80232 Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Proposed Rules 

1 15 U.S.C. 77a et seq. 

2Rule 701 is available for compensatory 

transactions with employees, directors, general 

partners, trustees (where the issuer is a business 

trust), officers, or consultants and advisors, and 

their family members who acquire such securities 

from such persons through gifts or domestic 

relations orders. Offers and sales to former 

employees, directors, general partners, trustees, 

officers, consultants and advisors are exempted 

from registration by the rule subject to specified 

conditions. Form S–8 is available for compensatory 

transactions with ‘‘employees,’’ with the form 

defining ‘‘employee’’ as any employee, director, 

general partner, trustee (where the registrant is a 

business trust), or officer. ‘‘Employee’’ also includes 

consultants and advisors, former employees, 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Parts 229, 230, and 239 

[Release No. 33–10891; File No. S7–18–20] 

RIN 3235–AM38 

Modernization of Rules and Forms for 

Compensatory Securities Offerings 

and Sales 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Proposed rule. 

SUMMARY: The Securities and Exchange 

Commission (‘‘Commission’’) is 

proposing for public comment 

amendments to Rule 701 under the 

Securities Act of 1933 (the ‘‘Securities 

Act’’), 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. The amendments are 

designed to modernize the exemption 

and registration statement in light of the 

significant evolution in compensatory 

offerings since the Commission last 

substantively amended these 

regulations, consistent with investor 

protection. 

DATES: Comments should be received on 

or before February 9, 2021. 

ADDRESSES: Comments may be 

submitted by any of the following 

methods: 

Electronic Comments 

• Use the Commission’s internet 

comment form (https://www.sec.gov/ 

rules/proposed.shtml). 

Paper Comments 

• Send paper comments to Vanessa 

A. Countryman, Secretary, Securities 

and Exchange Commission, 100 F Street 

NE, Washington, DC 20549–1090. 

All submissions should refer to File 

Number S7–18–20. To help us process 

and review your comments more 

efficiently, please use only one method. 

The Commission will post all comments 

on the Commission’s website (http://

www.sec.gov/rules/proposed.shtml). 

Comments are also available for website 

viewing and copying in the 

Commission’s Public Reference Room, 

100 F Street NE, Washington, DC 20549, 

on official business days between the 

hours of 10:00 a.m. and 3:00 p.m. All 

comments received will be posted 

without change. Persons submitting 

comments are cautioned that we do not 

redact or edit personal identifying 

information from comment submissions. 

You should submit only information 

that you wish to make available 

publicly. 

We or the staff may add studies, 

memoranda, or other substantive items 

to the comment file during this 

rulemaking. A notification of the 

inclusion in the comment file of any 

such materials will be made available 

on our website. To ensure direct 

electronic receipt of such notifications, 

sign up through the ‘‘Stay Connected’’ 

option at www.sec.gov to receive 

notifications by email. 

FOR FURTHER INFORMATION CONTACT: 

Anne M. Krauskopf, Senior Special 

Counsel, or Lisa Krestynick, Special 

Counsel, Office of Chief Counsel, 

Division of Corporation Finance, at 

(202) 551–3500. 

SUPPLEMENTARY INFORMATION: We are 

proposing to amend 17 CFR 230.405 

(‘‘Rule 405’’), 17 CFR 230.413 (‘‘Rule 

413’’), 17 CFR 230.416 (‘‘Rule 416’’), 17 

CFR 230.456 (‘‘Rule 456’’), 17 CFR 

230.457 (‘‘Rule 457’’), 17 CFR 230.701 

(‘‘Rule 701’’), and 17 CFR 239.16b 

(‘‘Form S–8’’) under the Securities Act 

of 1933 1 (the ‘‘Securities Act’’), and 17 

CFR 229.601 (‘‘Item 601’’) of Regulation 

S–K. 

Table of Contents 

I. Overview 

II. Rule 701 

A. Disclosure Requirements 

1. The Disclosure Requirement for the 

Period Preceding the Threshold Amount 

Being Exceeded 

2. Age of Financial Statements 

3. Financial Statement Content 

Requirements for Foreign Private Issuers 

4. Alternative Valuation Disclosure 

5. Disclosure Requirements for 

Derivative Securities 

6. Disclosure Requirements Following 

Business Combination Transactions 

B. Rule 701(d) 

C. Eligible Recipients 

1. Consultants and Advisors 

2. Former Employees 

3. Employees of Subsidiaries 

III. Form S–8 

A. Addition of Plans and Securities or 

Classes of Securities to Form S–8 

1. Addition of Plans to Form S–8 

2. Securities Allocation Among Incentive 

Plans 

3. Addition of Securities or Classes of 

Securities to Form S–8 

B. Fee Calculation and Fee Payments on 

Form S–8 for Defined Contribution Plans 

1. Calculation of the Registration Fee 

Using the Aggregate Offering Price 

2. New Fee Payment Method for Sales 

Pursuant to Defined Contribution Plans 

3. Additional Requests for Comment on 

Counting the Shares Registered on Form 

S–8 for Defined Contribution Plans 

C. Conforming Form S–8 to Rule 701 

1. Scope of ‘‘Former Employee’’ 

2. Consultants and Advisors 

D. Conforming Form S–8 Instructions With 

Current IRS Plan Review Practices 

E. Revisions to Item 1(f) of Form S–8; Tax 

Effects of Plan Participation 

F. Additional Requests for Comment About 

Form S–8 

1. Plan Trustee Signatures on Form S–8 

2. Bridging the IPO Gap for Employee 

Stock Purchase Plans 

IV. General Request for Comments 

V. Economic Analysis 

A. Economic Baseline 

1. Rule 701 

2. Form S–8 

B. Benefits and Costs to Proposed 

Amendments to Rule 701 and Form S– 

8 

1. Proposed Amendments to Rule 701(e) 

2. Proposed Amendments to Rule 701(d) 

3. Proposed Amendments to Rule 701(c) 

Eligible Participants 

4. Benefits and Costs to Proposed 

Amendments to Form S–8 

C. Anticipated Effects on Efficiency, 

Competition, and Capital Formation 

D. Reasonable Alternatives 

VI. Paperwork Reduction Act 

A. Summary of the Collection of 

Information 

B. Summary of the Proposed Amendments’ 

Effects on the Collections of Information 

C. Incremental and Aggregate Burden and 

Cost Estimates for the Proposed 

Amendments 

D. Request for Comment 

VII. Initial Regulatory Flexibility Act 

Analysis 

A. Reasons for, and Objectives of, the 

Proposed Action 

B. Legal Basis 

C. Small Entities Subject to the Proposed 

Amendments 

D. Reporting, Recordkeeping and other 

Compliance Requirements 

E. Duplicative, Overlapping or Conflicting 

Federal Rules 

F. Significant Alternatives 

G. Request for Comments 

VIII. Small Business Regulatory Enforcement 

Fairness Act 

IX. Statutory Authority 

I. Overview 

We are proposing amendments to 

Rule 701 and Form S–8 to modernize 

the two principal means by which 

issuers grant securities to employees in 

compensatory transactions.2 Every offer 


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Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Proposed Rules 80233 

executors, administrators or beneÉciaries of the 

estates of deceased employees, guardians or 

members of a committee for incompetent former 

employees, or similar persons duly authorized by 

law to administer the estate or assets of former 

employees, subject to specified conditions. For 

purposes of both Rule 701 and Form S–8, 

‘‘employee’’ includes insurance agents who are 

exclusive agents of the issuer, its subsidiaries or 

parents, or derive more than 50% of their annual 

income from those entities. See Rule 701(c) and 

General Instructions A.1(a)(1)-(3) to Form S–8. 

3 15 U.S.C. 77e. 

4See, e.g., Notice of Proposed Form S–8, Release 

No. 33–3469–X (Apr. 12, 1953) [18 FR 2182 (Apr. 

17, 1953)] and Adoption of Form S–8, Release No. 

33–3480 (Jun. 16, 1953) [18 FR 3688 (Jun. 27, 

1953)], each observing that the investment decision 

to be made by the employee is of a different 

character than when securities are offered for the 

purpose of raising capital. 

5Only issuers that are not subject to the reporting 

requirements of Section 13 or 15(d) of the Securities 

Exchange Act of 1934 (15 U.S.C. 78m and 78o(d)) 

and are not investment companies registered or 

required to be registered under the Investment 

Company Act of 1940 (15 U.S.C. 80a–1 et seq.) are 

eligible to use Rule 701. See Rule 701(b). As such, 

the use of the term ‘‘non-reporting issuer’’ in this 

release means issuers that are not subject to the 

reporting requirements of Section 13 or 15(d) of the 

Exchange Act, and includes issuers subject to Rule 

257 of Regulation A [17 CFR 230.257]. 

