Last week, the Securities and Exchange Commission (the “SEC”) proposed amendments that would ease restrictions on compensatory securities offerings to employees and other service providers under Rule 701 and Form S-8, both implemented under the Securities Act of 1933, as amended (the “Securities Act”).¹ At the same time, the SEC also proposed a temporary five-year expansion of Rule 701 and Form S-8 eligibility for certain compensatory offerings to “platform” or “gig economy” workers.² Both rule proposals will be subject to a 60-day comment period following publication in the Federal Register, with final rule amendments expected to follow – although the scope of such final rules may depend in part on the priorities of the new presidential administration. Although no action is recommended now, companies should consider the scope of the proposed amendments, which, if adopted, should enhance and simplify a company’s ability to use its equity for compensatory purposes. 

Background – Rule 701 and Form S-8 

Under federal securities laws, any offer or sale of securities must either be (1) registered with the SEC or (2) exempt.  Rule 701 provides an exemption from the registration requirements of the Securities Act for offers and sales of securities by non-reporting companies to their employees, directors, consultants and certain other service providers under written compensatory benefit plans or agreements.  Similarly, the Form S-8 registration statement is a short-form registration statement available to eligible reporting companies for the registration of offers and sales of securities to employees and other service providers under written compensatory plans/agreements.  Both Rule 701 and Form S-8 may only be relied upon for compensatory purposes and are not available for capital-raising or market-making purposes.³

Key Proposed Amendments to Rule 701 and Form S-8 

The following proposed amendments are the key amendments with respect to Form S-8: 

• Implementing improvements and clarifications to simplify registration on the form, including:

  • Clarifying the ability to add multiple plans to a single Form S-8.

  • Clarifying the ability to allocate securities among multiple incentive plans on a single Form S-8, thus allowing the creation of a “pool” of registered shares that may be allocated amongst various issuer plans.

  • Permitting the addition of securities or classes of securities by automatically effective post-effective amendment, rather than requiring a new registration statement, as mandated under current rules. 

• Implementing improvements to simplify share counting and fee payments on the form, including:

  • Requiring the registration of an aggregate offering amount of securities for defined contribution plans.

  • Implementing a new fee payment method for registration of offers and sales under defined contribution plans that would require issuers to pay the fee for all sales made under the plan during a given fiscal year no later than 90 days after fiscal year end. The SEC believes that this approach should lessen the burden of estimating at the time of registration the number of shares that may be offered or sold and reduce the risk that unregistered shares may be deemed “sold” under such plans. 

  • Conforming Form S-8 instructions with current IRS plan review practices.

• Revising the plan prospectus disclosure requirements to eliminate the requirement to describe the tax effects of plan participation on the issuer.

The following proposed amendments are the key amendments with respect to Rule 701: 

• Raising two of the three alternative ceilings that cap the amount of securities that a non-reporting issuer may sell under Rule 701 during any consecutive 12-month period.  The proposed caps would raise the 12-month ceilings from (i) $1 million to $2 million and (ii) 15% to 25% of the issuer’s total assets (keeping the third ceiling at 15% of the total outstanding amount of the class of issuer securities being offered in reliance on Rule 701).

• Reducing additional disclosure requirements for Rule 701 exempt transactions exceeding $10 million.⁴ Disclosure would only be required with respect to sales exceeding $10 million and not on a look-back basis to other sales during the prior 12 months that were below the $10 million limit. 

• Reducing the type of financial disclosure required, and also allowing an issuer to provide independent third-party valuation reports prepared in accordance with standards imposed under Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”)⁵, instead of financial statements. 

• Reducing the frequency with which disclosures must be updated from quarterly to semi-annually.

• Revising 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 (such as restricted stock units, as opposed to stock options and stock appreciation rights) in specified circumstances where such derivative securities are granted to new hires.

• Making the exemption available for offers and sales of securities under a written compensatory benefit plan established by the issuer’s subsidiaries, whether or not majority-owned.

The following proposed amendments are the key amendments with respect to both Rule 701 and Form S-8: 

• Extending consultant and advisor eligibility to entities meeting specified ownership criteria designed to link the securities to the performance of services, such as an entity whose ownership interests are held by no more than 25 people with 50% of such holders performing services for the company issuing the securities.

• Expanding eligibility for former employees to specified post-termination/resignation/retirement grants and former employees of acquired entities under certain circumstances. This change would allow for the assumption of securities awards, avoiding the need to cash-out former service providers in a stock transaction.  

Key Rule 701 and Form S-8 Proposals for “Platform Workers” 

In recognition of the evolving nature of the types of services provided by many service providers and their changing relationships with companies, the SEC’s proposals also would allow both reporting and non-reporting companies, under a five-year trial basis, to offer and sell issuer securities for compensatory purposes to “platform” and other “gig economy” workers who may not otherwise be Rule 701- or Form S-8-eligible.  These workers must provide bona fide services (such as ride-sharing, food delivery, household repairs, dog-sitting, tech support, etc.) through the issuer’s internet-based marketplace platform or through another widespread, technology-based marketplace platform. Generally, the following conditions must be met⁶: 

• The issuer must operate and control the platform (e.g., access, terms of service and terms and conditions for the platform worker’s payment for services).

• The issuance of securities to platform workers must be pursuant to a written compensation plan or agreement and not for capital-raising or market-making purposes.

• The value of the securities is (i) not more than 15% of the value of compensation received by a participating worker from the issuer for services provided by means of the platform during a 12-month period and (ii) not more than $75,000 of such compensation received from the issuer during a 36-month period, in each case with value determined at the time of grant.

• The amount/terms of securities issued to a platform worker cannot be subject to individual bargaining or the worker’s ability to elect payment in securities vs. cash.

• For Rule 701 offers only, the issuer must take reasonable steps to prohibit the transfer of securities issued to the platform worker, other than a transfer to the issuer or pursuant to applicable law.

• Issuers would be required to provide specified information regarding the offerings to the SEC at six-month intervals. 

¹ See “Modernization of Rules and Forms for Compensatory Securities Offerings and Sales,” (Release No. 33-10891) (November 24, 2020), available here.
² See “Temporary Rules to Include Certain ‘Platform Workers’ in Compensatory Offerings under Rule 701 and Form S-8,” (Release Nos. 33-10892 and 34-9049833) (November 24, 2020), available here. 
³ Our earlier client alert regarding the SEC’s 2018 releases on the topics covered by this alert may be found here. 
⁴ Under current Rule 701, issuers must provide specific disclosures (including financial statements) if the aggregate sales price/amount of securities sold during any consecutive 12-month period exceeds $10 million. 
⁵ Under Code Section 409A, independent appraisals that meet certain Section 409A requirements may support a “safe harbor” exemption from adverse Section 409A tax consequences for stock options and stock appreciation rights that are granted with a strike price at least equal to the fair market value of the company’s common stock on the grant date and if other conditions are met. 
⁶ In addition, most of the other Rule 701/Form S-8 requirements would continue to apply to offers to platform workers, including most of the proposed amendments discussed above, if adopted.