrained and by issuers that need to attract certain types of human 
capital.\241\ In addition, one study finds that employee stock options 
are more effective in younger and high growth issuers and when such 
plans are implemented more broadly within issuers.\242\ Other forms

[[Page 80259]]

of securities-based compensation could provide different incentives and 
lead to different outcomes. For example, a study that examines the 
effects of non-executive employee stock ownership in retirement savings 
vehicles finds an inverse relationship between employee stock ownership 
levels and risk-taking.\243\
---------------------------------------------------------------------------

    \239\ These academic studies examine the effects of compensatory 
benefit plans for publicly traded companies. The findings may not 
fully generalize to non-reporting issuers that rely on the Rule 701 
exemption to provide equity-based pay. For example, as discussed 
earlier, the value of non-reporting companies is likely to be more 
uncertain relative to the value of reporting companies due to 
differences such as the information environment. This may increase 
the risk that equity-based pay for non-reporting companies imposes 
for employees receiving such compensation and thereby affect the 
strength of the incentives provided.
    \240\ See Xin Chang et al., Non-Executive Employee Stock Options 
and Corporate Innovation, 115 J. Fin. Econ. 168 (2015) (``Chang et 
al. (2015)''), which uses a sample of S&P1500 companies over the 
1998-2003 period to examine the effect of stock options to non-
executive employees on corporate innovation, as measured by patent 
applications and patent citations. The study documents a positive 
relation between the use of stock options to compensate non-
executive employees and proxies for corporate innovation. The study 
also finds that the effect of employee stock options on innovation 
is due mostly to the risk-taking incentive that stock options 
provide to employees rather than the incentive to exert effort. See 
also Yael V. Hochberg & Laura Lindsey, Incentives, Targeting, and 
Firm Performance: An Analysis of Non-Executive Stock Options, 23 
Rev. Fin. Stud. 4148 (2010) (``Hochberg & Lindsey (2010)''), which 
uses a sample of S&P1500 companies over the 1997-2004 period to 
examine the effect of employee stock options on company performance. 
The study documents a positive relation between implied incentives 
from employee stock options and future operating performance, on 
average. The study also documents that the positive relation between 
employee stock options and firm performance is concentrated in 
smaller firms and firms with significant growth options. Moreover, 
the study shows that such effect is stronger for broad-based option 
plans as they induce a mutual monitoring effect within employees.
    \241\ See John E. Core & Wayne R. Guay, Stock Option Plans for 
Non-Executive Employees, 61 J. Fin. Econ. 253 (2001) (``Core & Guay 
(2001)''), which examines detailed information about non-executive 
employee stock option holdings, grants, and exercises for 756 
companies during the 1994-1997 period. Among other findings, the 
study's results support the hypothesis that options are granted to 
non-executives more intensively when firms have greater financing 
needs and face financing constraints. See also Ilona Babenko, 
Michael Lemmon, & Yuri Tserlukevich, Employee Stock Options and 
Investment, 66 J. Fin. 981 (2011) (``Babenko et al. (2011)''), which 
studies a sample of 1,773 companies over the period 2000 to 2005 
with regard to their broad-based employee stock option programs. The 
study finds evidence consistent with the idea that stock options can 
relax financing constraints by substituting for cash wages at the 
time of the grant, and by providing significant cash inflows at the 
time of exercise, conditional on a high stock price. The study 
further estimates that $0.34 of each dollar of cash inflow received 
by the firm from the exercise of stock options is allocated to 
increasing capital and R&D expenditures.
    \242\ See Hochberg & Lindsey (2010), supra note 240.
    \243\ See Francesco Bova et al., Non-Executive Employee 
Ownership and Corporate Risk, 90 Acct. Rev. 115 (2015), which uses 
U.S. Department of Labor Form 5500 filings to construct 
stockholdings which include employee stock ownership plans (ESOPs), 
401(k) plans, deferred profit sharing plans invested in company 
stock, and employer stock bonus plans. It finds that a higher level 
of such employee stock ownership is related to lower risk-taking by 
employees. The study emphasizes the difference in employee 
incentives created by the various forms of equity-based pay and 
their interaction.
---------------------------------------------------------------------------

    Relatedly, the proposed amendments may affect non-reporting 
issuers' ability to attract and retain talent. For example, a non-
reporting issuer would likely benefit if it is competing for talent 
with reporting companies that are relatively less constrained in their 
ability to offer securities-based incentives to attract talent. 
Moreover, such benefit would likely be particularly important for non-
reporting issuers that are capital constrained. On a similar note, the 
increased ability to offer securities-based compensation may provide 
non-reporting issuers with an additional tool to achieve higher 
employee retention. An academic study finds that the use of broad based 
employee stock options leads to increased retention rates after the 
grant, but such increased retention is followed by higher turnover when 
the options vest.\244\
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    \244\ See Serdar Aldatmaz, Paige Ouimet, & Edward D. Van Wesep, 
The Option to Quit: The Effect of Employee Stock Options on 
Turnover, 127 J. Fin. Econ. 136 (2018), which examines the effect of 
broad based stock option plans on employee retention. The study 
finds decreased employee turnover following the initiation of the 
plan and increased employee turnover in the third year of the grant.
---------------------------------------------------------------------------

    The proposed increases in the dollar cap and the asset cap may also 
allow non-reporting issuers to reallocate relatively limited cash 
resources to other productive uses. This expected benefit may be 
particularly important for non-reporting issuers that are resource-
constrained and for non-reporting issuers whose business models rely on 
human capital (and are less asset-intensive). We expect the proposed 
increase to both caps to provide additional flexibility to non-
reporting issuers in terms of allocating scarce resources.
    While we expect the proposed amendments to Rule 701(d) to benefit 
non-reporting issuers as described above, there is some uncertainty as 
to the extent of the expected benefits from the proposed amendments. 
Specifically, securities-based compensation carries liquidity and 
valuation risks, and these risks are likely to be relatively higher for 
compensatory securities of non-reporting issuers.\245\ Higher liquidity 
and valuation risks may blunt the anticipated economic effects of 
proposed amendments to Rule 701(d) on employee attraction, retention, 
and incentive alignment.\246\
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    \245\ The absence of an active market for securities of non-
reporting issuers introduces uncertainty as to their fair value. 
Holders of compensatory securities of non-reporting issuers also 
have to bear liquidity risk that arises from the absence of an 
active market for these securities.
    \246\ See Brian J. Hall & Kevin J. Murphy, Stock Options for 
Undiversified Executives, 33 J. Acct. & Econ. 3 (2002), which shows 
that there is a difference between the value of a stock option to an 
executive versus the cost of the option to the company, due to the 
executive's risk aversion and undiversified portfolio. See Core & 
Guay (2001), supra note 241.
---------------------------------------------------------------------------

    The proposed amendments also would provide that after completion of 
a business combination transaction, to calculate compliance with 
paragraph (d)(2) of Rule 701, the acquiring non-reporting issuer may 
use a pro forma balance sheet that reflects the transaction or a 
balance sheet for a date after the completion of the transaction that 
reflects the total assets and outstanding securities of the combined 
entity. In addition, in determining the amount of securities that it 
may offer pursuant to Rule 701 following a business combination 
transaction, the acquiring non-reporting issuer would not be required 
to include the aggregate sales price and amount of securities for which 
the acquired entity claimed the exemption during the same 12-month 
period. These proposed changes would allow non-reporting issuers to 
plan their compensation programs without uncertainty as to the effect 
of a potential future business combination transaction. Further, 
permitting an acquiring issuer to compute the asset cap based on the 
combined entity may result in an increase in the maximum dollar amount 
of securities that may be sold over a 12-month period under the 
exemption.
3. Proposed Amendments to Rule 701(c) Eligible Participants
(a) Consultants and Advisors
    We are proposing to extend the eligibility of consultants and 
advisors to receive Rule 701 compensatory securities to entities 
meeting specified ownership criteria designed to link the securities 
compensation to the performance of services and to prevent such 
securities from being issued to passive investment vehicles. Currently, 
only natural persons are eligible to receive securities pursuant to 
Rule 701 for providing services to the non-reporting issuer. The 
proposed amendment would expand the scope of eligible consultants or 
advisors to whom non-reporting issuers may issue securities as 
compensation for services. The proposed extension of consultant and 
advisor eligibility would allow non-reporting issuers to use 
securities-based compensation to engage a wider spectrum of service 
providers, which could enable these non-reporting issuers to gain 
access to potentially higher quality and/or lower cost outside 
expertise and services. These expected benefits likely would be greater 
for non-reporting issuers that are capital-constrained, and non-
reporting issuers whose business models rely on such outside expertise. 
We do not anticipate any significant costs related to this proposal.
(b) Former Employees
    The proposed amendments would extend eligibility to receive 
securities under Rule 701 to former employees of the non-reporting 
issuer who are issued specified post-termination grants and former 
employees of an entity that was acquired by the non-reporting issuer 
who are issued securities in substitution or exchange for securities 
issued as compensation while such persons were still employed by or 
providing services to the acquired issuer. We expect these amendments 
would benefit non-reporting issuers by making compensation planning and 
structure more efficient, as there would be less uncertainty and lower 
administrative costs in cases of employee turnover or business 
combination transactions. We do not anticipate any significant costs 
related to this proposal.
(c) Employees of Subsidiaries
    Further, the proposed amendments would expand availability of the 
Rule 701 exemption to securities offered to employees of any subsidiary 
of the non-reporting issuer, consistent with the scope of eligibility 
for Form S-8, rather than only employees of majority-owned 
subsidiaries. This proposed amendment likely would lower administrative 
burdens for non-reporting issuers relying on the Rule 701 exemption 
when they transition to reporting status and become eligible to use 
Form S-8. We also expect the proposed amendment to benefit non-
reporting issuers and their employees by providing certainty for this 
expanded group of eligible employees about their securities-based 
compensation awards