6Exempt Offerings Pursuant to Compensatory 

Arrangements, Release No. 33–10520 (Jul.18, 2018) 

[83 FR 34940] (‘‘2018 Rule 701 Adopting Release’’). 

7Public Law 115–174, 132 Stat. 1296 (2018). 

Section 507 of the Act mandated that the 

Commission amend Rule 701 to increase from $5 

million to $10 million the aggregate sales price or 

amount of securities sold during any consecutive 

12-month period in excess of which the issuer is 

required to deliver additional disclosures to 

investors. 

8Concept Release on Compensatory Securities 

Offerings and Sales, Release No. 33–10521 (Jul. 18, 

2018) [83 FR 34958] (‘‘Concept Release’’). Unless 

otherwise noted, comments cited are to the Concept 

Release and may be found at the following link: 

https://www.sec.gov/comments/s7-18-18/ 

s71818.htm. 

9See, e.g., letters from Airbnb, Inc. (‘‘Airbnb’’); 

American Bar Association, Business Law Section, 

Federal Regulation of Securities Committee 

(‘‘ABA’’); American Benefits Council (‘‘Council’’); 

Sen. Sherrod Brown, United States Senator 

(‘‘Senator Brown’’); Center for Capital Markets 

Competitiveness, U.S. Chamber of Commerce 

(‘‘Chamber’’); Davis Polk & Wardwell (‘‘Davis 

Polk’’); Ernest & Young LLP (‘‘EY’’); Indigo Ag, Inc. 

(‘‘Indigo’’); Rep. Patrick McHenry, United States 

Representative (‘‘Representative McHenry’’); 

National Association of Stock Plan Professionals 

(‘‘NASPP’’); National Employment Law Project 

(‘‘NELP’’); Marie P. Petion (‘‘Petion’’); Postmates 

(‘‘Postmates’’); Nick Reyes (‘‘Reyes’’); Brian Sament 

(‘‘Sament’’); Shearman & Sterling LLP 

(‘‘Shearman’’); John P. Stoelting (‘‘Stoelting’’); 

Sullivan & Cromwell LLP (‘‘Sullivan’’); Uber 

Technologies, Inc. (‘‘Uber’’); Rep. Maxine Waters, 

United States Representative (‘‘Representative 

Waters’’); Zachor Legal Institute (‘‘Zachor’’); and 

Zionist Advocacy Center (‘‘Zionist’’). 

10The current version of Rule 701 was adopted 

pursuant to the Commission’s general exemptive 

authority under Section 28 of the Securities Act. 

See Rule 701—Exempt Offerings Pursuant to 

Compensatory Arrangements, Release No. 33–7645 

(Feb. 25, 1999) [64 FR 11095 (Mar. 8, 1999)] (‘‘1999 

Adopting Release’’). We believe the proposed 

amendments to Rule 701 would modernize the 

exemption in light of the significant evolution in 

compensatory offerings since the Commission last 

substantively amended the rule, while maintaining 

important investor protections. For this reason and 

the reasons discussed below, we believe the 

proposed amendments to Rule 701, if adopted, 

would be necessary and appropriate in the public 

interest and consistent with investor protections. 

and sale of securities must be registered, 

or rely on an exemption from the 

registration requirements of Section 5 of 

the Securities Act.3 The Commission 

has long recognized that offers and sales 

of securities as compensation present 

different issues than offers and sales of 

securities by issuers that seek to raise 

capital.4 Among other considerations, 

the Commission has recognized that the 

relationship between the issuer and 

recipient of securities is often different 

in a compensatory, rather than capital 

raising, transaction. The Commission 

has thus provided a limited exemption 

from registration—Rule 701—for certain 

compensatory securities transactions by 

non-reporting issuers 5 and a specialized 

form—Form S–8—for registering certain 

compensatory securities transactions by 

reporting issuers. The proposed 

amendments reflect changes in 

compensatory practices, including the 

types of securities offered, and are 

intended to modernize and simplify 

administrative requirements. 

In July 2018, in connection with 

amending Rule 701,6 as mandated by 

the Economic Growth, Regulatory 

Relief, and Consumer Protection Act,7

the Commission sought comment on 

ways to modernize the Rule 701 

exemption from registration, the Form 

S–8 registration statement, and the 

relationship between these two 

regulations, consistent with investor 

protection.8 In doing so, the 

Commission noted that significant 

evolution has taken place in both the 

types of compensatory offerings issuers 

make and the composition of the 

workforce since it last substantively 

amended these regulations and sought 

to determine whether and, if so, how the 

rules should be amended to address 

these developments. The Concept 

Release stated that the Commission’s 

evaluation of any potential changes 

would focus on retaining the 

compensatory purpose of Rule 701 and 

Form S–8 and preventing them from 

being used for capital-raising purposes, 

consistent with the Commission’s 

investor protection mandate. The 

Concept Release also solicited comment 

on how any possible rule or form 

amendments may affect an issuer’s 

decision to become a reporting issuer. 

The Commission received many 

comment letters in response to the 

Concept Release.9

Among the Rule 701 topics covered 

by the Concept Release were the Rule 

701(d) exemptive conditions, including 

the 12-month sales caps, and the Rule 

701(e) disclosure requirements, 

including the timing and manner of 

disclosure, and how those disclosure 

requirements apply to derivative 

securities. Form S–8 topics covered by 

the Concept Release included ways to 

reduce administrative burdens, such as 

by permitting multiple plans to be 

registered on a single Form S–8, 

permitting fee payment on a ‘‘pay-asyou-go’’ basis, and registering taxqualified plans based on a dollar 

amount rather than the number of 

shares issued. The comments received 

on those topics and the Commission’s 

related proposed rule amendments are 

discussed in this release. 

Based, in part, on the consideration of 

feedback from commenters, with respect 

to Rule 701 we propose to:10

• 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 nonreporting 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 (or 

written compensation contract) 

established by the issuer’s subsidiaries, 

whether or not majority-owned. 

With respect to Form S–8, we propose 

to: 

• Implement improvements and 

clarifications to simplify registration on 

the form, including: 

Æ Clarifying the ability to add 

multiple plans to a single Form S–8; 

Æ Clarifying the ability to allocate 

securities among multiple incentive 

plans on a single Form S–8; 

Æ 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: 

Æ Requiring the registration of an 

aggregate offering amount of securities 

for defined contribution plans; 

Æ Implementing a new fee payment 

method for registration of offers and 


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80234 Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Proposed Rules 

11Temporary Rules to Include Certain ‘‘Platform 

Workers’’ in Compensatory Offerings Under Rule 

701 and Form S–8, Release No. 33–10892 (Nov. 24, 

2020). 

12A ‘‘foreign private issuer’’ is defined in Rule 

405 and 17 CFR 240.3b–4(c) [Exchange Act Rule 

3b–4(c)] as a foreign issuer other than a foreign 

government, except an issuer meeting the following 

conditions as of the last business day of its most 

recently completed second fiscal quarter: (i) More 

than 50 percent of the outstanding voting securities 

of which are directly or indirectly owned of record 

by residents of the United States; and (ii) any of the 

following: (A) the majority of the executive officers 

or directors are United States citizens or residents; 

(B) more than 50 percent of the assets of the issuer 

are located in the United States; or (C) the business 

of the issuer is administered principally in the 

United States. 

13Rule 701(e). 

14The Employee Retirement Income Security Act 

of 1974 (29 U.S.C. 1001 et seq.). 

15Form 1–A [17 CFR 239.90]. 

16Rule 701(e)(4). 

17Rule 701(e)(6). As described in Section II.A.5, 

infra, for options and other derivative securities, the 

issuer’s obligation to deliver Rule 701(e) disclosure 

is determined based on whether the option or other 

derivative security was granted during a 12-month 

period in which the disclosure threshold is 

exceeded. If the grant occurred during such a 

period, the issuer must deliver the Rule 701(e) 

disclosure a reasonable period of time before the 

date of exercise or conversion. 

