83 FR 34958 - Concept Release on Compensatory Securities Offerings and Sales
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 83, Issue 142 (July 24, 2018)
Federal Register Volume 83, Issue 142 (July 24, 2018)
| Page Range | 34958-34967 | |
| FR Document | 2018-15731 |
[Federal Register Volume 83, Number 142 (Tuesday, July 24, 2018)] [Proposed Rules] [Pages 34958-34967] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2018-15731] ======================================================================= ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION 17 CFR Part 230 [Release No. 33-10521; File No. S7-18-18] RIN 3235-AM38 Concept Release on Compensatory Securities Offerings and Sales AGENCY: Securities and Exchange Commission ACTION: Concept release; request for comment. ----------------------------------------------------------------------- SUMMARY: The Securities and Exchange Commission (``Commission'') is publishing this release to solicit comment on the exemption from registration under the Securities Act of 1933 (the ``Securities Act'') for securities issued by non-reporting companies pursuant to compensatory arrangements, and Form S-8, the registration statement for compensatory offerings by reporting companies. Significant evolution has taken place both in the types of compensatory offerings issuers make and the composition of the workforce since the Commission last substantively amended these regulations. Therefore, as we amend the exemption as mandated by the Economic Growth, Regulatory Relief, and Consumer Protection Act (the ``Act''), we seek comment on possible ways to modernize the exemption and the relationship between it and Form S- 8, consistent with investor protection. DATES: Comments should be received on or before September 24, 2018. ADDRESSES: Comments may be submitted by any of the following methods: Electronic CommentsUse the Commission's internet comment form (http://www.sec.gov/rules/concept.shtml); or Send an email to rule-comments@sec.gov. Please include File Number S7-18-18 on the subject line. Paper Comments Send paper comments to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090. All submissions should refer to File Number S7-18-18. This file number should be included on the subject line if email is used. 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/concept.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. FOR FURTHER INFORMATION CONTACT: Anne M. Krauskopf, Senior Special Counsel, and Adam F. Turk, Special Counsel, Office of Chief Counsel, Division of Corporation Finance, at (202) 551-3500. SUPPLEMENTARY INFORMATION: Table of Contents I. Overview II. Rule 701 A. Background B. Rule 701(c) Eligible Plan Participants C. Rule 701(e) Disclosure Requirements 1. General 2. Timing and Manner of Rule 701(e) Disclosure 3. Options and Other Derivative Securities/RSUs D. Rule 701(d) Exemptive Conditions III. Form S-8 A. Background B. Form S-8 Eligible Plan Participants C. Administrative Burdens D. Form S-8 Generally IV. Conclusion I. Overview Under the Securities Act, every offer and sale of securities must be registered or subject to an exemption from registration. The Commission has long recognized that offers and sales of securities as compensation present different issues than offers and sales that raise capital for the issuer of the securities.\1\ 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--17 CFR 230.701 (Rule 701)--for certain compensatory securities transactions as well as a specialized form--Form S-8--for registering certain compensatory transactions. Both Rule 701 and Form S-8 require the issuer to make specific disclosures. However, depending on the circumstances, compensatory transactions also may be conducted under the Securities Act Section 4(a)(2) exemption from registration or under a ``no sale'' theory,\2\ which would not require specific disclosures. --------------------------------------------------------------------------- \1\ See, e.g., Release No. 33-3469-X (Apr. 10, 1953) [18 FR 2182 (Apr. 17, 1953)] and Registration of Securities Offered Pursuant to Employees Stock Purchase Plans, 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. \2\ 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)] at n. 82, stating ``The ``no sale'' theory relates to the issuance of compensatory grants made by employers to broad groups of employees pursuant to broad- based stock bonus plans without Securities Act registration under the theory that the awards are not an offer or sale of securities under Section 2(a)(3) of the Securities Act [15 U.S.C. 77b(a)(3)].'' Where securities are awarded to employees at no direct cost through broad based bonus plans, the staff has taken the position generally that there has been no sale since employees do not individually bargain to contribute cash or other tangible or definable consideration to such plans. Where securities are awarded to or acquired by employees pursuant to individual employment arrangements, however the staff has expressed the view that such arrangements involve separately bargained consideration, and a sale of the securities has occurred. See Employee Benefit Plans: Interpretations of Statute, Release No. 33-6188 (Jan. 15, 1981) [29 FR 8960 (Feb. 11, 1980)] at Section II.A.5.d and n. 84. --------------------------------------------------------------------------- Equity compensation can be an important component of the employment relationship. Using equity for compensation can align the incentives of employees with the success of the enterprise, facilitate [[Page 34959]] recruitment and retention, and preserve cash for the company's operations.\3\ --------------------------------------------------------------------------- \3\ See Executive Compensation and Related Person Disclosure, Release No. 33-8732A (Aug. 29, 2006) [71 FR53158 (Sept. 6, 2006)] at Section II.A.1. --------------------------------------------------------------------------- Since Rule 701 and Form S-8 \4\ were last amended, forms of equity compensation have continued to evolve, and new types of contractual relationships between companies and the individuals who work for them have emerged. In light of these developments, as well as the Act's mandate to increase to $10 million the Rule 701(e) threshold in excess of which the issuer is required to deliver additional disclosure to investors, which we are implementing in a separate release,\5\ we believe this is an appropriate time to revisit the Commission's regulatory regime for compensatory securities transactions. We therefore solicit comment on possible ways to update the requirements of Rule 701 and Form S-8, consistent with investor protection. We also solicit comment on what effects any revised rule or form may have on a company's decision to become a reporting company. --------------------------------------------------------------------------- \4\ 17 CFR 239.16b. \5\ Section 507 of the Act directs the Commission, not later than 60 days after the date of enactment, to amend Rule 701(e) to increase this threshold. See Public Law 115-174, sec. 507, 132 Stat. 1296 (2018). In Release 33-10520, we adopt an amendment to Rule 701(e) to implement this change. --------------------------------------------------------------------------- II. Rule 701 A. Background In 1988, the Commission adopted Rule 701 under the Securities Act \6\ to allow non-reporting companies to sell securities to their employees without the need to register the offer and sale of such securities.\7\ Only issuers that are not subject to the reporting requirements of Section 13 \8\ or 15(d) \9\ of the Securities Exchange Act of 1934 (``Exchange Act'') and are not investment companies registered or required to be registered under the Investment Company Act of 1940 \10\ are eligible to use Rule 701. The rule provides an exemption from the registration requirements of Section 5 of the Securities Act \11\ for offers and sales of securities under compensatory benefit plans \12\ or written agreements relating to compensation. In adopting the rule, the Commission determined that it would be an unreasonable burden to require these non-reporting companies, many of which are small businesses, to incur the expenses and disclosure obligations of public companies where their sales of securities were to employees.\13\ In addition to domestic non-reporting companies, Rule 701 is also available for foreign private issuers.\14\ --------------------------------------------------------------------------- \6\ 15 U.S.C. 77a et seq. \7\ See Compensatory Benefit Plans and Contracts, Release No. 33-6768 (Apr. 14, 1988) [53 FR 12918 (Apr. 20, 1988)] (``1988 Adopting Release''). \8\ 15 U.S.C. 78m. \9\ 15 U.S.C. 78o(d). \10\ 15 U.S.C. 80a-1 et seq. \11\ 15 U.S.C. 77e. \12\ A ``compensatory benefit plan'' is defined in Rule 701(c)(2) [17 CFR 230.701(c)(2)] as ``any purchase, savings, option, bonus, stock appreciation, profit sharing, thrift, incentive, deferred compensation, pension or similar plan.'' \13\ As the Commission stated in re-proposing Rule 701, ``The essential concern [. . .] remains the same--many privately-held companies have found the costs of complying with the registration requirements of the Securities Act and the subsequent reporting obligations under section 15(d) of the Exchange Act so burdensome that employee incentive arrangements are not being provided by them. As a consequence, employees must forego [sic] potentially valuable means of compensation. The Commission historically has recognized that when transactions of this nature are primarily compensatory and incentive oriented, some accommodation should be made under the Securities Act.'' See Employee Benefit and Compensation Contracts Release No. 33-6726 (Jul. 30, 1987) [52 FR 29033 (Aug. 5, 1987)] (``Rule 701 Proposing Release'') at Section I. \14\ A ``foreign private issuer'' is defined in 17 CFR 230.405 (Securities Act Rule 405) 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. --------------------------------------------------------------------------- The rule provides an exemption from registration only for securities issued in compensatory circumstances and is not available for plans or schemes inconsistent with this purpose, such as to raise capital.\15\ The exemption is available only to the issuer of the securities, not to its affiliates, and does not cover resales of securities by any person.\16\ The rule exempts only the transactions in which the securities are offered or sold, and not the securities themselves.\17\ In addition to complying with Rule 701, the issuer also must comply with any applicable state law relating to the offer and sale of securities.\18\ --------------------------------------------------------------------------- \15\ Preliminary Note 5 to Rule 701 provides ``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 [Securities] Act. In any of these cases, registration under the [Securities] Act is required unless another exemption is available.'' \16\ Preliminary Note 4 to Rule 701. \17\ Id. \18\ Preliminary Note 2 to Rule 701. --------------------------------------------------------------------------- Since 1999,\19\ 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: \20\ --------------------------------------------------------------------------- \19\ 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''). \20\ Rule 701(d) [17 CFR 230.701(d)]. --------------------------------------------------------------------------- $1 million; 15% of the total assets of the issuer,\21\ measured at the issuer's most recent balance sheet date; or --------------------------------------------------------------------------- \21\ 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, without regard to when it becomes exercisable.\22\ For deferred compensation plans, the calculation is made at the time of the participant's irrevocable election to defer.\23\ There is no separate limitation on the amount of securities that may be offered. --------------------------------------------------------------------------- \22\ See Rule 701(d)(3)(ii) [17 CFR 230.701(d)(3)(ii)]. \23\ Id. --------------------------------------------------------------------------- In all cases, the issuer must deliver to investors a copy of the compensatory benefit plan or contract. Further, Rule 701 transactions are subject to the antifraud provisions of the federal securities laws.\24\ --------------------------------------------------------------------------- \24\ Preliminary Note 1 to Rule 701 (``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.''). --------------------------------------------------------------------------- In addition, if the aggregate sales price or amount of securities sold during the 12-month period exceeds $5 million,\25\ the issuer must deliver to investors a reasonable period of time before the date of sale: \26\ --------------------------------------------------------------------------- \25\ Rule 701(e) [17 CFR 230.701(e)]. \26\ Rule 701(e). This amount will change to $10 million upon effectiveness of the final rule amendment that raises this threshold. See n. 5, above, See also n. 49 and Section II.C.1, below. --------------------------------------------------------------------------- A copy of the summary plan description required by ERISA,\27\ or a summary of the plan's material terms, if it is not subject to ERISA; --------------------------------------------------------------------------- \27\ The Employee Retirement Income Security Act of 1974 (29 U.S.C. 1001 et seq.). --------------------------------------------------------------------------- Information about the risks associated with investment in the securities sold under the plan or contract; and [[Page 34960]] Financial statements required to be furnished by Part F/S of Form 1-A\28\ 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.\29\ --------------------------------------------------------------------------- \28\ Regulation A Offering Statement [17 CFR 239.90]. \29\ Rule 701(e)(4) [17 CFR 230.701(e)(4)]. --------------------------------------------------------------------------- This disclosure should be provided to all investors before sale. For options and other derivative securities, the issuer must deliver disclosure a reasonable period of time before the date of exercise or conversion.\30\ 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 during the 12-month period.\31\ --------------------------------------------------------------------------- \30\ Rule 701(e)(6) [17 CFR 230.701(e)(6)]. As described in Section II.C.3, below, for options and other derivative securities, whether the issuer is obligated 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. \31\ See 1999 Adopting Release at Section II.B. --------------------------------------------------------------------------- The exemption covers securities offered or sold under a plan or agreement between a non-reporting company (or its parents, majority- owned subsidiaries or majority-owned subsidiaries of its parent) and the company's employees, officers, directors, partners, trustees, consultants and advisors.\32\ Rule 701 is also available for sales, such as option exercises, to their family members \33\ who acquire such securities through gifts or domestic relations orders. --------------------------------------------------------------------------- \32\ Rule 701(c) [17 CFR 230.701(c)]. The rule also 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 at the time the securities were offered. \33\ Rule 701(c)(3) [17 CFR 230.701(c)(3)] defines ``family member'' for this purpose. --------------------------------------------------------------------------- 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.\34\ --------------------------------------------------------------------------- \34\ Rule 701(c)(1) [17 CFR 230.701(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 S-8 Adopting Release'') addressing such a corporate alter ego in the Form S-8 context. --------------------------------------------------------------------------- In adopting these restrictions on the range of eligible consultants and advisors, the Commission also provided that a person in a de facto employment relationship with the issuer, such as a non-employee providing services that traditionally are performed by an employee, with compensation paid for those services being the primary source of the person's earned income, would qualify as an eligible person under the exemption.\35\ Such services, however, must not be in connection with the offer or sale of securities in a capital-raising transaction, and must not directly or indirectly promote or maintain a market for the issuer's securities.\36\ --------------------------------------------------------------------------- \35\ 1999 Adopting Release at Section II.D. \36\ 1999 Adopting Release at n. 39. See also 1988 Adopting Release (``Consequently, the rule has been modified to extend to consultants and advisers who provide bona fide services to a company, its parents or majority-owned subsidiaries.''). --------------------------------------------------------------------------- Offers and sales under Rule 701 are deemed part of a single discrete offering and are not subject to integration with any other offers or sales, whether registered under the Securities Act or exempt from registration.\37\ An issuer that attempts to comply with Rule 701, but fails to do so, may claim any other exemption that is available.\38\ Securities issued under Rule 701 are deemed to be ``restricted securities,'' \39\ as defined in 17 CFR 230.144 (Securities Act Rule 144). --------------------------------------------------------------------------- \37\ Rule 701(f) [17 CFR 230.701(f)]. \38\ Preliminary Note 3 to Rule 701. \39\ Rule 701(g) [17 CFR 230.701(g)]. Ninety days after the issuer becomes subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 [15 U.S.C. 78m or 78o(d)], securities issued under Rule 701 may be resold by non- affiliates in reliance on Rule 144 without compliance with Rules 144(c) and (d), and by affiliates without compliance with Rule 144(d). --------------------------------------------------------------------------- Section 502 of the Jumpstart Our Business Startups Act \40\ (``JOBS Act'') amended Exchange Act Section 12(g)(5) \41\ to exclude from the definition of ``held of record,'' for the 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. 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. The Commission amended the definition of ``held of record'' in 17 CFR 240.12g5-1 (Exchange Act Rule 12g5-1) 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.