[[Page 80260]]

when business combination transactions occur. We do not anticipate any 
significant costs to issuers or eligible participants related to this 
proposed amendment.
4. Benefits and Costs to Proposed Amendments to Form S-8
    We are proposing multiple amendments regarding the use of Form S-8 
by reporting issuers. The proposed amendments would expand the scope of 
participants that are eligible to receive compensatory securities 
issued pursuant to a Form S-8 registration statement and conform that 
scope with the corresponding proposed amendments to Rule 701. Moreover, 
the proposed amendments would reduce both the complexities associated 
with registration on Form S-8 and the risk of inadvertent non-
compliance by reporting issuers using the form.
(a) Benefits and Costs From Changes to the Scope of Eligible 
Participants
    The proposed amendments would expand the scope of participants 
eligible to receive compensatory securities issued pursuant to a Form 
S-8 registration statement to include former employees of the reporting 
issuer for specified post-termination grants and former employees of an 
entity that was acquired by the reporting issuer in exchange for 
securities issued as compensation while such former employees were 
still with the acquired issuer. We expect these proposed amendments 
would benefit reporting issuers by reducing uncertainty and 
administrative costs for these issuers' compensation programs in cases 
of employee turnover, or business combination transactions, which may 
make compensation planning and structuring more efficient.
    The proposed amendments would permit reporting issuers to offer 
compensatory securities to consultants and advisors that have chosen to 
organize their business as an entity, provided that the entity meets 
specified ownership criteria designed to link the securities 
compensation with services performed for the issuer, and not issued to 
passive investment vehicles. We expect the proposed expansion of 
consultant and advisor eligibility would benefit reporting issuers as 
the ability to use securities-based compensation to engage a wider 
spectrum of service providers could enable these companies to gain 
access to potentially higher quality and/or lower cost outside 
expertise and services. The expected benefits likely would be greater 
for reporting issuers that are resource constrained and whose business 
models rely on such outside expertise. We do not expect any significant 
costs to issuers or eligible participants associated with the proposed 
amendments.
(b) Benefits and Costs From Other Amendments to Form S-8
    We also are providing clarifications and proposing amendments to 
Form S-8 that are intended to simplify registration and to reduce 
compliance and administrative costs while increasing the utility of 
Form S-8 for reporting issuers.
    We expect the main economic effect of these clarifications and 
proposed amendments to Form S-8 to be the reduction of compliance costs 
for issuers. For example, we are clarifying that reporting issuers may 
allocate securities among multiple incentive plans on a single Form S-8 
and proposing amendments that would permit the addition of securities 
to an existing Form S-8 by an automatically effective post-effective 
amendment. These clarifications and proposed amendments should reduce 
the number of Form S-8 filings, thus reducing reporting issuers' 
compliance costs. Reporting issuers would still have to file post-
effective amendments, which means they would incur some compliance 
costs associated with those filings, but we expect the costs of filing 
an amendment to Form S-8 to be less than those of filing the initial 
form. Likewise, we expect that the proposed amendments to Rule 457 and 
Form S-8 to require the registration of the offer and sale of a maximum 
aggregate offering price of securities pursuant to defined contribution 
plans would reduce compliance costs for reporting issuers by 
eliminating the need to track offers and sales of individual shares of 
issuer stock. For PRA purposes, we estimate the reduction in compliance 
costs associated with the proposed amendments to be approximately 
$46,000.\247\ We note that the PRA costs relate to paperwork burdens 
and thus may not encompass all compliance costs. Accordingly, the PRA 
estimate may underestimate the reduction in compliance costs due to the 
proposed amendments.
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    \247\ See Section VII.C, infra. We monetize the internal burden 
hours by multiplying them by $400, the cost per burden hour for 
outside professional help. Thus, the value of the internal burden 
hours is 115 * $400 = $46,000.
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    We also expect that the clarifications and proposed amendments to 
Form S-8 would provide reporting issuers with flexibility to adjust 
their compensatory benefit plans and should eliminate the risks of 
over- or underestimating the number of securities required for 
compensatory offerings, thereby also reducing the associated risk of 
inadvertent noncompliance. For example, under proposed Rule 413(c), 
reporting issuers would not need to anticipate how many securities will 
be needed to fulfill obligations under each individual plan or even the 
types of securities that might be authorized for issuance pursuant to a 
plan in the future. Additionally, clarifying the ability to file a 
single Form S-8 for multiple plans will facilitate its use, especially 
in connection with incentive plans, because to the extent a plan 
expires with authorized but unissued shares, those shares would be 
immediately available for issuance under another authorized plan. By 
requiring registration of the offer and sale of a maximum aggregate 
offering price of securities pursuant to defined contribution plans, 
the proposed amendment would simplify administration of defined 
contribution plans and avoid inadvertent non-compliance with Section 5 
of the Securities Act.
    The proposed amendments would implement several improvements to 
simplify fee payments. Revised Form S-8 would include a new fee payment 
method for registration of offers and sales pursuant to defined 
contribution plans. The proposed amendment to the fee payment method 
would require reporting issuers to pay the registration fee for all 
sales made pursuant to a defined contribution plan during a fiscal year 
in arrears, based on the aggregate offering amount, no later than 90 
days after the plan's fiscal year end. The proposed fee payment method 
would simplify administration of defined contribution plans and 
potentially eliminate the problem of inadvertently over- or 
underestimating the number of securities to be sold. As a result, it 
could create savings for issuers because instead of paying a 
registration fee to the Commission at the time of filing a registration 
statement, reporting issuers would pay the fee after the end of the 
fiscal year, when the number of transactions will have been 
definitively determined.
    Finally, the proposed amendments would align Form S-8 instructions 
with current IRS plan review practices. This proposed amendment would 
eliminate the requirement that issuers undertake to submit any 
amendment to the plan to the IRS and file a copy of the IRS 
determination letter confirming that the amended plan is qualified 
under Section 401 of the IRC with the Commission. We are also proposing 
to revise Item 1(f) of Form S-8 to eliminate

[[Page 80261]]

the requirement to describe the tax effects of plan participation on 
the issuer but are proposing to retain the requirement to describe the 
tax consequences to employees. These proposed amendments would align 
Form S-8 to current IRS review practices and streamline the content of 
Form S-8 without sacrificing potentially useful disclosure regarding 
the tax effects of participation in the plan for plan participants. We 
also expect these amendments to reduce the compliance costs for 
participants, but we are unable to quantify the cost reduction.
    Overall, we expect that the economic impact to reporting issuers 
from the proposed technical amendments to be limited to reducing 
administrative burdens and complexity associated with registering 
offerings of compensatory securities. We do not anticipate any 
significant costs related to the proposed technical amendments.

C. Anticipated Effects on Efficiency, Competition, and Capital 
Formation

    As described above, we believe that the proposed amendments could 
have positive effects on efficiency, competition, and capital 
formation. The proposed amendments to Rule 701 would enable non-
reporting issuers to expand the use of securities as compensation for a 
wider range of outside expertise and services. We expect this to lead 
to improvements in the operational efficiency of these issuers. We 
expect a similar result from the proposed amendments to the scope of 
eligible participants who may receive compensatory securities for 
reporting issuers in offerings registered on Form S-8. We expect the 
proposed increase to two of the three alternative Rule 701(d) offering 
caps to improve affected issuers' ability to compete for talent by 
increasing their ability to provide equity-based pay packages. The 
proposed amendments to Rule 701(d) also may allow non-reporting issuers 
that are cash-constrained to re-allocate scarce resources to other 
productive uses and, as a result, lead to increased efficiency. 
Increased efficiency may be achieved because non-reporting issuers 
could further the use of securities-based compensation for incentive 
alignment at a lower cost compared to cash. Although offerings made 
pursuant to Rule 701(d) may not be used for capital-raising purposes, 
the proposed amendments could lead to improved utilization of limited 
resources by cash-constrained non-reporting issuers, which would 
enhance overall capital formation.
    The proposed technical amendments to Form S-8 also may enhance 
efficiency as they are likely to lower administrative burdens and 
compliance uncertainty for reporting issuers offering securities-based 
compensation to employees. For example, the proposed amendments are 
likely to increase the ability of reporting issuers to react to 
changing conditions by adjusting their compensatory offerings by adding 
new securities or plans to an existing registration statement, and to 
pay fees for securities sold pursuant to defined contribution plans 
without the risk of inadvertent non-compliance.