18 In the 1999 Adopting Release at Section II.B, 

the Commission, referencing the $5 million 

threshold that applied at the time, stated: ‘‘Where 

the formula permits sales in excess of $5 million 

during a 12-month period, and the issuer chooses 

to take advantage of this increased amount, the new 

disclosure should be provided to all investors 

before sale. This requirement will obligate issuers 

to provide disclosure to all investors if the issuer 

believes that sales will exceed the $5 million 

threshold in the coming 12-month period. If 

disclosure has not been provided to all investors 

before sale, the issuer will lose the exemption for 

the entire offering when sales exceed the $5 million 

threshold.’’ 

19See letter from ABA. 

20See letter from Sullivan. 

21See Instruction to paragraph (b)(2) of Rule 504 

(‘‘If a transaction under § 230.504 fails to meet the 

sales pursuant to defined contribution 

plans; 

Æ Conforming Form S–8 instructions 

with current IRS plan review practices; 

and 

• 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 the Rule 701 

exemption and the Form S–8 

registration statement, we propose to: 

• 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. 

To comply with current Federal 

Register formatting requirements, we 

also propose a ministerial amendment 

to Rule 701 to remove the Preliminary 

Notes and move their provisions 

without change to Rule 701(a). This 

change does not affect the purpose or 

effect of these provisions. 

The Concept Release also discussed 

the scope of eligible plan participants, 

including whether persons providing 

services in the so-called ‘‘gig economy’’ 

should be eligible to receive securities 

pursuant to Rule 701 and Form S–8. We 

are addressing these issues and the 

comments received on these topics in a 

separate companion release.11

We discuss the proposed amendments 

below. We welcome feedback and 

encourage interested parties to submit 

comments on any or all aspects of the 

proposed amendments. When 

commenting, it would be most helpful 

if you include the reasoning behind 

your position or recommendation. 

II. Rule 701 

A. Disclosure Requirements 

We are proposing to amend Rule 

701(e) to revise the disclosure 

requirements for transactions exceeding 

$10 million, including the age of 

financial statements, and to allow 

issuers to provide alternative valuation 

information in lieu of financial 

statements. In addition, we are 

proposing to allow certain foreign 

private issuers 12 to provide financial 

statements using home country 

accounting standards if financial 

statements prepared in accordance with 

generally accepted accounting 

principles in the United States (‘‘U.S. 

GAAP’’) or International Financial 

Reporting Standards as issued by the 

International Accounting Standards 

Board (‘‘IFRS’’) are not otherwise 

available. Finally, we propose to modify 

the timing requirement for providing 

disclosure for certain derivative 

securities granted to new hires in 

specified circumstances. 

Rule 701(e) currently provides that an 

issuer must deliver to investors a copy 

of the compensatory benefit plan or 

contract, as applicable. In addition, if 

the aggregate sales price or amount of 

securities sold during any consecutive 

12-month period exceeds $10 million, 

the issuer must deliver the following 

additional disclosure to investors a 

reasonable period of time before the 

date of sale:13

• A copy of the summary plan 

description required by ERISA 14 or a 

summary of the plan’s material terms if 

it is not subject to ERISA; 

• Information about the risks 

associated with investment in the 

securities sold pursuant to the 

compensatory plan or compensation 

contract; and 

• Financial statements required to be 

furnished by Part F/S of Form 1–A 15

under 17 CFR 230.251 through 230.263 

(‘‘Regulation A’’). These financial 

statements must be as of a date no more 

than 180 days before the sale of 

securities relying on Rule 701.16

• Foreign private issuers must 

provide a reconciliation to U.S. GAAP if 

their financial statements are not 

prepared in accordance with U.S. GAAP 

or IFRS. 

This disclosure must be provided to 

investors a reasonable period of time 

before the date of sale. For options and 

other derivative securities, this requires 

the issuer to deliver disclosure a 

reasonable period of time before the 

date of exercise or conversion.17 In 

adopting Rule 701(e), the Commission 

made clear that if the required 

disclosure has not been provided to all 

investors on a timely basis, the issuer 

will lose the exemption for the entire 

offering.18

1. The Disclosure Requirement for the 

Period Preceding the Threshold Amount 

Being Exceeded 

We are proposing to revise Rule 

701(e) to provide that, if the aggregate 

sales price or amount of securities sold 

during any consecutive 12-month 

period exceeds $10 million, the issuer 

must deliver to investors the additional 

disclosure required by the rule only 

with respect to those sales that exceed 

the rule’s $10 million threshold. One 

commenter who addressed the current 

rule characterized the requirement that 

the disclosure be provided for all sales, 

including those occurring before the 

threshold is exceeded, as ‘‘largely 

unworkable’’ and ‘‘a trap for the 

unwary.’’ 19 The same commenter 

recommended that there be a thirty-day 

‘‘grace period’’ following the date when 

the threshold is exceeded, so that the 

issuer would be required to provide 

disclosure only for future offers or sales 

after the ‘‘grace period.’’ Another 

commenter suggested that crossing the 

threshold should impact the 

exemption’s availability only for: (1) 

The securities issued that caused the 

threshold to be breached and for which 

disclosure was not provided; and (2) 

any subsequent offerings in the same 12- 

month period for which sufficient 

disclosure was not provided.20 This 

commenter further expressed the view 

that treating sales over $10 million 

separately from earlier sales would be 

consistent with the current operation of 

Rule 504 of Regulation D.21


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Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Proposed Rules 80235 

limitation on the aggregate offering price, it does 

not affect the availability of this § 230.504 for the 

other transactions considered in applying such 

limitation. For example, if an issuer sold 

$10,000,000 of its securities on June 1, 2021 under 

this § 230.504 and an additional $500,000 of its 

securities on December 1, 2021, this § 230.504 

would not be available for the later sale, but would 

still be applicable to the June 1, 2021 sale.’’). 

22Proposed Rule 701(e). 

23See Sections II.A.2–6, infra. 

24Tier 2 offerings require audited financial 

statements. See Part F/S of Form 1–A [17 CFR 

239.90]. 

25Specifically, an issuer may elect to provide 

financial statements that follow the requirements of 

either Tier 1 or Tier 2 Regulation A offerings 

without regard to whether the amount of sales that 

occurred pursuant to Rule 701 during the time 

period contemplated in Rule 701(e) would have 

required the issuer to follow the Tier 2 financial 

statement requirements in a Regulation A offering 

of the same amount. Rule 701 does not, and the 

proposals would not, require an issuer utilizing 

Rule 701 that would be subject to Tier 2 financial 

statement requirements to file with the Commission 

the current and periodic reports required by Rule 

257(b) [17 CFR 230.257(b)]. 

26See Rule 701(e)(4). 

27See letter from ABA. 

28This is generally the same timing that applies 

to updating valuation disclosures under the IRS 

Section 409A regulations. See Treas. Reg. § l.409A– 

l(b)(5)(iv)(B) (2017). 

29See Rule 701(e). See also 1999 Adopting 

Release at Section II.C. 

30 17 CFR 249.220f. See Item 8.A.5 of Form 20– 

F. 

31See letters from ABA, Davis Polk, and 

Shearman. In particular, one commenter noted that 

foreign private issuers subject to Exchange Act 

reporting requirements can use Form S–8 for 

compensatory offerings without providing financial 

statements more frequently than required by their 

home jurisdiction, which puts U.S. employees of 

non-registered foreign private issuers at a 

disadvantage compared to U.S. employees of 

registered foreign private issuers. See letter from 

Davis Polk. 

32Proposed Rule 701(e)(4)(i). 

33See Part F/S of Form 1–A. 

Currently, for issuers to be able to rely 

on Rule 701, they must anticipate 

whether their compensatory sales could 

exceed $10 million at the outset of a 12- 

month period. If an issuer does not 

anticipate exceeding the $10 million 

threshold and, as a result, does not 

provide disclosures to all investors, then 

that issuer cannot exceed the $10 

million threshold without losing the 

exemption for all of the sales in that 12- 

month period. We understand that the 

‘‘lookback’’ aspect of the requirement 

may make it unduly difficult for issuers 

to plan their compensatory programs or 

respond efficiently to unforeseen 

situations, such as where an issuer 

wants to offer equity compensation in 

connection with an unanticipated 

opportunity to hire new employees. 