\42\ 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). These provisions help enable private companies to offer securities to their employees under Rule 701 without triggering the obligation to register the class of securities and file periodic reports with the Commission. --------------------------------------------------------------------------- \40\ 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. \41\ 15 U.S.C. 78l(g)(5). \42\ 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)]. --------------------------------------------------------------------------- Questions have arisen about whether the current requirements of Rule 701 would benefit from updates in light of developments since the Commission last substantively revised the rule. Forms of equity compensation that were not typically used at that time, particularly restricted stock units (``RSUs''), have become common, and new types of contractual relationships between companies and individuals involving alternative work arrangements have emerged in the so-called ``gig economy.'' \43\ In this release, we solicit comment on various aspects of Rule 701 [[Page 34961]] to determine whether and if so, how, the rule should be amended to address these concerns and developments. Our evaluation of any potential changes will focus on retaining the compensatory purpose of Rule 701 and avoiding potential abuse of the rule for capital-raising purposes, consistent with the Commission's investor protection mandate. Comments are of greatest assistance if accompanied by supporting data and analysis of the issues addressed in those comments. --------------------------------------------------------------------------- \43\ See The Rise and Nature of Alternative Work Arrangements in the United States, 1995-2015, Lawrence F. Katz and Alan B.Krueger, National Bureau of Economic Research, available at http://www.nber.org/papers/w22667 (defining alternative work arrangements as temporary help agency workers, on-call workers, contract workers, and independent contractors or freelancers). --------------------------------------------------------------------------- B. Rule 701(c) Eligible Plan Participants Due in large part to the internet, new types of contractual relationships are arising between companies and individuals in the labor markets and the workplace economy. These can involve short-term, part-time or freelance arrangements, where the individual--rather than the company--may set the work schedule. Typically, this involves the individual's use of the company's internet ``platform'' for a fee to find business, whether that involves the individual providing services to end users, or using the platform to sell goods or lease property. Platforms are available that offer end users such services as ride- sharing, food delivery, household repairs, dog-sitting, and tech support. Other platforms offer hand-made craft objects, lodging, or car rentals. An individual who provides services or goods through these platforms may have similar relationships with multiple companies, through which the individual may engage in the same or different business activities. Individuals participating in these arrangements do not enter into traditional employment relationships, and thus may not be ``employees'' eligible to receive securities in compensatory arrangements under Rule 701.\44\ Similarly, they also may not be consultants or advisors, or de facto employees under Rule 701. As with traditional employees, however, companies may have the same compensatory and incentive motivations to offer equity compensation to these individuals. Accordingly, we solicit comment regarding these ``gig economy'' relationships to better understand how they work and determine what attributes of these relationships potentially may provide a basis for extending eligibility for the Rule 701 exemption. --------------------------------------------------------------------------- \44\ They may also not be ``employees'' for purposes of labor, tax and other regulatory regimes. --------------------------------------------------------------------------- Our comment requests focus on what activities an individual should need to engage in to be eligible to participate in exempt compensatory offerings: 1. To what extent should definitions of ``employee'' under other regulatory regimes guide our thinking on eligible participants in compensatory securities offerings? Which regulatory regimes should we consider for this purpose? Should any new test apply equally to all companies, or would there be a reason to apply different tests based on the nature of the working relationship? 2. Would the application of Rule 701 to consultants and advisors in any circumstances cover the alternative work arrangements described above? 3. What, if any, services should an individual participating in the ``gig economy'' need to provide to the issuer to be eligible under Rule 701? Do these individuals in fact provide services to the issuer, or instead to the issuer's customers or end users? Should this fact make any difference for purposes of Rule 701 eligibility? 4. Should we consider a test that identifies Rule 701 eligible participants as individuals who use the issuer's platform to secure work providing lawful services to end users? a. Are any other factors necessary to establish any level of control by the issuer, such as requiring the work to be assigned by the issuer? Or is it necessary that the issuer control what the individual charges end users for services, such as by setting hourly rates or ride fares? Should a written contractual relationship between the issuer and individual be necessary? Why or why not? b. Does it matter whether the individual goes through a vetting or screening process by the issuer to use the platform? c. Does it matter whether the issuer controls when and how the individual receives monetary compensation for the services provided? 5. Would it be sufficient for an individual to use the issuer's platform to sell goods, to earn money from leasing real estate or personal property, or to conduct a business activity? Would the individual be considered to be providing a service to either or both the company and its end-users or customers? Does it matter whether that business activity provides a service typically provided by an employee or is of a more entrepreneurial nature? How do the answers to these questions affect whether there is a sufficient nexus between the individual and the issuer to justify application of the exemption for compensatory transactions? 6. Should it make a difference whether the end user pays the issuer for the goods or leased property, and the issuer then provides a monetary payment to the individual, or the end user pays the individual directly, who then pays a fee to the issuer? Our comment requests also focus on whether a potential eligibility test should consider the individual's level of dependence on the issuer, or, conversely, the issuer's degree of dependence on the individuals: 7. For example, should it matter what percentage of the individual's earned income is derived from using the issuer's platform? If so, should this be based on earned income during the last year, a series of consecutive years, or current expectations? Should there be a minimum percentage? How should this be verified? How should such a test be applied where the individual provides services to multiple companies? How would the issuer be able to determine how much of an individual's income is derived from using the issuer's platform? 8. Alternatively, where the individual provides services, should eligibility be based on information objectively verifiable by the issuer, such as amount of income earned, or percentage of time or number of hours worked? 9. Where use of the platform relates to leasing a property, should the test focus on how frequently the property is available, how often it actually is leased, the revenues generated by the property, or other factors? 10. Should the test focus on the extent to which the individual uses the issuer's platform to obtain business on a regular basis? Should it consider the duration of time over which the individual has so used the issuer's platform? 11. Should the test instead focus on the extent to which the issuer's business is dependent on individuals' use of the issuer's platform? If so, why, and how should that dependence be measured? 12. What test or tests would leave an issuer best positioned to determine whether it could rely on Rule 701? We are mindful that extending eligibility to individuals participating in the ``gig economy'' could increase the volume of Rule 701 issuances. In this regard: 13. Would revising the rule have an effect on a company's decision to become a reporting company? Would such revisions encourage companies to stay private longer? 14. Would investors be harmed if the exemption is expanded to individuals participating in the ``gig economy,'' potentially resulting in higher levels of equity ownership in the hands of persons who would not be shareholders of record for purposes of triggering [[Page 34962]] Exchange Act registration and reporting? 15. Should the amount of securities issuable pursuant to Rule 701 to individuals participating in the ``gig economy'' in a 12-month period be subject to a separate ceiling rather than the current Rule 701(d) ceilings? If so, how should that ceiling be designed and measured? 16. Should additional disclosures be provided? If so, what and when? Employers have many reasons for compensating employees with securities. These can include aligning the company's interests with those of employees', retaining staff, and offering higher compensation than the company may be able to pay in cash or other benefits. 17. Do companies utilizing ``gig economy'' workers issue securities as compensation to those individuals? If so, how prevalent is this practice? 18. How might companies benefit from the ability to offer securities to a broader range of individuals by expanding Rule 701 eligibility to individuals participating in the ``gig economy''? 19. What effect would the use of Rule 701 for ``gig economy'' companies have on competition among those companies and newer companies and more established companies vying for the same talent? The ``gig economy'' has enabled even very small companies to conduct cross-border operations. 20. Do existing regulations affect the ability of employers to use Rule 701 to compensate overseas employees through securities? 21. To the extent that U.S. companies would seek to use Rule 701 to compensate non-U.S. based workers in a ``gig economy'' model, would there be any competitive effects? C. Rule 701(e) Disclosure Requirements 1. General When Rule 701 was originally adopted in 1988,\45\ the Commission relied on Section 3(b) of the Securities Act \46\ to exempt offers and sales of up to $5 million per year. In 1999, the Commission amended Rule 701 to reflect that the National Securities Markets Improvement Act of 1996 (``NSMIA'') \47\ had given the Commission authority to provide exemptive relief in excess of $5 million for transactions such as these.\48\ --------------------------------------------------------------------------- \45\ See 1988 Adopting Release. \46\ 15 U.S.C. 77c(b). \47\ Public Law 104-290, 110 Stat. 3416 (1996). \48\ 1999 Adopting Release at Section II.A. --------------------------------------------------------------------------- The 1999 adoption of the $5 million disclosure threshold reflected concern that eliminating the overall $5 million ceiling on the annual amount of securities sold during a 12-month period ``could result in some very large offerings of securities without the protections of registration, even though made pursuant to compensatory arrangements.'' \49\ Because the Commission had not witnessed abuse of Rule 701 in offerings below the prior $5 million ceiling, it did not believe imposing the burdens of preparing and disseminating additional disclosure for these smaller offerings would justify potential benefits to employee-investors. In contrast, large non-reporting companies could issue substantial amounts of securities exceeding $5 million. Based on comments received, the Commission believed that many of these companies already prepared the same types of disclosure in their normal course of business, such as for using other exemptions, so that the disclosure requirement generally would be less burdensome for them. If these companies did not want to provide the new disclosures, the Commission noted that they could keep the amount sold below $5 million in the 12- month period.\50\ --------------------------------------------------------------------------- \49\ 1999 Adopting Release at Section II.B. In adopting this requirement, the Commission stated it would have investor protection concerns in the context of offerings of securities with an aggregate sales price or amount of securities sold during the 12-month period exceeding $5 million without imposing specific disclosure requirements. The Commission noted that, ``[m]oreover, we believe that many of these companies already have prepared the type of disclosure required in their normal course of business, either for using other exemptions, such as Regulation D or for other purposes.'' \50\ Id. --------------------------------------------------------------------------- Inflation since 1999 \51\ has made it more likely for non-reporting issuers, regardless of size, to cross this threshold in a 12-month period. In circumstances where the required disclosure is inadvertently not provided to all investors before the $5 million threshold is crossed, issuers may not rely on the exemption. Accordingly, the current structure of the rule results in issuers needing to anticipate, up to 12 months before exceeding the $5 million threshold, the possibility that they may do so, and to supply plan participants with the additional disclosures for that period. --------------------------------------------------------------------------- \51\ Based on data provided by the U.S. Department of Labor, Bureau of Labor Statistics, $5 million in 1999 dollars would be approximately $7.5 million in 2018. --------------------------------------------------------------------------- As noted above, in a separate release, the Commission is amending Rule 701(e) to implement the Act's mandate 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.\52\ Because the amendment does not otherwise revise Rule 701(e), the rule will continue to operate in the same manner as it has under the previous $5 million threshold. --------------------------------------------------------------------------- \52\ See n. 5, above. --------------------------------------------------------------------------- While the adopted amendment may provide non-reporting issuers flexibility in further utilizing the exemption, it does not address some of the concerns we have heard regarding Rule 701(e). In particular, although the threshold is higher, the need to anticipate the consequences of crossing it remains.\53\ Concern also has been expressed that some non-reporting companies are not necessarily familiar with Regulation A financial disclosure and that compliance can be burdensome, especially for companies first utilizing Rule 701.\54\ --------------------------------------------------------------------------- \53\ U.S. Securities and Exchange Commission Advisory Committee on Small and Emerging Companies, Recommendation Regarding Securities Act Rule 701 (Sept. 21, 2017) (``Advisory Committee Recommendation''), available at: https://www.sec.gov/info/smallbus/acsec/acsec-rule-701-recommendation-2017-09-21.pdf. Among other things, the Advisory Committee Recommendation expresses concern that crossing the disclosure threshold could result in the loss of the exemption for earlier Rule 701 transactions in the same 12-month period for which the Rule 701(e) disclosure was not provided a reasonable time before sale. \54\ Advisory Committee Recommendation. --------------------------------------------------------------------------- In light of these concerns, we request comment: 22. Should Rule 701(e) continue to require more disclosure for a period that precedes the threshold amount being exceeded? If so, should the consequence for failure to deliver continue to be loss of the exemption for the entire offering? 23. To what extent are non-reporting companies that issue securities in an amount that would exceed the new threshold already preparing forms of financial disclosure, such as in connection with 17 CFR 230.500 through 230.508 (Regulation D) or Regulation A? 24. Alternatively, should the consequence for failing to provide the disclosure be loss of the exemption only for transactions in offerings that occur after the threshold is crossed and for which disclosure was not provided? a. If disclosure is required only for transactions that occur after the $10 million threshold is crossed, should disclosure be required for all transactions immediately following that event, or should an interval of time be provided to permit the disclosure to be prepared before it must be delivered? If [[Page 34963]] so, how long should that time interval be? b. Should the disclosure subsequently also be made available to investors in transactions that occurred before the $10 million threshold is crossed? 25. Alternatively, should there instead be a grace period, such that if the threshold is crossed, the issuer has an opportunity to provide the required disclosure before losing the exemption for the entire offering? 26. Should we provide a regulatory option whereby all Rule 701(e) information would be disclosed to all investors, so that all would receive equal information and there would be no risk of losing the exemption in the manner there is today? Should we provide a different regulatory alternative that would provide all investors all Rule 701(e) information other than the financial statement disclosure? Part F/S of Form 1-A prescribes that financial statements are required for Regulation A Tier 1 and Tier 2 offerings. In Regulation A offerings, companies include two years of consolidated balance sheets, statements of income, cash flows, and changes in stockholders' equity.\55\ Issuers relying on Rule 701 may choose to provide financial statements that comply with the requirements of either Tier. This information must be provided as of a date no more than 180 days before the date of sale. As a result, for issuers seeking to maintain current information, this has the effect of requiring financial statements to be available on at least a quarterly basis, and to be completed within three months after the end of each quarter, for sales to be permitted continuously. The Commission, in adopting the current version of Rule 701, stated that because of the pre-existing relationship a compensated individual has with the issuer, the disclosures provided in Rule 701(e) are appropriate.