D. Reasonable Alternatives

    In broad terms, the proposed amendments to Rule 701 are likely to 
have three main effects:
    (i) Increase the amount of securities-based compensation non-
reporting issuers may provide pursuant to the Rule 701 exemption by 
increasing the rule's dollar amount and asset caps (Rule 701(d));
    (ii) Expand the scope of eligible consultants, advisors and 
employees that may receive securities-based compensation under Rule 701 
in exchange for services provided (Rule 701(c)); and
    (iii) Lower the compliance and disclosure costs for non-reporting 
issuers relying on, or seeking to rely on, the exemption to provide 
exempt securities-based compensation (Rule 701(e)).
    As an alternative to the proposed amendments, we could use 
different caps on the amount of annual securities-based compensation 
that a non-reporting issuer could provide under the Rule 701 exemption 
and/or adjust the third alternative cap (currently set at 15% of the 
maximum number of shares outstanding). Higher caps would allow non-
reporting issuers more flexibility in using the Rule 701 exemption as a 
tool to compensate, attract, and retain employees (and vice versa for 
lower caps). However, due to the fact that non-reporting issuers are 
more opaque and their securities are less liquid, further increasing 
Rule 701(d) caps could lead to diminishing marginal benefits.
    As another alternative, we could choose not to expand Rule 701 and 
Form S-8 eligibility to consultants or advisors organized as entities 
with prescribed characteristics, or to expand Rule 701 and Form S-8 to 
consultant and advisor entities that do not conform to the proposed 
ownership requirements. Given the tax and legal incentives that such 
consultants or advisors have to organize as entities, not including 
such entities under the exemption would result in a limited set of 
choices for non-reporting issuers to seek such services from third 
parties. In seeking the highest quality services at the lowest cost, 
cash-constrained issuers could be at a disadvantage to more established 
issuers facing fewer resource constraints. We also could expand Rule 
701 and Form S-8 eligibility to any consultant or advisor, regardless 
of ownership structure. Such an alternative may provide an even wider 
range of options to issuers to engage outside expertise but would 
increase the risk that such compensatory securities would be issued to 
passive investment vehicles rather than individuals who perform 
services for the issuer.
    Another alternative that we could have pursued is to extend the 
Rule 701 exemption to offers to participate in an ESPP made before the 
IPO and sales pursuant to ESPPs made after the IPO. This would 
facilitate employees' participation in the ESPP to obtain shares at the 
IPO price, which could be lower than the subsequent trading price. Such 
a proposal could present disadvantages, such as employees' loss of the 
information in the prospectus they receive pursuant to Part I of Form 
S-8, employees' loss of the legal protections provided by Securities 
Act liability in the case of material misstatements or omissions, and 
employees' receipt of restricted stock pursuant to Rule 701. However, 
as such an alternative could facilitate the use of ESPPs and allow 
issuers to better align incentives of their employees, the release 
requests comment on this alternative.
    Finally, we could make different amendments to the Rule 701(e) 
disclosure requirements. For example, instead of harmonizing the Rule 
701(e) disclosure requirements with those of Regulation A offerings in 
terms of age of financial statements, we could require less frequent 
updating of this disclosure, for example on an annual basis. Less 
frequent updating would provide less certainty to holders of these 
securities regarding their value and potentially weaken incentive 
effects from the provision of securities-based compensation. However, 
less frequent disclosure of financial statements would be less costly 
for non-reporting issuers and could lead to increased use of 
compensatory securities by non-reporting issuers.
    As another alternative, we could permit the use of a Section 409A 
valuation report in lieu of financial statement disclosure but without 
requiring it to be independently prepared. Such an alternative could 
provide a lower cost option for affected non-reporting issuers to 
satisfy the disclosure requirement of Rule 701(e).

[[Page 80262]]

However, such alternative could give rise to conflicts of interest that 
would undermine the reliability of the valuation report. A lower 
quality valuation report would increase uncertainty about the value of 
the non-reporting issuer and the offered compensatory securities, and 
as a result, would attenuate the expected benefits from the provision 
of equity-based compensation.
    Finally, we could eliminate Form S-8 and allow reporting issuers to 
rely on the Rule 701 exemption instead. Such alternative would lower 
compliance costs for reporting issuers and could promote further use of 
securities-based compensation by reporting issuers. However, such 
alternative could cause employees to receive less information than 
would be required to be provided pursuant to Part I of Form S-8, which 
could lead to more uncertainty about their compensation and potentially 
weaken the expected benefits from the provision of equity-based 
compensation. Eliminating Form S-8 also would cause employees to lose 
the protections provided by Section 11 and, in some cases, Section 
12(a)(2) liability in the case of material misstatements or 
omissions.\248\
---------------------------------------------------------------------------

    \248\ See 15 U.S.C. 77k and 77l(a)(2).
---------------------------------------------------------------------------

    Request for Comment:
    We request comments on all aspects of our economic analysis, 
including the potential costs and benefits of the proposed amendments 
and alternatives thereto, and whether the proposed amendments, if 
adopted, would promote efficiency, competition, and capital formation 
or affect investor protection. In addition, we also seek comment on 
alternative approaches to the proposed amendments and the associated 
costs and benefits of these approaches. Commenters are requested to 
provide data, estimation methodologies, and other factual support for 
their views, in particular, costs and benefits estimates.
    Specifically, we seek comment with respect to the following 
questions: Are there any costs and benefits to any entity that are not 
identified or misidentified in the above analysis? Are there any 
effects on efficiency, competition, and capital formation that are not 
identified or are misidentified in the above analysis? Should we 
consider any of the alternative approaches outlined above instead of 
the proposed amendments? If so, which approach and why? Are there any 
other potential alternative approaches we should consider that would 
promote the ability of companies to compete in the market for talent 
consistent with investor protection?

VI. Paperwork Reduction Act

A. Summary of the Collection of Information

    Certain provisions of our rules and forms that would be affected by 
the proposed amendments contain ``collection of information'' 
requirements within the meaning of the Paperwork Reduction Act of 1995 
(``PRA'').\249\ The Commission is submitting the proposal to the Office 
of Management and Budget (``OMB'') for review in accordance with the 
PRA.\250\ The hours and costs associated with preparing and filing the 
forms and reports constitute reporting and cost burdens imposed by each 
collection of information. An agency may not conduct or sponsor, and a 
person is not required to respond to, a collection of information 
requirement unless it displays a currently valid OMB control number.
---------------------------------------------------------------------------

    \249\ See 44 U.S.C. 3501 et seq.
    \250\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------

    Compliance with the information collections is mandatory. Responses 
to the information collections are not kept confidential and there is 
no mandatory retention period for the information disclosed. The titles 
for the affected collections of information are:
    ``Rule 701'' (OMB Control No. 3235-0522); and
    ``Form S-8'' (OMB Control No. 3235-0066).
    The Commission adopted Form S-8 and Rule 701 pursuant to the 
Securities Act. Form S-8 sets forth the disclosure requirements for a 
registration statement for securities to be offered by a reporting 
issuer under an employee benefit plan to its employees, or employees of 
a subsidiary or parent company, to help such investors make informed 
investment decisions. Rule 701 provides an exemption from registration 
for offers and sales of securities pursuant to certain compensatory 
benefit plans and contracts relating to compensation by non-reporting 
issuers. Issuers conducting compensatory benefit plan offerings in 
excess of $10 million in reliance on Rule 701 during any consecutive 
12-month period are required to provide plan participants with certain 
disclosures, including financial statement disclosures.\251\ This 
disclosure constitutes a collection of information. A description of 
the proposed rule amendments, including the need for the information 
and its proposed use, as well as a description of the likely 
respondents, can be found in Sections II and III above, and a 
discussion of the economic effects of the proposed amendments can be 
found in Section IV above.
---------------------------------------------------------------------------

    \251\ See Rule 701(e).
---------------------------------------------------------------------------

B. Summary of the Proposed Amendments' Effects on the Collections of 
Information

    The following table summarizes the estimated effects of the 
proposed amendments on the paperwork burdens associated with the 
affected collections of information.

                   PRA Table 1--Estimated Paperwork Burden Effects of the Proposed Amendments
----------------------------------------------------------------------------------------------------------------
                                                                                                      Estimated
                                                                                          Current     change in
                                                              Expected estimated PRA     number of    number of
  Collection of  information        Proposed amendment          effect of proposed        average      average
                                                                     amendment             annual       annual
                                                                                         responses   respondents
----------------------------------------------------------------------------------------------------------------
Form S-8.....................   Clarify that         These proposed           2,140            0
                                registrants may add          amendments are expected
                                multiple plans and           to reduce the number of
                                allocate securities among    initial Forms S-8 filed
                                multiple plans on a single   annually, and
                                Form S-8; permit addition    correspondingly increase
                                of securities or classes     the number of post-
                                of securities by             effective amendments to
                                automatically effective-     Form S-8 filed annually.
                                post effective amendment;    We expect the net effect
                                permit registration of an    to be no change in the
                                indeterminate amount of      PRA burden per response
                                securities for Defined       and no change in the
                                Contribution Plans;          number of responses.
                                implement a new fee
                                calculation and payment
                                method for Defined
                                Contribution Plan.
                                Conform Form S-8     Decrease PRA
                                instructions to current      burden per response by 1
                                IRS plan review practices    hour.
                                and eliminate the
                                requirement to describe
                                the tax effects of plan
                                participation on the
                                registrant.

