September 19, 2018Client Alert

Developments in SEC’s Equity Compensation Rules

In July 2018, the United States Securities and Exchange Commission (SEC) issued two releases related to equity compensation under Rule 701 and Form S-8. These releases are generally aimed at allowing companies to more easily pay their employees in stock while still complying with federal securities laws.

Under the securities laws, all offers and sales of securities must either be registered or exempt from registration. These two options apply even when a company desires to issue stock to its own employee population.

That said, the SEC has attempted to "relax" the rules for situations involving employee issuances given that these issuances present different issues than capital-raising issuances. This attempted relaxation brought about the prior adoption of accommodations set forth in Rule 701 and Form S-8:

  • Rule 701 provides an exemption from the registration requirements that allows companies that are not subject to the reporting requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934 to issue equity securities as compensation. This rule has provided the basis for start-up companies to compensate employees with stock options and restricted stock without having to register the securities transactions.
  • Form S-8 provides SEC reporting companies a simple and efficient way to register the issuance of equity securities as compensation.

The two releases modified these accommodations as follows:

  1. The first release implemented a change required by the Economic Growth, Regulatory Relief, and Consumer Protection Act raising the threshold above which companies must provide additional disclosures to recipients of securities under Rule 701. Companies will now be able to issue up to $10 million in equity securities in a 12-month period (up from $5 million) before they are required to provide a written summary of the compensation plan, risk factors, and financial statements to the recipients before the securities are issued.
  2. The second release was a concept release indicating that the SEC is considering broader changes to both Rule 701 and Form S-8. Noting that the rules have been largely unchanged since 1999, the SEC acknowledged the growth of the so-called “gig economy” and is asking for comment on specific issues that might modernize the regulatory scheme. Of particular interest to the SEC is public comment as to whether companies should be allowed to issue stock compensation to even more people without having to register the offering with the SEC. The SEC is similar seeking comment on issues such as simplifying or eliminating Form S-8 and removing restrictions on the amount of securities that can be issued under Rule 701. The SEC will be accepting comments on this release until September 24, 2018.

Michael Best has attorneys specializing in the issuance of equity securities by public and private companies and the structure and implementation of compensation plans. If you have questions about these issues or would like help submitting a comment in response to the SEC’s concept release, please do not hesitate to contact one of the attorneys below.

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