\56\ It also noted that the ``amount and type of disclosure required for this person is not the same as for the typical investor with no particular connection with the issuer.'' \57\ --------------------------------------------------------------------------- \55\ 17 CFR 210.1-01 through 201.12-29. Tier 2 offerings require audited financial statements. See Part F/S of Form 1-A [17 CFR 239.90]. \56\ 1999 Adopting Release at Section II.B. \57\ Id. --------------------------------------------------------------------------- 27. Should the type of information provided depend on who is the recipient of the securities? For example, should more disclosure be provided to the types of recipients described in Section II.B. above? Why or why not? If so, what, specifically, should be added to the disclosures and why? 28. Should this disclosure be updated less frequently than currently required? For example, should we require updates once a year unless an event results in a material change to the company's enterprise value or value of the securities issued? \58\ Should the frequency of disclosure depend on who is the recipient of the securities? For example, should the frequency be greater for recipients described in Section II.B, above? Why or why not? If so, what is the appropriate frequency and why? --------------------------------------------------------------------------- \58\ Advisory Committee Recommendation. --------------------------------------------------------------------------- 29. Should we consider other alternatives to the Regulation A financial statements, such as the issuer's most recent balance sheet and income statement as of a date no more than 180 days before the sale of securities? 30. Should we provide a regulatory option that would provide valuation information regarding the securities in lieu of, or in addition to, financial statements? If so, what valuation method should be used? Would ASC Topic 718 \59\ grant date fair value information be informative? Would Internal Revenue Code Section 409A \60\ valuation information be informative? If so, would issuers be able to determine Section 409A valuations regardless of whether the offering involves securities other than options? --------------------------------------------------------------------------- \59\ FASB ASC Topic 718. \60\ 26 U.S.C. 409A. --------------------------------------------------------------------------- Under existing Rule 701, foreign private issuers are required to provide financial information on the same schedule as domestic issuers.\61\ Foreign private issuers may issue securities in reliance on Rule 701 throughout the year, which could lead them to update their financial statements more frequently than required under Form 20-F.\62\ --------------------------------------------------------------------------- \61\ 1999 Adopting Release at Section II.C. \62\ 17 CFR 249.220f. See Item 8A.5 of Form 20-F. --------------------------------------------------------------------------- 31. Because foreign private issuers that are subject to the Exchange Act reporting requirements generally are not required to submit quarterly financial statements, should non-reporting foreign private issuers that rely on Rule 701 be subject to the condition to provide quarterly financial statements if they are continuing to sell securities throughout the year? Why or why not? 32. Should we amend any other aspect of the Rule 701 financial statement requirements that apply to foreign private issuers? If so, what should we amend and why? 2. Timing and Manner of Rule 701(e) Disclosure Rule 701(e) requires the prescribed disclosure to be delivered ``a reasonable period of time before the date of sale.'' However, the rule does not prescribe the manner or medium in which disclosure should be delivered. We are aware that non-reporting companies are sensitive to maintaining the confidentiality of financial information so that it does not fall into the hands of competitors. To determine if the rule needs further clarification, we request comment: 33. Do we need to clarify what it means to deliver disclosure ``a reasonable period of time before the date of sale''? Should that mean any time before sale such that the recipient has an opportunity to review the disclosure? Should any new standard further clarify that the disclosure provided to the recipient must remain current during that time? 34. Should we specify a different time for providing disclosure? If so, when should that be and why? 35. Should we also specify the manner or medium in which disclosure should be delivered? Should we specify how to deliver information electronically? Should we require a method for confirming receipt of the information? If so, what vehicles would best give effect to the purpose of disclosure without undermining issuers' confidentiality concerns? 36. Should the rule specify that confidentiality safeguards should not be so burdensome that intended recipients cannot effectively access the required disclosures? 3. Options and Other Derivative Securities/RSUs For options and other derivative securities, whether the issuer is obligated to deliver Rule 701(e) disclosure is based on whether the option or other derivative security was granted during a 12-month period during which the disclosure threshold is exceeded.\63\ If so, the issuer must deliver Rule 701(e) disclosure a reasonable period of time before the date of exercise or conversion.\64\ --------------------------------------------------------------------------- \63\ Rule 701(d)(3)(ii) provides that the aggregate sales price for options is determined when an option grant is made (without regard to when it becomes exercisable). Use of this measure for both Rule 701(d) and (e) simplifies the operation of the rule. \64\ Rule 701(e)(6). --------------------------------------------------------------------------- This approach simplifies the operation of Rule 701 for options and other derivative securities for which the recipient must make an investment decision to exercise or convert. However, because instruments such as RSUs settle by their terms without the recipient taking such an action, the relevant investment decision for the RSU, if there is one, likely takes place [[Page 34964]] 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 award is granted. Concern has been expressed, however, that disclosure of financial information before an RSU is granted could compel disclosure to recipients at a time when they are negotiating their employment contracts before joining the company. In light of this concern, we request comment: 37. Should Rule 701 be amended to specifically address when disclosure is required for RSUs? If so, when should Rule 701(e) disclosure be required for an RSU? Should we revisit the concept of ``convert or exercise'' as providing the relevant date for disclosure? For new hires who receive RSUs, should we require that disclosure be provided within 30 days after commencing employment? If not, when should Rule 701(e) disclosure be required for RSUs issued to new hires? 38. Should we clarify that RSUs should be valued for Rule 701 purposes based on the value of the underlying securities on the date of grant? If not, how should they be valued? 39. Are there any other instruments that should be specifically addressed in the rule? D. Rule 701(d) Exemptive Conditions Questions have arisen whether the current 12-month sales cap of the greater of 15% of the total assets of the issuer or 15% of the total outstanding amount of the class of securities being offered and sold in reliance on the rule, subject to the annual availability of a $1 million cap if greater than either of these tests, is unduly restrictive, particularly for smaller and start-up companies that may be more dependent on equity compensation to attract and retain necessary talent.\65\ Each of the 15% amounts is measured as of the issuer's most recent balance sheet date, if no older than its last fiscal year end.\66\ In proposing the original version of the 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.'' \67\ The alternatives based on 15% of total assets or 15% of the outstanding amount of the class of securities were intended to increase the flexibility and utility of the exemption.\68\ The $1 million alternative provides an amount that any issuer can use, regardless of size. --------------------------------------------------------------------------- \65\ Advisory Committee Recommendation. But see, e.g., Edward M. Zimmerman, Late Stage Startups Trip SEC Rule 701 Long Before IPO, Forbes (Aug. 2, 2016) (stating that ``[b]ecause the test [provided in Rule 701(d)] is analyzed on the basis of a 12-month period, because the test excludes Exempt Issuances and because founders and investors have significant business reasons for limiting the dilutive impact of compensatory equity awards, startups rarely come near the Rule 701(d) thresholds.''). \66\ Rules 701(d)(2)(ii) and (iii). \67\ See Rule 701 Proposing 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 1988 Adopting Release. \68\ See 1988 Adopting Release at Section I.A.(2). --------------------------------------------------------------------------- Recently, however, concern has been expressed that because there is no longer any statutorily imposed ceiling on the exemption,\69\ compliance with an annual regulatory ceiling requires an on-going analysis with no clear benefit.\70\ At the same time, the implications of qualifying for the Rule 701 exemption have expanded, as securities held by persons who receive them in transactions exempted by Rule 701 are excluded from the definition of ``held of record,'' for the purposes of determining whether an issuer is required to register a class of equity securities under the Exchange Act. --------------------------------------------------------------------------- \69\ NSMIA enacted Securities Act Section 28 [15 U.S.C. 77z-3], giving the Commission general exemptive authority. Because the Commission relied on this authority in the 1999 Adopting Release, the Securities Act Section 3(b) absolute limit of $5,000,000 no longer applies to Rule 701. \70\ Advisory Committee Recommendation. --------------------------------------------------------------------------- In light of these factors, we request comment: 40. Is there a continuing need for any annual regulatory ceiling for Rule 701 transactions? Why or why not? Would investors be harmed if the ceiling is eliminated or raised significantly? Does an annual ceiling provide benefits in curbing potential abuse of the rule for non-compensatory sales? If so, how? 41. If a ceiling is retained, should it be raised? If so, what threshold would be appropriate, and why? Would compliance be easier if issuers are permitted to measure the 15% alternatives as of last fiscal year-end, rather than at the issuer's most recent balance sheet date? III. Form S-8 A. Background Form S-8 was originally adopted in 1953, as a simplified form for the registration of securities to be issued pursuant to employee stock purchase plans.\71\ It retains certain disclosure obligations. For example, it requires that employees receiving securities as compensation receive public company disclosure to which the full spectrum of Securities Act protections apply. In addition, reporting company securities received pursuant to Form S-8 registration are generally not restricted.\72\ As described below, from time to time the Commission has amended Form S-8 to streamline its operations, such as by providing immediate effectiveness upon filing and updating of the registration statement through incorporation by reference.\73\ Form S-8 is available solely to register compensatory sales of securities to ``employees,'' including consultants and advisors and de facto employees. The form is not available for the registration of securities offered for the purpose of raising capital.\74\ --------------------------------------------------------------------------- \71\ Registration of Securities Offered Pursuant to Employees Stock Purchase Plans, Release No. 33-3480 (Jun. 16, 1953) [18 FR 3688 (Jun. 27, 1953)]. \72\ In addition, General Instruction C to Form S-8 permits registrants to file a resale prospectus for control securities, and restricted securities issued under any employee benefit plan of the issuer that were acquired by the selling security holder prior to the filing of the Form S-8. \73\ See e.g., Registration and Reporting Requirements for Employee Benefit Plans, Release No. 33-6867 (June 6, 1990) [55 FR 23909 (June 13, 1990)] (``1990 Adopting Release''). \74\ The abbreviated disclosure format of Form S-8 reflects the Commission's historic distinction between offerings made to employees for compensatory and incentive purposes and offerings made for capital-raising purposes. See 1990 Adopting Release. --------------------------------------------------------------------------- Form S-8 is available for the registration of securities to be offered under any employee benefit plan \75\ to a registrant's employees or employees of its subsidiaries or parents. Form S-8 registration is utilized for many different types of employee benefit plans, including Internal Revenue Code Section 401(k) \76\ plans and similar defined contribution retirement savings plans, employee stock purchase plans, nonqualified deferred compensation plans, and incentive plans that issue options, restricted stock, or RSUs. The form may be used by any issuer that is subject, at the time of filing, to the periodic 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.\77\ Form S-8 is not available for shell companies.\78\ --------------------------------------------------------------------------- \75\ ``Employee benefit plan'' is defined in Securities Act Rule 405 and includes the same restrictions on the scope of eligible consultants and advisors as set forth in Rule 701. \76\ 26 U.S.C. 401(k). \77\ See General Instruction A.1 to Form S-8. \78\ ``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, it is required to file Form 10 equivalent information with the Commission. General Instruction A.1 to Form S-8 provides that it then becomes eligible to use Form S-8 60 days following that filing. --------------------------------------------------------------------------- [[Page 34965]] Form S-8 does not require that a form of prospectus be filed with the registration statement for employee benefit plan offerings. Instead, 17 CFR 230.428 (Rule 428) specifies the documents that, together, constitute a prospectus that meets the requirements of Securities Act Section 10(a): \79\ --------------------------------------------------------------------------- \79\ 15 U.S.C. 77j(a). --------------------------------------------------------------------------- Certain documents containing the employee benefit plan information required by Item 1 of the Form; the statement of availability of company information, employee benefit plan annual reports and other information required by Item 2 of the Form; and the documents containing registrant information and employee benefit plan annual reports that are incorporated by reference in the registration statement pursuant to Item 3 of the Form. Companies are also permitted to file a resale prospectus covering only control securities or restricted securities acquired pursuant to an employee benefit plan.\80\ --------------------------------------------------------------------------- \80\ The resale prospectus is prepared in accordance with the requirement of Part I of Form S-3 (or, if the registrant is a foreign private issuer, in accordance with Part I of Form F-3) and filed with the registration statement on Form S-8 or, in the case of control securities, a post-effective amendment thereto. Restricted securities must have been acquired by the holder before the Form S-8 is filed and the resale prospectus for them must be filed with the initial Form S-8. See General Instruction C to Form S-8. --------------------------------------------------------------------------- B. Form S-8 Eligible Plan Participants To prevent abuse of Form S-8 to register securities issued in capital-raising transactions, in 1999 the Commission revised the eligibility standards for ``consultants and advisors'' for the purposes of Form S-8.\81\ In so doing the Commission sought to preclude the issuance of securities on Form S-8 to consultants either (i) as compensation for any service that directly or indirectly promotes or maintains a market for the registrant's securities, or (ii) as conduits for a distribution to the general public.\82\ At the same time, the Commission revised the Rule 701 ``consultants and advisors'' definition to be consistent with Form S-8.\83\ In adopting the changes, the Commission also noted that issuers may continue to use securities registered on Form S-8, or issued under the Rule 701 exemption, to compensate persons with whom they have a de facto employment relationship.\84\ We are soliciting comment regarding the continued harmonization of the scope of ``consultants and advisors'' between Form S-8 and Rule 701, and more broadly whether the scope of eligible individuals should be the same under both the form and the exemption. Specifically: --------------------------------------------------------------------------- \81\ See 1999 S-8 Adopting Release. \82\ Since the adoption of the 1999 amendments, the Commission has brought enforcement actions related to Form S-8 abuse, particularly the misuse of the form for capital-raising activities involving coordinated unregistered resales into the public market by the purported ``consultants'' or employees acting as underwriters, funding the company with the proceeds and denying Securities Act protection to the genuine public purchasers. See, e.g., SEC. v. Phan, 500 F.3d 895 (9th Cir. 2007) (holding the resale of publicly traded stock, which had the effect of supplying the company with capital from the public at the company's behest, could not be covered by a Form S-8 registration statement); SEC v. East Delta Resources Corp., No. 10-CV-0310 (SJF/wdw) 2012 WL 10975938 (E.D.N.Y. 2012) (finding violations of Sections 5 notwithstanding the existence of a Form S-8 registration statement and consulting agreement where the defendant's consulting role was capital-raising and promotional and thus contrary to the eligibility requirements for effective Form S-8 registration); and SEC v. Esposito, No. 8:08- CV-494-T-26EAJ, 2011 WL 13186000 (M.D. Fla. June 24, 2011) (finding defendants violated Section 5 where Form S-8 was used to register shares received by consultant as compensation for arranging a reverse merger). \83\ 1999 Adopting Release at Section II.D. \84\ See Section II.A, above. --------------------------------------------------------------------------- 42. To the extent we change the application of Rule 701 by changing the scope of individuals eligible for compensatory offerings, such as to include individuals participating in the ``gig economy,'' \85\ should we make corresponding changes to Form S-8? Why or why not? If the scope of individuals who are eligible for Form S-8 offerings were expanded, would there be concerns about misuse of the form for capital- raising activities? If so, how could we safeguard against those concerns? --------------------------------------------------------------------------- \85\ See Section II.B, above. --------------------------------------------------------------------------- 43. Would differences between the eligibility standards of Rule 701 and Form S-8 cause problems for issuers or recipients? C. Administrative Burdens Issuers register a specified number of company shares on Form S-8. For registration fee purposes, if the offering price is not known, the fee is computed based on the price of securities of the same class, in the same manner as for other offerings at fluctuating market prices.