[[Page 80263]]

 
                                Expand eligibility   No change in PRA
                                to specified consultant      burden per response or
                                entities and specified       number of responses.
                                former employees of the
                                registrant and acquired
                                companies.
Rule 701.....................   Require Rule         Elimination of             800           40
                                701(e) disclosure to be      the requirement to
                                delivered to investors       provide Rule 701(e)
                                only for sales that exceed   disclosure to investors
                                the $10 million threshold.   who purchase before the
                                                             $10 million threshold is
                                                             crossed would permit
                                                             issuers who did not
                                                             provide such disclosure
                                                             to continue relying on
                                                             the exemption after
                                                             crossing the $10 million
                                                             threshold. It would also
                                                             allow issuers to avoid
                                                             providing such disclosure
                                                             as a precautionary
                                                             measure in offerings
                                                             where it is unclear
                                                             whether the threshold
                                                             will be crossed. We
                                                             expect the net effect on
                                                             the number of responses
                                                             to be 40 additional
                                                             responses with no change
                                                             in the PRA burden per
                                                             response.
                                Reduce the           Decrease PRA
                                frequency of Rule 701(e)     burden per response by
                                financial statement          0.5 hours.
                                updates; allow Rule 12g3-
                                2(b) eligible foreign
                                private issuers to
                                disclose financial
                                statements that are not
                                reconciled to U.S. GAAP;
                                and allow issuers to
                                disclose valuation
                                information consistent
                                with IRC Section 409A
                                rather than financial
                                statements.
                                Increase the         No change in PRA
                                assets cap to 25% and        burden per response or
                                increase dollar cap to $2    number of responses.
                                million and expand
                                eligibility to specified
                                consultant entities,
                                employees of all
                                subsidiaries, and
                                specified former employees
                                of issuer and acquired
                                companies.
----------------------------------------------------------------------------------------------------------------

C. Incremental and Aggregate Burden and Cost Estimates for the Proposed 
Amendments

    Below we estimate the incremental and aggregate change in paperwork 
burden as a result of the proposed amendments. These estimates 
represent the average burden for all registrants, both large and small. 
In deriving our estimates, we recognize that the burdens will likely 
vary among individual issuers based on a number of factors, including 
the nature of their business. For purposes of the PRA, the burden is to 
be allocated between internal burden hours and outside professional 
costs. The table below sets forth the percentage estimates we typically 
use for the burden allocation for each affected collection of 
information. We also estimate that the average cost of retaining 
outside professionals is $400 per hour.\252\
---------------------------------------------------------------------------

    \252\ We recognize that the costs of retaining outside 
professionals may vary depending on the nature of the professional 
services, but for purposes of this PRA analysis, we estimate that 
such costs would be an average of $400 per hour. This estimate is 
based on consultations with several registrants, law firms, and 
other persons who regularly assist registrants in preparing and 
filing reports with the Commission.

     PRA Table 2--Standard Estimated Burden Allocation for Specified
                       Collections of Information
------------------------------------------------------------------------
                                                              Outside
        Collection of information          Internal (%)    professionals
                                                                (%)
------------------------------------------------------------------------
Form S-8................................              50              50
Rule 701................................              25              75
------------------------------------------------------------------------

    For Rule 701, we estimate that the proposed amendments would change 
both the frequency of responses to, and the burden per response of, the 
existing collections of information. We believe that increasing the 
Rule 701 asset and dollar caps and making the exemption available for 
additional participants would increase the number of securities to be 
issued and expand eligibility to receive securities but would not 
increase the number of responses. For Form S-8 we believe the 
amendments would change only the burden hours. The revised burden 
estimates were calculated by multiplying the revised estimated number 
of responses by the revised estimated average amount of time it would 
take to prepare and review the disclosure required under the affected 
collection of information. The table below illustrates the incremental 
change to the annual compliance burden of the affected collection of 
information, in hours and in costs.\253\
---------------------------------------------------------------------------

    \253\ In both PRA Table 3 and PRA Table 4, the estimated number 
of Form S-8 responses is 230, reflecting the number of Forms S-8 
filed during 2019 in regards to retirement related plans. See n. 
231, supra.

[[Page 80264]]



           PRA Table 3--Calculation of the Incremental Change in Burden Estimates of Current Responses Resulting From the Proposed Amendments
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                            Burden hour                     Decrease in     Decrease in     Decrease in
                                                             Number of        annual        Decrease in      internal      professional    professional
                Collection of information                    estimated     decrease per    burden hours    burden hours      hours for       costs for
                                                             affected        affected      for affected    for  affected     affected        affected
                                                            respondents     respondent      respondents     respondents     respondents     respondents
                                                                     (A)             (B)     (C) = (A) x     (D) = (C) x     (E) = (C) x     (F) = (E) x
                                                                                                     (B)     0.5 or 0.25     0.5 or 0.75            $400
--------------------------------------------------------------------------------------------------------------------------------------------------------
Form S-8................................................             230             (1)           (230)           (115)           (115)       ($46,000)
Rule 701................................................             840           (0.5)           (420)           (105)           (315)       (126,000)
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The table below illustrates the program change expected to result 
from the proposed rule amendments together with the total requested 
change in reporting burden and costs.

                                                              PRA Table 4--Requested Paperwork Burden Under the Proposed Amendments
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Current burden                          Program change                        Requested change in burden
                                                                   -----------------------------------------------------------------------------------------------------------------------------
                               Form                                   Current      Current                  Number of    Change in      Change in     Requested    Requested
                                                                       annual       burden      Current      affected     company     professional      annual       burden       Cost burden
                                                                     responses      hours     cost burden   responses      hours          costs       responses      hours
                                                                            (A)          (B)          (C)          (D)          (E)             (F)          (G)          (H)                (I)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Form S-8..........................................................        2,140       28,890  $11,556,000          230        (115)       ($46,000)        2,140   \1\ 28,775    \2\ $11,510,000
Rule 701..........................................................          800          400      480,000          840     \3\ (85)   \4\ (102,000)          840      \5\ 315        \6\ 378,000
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ This equals the sum of (or difference between) Form S-8 current burden hours and the change in company hours.
\2\ This equals the sum of (or difference between) the current cost burden and the change in professional costs.
\3\ This represents a reduction of (.25 x 400) in the burden hours of the existing 800 respondents, as the PRA burden per response declines from 2 to 1.5 hours, plus (40 x 1.5 x .25) for the
  additional burden hours attributable to 40 additional responses.
\4\ This represents $120,000 reduction in existing cost for existing 800 respondents, plus $18,000 additional cost from adding 40 responses.
\5\ This equals 840 issuers x 1.5 hours x 25%.
\6\ This equals 840 issuers x 1.5 hours x 75% x $400 per hour.

D. Request for Comment

    Request for Comment:
    We request comment in order to:
     Evaluate whether the proposed collection of information is 
necessary for the proper performance of the functions of the agency, 
including whether the information would have practical utility;
     Evaluate the accuracy of our estimate of the burden of the 
proposed collection of information;
     Determine whether there are ways to enhance the quality, 
utility, and clarity of the information to be collected;
     Evaluate whether there are ways to minimize the burden of 
the collection of information on those who are to respond, including 
through the use of automated collection techniques or other forms of 
information technology; and
     Evaluate whether the proposed amendments would have any 
effects on any other collections of information not previously 
identified in this section.\254\
---------------------------------------------------------------------------

    \254\ We request comment pursuant to 44 U.S.C. 3506(c)(2)(B).
---------------------------------------------------------------------------

    Any member of the public may direct to us any comments about the 
accuracy of these burden estimates and any suggestions for reducing 
these burdens. Persons submitting comments on the collection of 
information requirements should direct the comments to the Office of 
Management and Budget, Attention: Desk Officer for the Securities and 
Exchange Commission, Office of Information and Regulatory Affairs, 
Washington, DC 20503, and should send a copy to Vanessa A. Countryman, 
Secretary, Securities and Exchange Commission, 100 F Street NE, 
Washington, DC 20549-1090, with reference to File No. S7-20. Requests 
for materials submitted to OMB by the Commission with regard to these 
collections of information should be in writing, refer to File No. S7-
20, and be submitted to the Securities and Exchange Commission, Office 
of FOIA Services, 100 F Street NE, Washington, DC 20549-2736. OMB is 
required to make a decision concerning the collection of information 
between 30 and 60 days after publication of this release. Consequently, 
a comment to OMB is best assured of having its full effect if OMB 
receives it within 30 days of publication.

VII. Initial Regulatory Flexibility Act Analysis

    This Initial Regulatory Flexibility Act Analysis (``IRFA'') has 
been prepared, and made available for public comment, in accordance 
with the Regulatory Flexibility Act (``RFA'').\255\ It relates to the 
proposed amendments to Securities Act Rule 701 and Form S-8 to 
modernize the two principal means by which issuers grant securities to 
employees in compensatory transactions. As required by the RFA, this 
IRFA describes the impact of these proposed amendments on small 
entities.\256\
---------------------------------------------------------------------------

    \255\ 5 U.S.C. 601 et seq.
    \256\ 5 U.S.C. 603(a).
---------------------------------------------------------------------------

A. Reasons for, and Objectives of, the Proposed Action

    The proposed amendments are designed to modernize Rule 701, an 
exemption from Securities Act registration for certain compensatory 
securities transactions by non-reporting issuers, and Form S-8, a form 
for registering certain compensatory securities transactions by 
reporting companies. The Commission has recognized that the 
relationship between the issuer and recipient of securities is often 
different in compensatory, rather than capital raising, transactions. 
The proposed amendments reflect changes in compensatory practices, 
including the

[[Page 80265]]

types of securities offered, and are intended to modernize and simplify 
administrative requirements.

