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SEC Announces Proposed Amendments to Rule 701 and Form S-8

On November 24, the Securities and Exchange Commission voted to propose amendments (the Proposal) to (1) Rule 701 under the Securities Act of 1933, as amended (Securities Act), which exempts certain compensatory equity offerings by non-reporting issuers from registration under the Securities Act, and (2) Form S-8, which is a registration statement form available for compensatory securities offerings by reporting issuers. The Proposal is intended to modernize the framework for compensatory securities offerings based on developments related to, and the evolution of, compensatory offerings and the composition of the workforce since the SEC last amended Rule 701 and Form S-8. In the SEC’s press release announcing the Proposal, SEC Chairman Jay Clayton noted that, the Proposal would enhance the ability of issuers to include “company securities in worker-company compensation arrangements so that workers have the opportunity to share in the growth of the business.” As highlighted in the fact sheet included in the press release, the Proposal would, among other things:

(1) With respect to Rule 701:

  1. revise the limits under Rule 701 so that the maximum amount of securities that may be offered in reliance on Rule 701 in any consecutive 12-month period is the greatest of: (1) 15 percent of the outstanding amount of the class of securities being offered, which would be unchanged from the current rule; (1) an amount equal to the value of 25 percent of the issuer’s assets (or, if the offering is guaranteed by the issuer’s parent, 25 percent of the value of the issuer’s parent’s assets), which would result in an increase from 15 percent under the current rule in each instance; and (3) $2 million, which would result in an increase from $1 million under the current rule;

  2. eliminate the current requirement that a subsidiary of the issuer or its parent be majority-owned in order for the subsidiary’s employees to be eligible to participate in Rule 701 offering;

  3. modify the existing requirement that an issuer provide certain financial disclosures to “all persons participating in the offering” if aggregate sales made by an issuer in reliance on Rule 701 during any 12-month period exceed $10 million to provide that the additional disclosure is only required to be provided in respect of sales that occur after the $10 million threshold has been exceeded;

  4. provide an issuer with alternatives to satisfy the disclosure requirements if the $10 million threshold is exceeded, including to permit an issuer to provide financial statements that are not more than 270 days old (compared to the requirement under the current rule that such financial information be not more than 180 days old) and, if the issuer is a foreign issuer, to allow such financial statements to be prepared in accordance with the rules of the issuer’s home country (rather than in accordance with US GAAP or IFRS) without a US GAAP reconciliation, if financial statements reconciled to US GAAP or IFRS are not available; and

  5. for derivative securities that do not involve a volitional act by the recipient to exercise or convert (e.g., restricted stock units), provide that the disclosure required under Rule 701(e) must be delivered a reasonable period of time before the date the award of derivative securities is made, which modifies the current requirement that such disclosure be delivered a reasonable period of time before the date of exercise or conversion.

(2) With respect to Form S-8:

  1. clarify that an issuer (x) may register on a single Form S-8 offers and sales pursuant to multiple employee benefit plans, (y) may add additional plans to an existing Form S-8 by filing a post-effective amendment if the new plan does not require authorization and registration of additional securities for offer and sale, and (z) is not required to allocate registered securities among employee benefit plans on a single Form S-8;

  2. permit an issuer to add securities or classes of securities by post-effective amendment;

  3. simplify related share-counting and fee payments for registration statements filed related to defined contribution plans (e.g., a 401(k) plan) by allowing the registration of an indeterminable number of shares, in which case, the registration fee would be based on the number of shares actually sold (which fee would be paid annually, in arrears, following the end of the issuer’s fiscal year); and

  4. eliminate the requirement in Item 1(f) of Form S-8 to describe the tax effects of plan participation on the issuer.

The Proposal would also expand the application of, and eligibility requirements under, Rule 701 and Form S-8 from employees, consultants and advisors who are natural persons to also include securities issuances to entities that provide a service to the issuer, so long as substantially all of the activities of such entity consist of the performance of services, and the ownership of the entity meets certain criteria specified in the Proposal. In addition, the Proposal would allow an issuer to, in reliance on Rule 701 or Form S-8, as applicable, issue securities (1) to former employees and other persons who provided services to the issuer, its parents, its subsidiaries or subsidiaries of its parent, even if the securities are issued after such person’s resignation, retirement or other cessation of services, so long as the issuance is made as compensation for services rendered during a performance period that ended within 12 months preceding such person’s resignation, retirement or other cessation of services, or (2) as a “substitute award” to former employees of an entity the issuer acquires so long as the award held at the time of the acquisition was properly issued in reliance on Rule 701 or Form S-8, as applicable.