\86\ No additional fee is assessed for securities offered for resale.\87\ --------------------------------------------------------------------------- \86\ 17 CFR 230.457(h) and (c). \87\ 17 CFR 230.457(h)(3). --------------------------------------------------------------------------- The Commission has sought to reduce the costs and burdens incident to registration of securities issued through such plans, where consistent with investor protection,\88\ for example by: --------------------------------------------------------------------------- \88\ See, e.g., Release No. 33-5767 (November 22, 1976) [41 FR 52701 (Dec. 1, 1976)], Amendments to Registration Statement Form S-8 and Related New and Amended Rules Under the Securities Act of 1933, Release No. 33-6190 (February 22, 1980) [45 FR 13438 (Feb. 29, 1980)] (``1980 S-8 Adopting Release'') and 1990 Adopting Release. --------------------------------------------------------------------------- Allowing Form S-8 to go effective automatically without review by the staff or other action by the Commission; \89\ --------------------------------------------------------------------------- \89\ In the 1980 S-8 Adopting Release the Commission initially provided that automatic effectiveness for Form S-8 occurred 20 days after filing, while post-effective amendments became effective upon filing. Now, all registration statements on Form S-8 become effective upon filing with the Commission. See 17 CFR 230.462(a) and 1990 Adopting Release. --------------------------------------------------------------------------- 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; \90\ --------------------------------------------------------------------------- \90\ See Item 3 and General Instruction G of Form S-8. --------------------------------------------------------------------------- adopting 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; \91\ --------------------------------------------------------------------------- \91\ 17 CFR 230.428(a)(1). --------------------------------------------------------------------------- providing for registration of an indeterminate amount of plan interests and providing that there is no separate fee calculation for registration of plan interests; \92\ and --------------------------------------------------------------------------- \92\ 17 CFR 230.416(c) and 17 CFR 230.457(h)(2), respectively. --------------------------------------------------------------------------- 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.\93\ --------------------------------------------------------------------------- \93\ See General Instruction E to Form S-8. --------------------------------------------------------------------------- We remain interested in simplifying the requirements of Form S-8 and reducing the complexity and cost of compliance to issuers for securities issuances to employees and other eligible employee benefit plan participants while retaining appropriate investor protections. We therefore seek comment on ways we could further reduce the burdens associated with registration on Form S-8: 44. What effects would stem from revising the form in this way? Would such revisions encourage more companies to become reporting companies? 45. Should we further simplify the registration requirements of Form S-8? For example, does registering a specific number of shares result in Section 5 compliance problems when plan sales exceed the number of shares registered, such as for Section 401(k) plans and similar defined contribution retirement savings plans? If so, how should we address this issue? [[Page 34966]] 46. Should Form S-8 allow an issuer to register on a single form the offers and sales pursuant to all employee benefit plans that it sponsors? \94\ When shares are authorized for issuance by a given plan what information would need to be disclosed that would have been previously omitted from the effective registration statement? \95\ --------------------------------------------------------------------------- \94\ Cf. Simplification of Registration Procedures for Primary Securities Offerings, Release No. 33-6964 (October 22, 1992) [57 FR 48970 (Oct. 29, 1992)] (adopting the unallocated shelf procedure). See also Securities Offering Reform, Release No. 33-8591 (December 1, 2005) [70 FR 44722 (Aug. 3, 2005)] (``Securities Offering Reform Adopting Release''). \95\ For example, in unallocated shelf offerings conducted under 17 CFR 203.415(a)(1)(x) (Rule 415(a)(1)(x)) and 17 CFR 230.430B (Rule 430B), prospectus supplements are filed to disclose information that would have been previously omitted from a prospectus filed as part of the effective registration statement. See 17 CFR 230.424(b)(2) and Rule 430B. --------------------------------------------------------------------------- 47. If we facilitate a single registration statement for all employee benefit plan securities, should the number of shares to be registered continue to be specified in the initial registration statement? Alternatively, should issuers be able to add securities to the existing Form S-8 by an automatically effective post-effective amendment? \96\ If so, what would be the best way to implement such a system? --------------------------------------------------------------------------- \96\ This would be analogous to how well-known seasoned issuers are currently permitted to add other securities or even new classes of securities at any time by post-effective amendment to an existing automatic shelf registration statement on Form S-3. See 17 CFR 230.413(b)(1). See also, Securities Offering Reform Adopting Release. --------------------------------------------------------------------------- 48. With respect to either alternative above, would the ability to have a single Form S-8 reduce administrative burdens given that many issuers currently monitor and track multiple registration statements on Form S-8? \97\ Would this be practicable where the securities to be registered relate to different forms of plans, such as Section 401(k) plans and incentive plans? Would it be practicable if some of the plans involved the issuance of plan interests, which trigger the individual plan's obligation to file an Exchange Act annual report on Form 11-K? \98\ Would the offer and sale of shares pursuant to multiple plans registered on the same Form S-8 create difficulties keeping track of which registered shares are being issued pursuant to which plan? For example, upon the expiration of a plan, would there be difficulties transferring shares between plans? --------------------------------------------------------------------------- \97\ For example, Form S-8 filers update their registration statement through the incorporation by reference of Exchange Act reports. Such updates require the consent of an auditor where the auditor's report is contained in the Exchange Act report which is automatically incorporated by reference into a previously filed Securities Act filing, such as a Form S-3 or Form S-8. See 17 CFR 229.601(b)(23) (Item 601(b)(23) of Regulation S-K) and 17 CFR 229.601, footnote 5 of the exhibit table (Footnote 5 of the Item 601 Exhibit Table). The primary purpose of obtaining a consent or acknowledgement letter is to assure that the auditor is aware of the use of its report and the context in which it is used. Where such consents are required in an update to a registration statement, the auditor frequently refers to all active Securities Act registration statements. The ability to file a single Form S-8 for all securities to be issued pursuant to employee benefit plans would mean that the auditor's consent would refer to a single Form S-8. \98\ 17 CFR 249.311. --------------------------------------------------------------------------- 49. Well-known seasoned issuers are permitted, at their option, to pay filing fees on a ``pay-as-you-go'' basis at the time of each takedown off the shelf registration statement in an amount calculated for that takedown.\99\ Should we adopt a similar ``pay-as-you-go'' fee structure for Form S-8 pursuant to which all issuers eligible to use Form S-8 could, at their option, pay filing fees on Form S-8 on an as needed basis rather than when the form is originally filed? What, if any, variations from the pay-as-you-go fee structure would be needed to adapt it to employee benefit plan registration statements? --------------------------------------------------------------------------- \99\ See 17 CFR 230.456(b) and 17 CFR 230.457(r). --------------------------------------------------------------------------- a. For well-known seasoned issuers using the pay-as-you-go fee structure, a cure is available that allows such issuers to pay required filing fees after the original payment due date if the issuer makes a good faith effort to pay the fee timely and then pays the fee within four business days of the original fee due date.\100\ If we adopted a pay-as-you-go fee structure for Form S-8, should we adopt a similar cure provision? What, if any, variations from the cure provision for well-known seasoned issuers would be needed to adapt it to employee benefit plan registration statements? --------------------------------------------------------------------------- \100\ 17 CFR 230.456(b)(1)(i). --------------------------------------------------------------------------- 50. Alternatively, should we require the payment of registration fees on a periodic basis with respect to the securities, the offer and sale of which were registered on Form S-8, during the prior period? How would such a system best be implemented? How could we structure such a system consistent with the requirements of Securities Act Section 6(c)? \101\ --------------------------------------------------------------------------- \101\ 15 U.S.C. 77f(c). --------------------------------------------------------------------------- 51. Are there any other ways to reduce the administrative burdens associated with filing and updating Form S-8? If so, please explain. D. Form S-8 Generally We also are soliciting comment more broadly on Form S-8 itself: 52. Does the current operation of Form S-8 present significant challenges to the use of employee benefit plans? If so, please explain how. 53. It has been suggested that Form S-8 registration would no longer be necessary if the Commission were to extend the Rule 701 exemption to Exchange Act reporting companies.\102\ What would be the advantages and disadvantages of allowing Exchange Act reporting companies to use Rule 701 and, in turn, eliminating Form S-8? Would permitting Exchange Act reporting companies to use Rule 701 raise any investor protection concerns or be inconsistent with the purposes underlying Rule 701? --------------------------------------------------------------------------- \102\ Keith F. Higgins, Is It Time to Retire Form S-8?, Insights: Corporate and Securities Law Advisor, September 2017 at 16. --------------------------------------------------------------------------- 54. Form S-8 requires issuers to remain current in their Exchange Act reports in order to be eligible to use the form,\103\ and Form S-8 disclosure relies upon incorporation by reference \104\ and delivery \105\ of these Exchange Act reports. Would the elimination of Form S-8 reduce an incentive for public companies to remain current in their Exchange Act reporting obligations? If we permit reporting companies to use Rule 701, should we require these companies to be current in their Exchange Act reports in order to rely on the exemption? --------------------------------------------------------------------------- \103\ Item 3 of Form S-8. \104\ Item 3 of Form S-8. \105\ Rule 428(b)(2). --------------------------------------------------------------------------- 55. Since Exchange Act reports are automatically incorporated by reference into Form S-8, would the lack of a filed registration statement for employee benefit plans result in reduced scrutiny of Exchange Act filings by issuers and their representatives? \106\ Would the potential lack of Securities Act Section 11 \107\ and Section 12(a)(2) \108\ liability for these filings as a result of the elimination of Form S-8 have a meaningful impact on the quality of disclosure? --------------------------------------------------------------------------- \106\ Part II, Item 3 to Form S-8. \107\ 15 U.S.C. 77k. \108\ 15 U.S.C. 77l(a)(2). --------------------------------------------------------------------------- 56. If Form S-8 were rescinded, how would issuers be likely to register the resale of restricted securities issued pursuant to employee benefit plans? Would Form S-8 remain necessary as a method of registering resales of control securities or restricted securities acquired pursuant to an employee benefit plan? Alternatively, should the provisions of General Instruction C to Form S-8 be moved to Securities Act Form S-3? \109\ If so, should Form S-3 eligibility requirements be revised for this purpose? --------------------------------------------------------------------------- \109\ 17 CFR 239.33. --------------------------------------------------------------------------- [[Page 34967]] IV. Conclusion We are interested in the public's opinions regarding the matters discussed in this concept release. We encourage all interested parties to submit comments on these topics. In addition, we solicit comment on any other aspect of Rule 701 and Form S-8 that commenters believe may be improved upon. By the Commission. Dated: July 18, 2018. Brent J. Fields, Secretary. [FR Doc. 2018-15731 Filed 7-23-18; 8:45 am] BILLING CODE 8011-01-P
![34958 Federal Register / Vol. 83, No. 142 / Tuesday, July 24, 2018 / Proposed Rules
21°28′41″ N, long. 157°58′19″ W, thence (the ‘‘Act’’), we seek comment on B. Form S–8 Eligible Plan Participants
clockwise along a 3.7-mile radius of the possible ways to modernize the C. Administrative Burdens
airport to lat. 21°25′46″ N, long. 158°04′24″ exemption and the relationship between D. Form S–8 Generally
W; to lat. 21°26′52″ N, long. 158°04′31″ W; IV. Conclusion
it and Form S–8, consistent with
to lat. 21°27′17″ N, long. 158°05′45″ W; to lat.
21°29′14″ N, long. 158°04′50″ W; to lat.
investor protection. I. Overview
21°30′18″ N, long. 158°03′59″ W; thence to DATES: Comments should be received on Under the Securities Act, every offer
the point of beginning; excluding that or before September 24, 2018. and sale of securities must be registered
airspace below 1,800 feet MSL beyond 3.3 ADDRESSES: Comments may be or subject to an exemption from
miles from the airport from the 89° bearing submitted by any of the following registration. The Commission has long
clockwise to the 218° bearing from the methods: recognized that offers and sales of
airport.
securities as compensation present
Paragraph 6005 Class E Airspace Areas
Electronic Comments
different issues than offers and sales
Extending Upward From 700 Feet or More • Use the Commission’s internet that raise capital for the issuer of the
Above the Surface of the Earth. comment form (http://www.sec.gov/ securities.1 Among other considerations,
* * * * * rules/concept.shtml); or the Commission has recognized that the
• Send an email to rule-comments@ relationship between the issuer and
AWP HI E5 Honolulu, HI [Amended]
sec.gov. Please include File Number S7– recipient of securities is often different
Wheeler AAF, HI 18–18 on the subject line. in a compensatory rather than capital
(Lat. 21°28′53″ N, long. 158°02′16″ W)
Paper Comments raising transaction. The Commission has
That airspace extending upward from 700 thus provided a limited exemption from
feet above the surface within a 4.2-mile • Send paper comments to Brent J. registration—17 CFR 230.701 (Rule
radius of Wheeler AAF, excluding that Fields, Secretary, Securities and
portion within Restricted Area R–3109, when 701)—for certain compensatory
Exchange Commission, 100 F Street NE, securities transactions as well as a
active.
Washington, DC 20549–1090. specialized form—Form S–8—for
Issued in Seattle, Washington, on July 17, All submissions should refer to File registering certain compensatory
2018.
Number S7–18–18. This file number transactions. Both Rule 701 and Form
Shawn M. Kozica, should be included on the subject line S–8 require the issuer to make specific
Group Manager, Operations Support Group, if email is used. To help us process and disclosures. However, depending on the
Western Service Center. review your comments more efficiently, circumstances, compensatory
[FR Doc. 2018–15738 Filed 7–23–18; 8:45 am] please use only one method. The transactions also may be conducted
BILLING CODE 4910–13–P Commission will post all comments on under the Securities Act Section 4(a)(2)
the Commission’s website (http:// exemption from registration or under a
www.sec.gov/rules/concept.shtml). ‘‘no sale’’ theory,2 which would not
SECURITIES AND EXCHANGE Comments are also available for website require specific disclosures.
COMMISSION viewing and copying in the Equity compensation can be an
Commission’s Public Reference Room, important component of the
17 CFR Part 230 100 F Street NE, Washington, DC 20549, employment relationship. Using equity
[Release No. 33–10521; File No. S7–18–18] on official business days between the for compensation can align the
hours of 10:00 a.m. and 3:00 p.m. All incentives of employees with the
RIN 3235–AM38 comments received will be posted success of the enterprise, facilitate
without change. Persons submitting
Concept Release on Compensatory comments are cautioned that we do not 1 See, e.g., Release No. 33–3469–X (Apr. 10, 1953)
Securities Offerings and Sales redact or edit personal identifying [18 FR 2182 (Apr. 17, 1953)] and Registration of
Securities Offered Pursuant to Employees Stock
AGENCY: Securities and Exchange information from comment submissions. Purchase Plans, Release No. 33–3480 (Jun. 16,
Commission You should submit only information 1953) [18 FR 3688 (Jun. 27, 1953)], each observing
that you wish to make available that the investment decision to be made by the
ACTION: Concept release; request for employee is of a different character than when
publicly.
comment. securities are offered for the purpose of raising
FOR FURTHER INFORMATION CONTACT: capital.