We are proposing to amend the rule 

to provide that the disclosure required 

by Rule 701(e) be delivered to investors 

only with respect to sales after the $10 

million threshold is exceeded and not to 

require after-the-fact disclosure for sales 

made in reliance on the rule during the 

12-month period before the threshold 

was exceeded.22 The exemption would 

remain available for all sales that exceed 

the $10 million threshold during the 12- 

month period if the issuer provides the 

required disclosure for those sales. We 

are not proposing to include a ‘‘grace 

period’’ between the point at which the 

$10 million threshold is exceeded and 

the requirement to deliver the Rule 

701(e) disclosure, given that other 

amendments to Rule 701(e) proposed in 

this release should make it easier for 

issuers to comply with the disclosure 

delivery requirement.23

Request for Comment: 

1. Should the rule be amended, as 

proposed, to require additional 

disclosure only for those sales during 

the 12-month period that exceed the $10 

million threshold? Are there 

circumstances in which issuers may 

have trouble providing the information 

upon exceeding the threshold? If so, 

how could those difficulties be 

addressed? 

2. Should there be a ‘‘grace period’’ 

between crossing the $10 million 

threshold and the requirement to 

provide additional disclosure with 

respect to the sales exceeding the $10 

million threshold? If so, how long a 

period is appropriate? Would the other 

amendments proposed in this release 

that make it easier for issuers to comply 

with Rule 701’s disclosure delivery 

requirement mitigate the need for a 

grace period? 

3. Alternatively, upon crossing the 

$10 million threshold, should the issuer 

be required to provide the additional 

Rule 701(e) disclosure on a retrospective 

basis to all investors who had 

previously been granted or purchased 

securities during the 12-month period? 

Would such after-the fact disclosure 

mitigate informational asymmetry 

between investors who purchase before 

and investors who purchase after 

crossing the $10 million threshold? If 

we impose such a requirement, should 

the issuer lose the exemption for those 

earlier transactions if it fails to 

retrospectively provide the disclosure? 

Should there be a ‘‘grace period’’ 

between crossing the $10 million 

threshold and the requirement to 

retrospectively provide the disclosure? 

If so, how long a period is appropriate? 

2. Age of Financial Statements 

We propose to conform the age of 

financial statement requirement set 

forth in Rule 701(e) to the 

corresponding requirement in Part F/S 

of Form 1–A. Rule 701(e) requires 

delivery of financial statements required 

to be furnished by Part F/S of Form 1– 

A, which prescribes the financial 

statements required for Regulation A 

Tier 1 and Tier 2 offerings. In 

Regulation A offerings, issuers generally 

must include two years of consolidated 

balance sheets, statements of 

comprehensive income, cash flows, and 

changes in stockholders’ equity.24

Issuers relying on Rule 701 may choose 

to provide financial statements that 

comply with the requirements of either 

tier.25

Currently, the age of the financial 

statements must be as of a date no more 

than 180 days before the date of sale of 

securities relying on the Rule 701 

exemption.26 This requirement, in 

effect, necessitates financial statements 

to be prepared on a quarterly basis, and 

to be completed within three months 

after the end of each quarter, in order to 

keep current information available for 

delivery a reasonable time before the 

date of sale so that sales may occur on 

an uninterrupted basis. One 

commenter 27 recommended requiring 

the financial statement disclosure to be 

updated and provided only once per 

fiscal year, unless a material event 

results in a material change to the 

issuer’s enterprise value or the value of 

the securities.28

Moreover, under existing Rule 701, 

foreign private issuers are required to 

provide financial information on the 

same schedule as domestic issuers.29

Foreign private issuers, like domestic 

issuers, may issue securities in reliance 

on Rule 701 throughout the year, which 

could require them to update their 

financial statements more frequently 

than required for registered offerings 

under Form 20–F.30 Commenters 

expressed the view that non-reporting 

foreign private issuers should not be 

obligated to prepare quarterly financial 

statements solely to rely on Rule 701, 

but instead should be able to satisfy the 

requirements of Rule 701 by providing 

investors financial statements 

conforming to the requirements for 

annual financial statements in reports 

on Form 20–F and interim financial 

statements within the timeframe 

required by home country rules.31

We propose to amend Rule 701(e) to 

apply the age of financial statement 

requirements of Form 1–A, Part F/S, 

paragraphs (b)(3) and (4) at the time of 

sale.32 This proposal, which would 

apply to both domestic and foreign 

issuers, would conform the Rule 701(e) 

financial statement age requirements 

with those of Regulation A.33 Under the 

proposal, financial statements must be 

available on at least a semi-annual basis 


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80236 Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Proposed Rules 

34 17 CFR 240.12h–1(f). 

35 15 U.S.C 78a et seq. 

36 17 CFR 240.12g5–1(a)(8). See discussion in 

Section II.C.1, infra. 

37 17 CFR 230.12g3–2(b). 

38See Rule 701(e)(4). 

39See Concept Release at Section II.C.1. 

40See letter from Shearman. 

41See letter from EY. 

42 15 U.S.C. 78l(g). 

43Proposed Rule 701(e)(4)(i). 

44See the specific requirements of Exchange Act 

Rule 12g3–2(b). 

45See Exemption from Registration Under Section 

12(g) of the Securities Exchange Act of 1934 for 

Foreign Private Issuers, Release No. 34–57350 (Feb. 

19, 2008), citing Adoption of Rules Relating to 

Foreign Securities, Release No. 34–8066 (Apr. 28, 

1967). 

and completed within three months 

after the end of the second and fourth 

quarters. Issuers would no longer be 

required to prepare financial statements 

quarterly in order for sales to be made 

continuously pursuant to Rule 701. We 

believe the financial statement updating 

requirements for Rule 701 compensatory 

offerings need not be more stringent 

than those applicable to capital raising 

transactions under Regulation A, which 

may be used by the same issuers. The 

proposal also would be consistent with 

foreign private issuers’ financial 

statement updating requirements for 

registered offerings on Form 20–F, 

thereby eliminating any disadvantage 

for non-reporting foreign private issuers. 

Rule 12h–1(f) 34 under the Securities 

Exchange Act of 1934 35 (‘‘Exchange 

Act’’), which exempts from Exchange 

Act Section 12(g)’s registration 

requirements stock options issued under 

written compensatory stock option 

plans by non-reporting issuers, 

includes, as a condition to the 

exemption, the delivery of Rule 701(e) 

information every six months with the 

financial statements that are not more 

than 180 days old. For ease of plan 

administration, we considered 

proposing to amend the age of financial 

statements requirements of this rule to 

remain consistent with those of Rule 

701(e). However, it is unclear to what 

extent non-reporting companies 

continue to rely on Rule 12h–1(f) after 

the adoption of Exchange Act Rule 

12g5–1(a)(8),36 which excludes from the 

definition of ‘‘held of record’’ for 

purposes of Section 12(g) certain 

securities held by persons who received 

them pursuant to employee 

compensation plans. Accordingly, we 

request comment below on whether we 

should rescind or adopt a conforming 

amendment to Rule 12h–1(f). 

Request for Comment: 

4. Would the proposed amendment to 

the age of financial statement 

requirements ease the burden of 

compliance with Rule 701(e) in a 

manner consistent with investor 

protection, both for domestic issuers 

and foreign private issuers? Would a 

different age of financial statement 

requirement better promote this 

objective? For example, should issuers 

be required to update financial 

statements only once per fiscal year, 

unless there is a material change to the 

issuer’s enterprise value or the value of 

the securities? Should issuers be 

permitted to rely on either Tier 1 or Tier 

2 financial statement requirements 

regardless of the size of the offering, as 

proposed? 

5. Subsequent to the adoption of 

Exchange Act Rule 12g5–1(a)(8), to what 

extent do non-reporting issuers rely on 

the Rule 12h–1(f) exemption? If we 

amend Rule 701(e), should we also 

make conforming amendments to the 

age of financial statement requirement 

under Rule 12h–1(f), assuming nonreporting issuers continue to rely on the 

rule? If non-reporting issuers no longer 

rely on the exemption it provides, 

should we rescind Rule 12h–1(f)? 

3. Financial Statement Content 

Requirements for Foreign Private Issuers 

We propose to allow foreign private 

issuers that are eligible for the 

exemption from Exchange Act 

registration provided by Exchange Act 

Rule 12g3–2(b) 37 to provide financial 

statements prepared in accordance with 

home country accounting standards for 

purposes of Rule 701(e) disclosure 

without reconciliation to U.S. GAAP in 

certain circumstances. Currently, all 

foreign private issuers relying on the 

Rule 701 exemption must provide a 

reconciliation to U.S. GAAP if their 

financial statements are not prepared in 

accordance with U.S. GAAP or IFRS to 

satisfy their financial statement 

disclosure requirements under Rule 

701(e).38

The Concept Release requested 

comment on whether we should amend 

any aspect of the Rule 701 financial 

statement requirements that apply to 

foreign private issuers other than the 

timing requirements.39 A few 

commenters addressed this topic. One 

commenter 40 stated that the financial 

statement reconciliation and the need to 

keep it current for an ongoing plan is 

unduly costly and burdensome. Another 

commenter 41 stated that Rule 701 

should allow foreign private issuers to 

provide financial statements audited 

under the International Standards on 

Auditing (‘‘ISAs’’). 

