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SEC Proposes Amendments to Modernize Framework for Securities Offerings and Sales to Workers

Washington D.C., Nov. 24, 2020 —

The Securities and Exchange Commission today announced that it has voted to propose amendments to Securities Act Rule 701, which provides an exemption from registration for the issuance of compensatory securities by non-reporting issuers, and Form S-8, the Securities Act registration statement for compensatory offerings by reporting issuers. 

Additionally, in a companion release, the Commission also proposed rules to permit, on a temporary basis and subject to certain conditions, an issuer to provide equity compensation to certain “platform workers” who provide services available through the issuer’s technology-based marketplace platform. 

The proposed amendments to Rule 701 and Form S-8 are designed to modernize the framework for compensatory securities offerings in light of the significant evolution in compensatory offerings and composition of the workforce since the Commission last substantively amended these regulations, allowing employees and other workers to receive equity compensation from their company while maintaining important investor protections. 

“Today’s proposed amendments seek to modernize our requirements for including company securities in worker-company compensation arrangements so that workers have the opportunity to share in the growth of the business,” said Chairman Jay Clayton.  “I thank the staff for their continued efforts to review and improve our rules to better align them with today’s employment practices and the economy more generally.”

The Commission’s proposals are substantially informed by public comments received in response to the Commission’s July 2018 Concept Release on Compensatory Securities Offerings and Sales.  The public comment period for the proposed rule amendments will remain open for 60 days following publication of the release in the Federal Register.

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FACT SHEET

Modernization of Rules and Forms for Compensatory Securities Offerings and Sales
November 24, 2020

The Securities and Exchange Commission today proposed amendments to Rule 701 under the Securities Act of 1933, which provides an exemption from registration for securities issued by non-reporting issuers pursuant to compensatory arrangements, and Form S-8, the Securities Act registration statement for compensatory offerings by reporting issuers. 

Background

In July 2018, in coordination with adopting final amendments to Rule 701 consistent with congressional direction, the Commission issued a concept release that solicited public comment on possible ways to modernize the Rule 701 exemption and the relationship between the exemption and Form S-8, given the significant evolution that 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.  Informed by comment letters received in response to the concept release, the Commission’s proposed amendments are designed to modernize the framework for compensatory securities offerings, consistent with investor protection.

Highlights

With respect to Rule 701, the proposed amendments would:

  • Revise the additional disclosure requirements for Rule 701 exempt transactions exceeding $10 million, including how the disclosure threshold applies, the type of financial disclosure required, and the frequency with which it must be updated;
  • Revise the time at which such disclosure is required to be delivered for derivative securities that do not involve a decision by the recipient to exercise or convert in specified circumstances where such derivative securities are granted to new hires;
  • Raise two of the three alternative regulatory ceilings that cap the overall amount of securities that a non-reporting issuer may sell pursuant to the exemption during any consecutive 12-month period; and
  • Make the exemption available for offers and sales of securities under a written compensatory benefit plan established by the issuer’s subsidiaries, whether or not majority-owned.

With respect to Form S-8, the proposed amendments would:

  • Implement improvements and clarifications to simplify registration on the form, including:
    • Clarifying the ability to add multiple plans to a single Form S-8;
    • Clarifying the ability to allocate securities among multiple incentive plans on a single Form S-8; and
    • Permitting the addition of securities or classes of securities by automatically effective post-effective amendment.
  • Implement improvements to simplify share counting and fee payments on the form, including:
    • Requiring the registration of an aggregate offering amount of securities for defined contribution plans;
    • Implementing a new fee payment method for registration of offers and sales pursuant to defined contribution plans; and
    • Conforming Form S-8 instructions with current IRS plan review practices.
  • Revise Item 1(f) of Form S-8 to eliminate the requirement to describe the tax effects of plan participation on the issuer.

With respect to both Rule 701 and Form S-8, the proposals would:

  • Extend consultant and advisor eligibility to entities meeting specified ownership criteria designed to link the securities to the performance of services; and
  • Expand eligibility for former employees to specified post-termination grants and former employees of acquired entities.

What’s Next?

The comment period for the proposal will remain open for 60 days following publication in the Federal Register.

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