SUMMARY: The Securities and Exchange Anne M. Krauskopf, Senior Special
2 See Changes to Exchange Act Registration
Commission (‘‘Commission’’) is Requirements to Implement Title V and Title VI of
Counsel, and Adam F. Turk, Special the JOBS Act, Release No. 33–10075 (May 3, 2016)
publishing this release to solicit Counsel, Office of Chief Counsel, [81 FR 28689 (May 10, 2016)] at n. 82, stating ‘‘The
comment on the exemption from Division of Corporation Finance, at ‘‘no sale’’ theory relates to the issuance of
registration under the Securities Act of (202) 551–3500. compensatory grants made by employers to broad
groups of employees pursuant to broad-based stock
1933 (the ‘‘Securities Act’’) for securities SUPPLEMENTARY INFORMATION: bonus plans without Securities Act registration
issued by non-reporting companies under the theory that the awards are not an offer
pursuant to compensatory Table of Contents or sale of securities under Section 2(a)(3) of the
arrangements, and Form S–8, the Securities Act [15 U.S.C. 77b(a)(3)].’’ Where
I. Overview securities are awarded to employees at no direct
registration statement for compensatory II. Rule 701 cost through broad based bonus plans, the staff has
offerings by reporting companies. A. Background taken the position generally that there has been no
Significant evolution has taken place B. Rule 701(c) Eligible Plan Participants
jstallworth on DSKBBY8HB2PROD with PROPOSALS
sale since employees do not individually bargain to
both in the types of compensatory C. Rule 701(e) Disclosure Requirements contribute cash or other tangible or definable
1. General consideration to such plans. Where securities are
offerings issuers make and the awarded to or acquired by employees pursuant to
composition of the workforce since the 2. Timing and Manner of Rule 701(e)
Disclosure individual employment arrangements, however the
Commission last substantively amended 3. Options and Other Derivative Securities/
staff has expressed the view that such arrangements
these regulations. Therefore, as we involve separately bargained consideration, and a
RSUs sale of the securities has occurred. See Employee
amend the exemption as mandated by D. Rule 701(d) Exemptive Conditions Benefit Plans: Interpretations of Statute, Release
the Economic Growth, Regulatory III. Form S–8 No. 33–6188 (Jan. 15, 1981) [29 FR 8960 (Feb. 11,
Relief, and Consumer Protection Act A. Background 1980)] at Section II.A.5.d and n. 84.
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![Federal Register / Vol. 83, No. 142 / Tuesday, July 24, 2018 / Proposed Rules 34959
recruitment and retention, and preserve relating to compensation. In adopting Since 1999,19 the rule has provided
cash for the company’s operations.3 the rule, the Commission determined that the amount of securities that may
Since Rule 701 and Form S–8 4 were that it would be an unreasonable burden be sold in reliance on the exemption
last amended, forms of equity to require these non-reporting during any consecutive 12-month
compensation have continued to evolve, companies, many of which are small period is limited to the greatest of: 20
and new types of contractual businesses, to incur the expenses and • $1 million;
relationships between companies and disclosure obligations of public • 15% of the total assets of the
the individuals who work for them have companies where their sales of issuer,21 measured at the issuer’s most
emerged. In light of these developments, securities were to employees.13 In recent balance sheet date; or
as well as the Act’s mandate to increase addition to domestic non-reporting
• 15% of the outstanding amount of
to $10 million the Rule 701(e) threshold companies, Rule 701 is also available for
the class of securities being offered and
in excess of which the issuer is required foreign private issuers.14
The rule provides an exemption from sold in reliance on the rule, measured
to deliver additional disclosure to at the issuer’s most recent balance sheet
investors, which we are implementing registration only for securities issued in
compensatory circumstances and is not date.
in a separate release,5 we believe this is
available for plans or schemes These measures apply on an aggregate
an appropriate time to revisit the
inconsistent with this purpose, such as basis, not plan-by-plan. For securities
Commission’s regulatory regime for
to raise capital.15 The exemption is underlying options, the aggregate sales
compensatory securities transactions.
available only to the issuer of the price is determined when the option
We therefore solicit comment on
securities, not to its affiliates, and does grant is made, without regard to when
possible ways to update the
not cover resales of securities by any it becomes exercisable.22 For deferred
requirements of Rule 701 and Form
person.16 The rule exempts only the compensation plans, the calculation is
S–8, consistent with investor protection.
transactions in which the securities are made at the time of the participant’s
We also solicit comment on what effects
offered or sold, and not the securities irrevocable election to defer.23 There is
any revised rule or form may have on
themselves.17 In addition to complying no separate limitation on the amount of
a company’s decision to become a
with Rule 701, the issuer also must securities that may be offered.
reporting company.
comply with any applicable state law In all cases, the issuer must deliver to
II. Rule 701 relating to the offer and sale of investors a copy of the compensatory
A. Background securities.18 benefit plan or contract. Further, Rule
701 transactions are subject to the
In 1988, the Commission adopted appreciation, profit sharing, thrift, incentive, antifraud provisions of the federal
Rule 701 under the Securities Act 6 to deferred compensation, pension or similar plan.’’ securities laws.24
13 As the Commission stated in re-proposing Rule
allow non-reporting companies to sell In addition, if the aggregate sales price
701, ‘‘The essential concern [. . .] remains the
securities to their employees without same—many privately-held companies have found or amount of securities sold during the
the need to register the offer and sale of the costs of complying with the registration 12-month period exceeds $5 million,25
such securities.7 Only issuers that are requirements of the Securities Act and the
subsequent reporting obligations under section
the issuer must deliver to investors a
not subject to the reporting 15(d) of the Exchange Act so burdensome that reasonable period of time before the
requirements of Section 13 8 or 15(d) 9 of employee incentive arrangements are not being date of sale: 26
the Securities Exchange Act of 1934 provided by them. As a consequence, employees
• A copy of the summary plan
(‘‘Exchange Act’’) and are not must forego [sic] potentially valuable means of
compensation. The Commission historically has description required by ERISA,27 or a
investment companies registered or recognized that when transactions of this nature are summary of the plan’s material terms, if
required to be registered under the primarily compensatory and incentive oriented, it is not subject to ERISA;
Investment Company Act of 1940 10 are some accommodation should be made under the
Securities Act.’’ See Employee Benefit and • Information about the risks
eligible to use Rule 701. The rule
Compensation Contracts Release No. 33–6726 (Jul. associated with investment in the
provides an exemption from the 30, 1987) [52 FR 29033 (Aug. 5, 1987)] (‘‘Rule 701 securities sold under the plan or
registration requirements of Section 5 of Proposing Release’’) at Section I.
contract; and
the Securities Act 11 for offers and sales 14 A ‘‘foreign private issuer’’ is defined in 17 CFR
of securities under compensatory 230.405 (Securities Act Rule 405) as a foreign issuer
other than a foreign government, except an issuer 19 See Rule 701—Exempt Offerings Pursuant to
benefit plans 12 or written agreements meeting the following conditions as of the last Compensatory Arrangements, Release No. 33–7645
business day of its most recently completed second (Feb. 25, 1999) [64 FR 11095 (Mar. 8, 1999)] (‘‘1999
3 See Executive Compensation and Related
fiscal quarter: Adopting Release’’).
Person Disclosure, Release No. 33–8732A (Aug. 29, (i) More than 50 percent of the outstanding voting 20 Rule 701(d) [17 CFR 230.701(d)].
2006) [71 FR53158 (Sept. 6, 2006)] at Section II.A.1. securities of which are directly or indirectly owned 21 The relevant limit applies to the total assets of
4 17 CFR 239.16b. of record by residents of the United States; and the issuer’s parent if the issuer is a wholly-owned
5 Section 507 of the Act directs the Commission, (ii) Any of the following: subsidiary and the securities represent obligations
not later than 60 days after the date of enactment, (A) The majority of the executive officers or that the parent fully and unconditionally
to amend Rule 701(e) to increase this threshold. See directors are United States citizens or residents; guarantees.
Public Law 115–174, sec. 507, 132 Stat. 1296 (B) More than 50 percent of the assets of the 22 See Rule 701(d)(3)(ii) [17 CFR
(2018). In Release 33–10520, we adopt an issuer are located in the United States; or 230.701(d)(3)(ii)].
amendment to Rule 701(e) to implement this (C) The business of the issuer is administered 23 Id.
change. principally in the United States. 24 Preliminary Note 1 to Rule 701 (‘‘Issuers and
6 15 U.S.C. 77a et seq.
15 Preliminary Note 5 to Rule 701 provides ‘‘This persons acting on their behalf have an obligation to
jstallworth on DSKBBY8HB2PROD with PROPOSALS
7 See Compensatory Benefit Plans and Contracts,
section also is not available to exempt any provide investors with disclosure adequate to
Release No. 33–6768 (Apr. 14, 1988) [53 FR 12918 transaction that is in technical compliance with this satisfy the antifraud provisions of the federal
(Apr. 20, 1988)] (‘‘1988 Adopting Release’’). section but is part of a plan or scheme to evade the securities laws.’’).
8 15 U.S.C. 78m.
registration provisions of the [Securities] Act. In 25 Rule 701(e) [17 CFR 230.701(e)].
9 15 U.S.C. 78o(d). any of these cases, registration under the 26 Rule 701(e). This amount will change to $10
10 15 U.S.C. 80a–1 et seq. [Securities] Act is required unless another million upon effectiveness of the final rule
11 15 U.S.C. 77e. exemption is available.’’ amendment that raises this threshold. See n. 5,
16 Preliminary Note 4 to Rule 701.
12 A ‘‘compensatory benefit plan’’ is defined in above, See also n. 49 and Section II.C.1, below.
17 Id.
Rule 701(c)(2) [17 CFR 230.701(c)(2)] as ‘‘any 27 The Employee Retirement Income Security Act
purchase, savings, option, bonus, stock 18 Preliminary Note 2 to Rule 701. of 1974 (29 U.S.C. 1001 et seq.).
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![34960 Federal Register / Vol. 83, No. 142 / Tuesday, July 24, 2018 / Proposed Rules
• Financial statements required to be In adopting these restrictions on the 12(g)(5) 41 to exclude from the definition
furnished by Part F/S of Form 1–A28 range of eligible consultants and of ‘‘held of record,’’ for the purposes of
under 17 CFR 230.251 through 230.263 advisors, the Commission also provided determining whether an issuer is
(Regulation A). These financial that a person in a de facto employment required to register a class of equity
statements must be as of a date no more relationship with the issuer, such as a securities, securities that are held by
than 180 days before the sale of non-employee providing services that persons who received them pursuant to
securities relying on Rule 701.29 traditionally are performed by an an ‘‘employee compensation plan’’ in
This disclosure should be provided to employee, with compensation paid for transactions exempted from the
all investors before sale. For options and those services being the primary source registration requirements of Section 5 of
other derivative securities, the issuer of the person’s earned income, would the Securities Act. This statutory
must deliver disclosure a reasonable qualify as an eligible person under the exclusion applies solely for purposes of
period of time before the date of exemption.35 Such services, however, determining whether an issuer is
exercise or conversion.30 If disclosure must not be in connection with the offer required to register a class of equity
has not been provided to all investors or sale of securities in a capital-raising securities under the Exchange Act and
before sale, the issuer will lose the transaction, and must not directly or does not apply to a determination of
exemption for the entire offering when indirectly promote or maintain a market whether such registration may be
sales exceed the $5 million threshold for the issuer’s securities.36 terminated or suspended. The
during the 12-month period.31 Offers and sales under Rule 701 are Commission amended the definition of
The exemption covers securities deemed part of a single discrete offering ‘‘held of record’’ in 17 CFR 240.12g5–1
offered or sold under a plan or and are not subject to integration with (Exchange Act Rule 12g5–1) to exclude
agreement between a non-reporting any other offers or sales, whether certain securities held by persons who
company (or its parents, majority-owned registered under the Securities Act or received them pursuant to employee
subsidiaries or majority-owned exempt from registration.37 An issuer compensation plans in a transaction
subsidiaries of its parent) and the that attempts to comply with Rule 701, exempt from, or not subject to, the
company’s employees, officers, but fails to do so, may claim any other registration requirements of Section 5.42
directors, partners, trustees, consultants exemption that is available.38 Securities This amendment also established a non-
and advisors.32 Rule 701 is also issued under Rule 701 are deemed to be exclusive safe harbor for determining
available for sales, such as option ‘‘restricted securities,’’ 39 as defined in whether securities are ‘‘held of record’’
exercises, to their family members 33 17 CFR 230.144 (Securities Act Rule for purposes of registration under
who acquire such securities through 144). Exchange Act Section 12(g), providing
gifts or domestic relations orders. Section 502 of the Jumpstart Our that an issuer may deem a person to
Consultants and advisors may Business Startups Act 40 (‘‘JOBS Act’’) have received securities pursuant to an
participate in Rule 701 offerings only if: amended Exchange Act Section employee compensation plan if the plan
• They are natural persons; and the person who received the
• They provide bona fide services to 33–7646 (Feb. 25, 1999) [64 FR 11103 (Mar. 8, securities pursuant to it met the plan
the issuer, its parents, its majority- 1999)] at n. 20, (‘‘1999 S–8 Adopting Release’’) and participant conditions of Rule
owned subsidiaries or majority-owned addressing such a corporate alter ego in the Form 701(c). These provisions help enable
subsidiaries of the issuer’s parent; and S–8 context.
private companies to offer securities to
• The services are not in connection 35 1999 Adopting Release at Section II.D.
their employees under Rule 701 without
36 1999 Adopting Release at n. 39. See also 1988
with the offer or sale of securities in a triggering the obligation to register the
Adopting Release (‘‘Consequently, the rule has been
capital-raising transaction, and do not modified to extend to consultants and advisers who class of securities and file periodic
directly or indirectly promote or provide bona fide services to a company, its parents reports with the Commission.
maintain a market for the issuer’s or majority-owned subsidiaries.’’). Questions have arisen about whether
37 Rule 701(f) [17 CFR 230.701(f)].
securities.34 the current requirements of Rule 701
38 Preliminary Note 3 to Rule 701.
39 Rule 701(g) [17 CFR 230.701(g)]. Ninety days would benefit from updates in light of
28 Regulation A Offering Statement [17 CFR
after the issuer becomes subject to the reporting developments since the Commission
239.90].