After consideration of the comments 

received, we propose to permit foreign 

private issuers that are eligible for the 

exemption from registration under 

Section 12(g) 42 of the Exchange Act 

provided by Exchange Act Rule 12g3– 

2(b) to provide financial statements 

prepared in accordance with home 

country accounting standards to satisfy 

the financial statement disclosure 

requirements of Rule 701(e) if financial 

statements prepared in accordance with 

U.S. GAAP or IFRS are not otherwise 

available.43 Consistent with the current 

requirements, all other foreign private 

issuers would continue to be required to 

provide a reconciliation to U.S. GAAP if 

their financial statements are not 

prepared in accordance with U.S. GAAP 

or IFRS. 

We believe it is appropriate to extend 

this relief to foreign private issuers that 

are eligible for the exemption from 

registration under Section 12(g) because, 

in other contexts, those issuers are 

currently not required to provide a 

reconciliation to U.S. GAAP if financial 

statements prepared in accordance with 

U.S. GAAP or IFRS are not otherwise 

available. Specifically, to be eligible for 

the exemption from registration under 

Rule 12g3–2(b), a foreign private issuer 

that is not otherwise subject to 

Exchange Act reporting must maintain a 

securities listing on one or more 

exchanges in a foreign jurisdiction that 

constitutes the primary trading market 

for its securities and must publish in 

English, on its website or through an 

electronic information delivery system 

generally available to the public in its 

primary trading market, information 

that satisfies specified public 

dissemination and shareholder 

distribution requirements.44 The Rule 

12g3–2(b) exemption allows a foreign 

private issuer to exceed the registration 

thresholds of Section 12(g) and 

effectively have its equity securities 

traded on a limited basis in the over-thecounter market in the United States. The 

Commission determined that such 

Section 12(g) exemptive relief was 

appropriate for a foreign private issuer 

that has not sought a public market in 

the United States and that makes 

available its non-U.S. disclosure 

documents.45 As a foreign private issuer 

eligible for the exemption under Rule 

12g3–2(b) would not be seeking to 

create a public market for its securities 

in the United States through its reliance 

on Rule 701, we believe that the same 

level of disclosure would be 

appropriate. 

The proposal would not modify the 

disclosure requirements of Rule 701(e) 

to permit foreign private issuers to 

provide financial statements audited 

under ISAs, as suggested by one 


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Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Proposed Rules 80237 

46 26 U.S.C. 409A (‘‘IRC Section 409A’’). 

47FASB ASC Topic 718. 

48See letters from ABA and Sullivan. 

49See letter from ABA. 

50See letter from Sullivan. 

51Proposed Rule 701(e)(4)(ii). As provided in 

Treasury Reg. 1.409A–1(b)(5)(iv)(B)(1), in the case 

of service recipient stock that is not readily tradable 

on an established securities market, the fair market 

value of the stock as of a valuation date means a 

value determined by the reasonable application of 

a reasonable valuation method. For this purpose, a 

valuation is presumed to be a reasonable valuation 

if the valuation is determined by an independent 

appraisal that meets certain requirements. See 

Treasury Reg. 1.409A–1(b)(5)(iv)(B)(2)(i). The 

determination whether a valuation method is 

reasonable, or whether an application of a valuation 

method is reasonable, is made based on the facts 

and circumstances as of the valuation date. Factors 

to be considered under a reasonable valuation 

method include, as applicable, the value of tangible 

and intangible assets of the corporation, the present 

value of anticipated future cash-flows of the 

corporation, the market value of stock or equity 

interests in similar corporations and other entities 

engaged in trades or businesses substantially 

similar to those engaged in by the corporation the 

stock of which is to be valued, the value of which 

can be readily determined through 

nondiscretionary, objective means (such as through 

trading prices on an established securities market 

or an amount paid in an arm’s length private 

transaction), recent arm’s length transactions 

involving the sale or transfer of such stock or equity 

interests, and other relevant factors such as control 

premiums or discounts for lack of marketability and 

whether the valuation method is used for other 

purposes that have a material economic effect on 

the service recipient, its stockholders, or its 

creditors. The use of a valuation method is not 

reasonable if such valuation method does not take 

into consideration in applying its methodology all 

available information material to the value of the 

corporation. Under the Treasury Regulation, the use 

of a value previously calculated under a valuation 

method is not reasonable as of a later date if such 

calculation fails to reflect information available 

after the date of the calculation that may materially 

affect the value of the corporation (for example, the 

resolution of material litigation or the issuance of 

a patent). 

52Proposed Rule 701(e)(4)(ii)(B). 

53See n. 51, supra. 

commenter, because such an approach 

would require us to conduct a thorough 

evaluation of issuer financial statements 

audited in accordance with ISAs, which 

is beyond the scope of this rulemaking. 

Instead, the rule would continue to 

recognize only audits prepared in 

accordance with U.S. generally accepted 

auditing standards or Public Company 

Accounting Oversight Board auditing 

standards. 

Request for Comment: 

6. Should we permit foreign private 

issuers that are eligible for the 

exemption from Exchange Act 

registration provided by Exchange Act 

Rule 12g3–2(b) to provide financial 

statements prepared in accordance with 

home country accounting standards 

without reconciliation to U.S. GAAP, as 

proposed? Would such an 

accommodation provide financial 

information that is consistent with 

investor protection? 

7. Should the proposal be expanded 

to apply to any foreign private issuer 

with securities that are listed and traded 

in its home country, without regard to 

Exchange Act Rule 12g3–2(b) eligibility? 

Alternatively, if we do not expand the 

proposal to all foreign private issuers 

with securities listed and traded in its 

home country, should we amend Rule 

701(e)(4) to allow issuers to present 

their financial statements in accordance 

with other international financial 

reporting standards, such as 

International Financial Reporting 

Standards as adopted by the European 

Union, without requiring such issuers to 

provide a reconciliation to U.S. GAAP? 

4. Alternative Valuation Disclosure 

We propose to allow issuers to 

provide alternative valuation 

information, specifically an 

independent valuation report of the 

securities’ fair market value as 

determined by an independent appraisal 

consistent with the rules and 

regulations under Internal Revenue 

Code Section 409A 46 (a ‘‘Section 409A 

independent valuation report’’), in lieu 

of financial statements, for purposes of 

Rule 701(e) disclosure. The Concept 

Release solicited comment on whether 

we should allow valuation information 

regarding the securities in lieu of, or in 

addition to, financial statements. In 

particular, the Concept Release asked 

what valuation method should be used 

for this purpose, and whether ASC 

Topic 718 47 grant date fair value 

information or IRC Section 409A 

valuation information would be 

informative. 

A few commenters recommended 

allowing issuers to provide valuation 

information prepared for purposes of 

IRC Section 409A in lieu of U.S. GAAP 

financials.48 These commenters stated 

that this information would be a 

practical alternative to financial 

statement disclosure, as it is subject to 

an existing regulatory scheme and has 

independent economic significance. 

One of the commenters stated that it is 

less costly to comply with IRC Section 

409A than to produce than U.S. GAAP 

financials.49 Another commenter stated 

that valuation information would be 

more useful for an employee in 

evaluating an equity award than early 

stage financial information and that 

many issuers already prepare IRC 

Section 409A valuations to determine 

option exercise prices and tax 

withholding.50 This commenter also 

stated that non-reporting issuers would 

be more willing to disclose valuation 

information than U.S. GAAP financial 

statements and observed that some 

issuers choose not to rely on Rule 701 

to avoid facing competitive risks from 

unauthorized release of sensitive 

financial information. 

