On November 24, 2020, the Securities and Exchange Commission announced proposed amendments to Securities Act Rule 701 and Form S-8. Rule 701 (for non-reporting companies) provides an exemption from registration and Form S-8 (for reporting companies) provides a means of registration for the issuance of securities by companies to their employees under written compensatory benefit plans. The proposals respond to shifts in stock-based compensation and the rise of the “gig economy.” The SEC is seeking public comments within 60 days of the proposed amendments’ publication in the Federal Register.
Permitting Rule 701 and Form S-8 Compensatory Offerings to Platform Workers
The SEC is proposing a temporary, five-year registration exemption for securities issued to workers who provide bona fide services via an internet-based platform or other technology-based marketplace system. The exemption would not extend to workers’ activities relating to the sale/transfer of discrete, tangible goods. During the five-year period, issuing companies must furnish certain information to the SEC at six-month intervals in order to assist the Commission in evaluating the exemption’s effects on companies in the gig economy. To take advantage of the exemption, issuers must satisfy the following conditions:
- the issuer operates and controls the platform;
- the issuance of securities is pursuant to a written compensatory agreement and is not for services in connection with a capital-raising transaction or promoting a market for the issuer’s securities;
- the issuance is no more than 15% of the value of the recipient worker’s compensation during a 12-month period, and no more than $75,000 during a 36-month period;
- the amount and terms of securities issued may not be subject to individual bargaining or the worker’s ability to elect between payment in securities or cash; and
- the issuer must take reasonable steps to prohibit the transfer of the securities issued to a worker pursuant to the exemption, other than a transfer to the issuer or by operation of law. This proposed transferability restriction would apply to Rule 701, but not Form S-8, issuances.
Modernizing the Framework for Compensatory Offerings
Rule 701 Amendments
701(e) Disclosure requirements. The SEC is proposing to amend Rule 701 to:
- Require delivery of additional disclosures to investors only with respect to sales after the $10 million threshold is exceeded – this will essentially eliminate the “lookback” period;
- Require non-reporting issuers to provide financial statements that are dated less than 270 days (rather than 180 days) before the securities’ date of sale – this would permit issuers to satisfy the disclosure requirement through semi-annual rather than quarterly updating of financial statements;
- Allow foreign private issuers to provide financial statements prepared in accordance with home country accounting standards rather than U.S. GAAP standards;
- Allow issuers to provide an Internal Revenue Code Section 409A independent appraisal of the securities’ fair market value, in lieu of financial statements;
- Clarify that issuers of derivative securities must deliver disclosure a reasonable period of time before the date the derivative securities are granted (rather than before the date of exercise/conversion);
- Clarify that issuers of derivative securities made in connection with the hire of new employees must deliver disclosure within 14 calendar days after the date the person begins employment; and
- Clarify that exercise/conversion of derivative securities of a non-reporting issuer that assumed the securities through an acquisition will be exempt from registration if the acquired entity complied with Rule 701 at the time it originally granted the derivative securities.
701(d) Ceilings. The SEC is proposing to raise two of the three regulatory ceilings that cap the amount of securities that a non-reporting issuer may sell under Rule 701 in a 12-month period. It will raise the asset cap from 15% to 25% of the total assets of the issuer, and the dollar cap from $1 million to $2 million.
Rule 701 would also be amended to reflect Form S-8 in allowing issuances under plans established by the issuer’s parents, subsidiaries (whether or not majority-owned), or subsidiaries of its parents.
Form S-8 Amendments
The SEC is proposing to:
- allow issuers to use a single Form S-8 for multiple incentive plans, and to add additional plans to an existing Form S-8 by filing an automatically effective post-effective amendment;
- require registration based on the aggregate offering price of all defined contribution plans; and
- require issuers to pay the fee for sales made pursuant to its plans within 90 days of its fiscal year end.
Extension of Rule 701 and Form S-8 to Entities
The SEC is proposing to extend the exemptions to entities if substantially all of the entity’s activities involve the performance of services, and substantially all of its ownership interests are held directly by 25 or fewer natural persons, of whom at least 50% perform services for the issuer through the entity.
Eligibility will also be extended to former employees who:
- are issued securities as compensation for services rendered to the issuer during a performance period that ended within 12 months preceding the termination; or
- are employed by an entity that was acquired by the issuer, if the securities are a substitute for those issued by the acquired entity while the persons were employed by that acquired entity.
The Commission’s proposed amendments would allow companies greater flexibility in incentivizing employees through stock-based compensation plan. The Securities & Capital Markets team at Michael Best has experts who can advise companies on the proposed amendments and assist in submitting public comments to the SEC. Please do not hesitate to contact a member of our team for additional information.