SEC Proposes to Ease Restrictions on Compensatory Offerings to Employees

Final week, the Securities and Trade Fee (the “SEC”) proposed amendments that might ease restrictions on compensatory securities choices to workers and different service suppliers below Rule 701 and Type S-8, each carried out below the Securities Act of 1933, as amended (the “Securities Act”).1 On the similar time, the SEC additionally proposed a brief five-year enlargement of Rule 701 and Type S-Eight eligibility for sure compensatory choices to “platform” or “gig financial system” staff.2 Each rule proposals will likely be topic to a 60-day remark interval following publication within the Federal Register, with ultimate rule amendments anticipated to observe – though the scope of such ultimate guidelines might rely partly on the priorities of the brand new presidential administration. Though no motion is really useful now, firms ought to contemplate the scope of the proposed amendments, which, if adopted, ought to improve and simplify an organization’s capability to make use of its fairness for compensatory functions.

Background – Rule 701 and Type S-8

Underneath federal securities legal guidelines, any provide or sale of securities should both be (1) registered with the SEC or (2) exempt. Rule 701 gives an exemption from the registration necessities of the Securities Act for affords and gross sales of securities by non-reporting firms to their workers, administrators, consultants and sure different service suppliers below written compensatory profit plans or agreements. Equally, the Type S-Eight registration assertion is a short-form registration assertion out there to eligible reporting firms for the registration of affords and gross sales of securities to workers and different service suppliers below written compensatory plans/agreements. Each Rule 701 and Type S-Eight might solely be relied upon for compensatory functions and aren’t out there for capital-raising or market-making functions.3

Key Proposed Amendments to Rule 701 and Type S-8

The next proposed amendments are the important thing amendments with respect to Type S-8:

Implementing enhancements and clarifications to simplify registration on the shape, together with:

Clarifying the power so as to add a number of plans to a single Type S-8.

Clarifying the power to allocate securities amongst a number of incentive plans on a single Type S-8, thus permitting the creation of a “pool” of registered shares which may be allotted amongst varied issuer plans.

Allowing the addition of securities or courses of securities by robotically efficient post-effective modification, moderately than requiring a brand new registration assertion, as mandated below present guidelines.

Implementing enhancements to simplify share counting and payment funds on the shape, together with:

Requiring the registration of an combination providing quantity of securities for outlined contribution plans.

Implementing a brand new payment cost methodology for registration of affords and gross sales below outlined contribution plans that might require issuers to pay the payment for all gross sales made below the plan throughout a given fiscal 12 months no later than 90 days after fiscal 12 months finish. The SEC believes that this strategy ought to reduce the burden of estimating on the time of registration the variety of shares which may be supplied or offered and cut back the chance that unregistered shares could also be deemed “offered” below such plans.

Conforming Type S-Eight directions with present IRS plan assessment practices.

Revising the plan prospectus disclosure necessities to eradicate the requirement to explain the tax results of plan participation on the issuer.

The next proposed amendments are the important thing amendments with respect to Rule 701:

Elevating two of the three different ceilings that cap the quantity of securities {that a} non-reporting issuer might promote below Rule 701 throughout any consecutive 12-month interval. The proposed caps would elevate the 12-month ceilings from (i) $1 million to $2 million and (ii) 15% to 25% of the issuer’s whole property (retaining the third ceiling at 15% of the full excellent quantity of the category of issuer securities being supplied in reliance on Rule 701).

Decreasing further disclosure necessities for Rule 701 exempt transactions exceeding $10 million.4 Disclosure would solely be required with respect to gross sales exceeding $10 million and never on a look-back foundation to different gross sales in the course of the prior 12 months that had been beneath the $10 million restrict.

Decreasing the kind of monetary disclosure required, and in addition permitting an issuer to supply impartial third-party valuation reviews ready in accordance with requirements imposed below Part 409A of the Inner Income Code of 1986, as amended (the “Code”)5, as an alternative of monetary statements.

