The U.S. Securities and Exchange Commission (SEC) recently issued a final rule amending Rule 701, promulgated under the Securities Act of 1933 (the Securities Act). Rule 701 provides an exemption from the registration requirements of Section 5 of the Securities Act for offers and sales of securities under certain compensatory arrangements and covers securities offered or sold by a non-reporting company (including a foreign private issuer) to its employees, officers, directors, partners, trustees, consultants and advisors. The amendment increases the threshold for delivery of additional disclosures from $5 million in aggregate sales price or amount of securities sold during any consecutive 12-month period to $10 million. We previously discussed the Economic Growth Regulatory Relief and Consumer Protection Act and the proposed changes to Rule 701 in more detail in the article, “The Economic Growth, Regulatory Relief and Consumer Protection Act Amends a Key Provision of Rule 701”.
In connection with the issuance of the final rule, the SEC issued a concept release to solicit public comment on other aspects of Rule 701 and Form S-8, the registration statement for compensatory offerings by reporting companies. The SEC is soliciting comments to determine whether Rule 701 should be amended to reflect developments in the economy since the rule was last substantively revised.
Comments are being solicited on the following topics:
- The rise of alternative work arrangements emerging from the so called “gig economy” and the new types of contractual work arrangements between companies and workers. Individuals participating in these arrangements (e.g. Etsy or Uber) often do not enter into traditional employment relationships and therefore, may not be “employees” eligible to receive securities in compensatory arrangements under Rule 701. The SEC requested comments on these relationships including: whether they should apply different tests based upon the nature of the work relationship; whether gig economy relationships are already covered by the application of Rule 701 to consultants and advisors; what services individuals should be required to provide to an issuer to be eligible under Rule 701; whether the percentage of an individual’s earned income from an issuer’s platform should matter for purposes of Rule 701; and the effect that revising Rule 701 would have on a company’s decision to go public or remain private.
- Whether to revise the amount and type of disclosures required by Rule 701 and the manner and medium in which such disclosures are to be delivered. Rule 701 requires that the prescribed disclosures be delivered in “a reasonable period of time before the date of sale” but it does not prescribe the manner or medium in which such disclosure should be delivered. The SEC requested comments including: regarding whether Rule 701(e) should require more disclosure for period preceding the threshold amount being exceeded; whether the consequence for failure to provide disclosure should be the loss of the exemption only for transactions in offerings that occur after the threshold is crossed; whether a grace period to provide required disclosure should exist; whether all investors should receive Rule 701(e) disclosure information; whether the type of information disclosed should depend on who is the recipient of the securities; and the timing and method to disclosure and any updates to disclosure.
- Possible changes related to increased use of restricted stock units. The SEC requested comments regarding whether it should make changes to Rule 701 to account for the increased use of restricted stock units as employee compensation; whether Rule 701(e) disclosure should be required for restricted stock units; and how restricted stock units should be valued.
- Possible changes to Form S-8. The SEC requested comments on changes to Form S-8 (the form used to register shares issued under equity compensation plans for public companies) including: whether any changes made to Rule 701 for the gig economy should also apply to Form S-8; whether Form S-8 should be further simplified to register on a single form all employee benefits plans that an issuer sponsors and whether the registration requirements of Form S-8 should be further simplified.
All comments on the above must be submitted to the SEC on or before September 24, 2018. Issuers may see additional changes to Rule 701 and Form S-8 in the future in response to the comments received by the SEC.