On November 24, the Securities and Change Fee voted to suggest amendments (the Proposal) to (1) Rule 701 beneath the Securities Act of 1933, as amended (Securities Act), which exempts sure compensatory fairness choices by non-reporting issuers from registration beneath the Securities Act, and (2) Type S-8, which is a registration assertion type out there for compensatory securities choices by reporting issuers. The Proposal is meant to modernize the framework for compensatory securities choices based mostly on developments associated to, and the evolution of, compensatory choices and the composition of the workforce because the SEC final amended Rule 701 and Type S-8. Within the SEC’s press launch asserting the Proposal, SEC Chairman Jay Clayton famous that, the Proposal would improve the flexibility of issuers to incorporate “firm securities in worker-company compensation preparations in order that employees have the chance to share within the development of the enterprise.” As highlighted within the truth sheet included within the press launch, the Proposal would, amongst different issues:
(1) With respect to Rule 701:
revise the bounds beneath Rule 701 in order that the utmost quantity of securities that could be provided in reliance on Rule 701 in any consecutive 12-month interval is the best of: (1) 15 p.c of the excellent quantity of the category of securities being provided, which might be unchanged from the present rule; (1) an quantity equal to the worth of 25 p.c of the issuer’s belongings (or, if the providing is assured by the issuer’s mother or father, 25 p.c of the worth of the issuer’s mother or father’s belongings), which might lead to a rise from 15 p.c beneath the present rule in every occasion; and (3) $2 million, which might lead to a rise from $1 million beneath the present rule;
eradicate the present requirement {that a} subsidiary of the issuer or its mother or father be majority-owned to ensure that the subsidiary’s staff to be eligible to take part in Rule 701 providing;
modify the prevailing requirement that an issuer present sure monetary disclosures to “all individuals collaborating within the providing” if combination gross sales made by an issuer in reliance on Rule 701 throughout any 12-month interval exceed $10 million to offer that the extra disclosure is barely required to be supplied in respect of gross sales that happen after the $10 million threshold has been exceeded;
present an issuer with options to fulfill the disclosure necessities if the $10 million threshold is exceeded, together with to allow an issuer to offer monetary statements that aren’t greater than 270 days outdated (in comparison with the requirement beneath the present rule that such monetary info be no more than 180 days outdated) and, if the issuer is a overseas issuer, to permit such monetary statements to be ready in accordance with the principles of the issuer’s house nation (quite than in accordance with US GAAP or IFRS) with out a US GAAP reconciliation, if monetary statements reconciled to US GAAP or IFRS should not out there; and
for by-product securities that don’t contain a volitional act by the recipient to train or convert (e.g., restricted inventory models), present that the disclosure required beneath Rule 701(e) should be delivered an inexpensive time period earlier than the date the award of by-product securities is made, which modifies the present requirement that such disclosure be delivered an inexpensive time period earlier than the date of train or conversion.
(2) With respect to Type S-8:
make clear that an issuer (x) might register on a single Type S-Eight provides and gross sales pursuant to a number of worker profit plans, (y) might add further plans to an present Type S-Eight by submitting a post-effective modification if the brand new plan doesn’t require authorization and registration of further securities for provide and sale, and (z) isn’t required to allocate registered securities amongst worker profit plans on a single Type S-8;
allow an issuer so as to add securities or lessons of securities by post-effective modification;
simplify associated share-counting and payment funds for registration statements filed associated to outlined contribution plans (e.g., a 401(ok) plan) by permitting the registration of an indeterminable variety of shares, by which case, the registration payment could be based mostly on the variety of shares really bought (which payment could be paid yearly, in arrears, following the top of the issuer’s fiscal yr); and
eradicate the requirement in Merchandise 1(f) of Type S-Eight to explain the tax results of plan participation on the issuer.
The Proposal would additionally increase the applying of, and eligibility necessities beneath, Rule 701 and Type S-Eight from staff, consultants and advisors who’re pure individuals to additionally embody securities issuances to entities that present a service to the issuer, as long as considerably all the actions of such entity encompass the efficiency of providers, and the possession of the entity meets sure standards specified within the Proposal. As well as, the Proposal would enable an issuer to, in reliance on Rule 701 or Type S-8, as relevant, challenge securities (1) to former staff and different individuals who supplied providers to the issuer, its dad and mom, its subsidiaries or subsidiaries of its mother or father, even when the securities are issued after such particular person’s resignation, retirement or different cessation of providers, as long as the issuance is made as compensation for providers rendered throughout a efficiency interval that ended inside 12 months previous such particular person’s resignation, retirement or different cessation of providers, or (2) as a “substitute award” to former staff of an entity the issuer acquires as long as the award held on the time of the acquisition was correctly issued in reliance on Rule 701 or Type S-8, as relevant.
The SEC is soliciting feedback on the Proposal for a interval of 60 days after publication within the Federal Register.
The complete textual content of the Proposal is on the market right here, and the press launch and truth sheet can be found right here.
In a separate proposal additionally issued by the SEC on November 24, the SEC proposed to amend Rule 701 and Type S-8, for a brief five-year interval, to be able to allow issuers to grant fairness compensation to so-called “gig financial system” employees or “platform employees” who present providers to these issuers. Particularly, if the momentary modification is accepted, an issuer could be permitted to supply and promote compensatory securities pursuant to Rule 701 to platform employees who present bona fide providers to the issuer, pursuant to a written contract or settlement, via the issuer’s “internet-based platform or different widespread, technology-based market platform or system,” as long as:
the issuer operates and controls the platform;
the securities issuance to the platform employee(s) is pursuant to a written compensatory association (e.g., a written compensation plan, contract or settlement), and never for providers which are in reference to the provide or sale of securities in a capital-raising transaction or providers that straight or not directly promote or preserve a marketplace for the issuer’s securities;
not more than 15 p.c of the worth of the collaborating employee’s compensation obtained from the issuer for providers throughout a 12-month interval, and not more than $75,000 of such compensation obtained from the issuer throughout a 36-month interval, consists of securities (with the securities valued on the time of the grant, utilizing any affordable, acknowledged valuation methodology, as long as the identical methodology is used in the course of the 12-month interval or the 36-month interval);
the quantity and phrases (e.g., the vesting schedule) of any securities issuance to a platform employee is probably not topic to bargaining or negotiation or present for the employee’s means to elect to be paid in securities or money; and
the issuer should take affordable steps to ban the securities issued to the platform employee pursuant to Rule 701 from being transferred, apart from a switch to the issuer or by operation of legislation.
Issuers would even be permitted to make registered securities choices to platform employees utilizing Type S-8, topic to the identical situations described above, apart from the proposed restriction on switch. Notably, the proposed momentary modification wouldn’t allow issuers to challenge securities to platform employees for actions associated to the sale or switch of everlasting possession of discrete, tangible items.
Within the proposal for the momentary modification, the SEC expressed the view that briefly allowing platform employees to obtain fairness grants beneath Rule 701 and utilizing Type S-Eight would enable the SEC to evaluate whether or not such issuances are being made for applicable compensatory functions (and never for capital-raising functions), which is able to inform the SEC’s efforts to modernize its guidelines to replicate altering financial and market situations.
The SEC is soliciting feedback on the proposed momentary modification for a interval of 60 days after publication within the Federal Register.
The complete textual content of the proposal is on the market right here, and the press launch and truth sheet can be found right here.
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