Decreasing the frequency with which disclosures should be up to date from quarterly to semi-annually.

Revising the time at which such disclosure is required to be delivered for spinoff securities that don’t contain a call by the recipient to train or convert (akin to restricted inventory items, versus inventory choices and inventory appreciation rights) in specified circumstances the place such spinoff securities are granted to new hires.

Making the exemption out there for affords and gross sales of securities below a written compensatory profit plan established by the issuer’s subsidiaries, whether or not or not majority-owned.

The next proposed amendments are the important thing amendments with respect to each Rule 701 and Type S-8:

Extending guide and advisor eligibility to entities assembly specified possession standards designed to hyperlink the securities to the efficiency of companies, akin to an entity whose possession pursuits are held by not more than 25 folks with 50% of such holders performing companies for the corporate issuing the securities.

Increasing eligibility for former workers to specified post-termination/resignation/retirement grants and former workers of acquired entities below sure circumstances. This modification would permit for the idea of securities awards, avoiding the necessity to cash-out former service suppliers in a inventory transaction.

Key Rule 701 and Type S-Eight Proposals for “Platform Staff”

In recognition of the evolving nature of the kinds of companies supplied by many service suppliers and their altering relationships with firms, the SEC’s proposals additionally would permit each reporting and non-reporting firms, below a five-year trial foundation, to supply and promote issuer securities for compensatory functions to “platform” and different “gig financial system” staff who might not in any other case be Rule 701- or Type S-8-eligible. These staff should present bona fide companies (akin to ride-sharing, meals supply, family repairs, dog-sitting, tech help, and so on.) by way of the issuer’s internet-based market platform or by way of one other widespread, technology-based market platform. Usually, the next circumstances should be met6:

The issuer should function and management the platform (e.g., entry, phrases of service and phrases and circumstances for the platform employee’s cost for companies).

The issuance of securities to platform staff should be pursuant to a written compensation plan or settlement and never for capital-raising or market-making functions.

The worth of the securities is (i) no more than 15% of the worth of compensation acquired by a collaborating employee from the issuer for companies supplied by way of the platform throughout a 12-month interval and (ii) no more than $75,000 of such compensation acquired from the issuer throughout a 36-month interval, in every case with worth decided on the time of grant.

The quantity/phrases of securities issued to a platform employee can’t be topic to particular person bargaining or the employee’s capability to elect cost in securities vs. money.

For Rule 701 affords solely, the issuer should take affordable steps to ban the switch of securities issued to the platform employee, aside from a switch to the issuer or pursuant to relevant regulation.

Issuers could be required to supply specified data relating to the choices to the SEC at six-month intervals.

1 See “Modernization of Guidelines and Varieties for Compensatory Securities Choices and Gross sales,” (Launch No. 33-10891) (November 24, 2020), out there right here.
2 See “Short-term Guidelines to Embody Sure ‘Platform Staff’ in Compensatory Choices below Rule 701 and Type S-8,” (Launch Nos. 33-10892 and 34-9049833) (November 24, 2020), out there right here.
3 Our earlier shopper alert relating to the SEC’s 2018 releases on the matters lined by this alert could also be discovered right here.
4 Underneath present Rule 701, issuers should present particular disclosures (together with monetary statements) if the mixture gross sales worth/quantity of securities offered throughout any consecutive 12-month interval exceeds $10 million.
5 Underneath Code Part 409A, impartial value determinations that meet sure Part 409A necessities might help a “protected harbor” exemption from opposed Part 409A tax penalties for inventory choices and inventory appreciation rights which can be granted with a strike worth at the very least equal to the honest market worth of the corporate’s widespread inventory on the grant date and if different circumstances are met.
6 As well as, a lot of the different Rule 701/Type S-Eight necessities would proceed to use to affords to platform staff, together with a lot of the proposed amendments mentioned above, if adopted.