B. Legal Basis

    We are proposing the amendments contained in this release under the 
authority set forth in Sections 3(b), 6, 7, 8, 10, 19(a) and 28 of the 
Securities Act, as amended, and Sections 3(b), 12, 13, 15, 23(a), and 
36 of the Exchange Act.

C. Small Entities Subject to the Proposed Amendments

    The proposed amendments would affect some issuers that are small 
entities. The RFA defines ``small entity'' to mean ``small business,'' 
``small organization,'' or ``small governmental jurisdiction.'' \257\ 
For purposes of the RFA, under 17 CFR 240.0-10(a), an issuer, other 
than an investment company, is a ``small business'' or ``small 
organization'' if it had total assets of $5 million or less on the last 
day of its most recent fiscal year and, under 17 CFR 230.157, is also 
engaged or proposing to engage in an offering of securities that does 
not exceed $5 million. Under 17 CFR 230.157 and 17 CFR 240.0-10(a), an 
investment company is considered to be a small entity if it, together 
with other investment companies in the same group of related investment 
companies, has net assets of $50 million or less as of the end of its 
most recent fiscal year.
---------------------------------------------------------------------------

    \257\ 5 U.S.C. 601(6).
---------------------------------------------------------------------------

    The proposed amendments would affect both reporting and non-
reporting issuers. We estimate that approximately 52 currently 
reporting issuers that filed a Form S-8 in 2019 qualify as small 
entities that would be eligible to rely on the proposed amendments, but 
lack sufficient data to similarly estimate the number of small, non-
reporting issuers who may be affected.\258\ We therefore are soliciting 
comment on the number of small entities that would be affected by the 
proposed amendments.
---------------------------------------------------------------------------

    \258\ This estimate is based on staff analysis of issuers, 
excluding co-registrants, with EDGAR filings of Form 10-K, 20-F and 
40-F, or amendments, and an S-8 registration filed during the 
calendar year of January 1, 2019 to December 31, 2019. This analysis 
is based on data from XBRL filings, Compustat, and Ives Group Audit 
Analytics.
---------------------------------------------------------------------------

D. Reporting, Recordkeeping and other Compliance Requirements

    The proposed amendments to Rule 701 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; and
     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.
    Because these two proposals affect only Rule 701 offerings that 
exceed $10 million, it is unlikely that they would affect small 
entities that are small businesses or small organizations, which, as 
defined for purposes of the RFA, are subject to a $5 million offering 
limit.
    The remaining proposed amendments would apply to small entities to 
the same extent as other issuers, irrespective of size. The remaining 
proposed amendments to Rule 701 would:
     Raise two of the three alternative regulatory ceilings 
that cap the overall amount of securities that a non-reporting company 
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 (or written 
compensation contract) established by the issuer's subsidiaries, 
whether or not majority-owned.
    With respect to Form S-8, the proposals would:
     Implement improvements and clarifications to simplify 
registration on the form, including:
    [cir] Clarify the ability to add multiple plans to a single Form S-
8; and
    [cir] Clarify the ability to allocate securities among multiple 
incentive plans on a single Form S-8;
    [cir] Permit 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:
    [cir] Permit the registration of an aggregate dollar amount of 
securities; and
    [cir] Implement a new fee payment method for registration of offers 
and sales pursuant to Defined Contribution Plans;
    [cir] Conform Form S-8's instructions with current IRS plan review 
practices; and
     Revise Item 1(f) of Form S-8 to eliminate the requirement 
that the tax effects of plan participation on the registrant be 
described.
    Finally, for both the 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.
    The proposed amendments are expected to modernize and simplify 
compensatory securities offerings for all issuers. As a result, we 
expect that the impact of the proposed amendments would be a reduction 
in the paperwork burden for all issuers, including small entities.\259\ 
We expect that the nature of any benefits and costs imposed by the 
proposed amendments to be similar for large and small entities.\260\
---------------------------------------------------------------------------

    \259\ For purposes of the Paperwork Reduction Act, we estimate a 
decrease of 0.5 burden hour per response for Rule 701 and a decrease 
of 1 burden hour per response for Form S-8. See Section VI, supra.
    \260\ See the discussion of the proposed amendments' economic 
effects on all affected parties, including small entities, in 
Section V, supra.
---------------------------------------------------------------------------

    The proposed amendments would not impose any new reporting or 
recordkeeping requirement, except that the new fee payment method for 
registration of offers and sales pursuant to Defined Contribution Plans 
would require such plans to file a post-effective amendment annually 
within 90 days after the end of the plan's fiscal year to pay the 
registration fee, in arrears, based on aggregate sales by the plan 
during the fiscal year. Currently, Defined Contribution Plans are 
required to keep track of the number of shares sold, so that they can 
maintain registration of sufficient shares to continue compensatory 
offers and sales without violating Section 5 of the Securities Act. The 
proposed fee payment method would simplify plan administration by 
eliminating the need to track individual offers and sales of shares and 
permit fees to be paid based on a known aggregate dollar amount after 
contributions are allocated to company stock. This should significantly 
simplify plan administration and reduce related costs for all reporting 
companies sponsoring Defined Contribution Plans that offer company 
stock, regardless of size.

E. Duplicative, Overlapping or Conflicting Federal Rules

    We believe that the proposed amendments would not duplicate, 
overlap or conflict with other federal rules.

F. Significant Alternatives

    The RFA directs us to consider alternatives that would accomplish 
our stated objectives, while minimizing any significant economic impact 
on small entities. In connection with the

[[Page 80266]]

proposed amendments, we considered the following alternatives:
     Establishing different compliance or reporting 
requirements that take into account the resources available to small 
entities;
     Clarifying, consolidating, or simplifying compliance and 
reporting requirements under the rules for small entities;
     Using performance rather than design standards; and
     Exempting small entities from all or part of the 
requirements.
    We considered establishing different compliance or reporting 
requirements or further clarifying, consolidating, or simplifying 
compliance and reporting requirements for small entities. We have not 
proposed such alternatives, however, because we believe that investor 
protection is better served by the proposals we have chosen. In 
addition, some of the proposals, such as the proposed amendment to Rule 
701(e), are unlikely to affect small entities due to the offering size 
involved.
    With respect to performance versus design standards, the proposed 
amendments generally apply performance standards. For example, the 
proposed amendments provide issuers with discretion in crafting 
disclosures that meet broad principles and standards. We believe that 
it is not appropriate to apply design standards or different 
performance standards to small entities given that compensatory 
relationship between the issuer and employees and related investor 
protection concerns would be the same for small entities and other 
issuers. The proposed amendments generally would simplify, harmonize 
and improve the framework for compensatory securities offerings, 
including for the offering exemption used by small entities. With 
respect to Rule 701, we believe that the proposed amendments would 
provide small entities greater flexibility to make compensatory 
securities offerings at lower costs. With respect to Form S-8, the 
proposed amendments would not establish any significant new reporting, 
recordkeeping, or compliance requirements for small entities, and would 
relieve them of burdens currently associated with registration of 
compensatory offerings. Accordingly, we do not believe it is necessary 
to exempt small entities from all or part of the proposed amendments.

G. Request for Comments

    Request for Comment:
    We encourage the submission of comments with respect to any aspect 
of this
    IFRA. In particular, we request comments regarding:
     How the proposed rule and form amendments can achieve 
their objective while lowering the burden on small entities;
     The number of small entity companies that may be affected 
by the proposed rule and form amendments;
     The existence or nature of the potential effects of the 
proposed amendments on small entity companies discussed in the 
analysis;
     How to quantify the effects of the proposed amendments; 
and
     Whether the proposed amendments would duplicate, overlap 
or conflict with other federal rules.
    Commenters are asked to describe the nature of any effect and 
provide empirical data supporting the extent of the effect. Comments 
will be considered in the preparation of the Final Regulatory 
Flexibility Analysis, if the proposed amendments are adopted, and will 
be placed in the same public file as comments on the proposed 
amendments themselves.

VIII. Small Business Regulatory Enforcement Fairness Act

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996 (SBREFA),\261\ the Commission must advise OMB as to whether 
the proposed amendments constitute a ``major'' rule if it results in, 
or is likely to result in:
---------------------------------------------------------------------------

    \261\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------

     A major increase in costs or prices for consumers or 
individual industries; or
     Significant adverse effects on competition, investment, or 
innovation.
     An annual effect on the U.S. economy of $100 million or 
more;
    We request comment on whether our proposal would be a ``major 
rule'' for purposes of the SBREFA. In particular, we request comment 
and empirical data on:
     The potential effect on the U.S. economy on an annual 
basis;
     Any potential increase in costs or prices for consumers or 
individual industries; and
     Any potential effect on competition, investment, or 
innovation.

IX. Statutory Authority

    The amendments contained in this release are being proposed under 
the authority set forth in Sections 3(b), 6, 7, 8, 10, 19(a) and 28 of 
the Securities Act, as amended, and Sections 3(b), 12, 13, 15, 23(a), 
and 36 of the Exchange Act.

List of Subjects in 17 CFR Parts 229, 230, and 239

    Administrative practice and procedure, Reporting and recordkeeping 
requirements, Securities.