The SEC is soliciting comments on the Proposal for a period of 60 days after publication in the Federal Register.

The full text of the Proposal is available here, and the press release and fact sheet are available here.

In a separate proposal also issued by the SEC on November 24, the SEC proposed to amend Rule 701 and Form S-8, for a temporary five-year period, in order to permit issuers to grant equity compensation to so-called “gig economy” workers or “platform workers” who provide services to those issuers. Specifically, if the temporary amendment is approved, an issuer would be permitted to offer and sell compensatory securities pursuant to Rule 701 to platform workers who provide bona fide services to the issuer, pursuant to a written contract or agreement, by means of the issuer’s “internet-based platform or other widespread, technology-based marketplace platform or system,” so long as:

  • the issuer operates and controls the platform;

  • the securities issuance to the platform worker(s) is pursuant to a written compensatory arrangement (e.g., a written compensation plan, contract or agreement), and not for services that are in connection with the offer or sale of securities in a capital-raising transaction or services that directly or indirectly promote or maintain a market for the issuer’s securities;

  • no more than 15 percent of the value of the participating worker’s compensation received from the issuer for services during a 12-month period, and no more than $75,000 of such compensation received from the issuer during a 36-month period, consists of securities (with the securities valued at the time of the grant, using any reasonable, recognized valuation methodology, so long as the same methodology is used during the 12-month period or the 36-month period);

  • the amount and terms (e.g., the vesting schedule) of any securities issuance to a platform worker may not be subject to bargaining or negotiation or provide for the worker’s ability to elect to be paid in securities or cash; and

  • the issuer must take reasonable steps to prohibit the securities issued to the platform worker pursuant to Rule 701 from being transferred, other than a transfer to the issuer or by operation of law.

Issuers would also be permitted to make registered securities offerings to platform workers using Form S-8, subject to the same conditions described above, other than the proposed restriction on transfer. Notably, the proposed temporary amendment would not permit issuers to issue securities to platform workers for activities related to the sale or transfer of permanent ownership of discrete, tangible goods.

In the proposal for the temporary amendment, the SEC expressed the view that temporarily permitting platform workers to receive equity grants under Rule 701 and using Form S-8 would allow the SEC to assess whether such issuances are being made for appropriate compensatory purposes (and not for capital-raising purposes), which will inform the SEC’s efforts to modernize its rules to reflect changing economic and market conditions.

The SEC is soliciting comments on the proposed temporary amendment for a period of 60 days after publication in the Federal Register.

The full text of the proposal is available here, and the press release and fact sheet are available here.

©2021 Katten Muchin Rosenman LLPNational Law Review, Volume X, Number 339
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About this Author

Mark Reyes Securities Lawyer Katten Muchin law firm Chicago office
Partner

Mark J. Reyes concentrates his practice in corporate and securities matters, including representing issuers and investors in public offerings and private placements of equity and debt securities and advising clients in complex corporate transactions such as mergers, acquisitions, private investments in public equity (PIPEs), private equity investments and joint ventures. He also counsels public companies on securities law compliance, disclosures and corporate governance matters.

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312-902-5612
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Alyse Sagalchik concentrates her practice on corporate matters, with an emphasis on mergers and acquisitions, joint ventures, private equity and securities transactions. Alyse also advises companies on a broad range of general corporate, federal securities laws and corporate governance matters, including Securities Exchange Act of 1934 reporting and disclosure matters. She has represented strategic and financial buyers and sellers in M&A transactions ranging in value from $10 million to more than $15 billion and spanning a wide variety of industries, including health...

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Mark D. Wood, corporate securities lawyer Katten Muchin Chicago Law firm
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Mark D. Wood is head of Katten's Securities practice and concentrates in corporate and securities law. Mark represents public companies, issuers and investment banks in initial public offerings (IPOs) and other public offerings, private investment in public equity (PIPE) transactions, debt securities and other securities matters.

Mark also represents clients in complex corporate transactions, including tender offers, mergers, acquisitions, dispositions, going-private transactions, private equity investments, joint ventures and...

312-902-5493
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