We propose amending Rule 701(e)(4) 

to permit, as an alternative to financial 

statement disclosure, the use of a 

Section 409A independent valuation 

report prepared in accordance with the 

rules and regulations applicable to 

determining the fair market value of 

service recipient stock for stock not 

readily tradable on an established 

securities market.51 The proposed 

alternative would apply to all issuers 

other than foreign private issuers 

eligible for the Rule 12g3–2(b) 

exemption. We believe that permitting 

this alternative is appropriate because 

the disclosure would be particularly 

helpful to employee investors in nonreporting issuers, which typically do not 

have a significant trading market from 

which to readily derive valuation 

information. To provide employee 

investors with meaningful information 

that they can use to assess the manner 

in which fair market value was derived, 

the amendments would require the 

issuer to provide employees the entire 

Section 409A independent valuation 

report provided to the issuer.52 As noted 

above,53 the applicable rules and 

regulations under IRC Section 409A 

specify numerous factors to be taken 

into account in determining the fair 

market value of securities not readily 

tradeable on an established securities 

market, including but not limited to 

recent arm’s length transactions 

involving the sale or transfer of such 

securities, and specifically provide that 

use of a valuation method is not 

reasonable if such valuation method 

does not take into consideration all 

available information material to the 

value of the company. These rules are 

widely-used and have independent legal 

significance under Federal tax law. We 

believe that a Section 409A independent 

valuation report containing a rigorous 

analysis of the factors considered in 

such a valuation would provide 

employee investors with appropriate 

financial disclosure. 

To ensure appropriate investor 

protections, we are proposing certain 

conditions on the use of a Section 409A 

independent valuation report. First, the 

proposed amendments require an 

independent appraisal that is consistent 

with the rules and regulations under 

Section 409A applicable to 

determination of the fair market value of 

service recipient stock for stock not 


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80238 Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Proposed Rules 

54To meet the requirements of Treasury Reg. 

1.409A–1(b)(5)(iv)(B)(2)(i), the valuation must be 

determined by an independent appraisal that meets 

the requirements of IRC Section 401(a)(28)(C) and 

the Treasury Regulations thereunder. For purposes 

of IRC Section 401(a)(28)(C), the term ‘‘independent 

appraiser’’ means any appraiser meeting 

requirements similar to the requirements of the 

Treasury Regulations prescribed under IRC Section 

170(a)(1). IRC Section 170(f)(11)(E) and Treasury 

Reg. 1.170A–17 define the terms ‘‘qualified 

appraisal’’ and ‘‘qualified appraiser.’’ In order to be 

a ‘‘qualified appraisal,’’ a valuation of property 

must be made by a ‘‘qualified appraiser.’’ See IRS 

Publication 561, which generally describes a 

‘‘qualified appraiser’’ as a disinterested person who 

has earned an appraisal designation from a 

generally recognized professional appraiser 

organization or met specified minimum educational 

requirements, and regularly prepare appraisals for 

which he or she is paid. 

55 In contrast, the applicable Treasury Regulations 

provide that use of a previously calculated 

valuation is not reasonable if the value was 

calculated more than 12 months earlier than the 

date for which the valuation is being used, or if the 

valuation fails to reflect information available after 

the date of the calculation that may materially affect 

the value of the corporation. Treasury Reg. 1.409A– 

1(b)(5)(iv)(B). 

56Exchange Act Rule 12g3–2(b)(1)(ii). 57Proposed Rule 701(e)(4)(ii)(A). 58For stock readily tradable on an established 

securities market, the fair market value of the stock 

must be determined ‘‘based upon the last sale 

before or the first sale after the grant, the closing 

price on the trading day before or the trading day 

of the grant, the arithmetic mean of the high and 

low prices on the trading day before or the trading 

day of the grant, or any other reasonable method 

using actual transactions in such stock as reported 

by such market.’’ See Treasury Reg. 1.409A– 

1(b)(5)(iv)(A). For this purpose, stock is treated as 

‘‘readily tradable’’ if it is regularly quoted by 

brokers or dealers making a market in such stock, 

and the term ‘‘established securities market’’ means 

an established securities market within the meaning 

of Treasury Reg. 1.897–1(m). See Treasury Reg. 

1.409A–1(b)(5)(vi)(G) and 1.409A–1(k). Treasury 

Reg. 1.897–1(m) provides that the term ‘‘established 

securities market’’ means ‘‘(1) A national securities 

exchange which is registered under section 6 of the 

Securities Exchange Act of 1934 (15 U.S.C. 78f), (2) 

A foreign national securities exchange which is 

officially recognized, sanctioned, or supervised by 

governmental authority, and (3) Any over-thecounter market. An over-the-counter market is any 

market reflected by the existence of an interdealer 

quotation system. An interdealer quotation system 

is any system of general circulation to brokers and 

dealers which regularly disseminates quotations of 

stocks and securities by identified brokers or 

dealers, other than by quotation sheets which are 

prepared and distributed by a broker or dealer in 

the regular course of business and which contain 

only quotations of such broker or dealer.’’ 

readily tradable on an established 

securities market. Those rules and 

regulations call for an independent 

appraisal. The proposed amendments 

would not permit reliance on other 

aspects of the Section 409A rules that 

permit determination of fair value for 

tax purposes by other means. This 

condition would have the effect of 

requiring an independent party to 

prepare the appraisal and report to 

reduce potential risks that may arise 

from an issuer providing its own 

valuation.54 Further, in order to keep 

valuation information current, similar to 

Rule 701(e) financial statement 

disclosure, the proposed amendments 

would require the Section 409A 

independent valuation report to be as of 

a date that is no more than six months 

before the sale of securities in reliance 

on this exemption.55 This updating 

schedule would be comparable to the 

proposed age of financial statement 

requirements for Rule 701(e). 

We anticipate that providing the 

proposed valuation disclosure may be 

less costly, particularly because it is 

likely the issuer is already preparing 

such reports for purposes of complying 

with IRC Section 409A. At the same 

time, as commenters suggested, 

valuation disclosure may be as useful to 

an investor, if not more so, than 

financial statements in the particular 

context of evaluating the value of an 

equity award granted pursuant to Rule 

701. 

Although most non-reporting issuers 

relying on Rule 701 are unlikely to have 

a trading market of the necessary depth 

and liquidity to justify using the IRC 

Section 409A valuation standard for 

stock readily traded on an established 

securities market, foreign private issuers 

eligible for the Rule 12g3–2(b) 

exemption may meet this criterion. In 

particular, such an issuer must maintain 

a listing of a class of securities on one 

or more exchanges in a foreign 

jurisdiction that, either singly or 

together with the trading of the same 

class of the issuer’s securities in another 

foreign jurisdiction, constitutes the 

primary trading market for those 

securities.56 For this reason, the 

proposed amendments would allow 

Rule 12g3–2(b) eligible foreign private 

issuers to provide alternative valuation 

disclosure prepared consistent with the 

IRC Section 409A rules and regulations 

applicable to determining the fair 

market value of stock readily tradeable 

on an established securities market.57

To comply with this alternative 

disclosure requirement, the eligible 

issuer would simply disclose the fair 

market value of the stock on the most 

recent trading day preceding the date of 

sale.58

Request for Comment: 

8. Should we permit a Section 409A 

independent valuation report to be 

provided in lieu of financial statement 

disclosures, as proposed? Would the 

IRC Section 409A regulations for 

determining the fair market value of 

stock not readily tradable on an 

established securities market generate 

valuation information that is easy to 

understand and appropriate to the 

financial disclosure needs of investors 

receiving securities under Rule 701? 

Would such disclosure be an acceptable 

alternative to financial statements 

prepared in accordance with U.S. GAAP 

or IFRS, as applicable? Would this 

proposal provide meaningful 

information to securities recipients 

while avoiding competitive risks from 

unauthorized financial statement 

disclosure? 

9. Should we require, as proposed, 

that Section 409A independent 

valuation reports be prepared pursuant 

to an independent appraisal for Rule 

701(e) disclosure purposes? Taken 

together, would the related Treasury 

Regulations defining the terms 

‘‘independent appraiser,’’ ‘‘qualified 

appraiser,’’ and ‘‘qualified appraisal’’ 

provide adequate guidance for purposes 

of satisfying this proposed requirement? 

If not, should we provide further 

guidance? Would the proposed 

independence requirement add 

significantly to preparation costs? How 

would those costs compare to the costs 

of preparing the financial statements 

required by the proposed amendments? 

10. As proposed, the Section 409A 

independent valuation reports would 

need to be updated at six-month 

intervals. Would a different interval be 

more appropriate to ensure that such 

valuation disclosures provide 

appropriate information? If so, what 

interval should we prescribe? Would the 

proposed updating schedule impose 

significant costs? Would a less frequent 

updating schedule raise investor 

protection concerns? 

