Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

At an open meeting on July 18th, the SEC agreed to issue a concept release exploring modifications and modernization of Rule 701 and Form S-8 for certain offerings for employees, in conjunction with its increase to the threshold for expanded disclosure required under Rule 701(e) as mandated by Congress.

Rule 701 and Form S-8 are alternating methods for a company to offer or sell securities to its own employees. Rule 701 provides an exemption from registration for securities issued by non-reporting companies pursuant to compensatory arrangements while Form S-8 provides the means by which a public company registers certain compensatory offerings.

Among the interesting modifications to Rule 701 contemplated by the release, the staff is seeking specific comment on the following topics:

  • Expanding Rule 701 to allow use by public companies;
  • Modifying the timing and methods of providing the enhanced disclosures required under Rule 701(e) if an offering exceeds the newly revised $10 million threshold and the consequences of not providing such information within the timeframe specified by the rule;
  • Modifying the type and frequency of financial statement required to be provided under Rule 701(e) and whether alternate presentations should be permitted;
  • Modifying timing requirements for enhanced disclosure under Rule 701(e) and whether the current standard requiring disclosure “a reasonable period of time before the date of sale” should be further clarified or modified;
  • Modifying Rule 701 and Rule 701(e) to address when and what type of disclosure should be provided in connection with grants of restricted stock units (RSUs); and
  • Increasing availability of Rule 701 for securities issued to non-traditional workers receiving compensation for sale of goods or services rendered through the use of Internet “platforms” such as, for example, those offering ride-sharing, food delivery, household repairs, dog-sitting, and tech support or hand-made craft objects or lodging (referred to as “gig economy” relationships).

The staff is also seeking comment on a number of topics with respect to use of Form S-8 including:

  • Eliminating Form S-8, allowing public companies to rely on Rule 701, and providing resale of restricted or control shares issued under employee benefits plans via Form S-3;
  • Simplifying requirements for Form S-8 including whether a specific amount of shares should be required to be disclosed, how additional shares may be added to Form S-8, and implementing a “pay-as-you-go” fee structure; and
  • Expanding availability of Form S-8 for securities issued to participants in “gig economy” relationships with the Company and whether such increased availability should match any similar changes to Rule 701.