29 Rule 701(e)(4) [17 CFR 230.701(e)(4)]. requirements of Section 13 or 15(d) of the Securities last substantively revised the rule.
30 Rule 701(e)(6) [17 CFR 230.701(e)(6)]. As
Exchange Act of 1934 [15 U.S.C. 78m or 78o(d)], Forms of equity compensation that were
securities issued under Rule 701 may be resold by
described in Section II.C.3, below, for options and non-affiliates in reliance on Rule 144 without
not typically used at that time,
other derivative securities, whether the issuer is compliance with Rules 144(c) and (d), and by particularly restricted stock units
obligated to deliver Rule 701(e) disclosure is affiliates without compliance with Rule 144(d). (‘‘RSUs’’), have become common, and
determined based on whether the option or other
derivative security was granted during a 12-month
40 Sec. 502, 126 Stat. at 326. Section 501 of the
new types of contractual relationships
JOBS Act [Sec. 601, 126 Stat. at 325] amended between companies and individuals
period in which the disclosure threshold is
Section 12(g)(1) of the Exchange Act to require an
exceeded. If the grant occurred during such a
issuer to register a class of equity securities (other involving alternative work arrangements
period, the issuer must deliver the Rule 701(e) have emerged in the so-called ‘‘gig
than exempted securities) within 120 days after its
disclosure a reasonable period of time before the
date of exercise or conversion.
fiscal year-end if, on the last day of its fiscal year, economy.’’ 43 In this release, we solicit
31 See 1999 Adopting Release at Section II.B.
the issuer has total assets of more than $10 million comment on various aspects of Rule 701
and the class of equity securities is ‘‘held of record’’
32 Rule 701(c) [17 CFR 230.701(c)]. The rule also
by either (i) 2,000 persons, or (ii) 500 persons who
exempts offers and sales to former employees, are not accredited investors. Section 601 of the
41 15 U.S.C. 78l(g)(5).
directors, general partners, trustees, officers, JOBS Act [Sec. 601, 126 Stat. at 326] further 42 See Changes to Exchange Act Registration
consultants and advisors only if such persons were Requirements to Implement Title V and Title VI of
jstallworth on DSKBBY8HB2PROD with PROPOSALS
amended Exchange Act Section 12(g)(1) to require
employed by or providing services to the issuer at an issuer that is a bank or bank holding company, the JOBS Act, Release No. 33–10075; (May 3, 2016)
the time the securities were offered. as defined in Section 2 of the Bank Holding [81 FR 28689 (May 10, 2016)].
33 Rule 701(c)(3) [17 CFR 230.701(c)(3)] defines 43 See The Rise and Nature of Alternative Work
Company Act of 1956 [12 U.S.C. 1841], to register
‘‘family member’’ for this purpose. a class of equity securities (other than exempted Arrangements in the United States, 1995–2015,
34 Rule 701(c)(1) [17 CFR 230.701(c)(1)]. Where securities) within 120 days after the last day of its Lawrence F. Katz and Alan B.Krueger, National
the consultant or advisor performs services for the first fiscal year ended after the effective date of the Bureau of Economic Research, available at http://
issuer through a wholly-owned corporate alter ego, JOBS Act, on which the issuer has total assets of www.nber.org/papers/w22667 (defining alternative
the issuer may contract with, and issue securities more than $10 million and the class of equity work arrangements as temporary help agency
as compensation to, that corporate entity. Cf., securities is ‘‘held of record’’ by 2,000 or more workers, on-call workers, contract workers, and
Registration of Securities on Form S–8, Release No. persons. independent contractors or freelancers).
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![34962 Federal Register / Vol. 83, No. 142 / Tuesday, July 24, 2018 / Proposed Rules
Exchange Act registration and The 1999 adoption of the $5 million million the aggregate sales price or
reporting? disclosure threshold reflected concern amount of securities sold during any
15. Should the amount of securities that eliminating the overall $5 million consecutive 12-month period in excess
issuable pursuant to Rule 701 to ceiling on the annual amount of of which the issuer is required to deliver
individuals participating in the ‘‘gig securities sold during a 12-month additional disclosures to investors.52
economy’’ in a 12-month period be period ‘‘could result in some very large Because the amendment does not
subject to a separate ceiling rather than offerings of securities without the otherwise revise Rule 701(e), the rule
the current Rule 701(d) ceilings? If so, protections of registration, even though will continue to operate in the same
how should that ceiling be designed and made pursuant to compensatory manner as it has under the previous $5
measured? arrangements.’’ 49 Because the million threshold.
16. Should additional disclosures be Commission had not witnessed abuse of While the adopted amendment may
provided? If so, what and when? Rule 701 in offerings below the prior $5 provide non-reporting issuers flexibility
Employers have many reasons for million ceiling, it did not believe in further utilizing the exemption, it
compensating employees with imposing the burdens of preparing and does not address some of the concerns
securities. These can include aligning disseminating additional disclosure for we have heard regarding Rule 701(e). In
the company’s interests with those of these smaller offerings would justify particular, although the threshold is
employees’, retaining staff, and offering potential benefits to employee-investors. higher, the need to anticipate the
higher compensation than the company In contrast, large non-reporting consequences of crossing it remains.53
may be able to pay in cash or other companies could issue substantial Concern also has been expressed that
benefits. amounts of securities exceeding $5 some non-reporting companies are not
17. Do companies utilizing ‘‘gig million. Based on comments received, necessarily familiar with Regulation A
economy’’ workers issue securities as the Commission believed that many of financial disclosure and that
compensation to those individuals? If these companies already prepared the compliance can be burdensome,
so, how prevalent is this practice? same types of disclosure in their normal especially for companies first utilizing
18. How might companies benefit course of business, such as for using Rule 701.54
from the ability to offer securities to a other exemptions, so that the disclosure In light of these concerns, we request
broader range of individuals by requirement generally would be less comment:
burdensome for them. If these 22. Should Rule 701(e) continue to
expanding Rule 701 eligibility to
companies did not want to provide the require more disclosure for a period that
individuals participating in the ‘‘gig
new disclosures, the Commission noted precedes the threshold amount being
economy’’?
that they could keep the amount sold exceeded? If so, should the consequence
19. What effect would the use of Rule
below $5 million in the 12-month for failure to deliver continue to be loss
701 for ‘‘gig economy’’ companies have
period.50 of the exemption for the entire offering?
on competition among those companies 23. To what extent are non-reporting
and newer companies and more Inflation since 1999 51 has made it
more likely for non-reporting issuers, companies that issue securities in an
established companies vying for the amount that would exceed the new
same talent? regardless of size, to cross this threshold
in a 12-month period. In circumstances threshold already preparing forms of
The ‘‘gig economy’’ has enabled even financial disclosure, such as in
very small companies to conduct cross- where the required disclosure is
inadvertently not provided to all connection with 17 CFR 230.500
border operations. through 230.508 (Regulation D) or
investors before the $5 million
20. Do existing regulations affect the Regulation A?
threshold is crossed, issuers may not
ability of employers to use Rule 701 to 24. Alternatively, should the
rely on the exemption. Accordingly, the
compensate overseas employees through consequence for failing to provide the
current structure of the rule results in
securities? disclosure be loss of the exemption only
issuers needing to anticipate, up to 12
21. To the extent that U.S. companies for transactions in offerings that occur
months before exceeding the $5 million
would seek to use Rule 701 to after the threshold is crossed and for
threshold, the possibility that they may
compensate non-U.S. based workers in which disclosure was not provided?
do so, and to supply plan participants
a ‘‘gig economy’’ model, would there be a. If disclosure is required only for
with the additional disclosures for that
any competitive effects? transactions that occur after the $10
period.
C. Rule 701(e) Disclosure Requirements As noted above, in a separate release, million threshold is crossed, should
the Commission is amending Rule disclosure be required for all
1. General transactions immediately following that
701(e) to implement the Act’s mandate
When Rule 701 was originally to increase from $5 million to $10 event, or should an interval of time be
adopted in 1988,45 the Commission provided to permit the disclosure to be
relied on Section 3(b) of the Securities 49 1999 Adopting Release at Section II.B. In prepared before it must be delivered? If
Act 46 to exempt offers and sales of up adopting this requirement, the Commission stated
it would have investor protection concerns in the 52 See n. 5, above.
to $5 million per year. In 1999, the context of offerings of securities with an aggregate 53 U.S. Securities and Exchange Commission
Commission amended Rule 701 to sales price or amount of securities sold during the Advisory Committee on Small and Emerging
reflect that the National Securities 12-month period exceeding $5 million without Companies, Recommendation Regarding Securities
Markets Improvement Act of 1996 imposing specific disclosure requirements. The Act Rule 701 (Sept. 21, 2017) (‘‘Advisory
Commission noted that, ‘‘[m]oreover, we believe Committee Recommendation’’), available at:
jstallworth on DSKBBY8HB2PROD with PROPOSALS
(‘‘NSMIA’’) 47 had given the that many of these companies already have https://www.sec.gov/info/smallbus/acsec/acsec-
Commission authority to provide prepared the type of disclosure required in their rule-701-recommendation-2017-09-21.pdf. Among
exemptive relief in excess of $5 million normal course of business, either for using other other things, the Advisory Committee
for transactions such as these.48 exemptions, such as Regulation D or for other Recommendation expresses concern that crossing
purposes.’’ the disclosure threshold could result in the loss of
50 Id. the exemption for earlier Rule 701 transactions in
45 See1988 Adopting Release. 51 Based on data provided by the U.S. Department the same 12-month period for which the Rule 701(e)
46 15U.S.C. 77c(b). of Labor, Bureau of Labor Statistics, $5 million in disclosure was not provided a reasonable time
47 Public Law 104–290, 110 Stat. 3416 (1996). before sale.
1999 dollars would be approximately $7.5 million
48 1999 Adopting Release at Section II.A. in 2018. 54 Advisory Committee Recommendation.
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![Federal Register / Vol. 83, No. 142 / Tuesday, July 24, 2018 / Proposed Rules 34963
so, how long should that time interval For example, should we require updates period of time before the date of sale.’’
be? once a year unless an event results in a However, the rule does not prescribe the
b. Should the disclosure subsequently material change to the company’s manner or medium in which disclosure
also be made available to investors in enterprise value or value of the should be delivered. We are aware that
transactions that occurred before the securities issued? 58 Should the non-reporting companies are sensitive
$10 million threshold is crossed? frequency of disclosure depend on who to maintaining the confidentiality of
25. Alternatively, should there instead is the recipient of the securities? For financial information so that it does not
be a grace period, such that if the example, should the frequency be fall into the hands of competitors.
threshold is crossed, the issuer has an greater for recipients described in To determine if the rule needs further
opportunity to provide the required Section II.B, above? Why or why not? If clarification, we request comment:
disclosure before losing the exemption so, what is the appropriate frequency 33. Do we need to clarify what it
for the entire offering? and why? means to deliver disclosure ‘‘a
26. Should we provide a regulatory 29. Should we consider other reasonable period of time before the
option whereby all Rule 701(e) alternatives to the Regulation A date of sale’’? Should that mean any
information would be disclosed to all financial statements, such as the issuer’s time before sale such that the recipient
investors, so that all would receive most recent balance sheet and income has an opportunity to review the
equal information and there would be statement as of a date no more than 180 disclosure? Should any new standard
no risk of losing the exemption in the days before the sale of securities? further clarify that the disclosure
manner there is today? Should we 30. Should we provide a regulatory provided to the recipient must remain
provide a different regulatory alternative option that would provide valuation current during that time?
that would provide all investors all Rule information regarding the securities in 34. Should we specify a different time
701(e) information other than the lieu of, or in addition to, financial for providing disclosure? If so, when
financial statement disclosure? statements? If so, what valuation should that be and why?
Part F/S of Form 1–A prescribes that 35. Should we also specify the
method should be used? Would ASC
financial statements are required for manner or medium in which disclosure
Topic 718 59 grant date fair value
Regulation A Tier 1 and Tier 2 offerings. should be delivered? Should we specify
information be informative? Would
In Regulation A offerings, companies how to deliver information
include two years of consolidated Internal Revenue Code Section 409A 60
valuation information be informative? If electronically? Should we require a
balance sheets, statements of income, method for confirming receipt of the
cash flows, and changes in stockholders’ so, would issuers be able to determine
Section 409A valuations regardless of information? If so, what vehicles would
equity.55 Issuers relying on Rule 701 best give effect to the purpose of
may choose to provide financial whether the offering involves securities
other than options? disclosure without undermining issuers’
statements that comply with the confidentiality concerns?
requirements of either Tier. This Under existing Rule 701, foreign
private issuers are required to provide 36. Should the rule specify that
information must be provided as of a confidentiality safeguards should not be
date no more than 180 days before the financial information on the same
schedule as domestic issuers.61 Foreign so burdensome that intended recipients
date of sale. As a result, for issuers cannot effectively access the required
seeking to maintain current information, private issuers may issue securities in
reliance on Rule 701 throughout the disclosures?
this has the effect of requiring financial
statements to be available on at least a year, which could lead them to update 3. Options and Other Derivative
quarterly basis, and to be completed their financial statements more Securities/RSUs
within three months after the end of frequently than required under Form For options and other derivative
each quarter, for sales to be permitted 20–F.62 securities, whether the issuer is
continuously. The Commission, in 31. Because foreign private issuers obligated to deliver Rule 701(e)
adopting the current version of Rule that are subject to the Exchange Act disclosure is based on whether the
701, stated that because of the pre- reporting requirements generally are not option or other derivative security was
existing relationship a compensated required to submit quarterly financial granted during a 12-month period
individual has with the issuer, the statements, should non-reporting during which the disclosure threshold is
disclosures provided in Rule 701(e) are foreign private issuers that rely on Rule exceeded.63 If so, the issuer must deliver
appropriate.56 It also noted that the 701 be subject to the condition to Rule 701(e) disclosure a reasonable
‘‘amount and type of disclosure required provide quarterly financial statements if period of time before the date of
for this person is not the same as for the they are continuing to sell securities exercise or conversion.64
typical investor with no particular throughout the year? Why or why not? This approach simplifies the
connection with the issuer.’’ 57 32. Should we amend any other operation of Rule 701 for options and
27. Should the type of information aspect of the Rule 701 financial other derivative securities for which the
provided depend on who is the statement requirements that apply to recipient must make an investment
recipient of the securities? For example, foreign private issuers? If so, what decision to exercise or convert.
should more disclosure be provided to should we amend and why? However, because instruments such as
the types of recipients described in 2. Timing and Manner of Rule 701(e) RSUs settle by their terms without the
Section II.B. above? Why or why not? If Disclosure recipient taking such an action, the
so, what, specifically, should be added
jstallworth on DSKBBY8HB2PROD with PROPOSALS
relevant investment decision for the
to the disclosures and why? Rule 701(e) requires the prescribed RSU, if there is one, likely takes place
28. Should this disclosure be updated disclosure to be delivered ‘‘a reasonable
less frequently than currently required? 63 Rule 701(d)(3)(ii) provides that the aggregate
58 Advisory
Committee Recommendation. sales price for options is determined when an
55 17 59 FASB
ASC Topic 718.