Text of Proposed Rule and Form Amendments

    In accordance with the foregoing, we are proposing to amend title 
17, chapter II of the Code of Federal Regulations as follows:

PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES 
ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND 
CONSERVATION ACT OF 1975--REGULATION S-K

0
1. The authority citation for part 229 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2, 
77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 
77nnn, 77sss, 78c, 78i, 78j, 78j-3, 78l, 78m, 78n, 78n-1, 78o, 78u-
5, 78w, 78ll, 78 mm, 80a-8, 80a-9, 80a-20, 80a-29, 80a-30, 80a-
31(c), 80a-37, 80a-38(a), 80a-39, 80b-11 and 7201 et seq.; 18 U.S.C. 
1350; sec. 953(b), Pub. L. 111-203, 124 Stat. 1904 (2010); and sec. 
102(c), Pub. L. 112-106, 126 Stat. 310 (2012).
* * * * *
0
2. Amend Sec.  229.601 by revising paragraph (b)(5)(iii) to read as 
follows:


Sec.  229.601  (Item 601) Exhibits.

* * * * *
    (b) * * *
    (5) * * *
    (iii) If the securities being registered are issued under a plan 
that is subject to the requirements of the Employment Retirement Income 
Security Act of 1974, as amended, (29 U.S.C. 1001 et seq.) (``ERISA'') 
and the plan has been amended subsequent to the filing of the documents 
required by paragraph (b)(5)(ii)(A) or (B) of this section, furnish an 
opinion of counsel that confirms the compliance of the amended 
provisions of the plan with the requirements of ERISA pertaining to 
such provisions.
* * * * *

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

0
3. The authority citation for part 230 continues to read as follows:

    Authority: 15 U.S.C. 77b, 77b note, 77c, 77d, 77f, 77g, 77h, 
77j, 77r, 77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78o-
7 note, 78t, 78w, 78ll(d), 78mm, 80a-8, 80a-24, 80a-28, 80a-29, 80a-
30, and 80a-37, and Pub. L. 112-106, sec. 201(a), sec. 401, 126 
Stat. 313 (2012), unless otherwise noted.
* * * * *

[[Page 80267]]

0
4. Amend Sec.  230.405 by adding in alphabetical order a definition for 
``Defined contribution plan'' and revising the definition of ``Employee 
benefit plan'' to read as follows:


Sec.  230.405  Definitions of terms.

* * * * *
    Defined contribution plan. The term defined contribution plan means 
an employee benefit plan (as defined in Sec.  230.405) that provides 
for specified or determinable contributions by the employee, employer 
or both to an individual account for each employee participant where 
the amount of benefits paid depends, in addition to the level of 
contributions, on the degree of investment success.
* * * * *
    Employee benefit plan. The term employee benefit plan means any 
written purchase, savings, option, bonus, appreciation, profit sharing, 
thrift, incentive, pension or similar plan or written compensation 
contract solely for employees, directors, general partners, trustees 
(where the registrant is a business trust), officers, or consultants or 
advisors. However, consultants or advisors may participate in an 
employee benefit plan only if:
    (1) They are:
    (i) Natural persons; or
    (ii) An entity, substantially all of the activities of which 
involve the performance of services; and substantially all of the 
ownership interests of which are held directly by:
    (A) No more than 25 natural persons, of whom at least 50 percent 
perform such services for the issuer through the entity;
    (B) The estate of a natural person specified in paragraph 
(1)(ii)(A) of this definition; and
    (C) Any natural person who acquired ownership interests in the 
entity by reason of the death of a natural person specified in 
paragraph (1)(ii) (A) of this definition.
    (2) They provide bona fide services to the registrant; and
    (3) 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 registrant's 
securities.
* * * * *
0
5. Amend Sec.  230.413 by revising paragraph (a) and adding paragraph 
(c) to read as follows:


Sec.  230.413  Registration of additional securities and additional 
classes of securities.

    (a) Except as provided in section 24(f) of the Investment Company 
Act of 1940 (15 U.S.C. 80a-24(f)) and in paragraphs (b) and (c) of this 
section, where a registration statement is already in effect, the 
registration of additional securities shall only be effected through a 
separate registration statement relating to the additional securities.
* * * * *
    (c) Notwithstanding paragraph (a) of this section, the following 
additional securities or additional classes of securities may be added 
to a Form S-8 registration statement already in effect by filing a 
post-effective amendment to that Form S-8 registration statement:
    (1) Securities of the same class as those already registered on a 
previously effective Form S-8 registration statement; and
    (2) Securities of a class different than those registered on the 
effective Form S-8 registration statement.
0
6. Amend Sec.  230.416 by adding paragraph (d) to read as follows:


Sec.  230.416  Securities to be issued as a result of stock splits, 
stock dividends and anti-dilution provisions and interests to be issued 
pursuant to certain employee benefit plans.

* * * * *
    (d) Where a registration statement on Form S-8 relates to 
securities to be offered pursuant to a defined contribution plan, such 
registration statement shall be deemed to register an indeterminate 
amount of such securities.
0
7. Amend Sec.  230.456 by adding paragraph (e) to read as follows:


Sec.  230.456   Date of filing; timing of fee payment.

* * * * *
    (e)(1) Notwithstanding paragraph (a) of this section, an issuer 
that registers securities on Form S-8 to be offered pursuant to a 
defined contribution plan is not required to pay a registration fee at 
the time of filing but instead must pay a registration fee to the 
Commission not later than 90 days after the end of the defined 
contribution plan's fiscal year. The registration fee must be 
calculated in the manner specified in section 6(b) of the Act and Sec.  
230.457(h)(4) (Rule 457), based on the aggregate offering price for 
which the issuer's securities were sold pursuant to registration of an 
indeterminate amount of securities under this subsection during the 
plan's previous fiscal year, provided that: Not later than 90 days 
after the end of the relevant plan fiscal year during which it has 
publicly offered such securities, the issuer files a post-effective 
amendment to the Form S-8 with the Commission. Such post-effective 
amendment must be filed for the sole purpose of paying the fees owed by 
the issuer for sales pursuant to a defined contribution plan, and not 
for any other purpose. The post-effective amendment is required to 
contain only the registration statement cover page including the 
calculation of the registration fee table and the required signatures. 
The post-effective amendment also must be accompanied by the payment by 
the issuer of a registration fee with respect to the offering amount of 
the securities sold during the plan's previous fiscal year as required 
in this section.
    (2) Where an issuer is registering an offering of an indeterminate 
amount of securities pursuant to a defined contribution plan under 
paragraph (e)(1) of this section, the securities sold will be 
considered registered, for purposes of section 6(a) of the Act, if the 
registration fee has been paid and a post-effective amendment is filed 
pursuant to paragraph (e)(1) of this section not later than the end of 
the 90-day period.
    (3) A registration statement filed relying on the registration fee 
payment provisions of paragraph (e)(1) of this section will be 
considered filed as to the securities identified in the registration 
statement for purposes of this section and section 5 of the Act when it 
is received by the Commission, if it complies with all other 
requirements under the Act, including this part.
    (4) For purposes of this section, if an issuer ceases operations, 
the date the issuer ceases operations will be deemed to be the end of 
the plan's fiscal year for the purpose of this Rule 456. In the case of 
a liquidation, merger, or sale of all or substantially all of the 
assets (``merger'') of the issuer, the plan will be deemed to have 
ceased operations for the purposes of this section on the date the 
liquidation, merger or sale is consummated.
    (5) An issuer paying the fee required by paragraph (e)(1) of this 
section or any portion thereof more than 90 days after the end of the 
fiscal year of the issuer shall pay to the Commission interest on 
unpaid amounts, calculated based on the interest rate in effect at the 
time of the interest payment by reference to the ``current value of 
funds rate'' on the Treasury Department's Financial Management Service 
internet site at http://www.fms.treas.gov, or by calling (202) 874-
6995, and using the following formula: I = (X) (Y) (Z/365), where: I = 
Amount of interest due; X = Amount of registration fee due; Y = 
Applicable interest rate, expressed as a fraction; Z = Number of days 
by which the registration fee payment is late. The payment of interest 
pursuant to this paragraph (e)(5) shall not preclude the Commission 
from bringing an action to

[[Page 80268]]

enforce the requirements of paragraph (e) of this section.
    Instruction 1 to paragraph (e): To determine the date on which the 
registration fee must be paid, the first day of the 90-day period is 
the first calendar day of the fiscal year following the fiscal year for 
which the registration fee is to be paid. If the last day of the 90-day 
period falls on a Saturday, Sunday, or Federal holiday, the 
registration fee is due on the first business day thereafter.
    Instruction 2 to paragraph (e): For the purposes of this paragraph, 
the term ``issuer'' refers to the registrant who is offering shares to 
be purchased as part of a defined contribution plan. The term does not 
refer to the defined contribution plan as issuer of plan interests.
0
8. Amend Sec.  230.457 by adding paragraph (h)(4) to read as follows:


Sec.  230.457   Computation of fee.

* * * * *
    (h) * * *
    (4) If an issuer is registering an offering of an indeterminate 
amount of securities to be issued pursuant to a defined contribution 
plan in accordance with paragraph (e)(1) of Sec.  230.456(e) (Rule 
456(e)), the registration fee is calculated by multiplying the 
aggregate offering price of securities sold during the fiscal year by 
the fee payment rate in effect on the date of the fee payment.
0
9. Amend Sec.  230.701 by removing the Preliminary Notes, and revising 
paragraphs (a), and (c) through (e) to read as follows:


Sec.  230.701  Exemption for offers and sales of securities pursuant to 
certain compensatory benefit plans and contracts relating to 
compensation.