11. More specifically, would the 

Section 409A updating schedule 

imposed for tax purposes, calling for an 

independent valuation report to be 

updated if it fails to reflect information 

that may materially affect the value of 

the issuer and otherwise only once per 

fiscal year, result in more frequently 

updated information than if the issuer 

provides financial statement disclosure 

only on a semi-annual basis as 

proposed? Would using the tax updating 

schedule for Rule 701(e) purposes 

provide adequate investor protection? 

12. Should we require disclosure of 

the entire Section 409A independent 

valuation report, as proposed? Would 

requiring disclosure of the entire 

Section 409A independent valuation 

report result in disclosure of 

competitively sensitive information? If 

so, how could we modify the proposal 

to avoid this result while still providing 

investors with appropriate disclosure? 

Are there particular contents of the 

report that would be competitively 

sensitive and not meaningful to 

investors? 


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59See 1999 Release, which predates issuers’ 

utilization of restricted stock units and similar 

instruments for compensatory awards. 

60See Concept Release at Section II.C.3. 

61See letters from Chamber and Davis Polk. 

62See letters from ABA and Chamber. 

63See letter from ABA. 

64See letter from Chamber. 

65See letter from ABA. 

66Proposed Rule 701(e)(6)(i). 

13. Is the proposed alternative 

valuation information based on IRC 

Section 409A valuation standards for 

stock readily tradable on an established 

securities market appropriate for Rule 

12g3–2(b) eligible foreign private 

issuers? From an investor protection 

standpoint, would disclosure of the 

securities’ fair market value alone be a 

sufficient alternative to financial 

statement disclosure? Would disclosure 

of the securities’ fair market value 

provide any benefit considering the 

securities are traded in an established 

trading market? 

14. Are there any other circumstances 

in which an issuer should be able to 

provide the alternative valuation 

information based on market price in 

accordance with the IRC Section 409A 

valuation standards for stock readily 

tradable on an established securities 

market? 

15. Are there any other aspects of the 

Section 409A valuation regulations that 

would be useful for purposes of Rule 

701(e) disclosure? 

16. Other than the independent 

valuation prescribed with respect to IRC 

Section 409A, are there any other 

securities valuation methods that would 

be appropriate to import into the Rule 

701(e) disclosure requirements? 

5. Disclosure Requirements for 

Derivative Securities 

We propose to amend the date by 

which Rule 701(e) disclosure must be 

provided for certain derivative 

securities. Specifically, for derivative 

securities that do not involve a decision 

by the recipient to exercise or convert, 

we propose to modify the date by which 

Rule 701(e) disclosure must be 

delivered for grants to new hires in 

specified circumstances. 

Rule 701(e)(6) currently provides that 

if a sale involves a stock option or 

another derivative security, the issuer 

must deliver disclosure a reasonable 

period of time before the date of 

exercise or conversion. Adopted in 

1999, this rule contemplates derivative 

securities where the sale of the 

underlying shares involves an 

investment decision at the time of 

exercise or conversion.59

Since Rule 701(e) was initially 

adopted, compensatory programs have 

developed that use derivative 

securities—such as restricted stock units 

(‘‘RSUs’’) and performance stock units 

(‘‘PSUs’’)—that do not require a 

decision to exercise or convert. Instead, 

when held to maturity, these 

instruments settle automatically in the 

underlying shares without need for any 

investment decision by the holder. In 

the Concept Release, the Commission 

observed that, because such instruments 

settle by their terms without action by 

the holder, the relevant investment 

decision, if there is one, likely takes 

place at the date of grant. Consequently, 

the issuer’s obligation to provide Rule 

701(e) disclosure would apply a 

reasonable period of time before the 

date the RSU or PSU award is granted.60

Commenters did not raise any 

concerns regarding the application of 

the existing rule to options, stock 

appreciation rights, or convertible 

securities. While commenters did not 

dispute the logic of the Commission’s 

date of sale analysis for RSUs and 

PSUs,61 they questioned its 

practicability in the context of grants to 

new hires.62 In particular, one 

commenter stated that providing 

financial information to an individual 

who is considering whether to join the 

issuer would result in an obligation to 

provide sensitive financial and 

operational risk information before the 

individual starts employment.63

To address these practical challenges, 

commenters suggested several 

alternative approaches. One commenter 

suggested permitting issuers to provide 

the required disclosure within 30 days 

after employment commences.64

Another commenter recommended 

treating RSU settlement as a conversion 

within the meaning of Rule 701(e)(6) on 

the date of settlement, so that disclosure 

delivery would be required a reasonable 

period of time before settlement.65

We propose revising Rule 701(e)(6) to 

clarify the distinction between 

derivative securities that involve a 

decision to exercise or convert, and 

those that do not.66 If the sale involves 

a stock option or other derivative 

security that involves a decision to 

exercise or convert, the issuer would 

continue to be required to deliver 

disclosure a reasonable period of time 

before the date of exercise or 

conversion. If the sale involves an RSU 

or other derivative security that does not 

involve a decision to exercise or 

convert, the issuer generally would 

continue to be required to deliver 

disclosure a reasonable period of time 

before the date the RSU or similar 

derivative security is granted. 

We also propose to amend the rule’s 

application to the grant of an RSU or 

similar derivative security made in 

connection with the hire of new 

employees. In such circumstances, the 

disclosure would be considered 

delivered a reasonable period of time 

before the date of sale if it is provided 

no later than 14 calendar days after the 

date the person begins employment. In 

our view, providing an accommodation 

for delivery 14 calendar days after 

commencing employment would 

provide the issuer an opportunity to 

address confidentiality concerns while 

providing the employee disclosure 

within an appropriate time period. In 

any other circumstances, the issuer 

would be required to deliver the 

disclosure a reasonable period of time 

before the date the RSU or similar 

derivative security is granted. In any 

case, however, the disclosure may be 

provided subject to appropriate 

confidentiality conditions. We do not 

propose to treat RSU settlement the 

same as a conversion because, unlike 

conversion, RSU settlement does not 

involve an investment decision, and, as 

discussed above, the requirements of 

Rule 701 contemplate disclosure 

delivery as part of an investment 

decision. 

Request for Comment: 

17. Does the proposal sufficiently 

clarify the distinction between 

derivative securities that involve a 

decision to exercise or convert and 

those that do not with respect to the 

timing of the obligation to deliver Rule 

701(e) disclosure? 

18. Is there any basis for treating 

settlement of an RSU or PSU as a 

conversion under the current rule, given 

that the holder does not make any 

investment decision at the time of 

settlement? For example, should the 

decision whether to settle tax 

obligations arising at settlement by 

withholding shares be viewed as an 

investment decision? 

19. For new hires, is it appropriate to 

require delivery of Rule 701(e) 

disclosures within 14 calendar days 

after a recipient’s commencement of 

employment, as proposed? Would a 

shorter period, such as seven calendar 

days, or longer period, such as 30 

calendar days, be more appropriate? 

20. Does the proposal adequately 

address issuer confidentiality concerns 

in the context of new hires, in a manner 

consistent with investor protection? 

21. Are there any circumstances in 

which the proposed new hire 

accommodation should not apply, such 


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67Proposed Rule 701(e)(7). 

68Proposed Rule 701(e)(7)(ii). 

69Proposed Rule 701(e)(7)(i). 

70See 1999 Adopting Release. 

71Rule 701(d). 

72The relevant limit applies to the total assets of 

the issuer’s parent if the issuer is a wholly-owned 

subsidiary and the securities represent obligations 

that the parent fully and unconditionally 

guarantees. 

73See Rule 701(d)(3)(i)–(ii). 

74See Rule 701(d)(3)(ii). 

75See Employee Benefit and Compensation 

Contracts, Release No. 33–6726 (July 30, 1987) [52 

FR 29033 (Aug. 5, 1987)] (‘‘Rule 701 Reproposing 

Release’’). As originally adopted, the rule permitted 

the amounts of securities offered and sold annually 

to be the greatest of $500,000, 15% of total assets 

of the issuer, or 15% of the outstanding securities 

of the class, subject to an absolute limit of 

$5,000,000 derived from Securities Act Section 3(b). 

See Compensatory Benefit Plans and Contracts, 

Release No. 33–6768 (Apr. 14, 1988) [53 FR 12918 

(Apr. 20, 1988)] (‘‘Rule 701 Adopting Release’’). 

as where the grant of securities is 

individually negotiated? 