CFR 210.1–01 through 201.12–29. Tier 2 option grant is made (without regard to when it
60 26 U.S.C. 409A.
offerings require audited financial statements. See becomes exercisable). Use of this measure for both
Part F/S of Form 1–A [17 CFR 239.90]. 61 1999 Adopting Release at Section II.C. Rule 701(d) and (e) simplifies the operation of the
56 1999 Adopting Release at Section II.B. 62 17 CFR 249.220f. See Item 8A.5 of Form rule.
57 Id. 20–F. 64 Rule 701(e)(6).
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![34964 Federal Register / Vol. 83, No. 142 / Tuesday, July 24, 2018 / Proposed Rules
at the date of grant. Consequently, the from employees.’’ 67 The alternatives compensation receive public company
issuer’s obligation to provide Rule based on 15% of total assets or 15% of disclosure to which the full spectrum of
701(e) disclosure would apply a the outstanding amount of the class of Securities Act protections apply. In
reasonable period of time before the securities were intended to increase the addition, reporting company securities
date the RSU award is granted. Concern flexibility and utility of the received pursuant to Form S–8
has been expressed, however, that exemption.68 The $1 million alternative registration are generally not
disclosure of financial information provides an amount that any issuer can restricted.72 As described below, from
before an RSU is granted could compel use, regardless of size. time to time the Commission has
disclosure to recipients at a time when Recently, however, concern has been amended Form S–8 to streamline its
they are negotiating their employment expressed that because there is no operations, such as by providing
contracts before joining the company. longer any statutorily imposed ceiling immediate effectiveness upon filing and
In light of this concern, we request on the exemption,69 compliance with an updating of the registration statement
comment: annual regulatory ceiling requires an on- through incorporation by reference.73
37. Should Rule 701 be amended to going analysis with no clear benefit.70 Form S–8 is available solely to register
specifically address when disclosure is At the same time, the implications of compensatory sales of securities to
required for RSUs? If so, when should qualifying for the Rule 701 exemption ‘‘employees,’’ including consultants and
Rule 701(e) disclosure be required for an have expanded, as securities held by advisors and de facto employees. The
RSU? Should we revisit the concept of persons who receive them in form is not available for the registration
‘‘convert or exercise’’ as providing the transactions exempted by Rule 701 are of securities offered for the purpose of
relevant date for disclosure? For new excluded from the definition of ‘‘held of raising capital.74
hires who receive RSUs, should we record,’’ for the purposes of determining Form S–8 is available for the
require that disclosure be provided whether an issuer is required to register registration of securities to be offered
within 30 days after commencing a class of equity securities under the under any employee benefit plan 75 to a
employment? If not, when should Rule Exchange Act. registrant’s employees or employees of
701(e) disclosure be required for RSUs In light of these factors, we request its subsidiaries or parents. Form S–8
issued to new hires? comment: registration is utilized for many
40. Is there a continuing need for any different types of employee benefit
38. Should we clarify that RSUs
annual regulatory ceiling for Rule 701 plans, including Internal Revenue Code
should be valued for Rule 701 purposes
transactions? Why or why not? Would Section 401(k) 76 plans and similar
based on the value of the underlying investors be harmed if the ceiling is
securities on the date of grant? If not, defined contribution retirement savings
eliminated or raised significantly? Does plans, employee stock purchase plans,
how should they be valued? an annual ceiling provide benefits in nonqualified deferred compensation
39. Are there any other instruments curbing potential abuse of the rule for plans, and incentive plans that issue
that should be specifically addressed in non-compensatory sales? If so, how? options, restricted stock, or RSUs. The
the rule? 41. If a ceiling is retained, should it form may be used by any issuer that is
D. Rule 701(d) Exemptive Conditions be raised? If so, what threshold would subject, at the time of filing, to the
be appropriate, and why? Would periodic reporting requirements of
Questions have arisen whether the compliance be easier if issuers are
current 12-month sales cap of the Section 13 or 15(d) of the Exchange Act
permitted to measure the 15% and has filed all reports required during
greater of 15% of the total assets of the alternatives as of last fiscal year-end, the preceding 12 months or such shorter
issuer or 15% of the total outstanding rather than at the issuer’s most recent period that it was subject to those
amount of the class of securities being balance sheet date? requirements.77 Form S–8 is not
offered and sold in reliance on the rule,
III. Form S–8 available for shell companies.78
subject to the annual availability of a $1
million cap if greater than either of A. Background 72 In addition, General Instruction C to Form S–
these tests, is unduly restrictive, 8 permits registrants to file a resale prospectus for
particularly for smaller and start-up Form S–8 was originally adopted in control securities, and restricted securities issued
companies that may be more dependent 1953, as a simplified form for the under any employee benefit plan of the issuer that
on equity compensation to attract and registration of securities to be issued were acquired by the selling security holder prior
pursuant to employee stock purchase to the filing of the Form S–8.
retain necessary talent.65 Each of the 73 See e.g., Registration and Reporting
plans.71 It retains certain disclosure
15% amounts is measured as of the Requirements for Employee Benefit Plans, Release
obligations. For example, it requires that
issuer’s most recent balance sheet date, No. 33–6867 (June 6, 1990) [55 FR 23909 (June 13,
employees receiving securities as 1990)] (‘‘1990 Adopting Release’’).
if no older than its last fiscal year end.66 74 The abbreviated disclosure format of Form
In proposing the original version of the 67 See Rule 701 Proposing Release. As originally S–8 reflects the Commission’s historic distinction
rule, the Commission explained that the adopted, the rule permitted the amounts of between offerings made to employees for
purpose of a 12-month cap is to securities offered and sold annually to be the compensatory and incentive purposes and offerings
‘‘assur[e] that the exemption does not greatest of $500,000, 15% of total assets of the made for capital-raising purposes. See 1990
issuer, or 15% of the outstanding securities of the Adopting Release.
provide a threshold that small issuers class, subject to an absolute limit of $5,000,000 75 ‘‘Employee benefit plan’’ is defined in
could use to raise substantial capital derived from Securities Act Section 3(b). See 1988 Securities Act Rule 405 and includes the same
Adopting Release. restrictions on the scope of eligible consultants and
65 Advisory Committee Recommendation. But see, 68 See 1988 Adopting Release at Section I.A.(2). advisors as set forth in Rule 701.
jstallworth on DSKBBY8HB2PROD with PROPOSALS
69 NSMIA enacted Securities Act Section 28 [15 76 26 U.S.C. 401(k).
e.g., Edward M. Zimmerman, Late Stage Startups
Trip SEC Rule 701 Long Before IPO, Forbes (Aug. U.S.C. 77z–3], giving the Commission general 77 See General Instruction A.1 to Form S–8.
2, 2016) (stating that ‘‘[b]ecause the test [provided exemptive authority. Because the Commission 78 ‘‘Shell company’’ is defined in Securities Act
in Rule 701(d)] is analyzed on the basis of a 12- relied on this authority in the 1999 Adopting Rule 405. When a company ceases to be a shell
month period, because the test excludes Exempt Release, the Securities Act Section 3(b) absolute company, by combining with a formerly private
Issuances and because founders and investors have limit of $5,000,000 no longer applies to Rule 701. operating business, it is required to file Form 10
significant business reasons for limiting the dilutive 70 Advisory Committee Recommendation.
equivalent information with the Commission.
impact of compensatory equity awards, startups 71 Registration of Securities Offered Pursuant to General Instruction A.1 to Form S–8 provides that
rarely come near the Rule 701(d) thresholds.’’). Employees Stock Purchase Plans, Release No. 33– it then becomes eligible to use Form S–8 60 days
66 Rules 701(d)(2)(ii) and (iii). 3480 (Jun. 16, 1953) [18 FR 3688 (Jun. 27, 1953)]. following that filing.
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![Federal Register / Vol. 83, No. 142 / Tuesday, July 24, 2018 / Proposed Rules 34965
Form S–8 does not require that a form At the same time, the Commission • Allowing Form S–8 to go effective
of prospectus be filed with the revised the Rule 701 ‘‘consultants and automatically without review by the
registration statement for employee advisors’’ definition to be consistent staff or other action by the
benefit plan offerings. Instead, 17 CFR with Form S–8.83 In adopting the Commission; 89
230.428 (Rule 428) specifies the changes, the Commission also noted • allowing the incorporation by
documents that, together, constitute a that issuers may continue to use reference of certain past and future
prospectus that meets the requirements securities registered on Form S–8, or reports required to be filed by the issuer
of Securities Act Section 10(a): 79 issued under the Rule 701 exemption, to under Section 13 or 15(d) under the
• Certain documents containing the compensate persons with whom they Exchange Act; 90
employee benefit plan information have a de facto employment • adopting an abbreviated disclosure
required by Item 1 of the Form; relationship.84 We are soliciting format that eliminated the need to file
• the statement of availability of comment regarding the continued a separate prospectus and permitting the
company information, employee benefit harmonization of the scope of delivery of regularly prepared materials
plan annual reports and other ‘‘consultants and advisors’’ between to advise employees about benefit plans
information required by Item 2 of the Form S–8 and Rule 701, and more to satisfy prospectus delivery
Form; and broadly whether the scope of eligible requirements; 91
• the documents containing registrant individuals should be the same under • providing for registration of an
information and employee benefit plan both the form and the exemption. indeterminate amount of plan interests
annual reports that are incorporated by Specifically: and providing that there is no separate
reference in the registration statement 42. To the extent we change the fee calculation for registration of plan
pursuant to Item 3 of the Form. application of Rule 701 by changing the interests; 92 and
Companies are also permitted to file
scope of individuals eligible for • providing a procedure for the filing
a resale prospectus covering only
compensatory offerings, such as to of a simplified registration statement
control securities or restricted securities
include individuals participating in the covering additional securities of the
acquired pursuant to an employee
‘‘gig economy,’’ 85 should we make same class to be issued pursuant to the
benefit plan.80
corresponding changes to Form S–8? same employee benefit plan.93
B. Form S–8 Eligible Plan Participants Why or why not? If the scope of We remain interested in simplifying
To prevent abuse of Form S–8 to individuals who are eligible for Form the requirements of Form S–8 and
register securities issued in capital- S–8 offerings were expanded, would reducing the complexity and cost of
raising transactions, in 1999 the there be concerns about misuse of the compliance to issuers for securities
Commission revised the eligibility form for capital-raising activities? If so, issuances to employees and other
standards for ‘‘consultants and how could we safeguard against those eligible employee benefit plan
advisors’’ for the purposes of Form concerns? participants while retaining appropriate
S–8.81 In so doing the Commission 43. Would differences between the investor protections. We therefore seek
sought to preclude the issuance of eligibility standards of Rule 701 and comment on ways we could further
securities on Form S–8 to consultants Form S–8 cause problems for issuers or reduce the burdens associated with
either (i) as compensation for any recipients? registration on Form S–8:
service that directly or indirectly 44. What effects would stem from
C. Administrative Burdens
promotes or maintains a market for the revising the form in this way? Would
registrant’s securities, or (ii) as conduits Issuers register a specified number of such revisions encourage more
for a distribution to the general public.82 company shares on Form S–8. For companies to become reporting
registration fee purposes, if the offering companies?
79 15 U.S.C. 77j(a). price is not known, the fee is computed 45. Should we further simplify the
80 The resale prospectus is prepared in based on the price of securities of the registration requirements of Form S–8?
accordance with the requirement of Part I of Form same class, in the same manner as for For example, does registering a specific
S–3 (or, if the registrant is a foreign private issuer, other offerings at fluctuating market
in accordance with Part I of Form F–3) and filed
number of shares result in Section 5
with the registration statement on Form S–8 or, in prices.86 No additional fee is assessed compliance problems when plan sales
the case of control securities, a post-effective for securities offered for resale.87 exceed the number of shares registered,
amendment thereto. Restricted securities must have The Commission has sought to reduce such as for Section 401(k) plans and
been acquired by the holder before the Form S–8 the costs and burdens incident to
is filed and the resale prospectus for them must be
similar defined contribution retirement
filed with the initial Form S–8. See General registration of securities issued through savings plans? If so, how should we
Instruction C to Form S–8. such plans, where consistent with address this issue?
81 See 1999 S–8 Adopting Release. investor protection,88 for example by:
82 Since the adoption of the 1999 amendments,
and Amended Rules Under the Securities Act of
the Commission has brought enforcement actions where the defendant’s consulting role was capital- 1933, Release No. 33–6190 (February 22, 1980) [45
related to Form S–8 abuse, particularly the misuse raising and promotional and thus contrary to the FR 13438 (Feb. 29, 1980)] (‘‘1980 S–8 Adopting
of the form for capital-raising activities involving eligibility requirements for effective Form S–8 Release’’) and 1990 Adopting Release.
coordinated unregistered resales into the public registration); and SEC v. Esposito, No. 8:08–CV– 89 In the 1980 S–8 Adopting Release the
market by the purported ‘‘consultants’’ or 494–T–26EAJ, 2011 WL 13186000 (M.D. Fla. June Commission initially provided that automatic
employees acting as underwriters, funding the 24, 2011) (finding defendants violated Section 5 effectiveness for Form S–8 occurred 20 days after
company with the proceeds and denying Securities where Form S–8 was used to register shares filing, while post-effective amendments became
jstallworth on DSKBBY8HB2PROD with PROPOSALS
Act protection to the genuine public purchasers. received by consultant as compensation for effective upon filing. Now, all registration
See, e.g., SEC. v. Phan, 500 F.3d 895 (9th Cir. 2007) arranging a reverse merger). statements on Form S–8 become effective upon
(holding the resale of publicly traded stock, which 83 1999 Adopting Release at Section II.D.
filing with the Commission. See 17 CFR 230.462(a)
had the effect of supplying the company with 84 See Section II.A, above. and 1990 Adopting Release.
capital from the public at the company’s behest, 85 See Section II.B, above. 90 See Item 3 and General Instruction G of Form
could not be covered by a Form S–8 registration
statement); SEC v. East Delta Resources Corp., No.
86 17 CFR 230.457(h) and (c). S–8.