    (a) Exemption. Offers and sales made in compliance with all of the 
conditions of this section are exempt from section 5 of the Act (15 
U.S.C. 77e).
    (1) This section relates to transactions exempted from the 
registration requirements of section 5 of the Act (15 U.S.C. 77e). 
These transactions are not exempt from the antifraud, civil liability, 
or other provisions of the federal securities laws. 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.
    (2) In addition to complying with this section, the issuer also 
must comply with any applicable state law relating to the offer and 
sale of securities.
    (3) An issuer that attempts to comply with this section, but fails 
to do so, may claim any other exemption that is available.
    (4) This section is available only to the issuer of the securities. 
Affiliates of the issuer may not use this section to offer or sell 
securities. This section also does not cover resales of securities by 
any person. This section provides an exemption only for the 
transactions in which the securities are offered or sold by the issuer, 
not for the securities themselves.
    (5) The purpose of this section is to provide an exemption from the 
registration requirements of the Act for securities issued in 
compensatory circumstances. This section is not available for plans or 
schemes to circumvent this purpose, such as to raise capital. 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 Act. In any of these cases, 
registration under the Act is required unless another exemption is 
available.
* * * * *
    (c) Transactions exempted by this section. This section exempts 
offers and sales of securities (including plan interests and guarantees 
pursuant to paragraph (d)(2)(ii) of this section) under a written 
compensatory benefit plan (or written compensation contract) 
established by the issuer, its parents, its subsidiaries or 
subsidiaries of the issuer's parent, for the participation of their 
employees, directors, general partners, trustees (where the issuer is a 
business trust), officers, or consultants and advisors, and their 
family members who acquire such securities from such persons through 
gifts or domestic relations orders. This section 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, its parents, its subsidiaries 
or subsidiaries of the issuer's parent at the time the securities were 
offered or during a performance period for which the securities are 
issued as compensation that ended within 12 months preceding the 
employee's resignation, retirement or other termination. This section 
also exempts offers and sales to former employees of an acquired entity 
of securities issued in substitution or exchange for securities issued 
to such employees on a compensatory basis while such persons were 
employed by or providing services to the acquired entity. In addition, 
the term ``employee'' includes insurance agents who are exclusive 
agents of the issuer, its subsidiaries, parents, or subsidiaries of the 
issuer's parent, or derive more than 50% of their annual income from 
those entities. The term ``employee'' also includes executors, 
administrators and beneficiaries of the estates of deceased employees, 
guardians or members of a committee for incompetent former employees, 
or similar persons duly authorized by law to administer the estate or 
assets of former employees.
    (1) Special requirements for consultants and advisors. This section 
is available to consultants and advisors only if:
    (i) They provide bona fide services to the issuer, its parents, its 
subsidiaries or subsidiaries of the issuer's parent;
    (ii) 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; 
and
    (iii) They are:
    (A) Natural persons; or
    (B) An entity, substantially all of the activities of which involve 
the performance of services; and substantially all of the ownership 
interests of which are held directly by:
    (1) No more than 25 natural persons, of whom at least 50 percent 
perform such services for the issuer through the entity;
    (2) The estate of a natural person specified in paragraph 
(c)(1)(iii)(B)(1) of this section; and
    (3) Any natural person who acquired ownership interests in the 
entity by reason of the death of a natural person specified in 
paragraph (c)(1)(iii)(B)(1) of this section.
    (d) Amounts that may be sold--(1) Offers. Any amount of securities 
may be offered in reliance on this section. However, for purposes of 
this section, sales of securities underlying options must be counted as 
sales on the date of the option grant.
    (2) Sales. The aggregate sales price or amount of securities sold 
in reliance on this section during any consecutive 12-month period must 
not exceed the greatest of the following:
    (i) $2,000,000;
    (ii) 25% of the total assets of the issuer (or 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) measured at the issuer's most recent balance sheet date (if 
no older than its last fiscal year end); or
    (iii) 15% of the outstanding amount of the class of securities 
being offered and sold in reliance on this section, measured at the 
issuer's most recent balance sheet date (if no older than its last 
fiscal year end).

[[Page 80269]]

    (3) Rules for calculating prices and amounts--(i) Aggregate sales 
price. The term aggregate sales price means the sum of all cash, 
property, notes, cancellation of debt or other consideration received 
or to be received by the issuer for the sale of the securities. Non-
cash consideration must be valued by reference to bona fide sales of 
that consideration made within a reasonable time or, in the absence of 
such sales, on the fair value as determined by an accepted standard. 
The value of services exchanged for securities issued must be measured 
by reference to the value of the securities issued. Options must be 
valued based on the exercise price of the option.
    (ii) Time of the calculation. With respect to options to purchase 
securities, the aggregate sales price is determined when an option 
grant is made (without regard to when the option becomes exercisable). 
With respect to other securities, the calculation is made on the date 
of sale. With respect to deferred compensation or similar plans, the 
calculation is made when the irrevocable election to defer is made.
    (iii) Derivative securities. In calculating outstanding securities 
for purposes of paragraph (d)(2)(iii) of this section, treat the 
securities underlying all currently exercisable or convertible options, 
warrants, rights or other securities, other than those issued under 
this exemption, as outstanding. In calculating the amount of securities 
sold for other purposes of paragraph (d)(2) of this section, count the 
amount of securities that would be acquired upon exercise or conversion 
in connection with sales of options, warrants, rights or other 
exercisable or convertible securities, including those to be issued 
under this exemption.
    (iv) Other exemptions. Amounts of securities sold in reliance on 
this section do not affect ``aggregate offering prices'' in other 
exemptions, and amounts of securities sold in reliance on other 
exemptions do not affect the amount that may be sold in reliance on 
this section.
    (v) Merged entities. After completion of a business combination 
transaction, to calculate compliance with paragraph (d)(2) of this 
section, the acquiring issuer may use a pro forma balance sheet that 
reflects the business combination transaction or a balance sheet for a 
date after the completion of the business combination transaction that 
reflects the total assets and outstanding securities of the combined 
entity.
    (e) Disclosure that must be provided. The issuer must deliver to 
investors a copy of the compensatory benefit plan or the contract, as 
applicable. In addition, if the aggregate sales price or amount of 
securities sold during any consecutive 12-month period exceeds $10 
million, the issuer must deliver to investors, for sales after the $10 
million threshold is exceeded, the following disclosure a reasonable 
period of time before the date of sale:
    (1) If the plan is subject to the Employee Retirement Income 
Security Act of 1974 (``ERISA'') (29 U.S.C. 1104-1107), a copy of the 
summary plan description required by ERISA;
    (2) If the plan is not subject to ERISA, a summary of the material 
terms of the plan;
    (3) Information about the risks associated with investment in the 
securities sold pursuant to the compensatory benefit plan or 
compensation contract; and
    (4)(i) Financial statements required to be furnished by Part F/S of 
Form 1-A (Regulation A Offering Statement) (Sec. Sec.  230.251 through 
230.263), for either a Tier 1 or Tier 2 offering. Issuers must apply 
the age of financial statements requirements of Part F/S paragraphs 
(b)(3) and (4) at the time of sale. Foreign private issuers as defined 
in Rule 405 must provide a reconciliation to generally accepted 
accounting principles in the United States (U.S. GAAP) if their 
financial statements are not prepared in accordance with U.S. GAAP or 
International Financial Reporting Standards (IFRS) as issued by the 
International Accounting Standards Board (IASB) (Item 17 of Form 20-F 
(Sec.  249.220f of this chapter)), provided that foreign private 
issuers that are eligible for the exemption from Exchange Act 
registration provided by Exchange Act Rule 12g3-2(b) (Sec.  240.12g3-
2(b) of this chapter) may provide financial statements that are 
prepared in accordance with home country accounting standards without 
reconciliation to U.S. GAAP if financial statements prepared in 
accordance with U.S. GAAP or IFRS as issued by the IASB are not 
otherwise available.
    (ii) In lieu of the financial statements required by paragraph 
(e)(4)(i) of this section:
    (A) A foreign private issuer that is eligible for the exemption 
from Exchange Act registration provided by Exchange Act Rule 12g3-2(b) 
(Sec.  240.12g3-2(b) of this chapter) may provide the fair market value 
of the securities to be sold as determined consistent with the rules 
and regulations under Section 409A of the Internal Revenue Code (26 
U.S.C. 409A) applicable to stock readily tradeable on an established 
securities market; and
    (B) Any other issuer may provide an independent valuation report of 
the fair market value of the securities to be sold as determined by an 
independent appraisal consistent with the rules and regulations under 
Section 409A of the Internal Revenue Code (26 U.S.C. 409A) applicable 
to determination of the fair market value of service recipient stock 
for stock not readily tradable on an established securities market, as 
of a date that is no more than 6 months before the sale of securities 
in reliance on this exemption.
    (5) If the issuer is relying on paragraph (d)(2)(ii) of this 
section to use its parent's total assets to determine the amount of 
securities that may be sold, the parent's financial statements must be 
delivered. If the parent is subject to the reporting requirements of 
section 13 or 15(d) of the Exchange Act (15 U.S.C. 78m or 78o(d)), the 
financial statements of the parent required by Rule 10-01 of Regulation 
S-X (Sec.  210.10-01 of this chapter) and Item 310 of Regulation D-B 
(Sec.  228.310 of this chapter), as applicable, must be delivered.
    (6) If the sale involves a stock option or other derivative 
security that involves a decision to exercise or convert, the issuer 
must deliver disclosure a reasonable period of time before the date of 
exercise or conversion. If the sale involves a restricted stock unit or 
other derivative security that does not involve a decision to exercise 
or convert, the issuer must deliver disclosure a reasonable period of 
time before the date the restricted stock unit or similar derivative 
security is granted; provided that, if the sale is in connection with 
the hire of a new employee, the disclosure must be delivered no later 
than 14 calendar days after the date the person begins employment. For 
deferred compensation or similar plans, the issuer must deliver 
disclosure to investors a reasonable period of time before the date the 
irrevocable election to defer is made.
    (7) Merged entities. (i) In determining whether the amount of 
securities the acquiring issuer sold during any consecutive 12-month 
period exceeds $10 million, the acquiring issuer would not be required 
to include any securities sold by the acquired entity pursuant to the 
rule during the same 12-month period.
    (ii) As long as the acquired entity complied with Rule 701 at the 
time it originally granted the derivative securities assumed by the 
acquiring issuer in the business combination transaction, the exercise 
or conversion of the derivative securities would be exempted by this 
section, subject to compliance, where applicable, with

