Defining Issues | December 2020

 

Insight

SEC proposes changes to compensatory offerings

Proposals include temporary rules for stock compensation of platform workers and other modernization amendments.

Due to the evolution of the composition of employees in the workplace, particularly with the development of the gig economy attributable to platform-based companies, the SEC is seeking to update its rules to permit a company to provide equity compensation to certain ‘platform workers’. 

Applicability

SEC Release No. 33-10891; File No. S7-18-20

  • Companies contemplating an offering of securities for purposes of compensation

SEC Release Nos. 33-10892; 34-909498; File No. S7-19-20

  • Companies contemplating an offering of securities for purposes of compensating platform workers for services provided 

Relevant dates

  • Both proposals have a public comment period of 60 days ending February 9, 2021.

Key impacts

Background:

  • Rule 701 of the Securities Act provides an exemption from registering securities issued by non-reporting issuers for compensatory arrangements, while Form S-8 is used by reporting issuers to register securities in compensatory offerings.
  • The SEC issued a concept release in 2018 seeking comments on ways to modernize the compensatory offering rules given the significant evolution in the composition of the workforce and the types of offerings since these rules were last updated.
  • These comments informed two proposals by the SEC staff in November 2020.

The following are the key impacts of these two proposed rule amendments.

Proposed temporary rules for platform workers

The development of the gig economy has resulted in new work relationships, including ‘platform workers’ who provide services to a company through an internet- or technology-based platform (e.g. ride-sharing, delivery)

  • These platform workers often do not fall within the scope of existing Rule 701 or Form S-8 definitions of individuals eligible to receive securities in a compensatory arrangement.
  • The proposed rules would create a new category for platform workers in the scope of Rule 701 and Form S-8.
  • The proposed rule would be a temporary provision that, for five years, would allow companies to compensate certain platform workers with securities in an arrangement meeting certain criteria, including:
    • compensation for bona fide services through a platform controlled by the company; and
    • compensation in securities cannot exceed 15% of a worker’s total compensation in a consecutive 12-month period or $75,000 during a consecutive 36-month period.

Proposed amendments to modernize compensatory offering framework

The proposed amendments to Rule 701 would revise:

  • Additional disclosure requirements for offerings > $10 million, including how the threshold applies (only with respect to sales after the threshold has been met), the types of information required and how often it must be updated.
  • Timing of when disclosures are required for certain types of derivative security offerings to new hires.
  • Increase two of the three caps (limited to greatest of the three) on the overall amount of securities that a non-reporting issuer may sell during any 12-month period:
    • $1 million – raised to $2 million
    • 15% of total assets – raised to 25% of total assets
    • 15% of the outstanding amount of the class of securities being offered – unchanged
  • Expand the exemption to include written compensatory benefit plans of the issuer’s subsidiaries – whether majority-owned or not.

The proposed amendments to Form S-8 would:

  • Clarify that a single Form S-8 may be used for multiple plans and securities may be allocated among multiple plans on a single Form S-8.
  • Permit issuers to file an automatically effective post-effective amendment in certain cases.
  • Simplify the timing, calculation and payment method of fees for defined contribution plan offerings.
  • Eliminate a disclosure requirement to describe the tax effects of plan participation on the company.

The proposed amendments impacting both Rule 701 and Form S-8 would:

  • Extend the eligibility of consultants and advisors to participate in compensatory offerings from only natural persons (i.e. individuals) to include entities meeting specific ownership criteria.
  • Extend the eligibility of former employees, including those of acquired entities, to participate in certain specified post-termination grants.

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