The Securities and Exchange Commission (the “SEC”) recently voted to propose temporary rules to permit companies to provide equity compensation to certain workers known as “gig” or “platform” workers.

Under the Securities Act of 1933 (the “33 Act”), every offer or sale of securities must be registered with the SEC unless the issuer relies upon an exemption to such registration. Recognizing that the offers or sales of securities in the form of equity compensation differ from the regular process of raising capital from investors, a limited exemption is provided to issuers under Rule 701 of the 33 Act. Rule 701 currently exempts certain sales of securities by private companies made to compensate employees, consultants, and advisors.

Through the proposed new Rule 701, the SEC is recognizing the existence of certain types of employment relationships in the “gig economy” that fall outside the scope of the traditional employer-employee relationship. These are the “gig” or “platform” workers who have become important to the economy with the increased use of technology. Gig workers use a company’s internet platform to find a specific type of work or “gig” to provide services to end-users. Some common examples are ride-sharing, food delivery, and dog-sitting services. These workers are generally not considered employees, consultants, or advisors, and thus have not been eligible to receive securities pursuant to compensatory arrangements under Rule 701. Under the proposed amendment to Rule 701, however, companies would be permitted to compensate these platform workers with equity compensation, subject to certain conditions.

For an issuer to compensate platform workers pursuant to the proposed new Rule 701, the platform workers will have to provide bona fide services pursuant to a written contract or arrangement by means of an internet platform or other technology-based marketplace platform or system provided by the issuer. Additionally, the issuer is required to operate and control the platform, the proposed issuance of securities to the platform worker must be pursuant to a written compensation arrangement or plan, the issuer must take reasonable steps to prohibit transfer of the securities offered to the platform worker, and the securities issued must not be subject to individual bargaining or the worker’s ability to elect between payment in securities or cash. The offering per worker must be within certain caps on the amount ($75,000) during a 36-month period and a percentage of the value of the compensation (15%) received by the platform worker during a 12-month period. This exemption, if adopted, would be available for a period of five years.

The proposal is subject to a 60-day comment period following its publication in the Federal Register.

Given the benefits that equity compensation offers to both employers and employees, this exemption should provide benefits to both issuers and platform workers in the “gig economy.”