[[Page 80270]]

Rule 701(e). For assumed derivative securities for which the acquired 
entity was required to provide disclosure pursuant to Rule 701(e) that 
are exercised or converted after completion of the business combination 
transaction, the acquiring issuer would satisfy that obligation by 
providing information meeting the requirements of Rule 701(e) 
consistent with the timing requirements of Rule 701(e)(6).
* * * * *

PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933

0
10. The authority citation for part 239 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3, 
77sss, 78c, 78l, 78m, 78n, 78o(d), 78o-7 note, 78u-5, 78w(a), 78ll, 
78mm, 80a-2(a), 80a-3, 80a-8, 80a-9, 80a-10, 80a-13, 80a-24, 80a-26, 
80a-29, 80a-30, 80a-37, and Sec. 71003 and Sec. 84001, Pub. L. 114-
94, 129 Stat. 1312, unless otherwise noted.
0
11. Amend Form S-8 (referenced in Sec.  239.16b) by:
0
a. Revising the cover page;
0
b. Adding Note 3 under Calculation of Registration Fee;
0
c. Revising General Instruction A.1(a)(1)
0
d. Revising General Instruction A.1(a)(3);
0
e. Re-designating the existing text of General Instruction E to be 
paragraph 1;
0
f. Amending General Instruction E to include paragraph 2
0
g. Revising paragraph (f) of Item 1;
0
h. Revising paragraph (b) of Item 8; and
0
i. Adding paragraph (c) to Item 8.
    The revisions and additions read as follows:

    Note: The text of Form S-8 does not, and these amendments will 
not, appear in the Code of Federal Regulations.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM S-8

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

* * * * *
(Full title of the plan(s))
* * * * *
    If this Form is a post-effective amendment to a registration 
statement filed pursuant to General Instruction E.2, filed to register 
additional securities or additional classes of securities pursuant to 
Rule 413(c) under the Securities Act, check the following box. 
[checkbox]
    If this Form is a post-effective amendment to a registration 
statement filed pursuant to Rule 456(e)(1) solely to pay fees with 
respect to securities sold under defined contribution plans in the 
previous fiscal year, check the following box. [checkbox]
* * * * *

CALCULATION OF REGISTRATION FEE

* * * * *
    Notes:
* * * * *
    3. If the filing fee is calculated pursuant to Rule 457(h)(4) 
(Sec.  230.457(h)(4) of this chapter) under the Securities Act in a 
post-effective amendment filed pursuant to Rule 456(e) (Sec.  
230.456(e) of this chapter) for defined contribution plans, only the 
title of the class of securities to be registered, the aggregate 
offering price for that class of securities, and the amount of 
registration fee need to appear in the Fee Table.
* * * * *

GENERAL INSTRUCTIONS

A. Rule as to Use of Form S-8

    1. * * *
    a. * * *
    (1) For purposes of this form, the term ``employee'' is defined as 
any employee, director, general partner, trustee (where the registrant 
is a business trust), officer, or consultant or advisor. Form S-8 is 
available for the issuance of securities to consultants or advisors 
only if:
    (i) They provide bona fide services to the registrant;
    (ii) 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; 
and
    (iii) They are:
    (A) Natural persons; or
    (B) An entity, substantially all of the activities of which involve 
the performance of services; and substantially all of the ownership 
interests of which are held directly by:
    (1) No more than 25 natural persons, of whom at least 50 percent 
perform such services for the issuer through the entity;
    (2) The estate of a natural person specified in paragraph (1); and
    (3) Any natural person who acquired ownership interests in the 
entity by reason of the death of a natural person specified in 
paragraph (1).
    (2) * * *
    (3) The term ``employee'' also includes former employees of the 
issuer, former employees of an entity acquired by the issuer, as well 
as executors, administrators or beneficiaries of the estates of 
deceased employees, guardians or members of a committee for incompetent 
former employees of the issuer or an entity acquired by the issuer, or 
similar persons duly authorized by law to administer the estate or 
assets of former employees of the issuer or an entity acquired by the 
issuer. The inclusion of all individuals described in the preceding 
sentence in the term ``employee'' is only to permit registration on 
Form S-8 of:
    (i) The exercise of employee bene[filig]t plan stock options and 
the subsequent sale of the securities, if these exercises and sales are 
permitted under the terms of the plan;
    (ii) the acquisition of registrant securities pursuant to intra-
plan transfers among plan funds, if these transfers are permitted under 
the terms of the plan;
    (iii) the acquisition of registrant securities as compensation for 
a former employee's service to the issuer during a performance period 
ending within the 12 months preceding the former employee's 
resignation, retirement or other termination; and
    (iv) with respect to former employees of an entity acquired by the 
issuer, the acquisition of securities issued in substitution or 
exchange for securities issued to such persons by the acquired entity 
on a compensatory basis while such persons were employed by the 
acquired entity.
* * * * *

E. Registration of Additional Securities

    1. With respect to the registration of additional securities of the 
same class as other securities for which a registration statement filed 
on this Form relating to an employee benefit plan is effective, the 
registrant may file a registration statement consisting only of the 
following: The facing page; a statement that the contents of the 
earlier registration statement, identified by file number, are 
incorporated by reference; required opinions and consents; the 
signature page; and any information required in the new registration 
statement that is not in the earlier registration statement. If the new 
registration statement covers restricted securities being offered for 
resale, it shall include the required reoffer prospectus. If the 
earlier registration statement included a reoffer prospectus, the new 
registration statement shall be deemed to include that reoffer 
prospectus; provided, however, that a revised reoffer prospectus shall 
be filed, if the reoffer prospectus is substantively different from 
that filed in the earlier

[[Page 80271]]

registration statement. The filing fee required by the Act and Rule 457 
(Sec.  230.457) shall be paid with respect to the additional securities 
only.
    2. An issuer may register additional securities or classes of 
securities, pursuant to Rule 413(c) by filing a post-effective 
amendment to the effective registration statement. The issuer may add 
subsidiaries as additional registrants, whose securities are eligible 
to be sold as part of the Form S-8 by filing a post-effective amendment 
identifying the additional registrants, and the registrant and the 
additional registrants and other persons required to sign the 
registration statement must sign the post-effective amendment. The 
post-effective amendment must consist of the facing page; any 
disclosure required by this Form that is necessary to update the 
registration statement to reflect the additional securities, additional 
classes of securities, any required opinions and consents; and the 
signature page. Required information, consents, or opinions may be 
included in the prospectus and the registration statement through a 
post-effective amendment or may be provided through a document 
incorporated or deemed incorporated by reference into the registration 
statement and the prospectus that is part of the registration 
statement.
* * * * *
    Item 1. Plan Information.
* * * * *
(f) Tax Effects of Plan Participation
    Describe briefly the tax effect that may accrue to employees as a 
result of plan participation and whether or not the plan is qualified 
under Section 401(a) of the Internal Revenue Code.
    Note: If the plan is not qualified under Section 401 of the 
Internal Revenue Code of 1986, as amended, consideration should be 
given to the applicability of the Investment Company Act of 1940. See 
Securities Act Release No. 4790 (July 13, 1965).
* * * * *
    Item 8. Exhibits.
* * * * *
    (b) Neither an opinion of counsel concerning compliance with the 
requirements of ERISA nor an Internal Revenue Service determination 
letter that the plan is qualified under Section 401 of the Internal 
Revenue Code shall be required for any plan amendment if, in lieu 
thereof, the response to this Item 8 includes an undertaking that the 
registrant will maintain the plan's compliance with the requirements of 
ERISA and will make all changes required to maintain such compliance in 
a timely manner.
    (c) Provided that if the plan adopted is a pre-approved plan that 
previously received an opinion letter from the Internal Revenue 
Service, neither an opinion of counsel concerning compliance with the 
requirements of ERISA nor an company-specific Internal Revenue Service 
opinion letter that the plan is qualified under Section 401 of the 
Internal Revenue Code shall be required if, in lieu thereof, the 
registrant files a copy of the IRS opinion letter approving the pre-
approved plan that was issued to the provider of the plan, unless the 
company makes revisions to the pre-approved plan that may call into 
question whether the plan, as so revised, is still qualified.
* * * * *

    By the Commission.

    Dated: November 24, 2020.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2020-26390 Filed 12-10-20; 8:45 am]
BILLING CODE 8011-01-P