87 17 CFR 230.457(h)(3). 91 17 CFR 230.428(a)(1).
10–CV–0310 (SJF/wdw) 2012 WL 10975938
88 See, e.g., Release No. 33–5767 (November 22, 92 17 CFR 230.416(c) and 17 CFR 230.457(h)(2),
(E.D.N.Y. 2012) (finding violations of Sections 5
notwithstanding the existence of a Form S–8 1976) [41 FR 52701 (Dec. 1, 1976)], Amendments to respectively.
registration statement and consulting agreement Registration Statement Form S–8 and Related New 93 See General Instruction E to Form S–8.
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![34966 Federal Register / Vol. 83, No. 142 / Tuesday, July 24, 2018 / Proposed Rules
46. Should Form S–8 allow an issuer plans involved the issuance of plan to the use of employee benefit plans? If
to register on a single form the offers interests, which trigger the individual so, please explain how.
and sales pursuant to all employee plan’s obligation to file an Exchange Act 53. It has been suggested that Form
benefit plans that it sponsors? 94 When annual report on Form 11–K? 98 Would S–8 registration would no longer be
shares are authorized for issuance by a the offer and sale of shares pursuant to necessary if the Commission were to
given plan what information would multiple plans registered on the same extend the Rule 701 exemption to
need to be disclosed that would have Form S–8 create difficulties keeping Exchange Act reporting companies.102
been previously omitted from the track of which registered shares are What would be the advantages and
effective registration statement? 95 being issued pursuant to which plan? disadvantages of allowing Exchange Act
47. If we facilitate a single registration For example, upon the expiration of a reporting companies to use Rule 701
statement for all employee benefit plan plan, would there be difficulties and, in turn, eliminating Form S–8?
securities, should the number of shares transferring shares between plans? Would permitting Exchange Act
to be registered continue to be specified 49. Well-known seasoned issuers are reporting companies to use Rule 701
in the initial registration statement? permitted, at their option, to pay filing raise any investor protection concerns
Alternatively, should issuers be able to fees on a ‘‘pay-as-you-go’’ basis at the or be inconsistent with the purposes
add securities to the existing Form S–8 time of each takedown off the shelf underlying Rule 701?
by an automatically effective post- registration statement in an amount 54. Form S–8 requires issuers to
effective amendment? 96 If so, what calculated for that takedown.99 Should remain current in their Exchange Act
would be the best way to implement we adopt a similar ‘‘pay-as-you-go’’ fee reports in order to be eligible to use the
such a system? structure for Form S–8 pursuant to form,103 and Form S–8 disclosure relies
48. With respect to either alternative which all issuers eligible to use Form S– upon incorporation by reference 104 and
above, would the ability to have a single 8 could, at their option, pay filing fees delivery 105 of these Exchange Act
Form S–8 reduce administrative on Form S–8 on an as needed basis reports. Would the elimination of Form
burdens given that many issuers rather than when the form is originally S–8 reduce an incentive for public
currently monitor and track multiple filed? What, if any, variations from the companies to remain current in their
registration statements on Form S–8? 97 pay-as-you-go fee structure would be Exchange Act reporting obligations? If
Would this be practicable where the needed to adapt it to employee benefit we permit reporting companies to use
securities to be registered relate to plan registration statements? Rule 701, should we require these
different forms of plans, such as Section a. For well-known seasoned issuers companies to be current in their
401(k) plans and incentive plans? using the pay-as-you-go fee structure, a Exchange Act reports in order to rely on
Would it be practicable if some of the cure is available that allows such issuers the exemption?
94 Cf. Simplification of Registration Procedures
to pay required filing fees after the 55. Since Exchange Act reports are
for Primary Securities Offerings, Release No. 33– original payment due date if the issuer automatically incorporated by reference
6964 (October 22, 1992) [57 FR 48970 (Oct. 29, makes a good faith effort to pay the fee into Form S–8, would the lack of a filed
1992)] (adopting the unallocated shelf procedure). timely and then pays the fee within four registration statement for employee
See also Securities Offering Reform, Release No. business days of the original fee due benefit plans result in reduced scrutiny
33–8591 (December 1, 2005) [70 FR 44722 (Aug. 3,
2005)] (‘‘Securities Offering Reform Adopting date.100 If we adopted a pay-as-you-go of Exchange Act filings by issuers and
Release’’). fee structure for Form S–8, should we their representatives? 106 Would the
95 For example, in unallocated shelf offerings adopt a similar cure provision? What, if potential lack of Securities Act Section
conducted under 17 CFR 203.415(a)(1)(x) (Rule any, variations from the cure provision 11 107 and Section 12(a)(2) 108 liability
415(a)(1)(x)) and 17 CFR 230.430B (Rule 430B),
prospectus supplements are filed to disclose
for well-known seasoned issuers would for these filings as a result of the
information that would have been previously be needed to adapt it to employee elimination of Form S–8 have a
omitted from a prospectus filed as part of the benefit plan registration statements? meaningful impact on the quality of
effective registration statement. See 17 CFR 50. Alternatively, should we require disclosure?
230.424(b)(2) and Rule 430B.
96 This would be analogous to how well-known
the payment of registration fees on a 56. If Form S–8 were rescinded, how
seasoned issuers are currently permitted to add periodic basis with respect to the would issuers be likely to register the
other securities or even new classes of securities at securities, the offer and sale of which resale of restricted securities issued
any time by post-effective amendment to an existing were registered on Form S–8, during the pursuant to employee benefit plans?
automatic shelf registration statement on Form S– Would Form S–8 remain necessary as a
3. See 17 CFR 230.413(b)(1). See also, Securities
prior period? How would such a system
Offering Reform Adopting Release. best be implemented? How could we method of registering resales of control
97 For example, Form S–8 filers update their structure such a system consistent with securities or restricted securities
registration statement through the incorporation by the requirements of Securities Act acquired pursuant to an employee
reference of Exchange Act reports. Such updates Section 6(c)? 101 benefit plan? Alternatively, should the
require the consent of an auditor where the
auditor’s report is contained in the Exchange Act 51. Are there any other ways to provisions of General Instruction C to
report which is automatically incorporated by reduce the administrative burdens Form S–8 be moved to Securities Act
reference into a previously filed Securities Act associated with filing and updating Form S–3? 109 If so, should Form S–3
filing, such as a Form S–3 or Form S–8. See 17 CFR Form S–8? If so, please explain. eligibility requirements be revised for
229.601(b)(23) (Item 601(b)(23) of Regulation S–K)
and 17 CFR 229.601, footnote 5 of the exhibit table
this purpose?
D. Form S–8 Generally
(Footnote 5 of the Item 601 Exhibit Table). The
We also are soliciting comment more
jstallworth on DSKBBY8HB2PROD with PROPOSALS
primary purpose of obtaining a consent or 102 Keith F. Higgins, Is It Time to Retire Form
acknowledgement letter is to assure that the auditor broadly on Form S–8 itself: S–8?, Insights: Corporate and Securities Law
is aware of the use of its report and the context in Advisor, September 2017 at 16.
which it is used. Where such consents are required 52. Does the current operation of 103 Item 3 of Form S–8.
in an update to a registration statement, the auditor Form S–8 present significant challenges 104 Item 3 of Form S–8.
frequently refers to all active Securities Act 105 Rule 428(b)(2).
registration statements. The ability to file a single 98 17
Form S–8 for all securities to be issued pursuant to CFR 249.311. 106 Part II, Item 3 to Form S–8.
99 See 17 CFR 230.456(b) and 17 CFR 230.457(r). 107 15 U.S.C. 77k.
employee benefit plans would mean that the
100 17 CFR 230.456(b)(1)(i). 108 15 U.S.C. 77l(a)(2).
auditor’s consent would refer to a single Form
S–8. 101 15 U.S.C. 77f(c). 109 17 CFR 239.33.
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![Federal Register / Vol. 83, No. 142 / Tuesday, July 24, 2018 / Proposed Rules 34967
IV. Conclusion docket EPA–HQ–OEM–2015–0725 to in the November 2017 version. This
We are interested in the public’s the Federal eRulemaking Portal: http:// analysis of the change in the number of
opinions regarding the matters www.regulations.gov. Follow the online facilities was presented in the
discussed in this concept release. We instructions for submitting comments. Regulatory Impact Analysis (RIA) for the
encourage all interested parties to Once submitted, comments cannot be Reconsideration Proposal. Stakeholders
submit comments on these topics. In edited or removed from Regulations.gov. requested that EPA supply the risk
addition, we solicit comment on any The EPA may publish any comment management plan data used in the RIA
other aspect of Rule 701 and Form received to its public docket. Do not that supported the comparison analysis.
S–8 that commenters believe may be submit electronically any information They also requested that EPA extend the
improved upon. you consider to be Confidential comment period for the Reconsideration
Business Information (CBI) or other Proposal for 60 days to allow the public
By the Commission. information whose disclosure is to access and review the data so that
Dated: July 18, 2018. restricted by statute. Multimedia they may have enough time to assess the
Brent J. Fields, submissions (audio, video, etc.) must be impacts of the updated data on the
Secretary. accompanied by a written comment. proposal and provide comments.1
[FR Doc. 2018–15731 Filed 7–23–18; 8:45 am] The written comment is considered the As a result, in this supplemental
BILLING CODE 8011–01–P official comment and should include action, EPA is providing additional
discussion of all points you wish to information in the docket for the
make. The EPA will generally not proposed action. On July 11, 2018, EPA
ENVIRONMENTAL PROTECTION consider comments or comment placed into the docket the November
AGENCY contents located outside of the primary 2017 version of the database containing
submission (i.e., on the web, cloud, or risk management plans submitted by
40 CFR Part 68 other file sharing system). For RMP facilities. This database does not
additional submission methods, the full contain the restricted offsite
[EPA–HQ–OEM–2015–0725; FRL–9981–07– EPA public comment policy, consequence analysis (OCA) data. This
OLEM]
information about CBI or multimedia database (Docket ID: EPA–HQ–OEM–
RIN 2050–AG95 submissions, and general guidance on 2015–0725–0989) consists of a digital
making effective comments, please visit versatile disc (DVD) containing the RMP
Accidental Release Prevention https://www.epa.gov/dockets/ database as a 1.4 gigabyte size file in
Requirements: Risk Management commenting-epa-dockets. .mdb format. The database file is too
Programs Under the Clean Air Act; FOR FURTHER INFORMATION CONTACT: large to be provided online through
Notification of Data Availability and James Belke, United States regulations.gov. To view or receive a
Extension of Comment Period Environmental Protection Agency, copy of the DVD, contact the EPA
Office of Land and Emergency Docket Center, Public Reading Room, as
AGENCY: Environmental Protection
Management, 1200 Pennsylvania Ave. follows: In person/writing:
Agency (EPA).
NW (Mail Code 5104A), Washington, Environmental Protection Agency,
ACTION: Proposed rule; notification of Docket Center, 1301 Constitution Ave.
DC 20460; telephone number: (202)
data availability and extension of NW, 2822T, Room 3334, Washington,
564–8023; email address: belke.jim@
comment period. DC 20004, telephone: 202–566–1744,
epa.gov, or Kathy Franklin, United
SUMMARY: EPA is providing notice that States Environmental Protection fax: 202–566–9744, email: docket-
it is supplementing the record for the Agency, Office of Land and Emergency customerservice@epa.gov. EPA will
proposed Risk Management Program Management, 1200 Pennsylvania Ave. address all comments received on the
(RMP) Reconsideration rule published NW (Mail Code 5104A), Washington, supplemental data being provided and
on May 30, 2018. We have placed into DC 20460; telephone number: (202) any comments submitted in response to
the rulemaking docket the November 564–7987; email address: this action in our final rulemaking
2017 version of the RMP database franklin.kathy@epa.gov. action. EPA is extending the comment
containing risk management plans SUPPLEMENTARY INFORMATION: Detailed period for Reconsideration Proposal
submitted to EPA. EPA used this background information describing the through August 23, 2018.
version to support analysis of changes proposed RMP Reconsideration II. What is the background for this
in the RMP reporting facility universe rulemaking may be found in a action?
discussed in the Regulatory Impact previously published document:
Accidental Release Prevention On May 30, 2018, EPA proposed a
Analysis of the proposed
Requirements: Risk Management rule (Reconsideration Proposal) that
Reconsideration rule. To afford the
Programs Under the Clean Air Act; seeks comment on various proposed
public an opportunity to comment on
Proposed Rule (83 FR 24850, May 30, changes to the final RMP Amendments
the updated RMP database and its
2018). rule (Amendments rule) issued on
impacts on the proposed
Reconsideration rule, EPA is extending I. What action is EPA taking? 1 Earthjustice first informed EPA about the failure
the comment period for the proposed to place the November 2017 version in the docket
rule. During the week of July 9, 2018 in an email dated July 9, 2018. Between July 10th
several stakeholders notified EPA that
jstallworth on DSKBBY8HB2PROD with PROPOSALS
through close of business on July 11th, EPA
DATES: The comment period for the we had failed to provide in the received requests for a 60 day-extension of the
proposed rule published on May 30, rulemaking docket for the proposed comment period from, or on behalf of, the: Utah
2018 at 83 FR 24850, is extended. Physicians for a Healthy Environment, Ohio Valley
RMP Reconsideration rule (referred to Environmental Coalition, the Union of Concerned
Comments and additional material must herein as the Reconsideration Proposal) Scientists, Coming Clean, Air Alliance Houston,
be received on or before August 23, the risk management plan data we used Coalition For A Safe Environment, Clean Air
2018. to compare the number of facilities Council, Sierra Club, the United Steelworkers, the
United Autoworkers, and the States of New York,
ADDRESSES: Submit comments and reporting in the February 2015 version Illinois, Maine, Massachusetts, Oregon, Rhode
additional materials, identified by of the RMP database to those reporting Island, and Vermont.
VerDate Sep<11>2014 13:58 Jul 23, 2018 Jkt 244001 PO 00000 Frm 00015 Fmt 4702 Sfmt 4702 E:\FR\FM\24JYP1.SGM 24JYP1](https://thefederalregister.org/doc/83_FR_35100/page/10.svg)
Document Created: 2018-07-24 00:10:25
Document Modified: 2018-07-24 00:10:25
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Proposed Rules | |
| Action | Concept release; request for comment. | |
| Dates | Comments should be received on or before September 24, 2018. | |
| Contact | Anne M. Krauskopf, Senior Special Counsel, and Adam F. Turk, Special Counsel, Office of Chief Counsel, Division of Corporation Finance, at (202) 551-3500. | |
| FR Citation | 83 FR 34958 | |
| RIN Number | 3235-AM38 |
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