22. Should the proposed 

accommodation for new hires be 

available only if the financial disclosure 

that will be provided consists of 

financial statements, rather than the 

alternative proposed Section 409A 

valuation disclosure? Does a Section 

409A independent valuation report raise 

the same concerns about disclosure of 

sensitive financial and operational risk 

information? 

23. Are there any other categories of 

Rule 701 eligible participants for whom 

the proposed accommodations should 

apply? 

24. Would it be helpful to amend Rule 

701(e) to specify that disclosure may be 

made either by physical or electronic 

delivery or by written notice of the 

availability of the information on a 

website that may be password-protected 

and of any password needed to access 

the information? Would it be helpful for 

the rule to specifically permit use of 

dedicated physical disclosure rooms 

that house the medium used to convey 

the information required to be 

disclosed? 

6. Disclosure Requirements Following 

Business Combination Transactions 

To clarify the application of Rule 701 

to merged entities, we propose to amend 

Rule 701(e) to address the application of 

the exemption and its disclosure 

delivery obligations to acquired entity 

derivative securities that the acquiring 

issuer assumes in a business 

combination transaction.67

In some business combination 

transactions, outstanding derivative 

securities issued by the acquired entity 

in compensatory transactions will not 

be accelerated, but will instead be 

assumed by the acquiring issuer. In 

these circumstances, shares of the 

acquiring issuer will be issued upon the 

exercise or conversion of the derivative 

securities, instead of those of the 

acquired entity. Under the proposal, as 

long as the acquired entity complied 

with Rule 701 at the time it originally 

granted the derivative securities, the 

exercise or conversion of those 

derivative securities that are assumed by 

the acquiring issuer would be exempt 

from registration, subject to the 

acquiring issuer’s compliance, where 

applicable, with Rule 701(e). For 

assumed derivative securities for which 

the acquired entity was required to 

provide disclosure pursuant to Rule 

701(e) and where the derivative 

securities are exercised or converted 

after completion of the business 

combination transaction, the acquiring 

issuer would satisfy that disclosure 

obligation by providing information 

meeting the requirements of Rule 701(e) 

consistent with the timing requirements 

of Rule 701(e)(6).68 In other words, if the 

acquired entity would have been 

required to provide Rule 701(e) 

disclosure upon exercise or conversion 

of its derivative securities, the acquiring 

issuer that assumes those derivative 

securities would assume the obligation 

to provide Rule 701(e) disclosure upon 

their exercise or conversion. 

Following completion of a business 

combination transaction, in determining 

whether the amount of securities the 

acquiring issuer sold during any 

consecutive 12-month period exceeds 

$10 million, the acquiring issuer would 

consider only the securities that it sold 

in reliance on Rule 701 during that 

period and would not be required to 

include any securities sold by the 

acquired entity pursuant to the rule 

during the same 12-month period.69

Because the acquiring issuer 

presumably did not consider the 

acquired entity’s Rule 701 sales 

preceding the business combination 

transaction in planning its own Rule 

701 transactions, taking them into 

account after the business combination 

transaction could in some cases result in 

retroactive loss of the exemption if the 

combined Rule 701 transactions exceed 

the $10 million threshold. We believe 

that this result would be unduly 

restrictive and could create hurdles to 

potentially value-enhancing business 

combinations. 

Request for Comment: 

25. Would the proposal addressing 

acquired entity derivative securities 

assumed by an acquiring issuer 

sufficiently clarify the exempt status of 

and disclosure obligations applicable to 

exercises and conversions of those 

securities after completion of the 

business combination transaction? Are 

any additional clarifications needed? 

For example, is guidance needed to 

clarify who is the acquiring issuer in a 

business combination transaction where 

the acquirer is not the same entity for 

legal and accounting purposes? 

26. Following completion of a 

business combination transaction, in 

determining whether the amount of 

securities the acquiring issuer sold 

pursuant to Rule 701 during any 

consecutive 12-month period exceeds 

$10 million, should the acquiring entity 

be permitted to disregard the securities 

that the acquired entity sold pursuant to 

the rule during the same 12-month 

period, as proposed? Are there any 

circumstances in which the acquiring 

entity should be required to take those 

acquired entity securities into account 

for purposes of the $10 million 

disclosure threshold, and how do these 

circumstances relate to investor 

protection? 

B. Rule 701(d) 

We propose to raise two of the three 

alternative regulatory ceilings that cap 

the overall amount of securities that a 

non-reporting issuer may sell pursuant 

to Rule 701 during any consecutive 12- 

month period. Since 1999,70 the rule has 

provided that the amount of securities 

that may be sold in reliance on the 

exemption during any consecutive 12- 

month period is limited to the greatest 

of: 71

• $1 million; 

• 15% of the total assets of the 

issuer,72 measured at the issuer’s most 

recent balance sheet date; or 

• 15% of the outstanding amount of 

the class of securities being offered and 

sold in reliance on the rule, measured 

at the issuer’s most recent balance sheet 

date. 

These measures apply on an aggregate 

basis, not plan-by-plan. For securities 

underlying options, the aggregate sales 

price is determined when the option 

grant is made, using the exercise price 

of the option, without regard to when it 

becomes exercisable.73 For deferred 

compensation plans, the calculation is 

made at the time of the participant’s 

irrevocable election to defer.74 There is 

no separate limitation on the amount of 

securities that may be offered. 

In proposing the current rule, the 

Commission explained that the purpose 

of a 12-month cap is to ‘‘assur[e] that the 

exemption does not provide a threshold 

that small issuers could use to raise 

substantial capital from employees.’’ 75

The alternatives based on 15% of total 

assets or 15% of the outstanding amount 


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76See Rule 701 Adopting Release at Section 

I.A.(2). 

77See letter from ABA. 

78See letter from Sullivan. 

79See letter from Chamber. 

80Proposed Rule 701(d)(2)(ii). 

81Proposed Rule 701(d)(2)(i). 

82Proposed Rule 701(d)(3)(v). 

83Rule 701(c)(1). Where the consultant or advisor 

performs services for the issuer through a whollyowned corporate alter ego, the issuer may contract 

with, and issue securities as compensation to, that 

corporate entity. Cf., Registration of Securities on 

Form S–8, Release No. 33–7646 (Feb. 25, 1999) [64 

FR 11103 (Mar. 8, 1999)] at n. 20, (‘‘1999 Form S– 

8 Adopting Release’’) addressing such a corporate 

alter ego in the Form S–8 context. 

of the class of securities were intended 

to increase the flexibility and utility of 

the exemption.76 The $1 million 

alternative provides an amount that any 

issuer can use, regardless of size. 

The Concept Release solicited 

comment on whether there is a 

continuing need for any annual 

regulatory ceiling for Rule 701 

transactions, and whether investors 

would be harmed if the Commission 

eliminated or raised the ceiling. One 

commenter stated that compliance with 

Rule 701(d) imposes costly ongoing 

analysis and monitoring on issuers 

without any clear benefit to them or 

their employees.77 A different 

commenter recommended raising the $1 

million limit to $2 million, to retain its 

utility for start-up issuers that have few 

assets and may want to issue a large 

percentage of current equity to first 

round employees.78 This commenter 

also recommended raising the 15% asset 

cap to 25%, as modern issuers rely 

increasingly on human capital and are 

less asset-intensive. Another commenter 

recommended providing relief in 

business combination transactions 

where the acquirer assumes the target’s 

employee benefit plans, resulting in the 

combined enterprise exceeding the 

aggregate offering limitations in Rule 

701(d)(2), particularly in the first year 

following closing of the transaction.79

We continue to believe that the Rule 

701(d) caps are useful in curbing noncompensatory sales in reliance on the 

rule. Accordingly, the proposal retains 

the general structure of Rule 701(d)(2), 

providing that the aggregate sales price 

or amount of securities sold in reliance 

on Rule 701 during any consecutive 12- 

month period must not exceed the 

greatest of the three alternative ceilings. 

In light of the less asset-intensive nature 

of contemporary businesses and the 

effects of inflation since the adoption of 

these alternatives in 1999, we believe 

that it could be beneficial to issuers and 

securities recipients to raise two of the 

ceilings. As proposed, the asset cap 

would be raised from 15% to 25% of the 

total assets of the issuer (or of the 

issuer’s parent if the issuer is a whollyowned subsidiary and the securities 

represent obligations that the parent 

fully and unconditionally guarantees) 

measured at the issuer’s most recent 

balance sheet date (if no older than its 

last fiscal year end).80 The alternative $1 

million cap available to any issuer 

would be raised to $2 million.81 The 

third alternative cap—15% of the 

outstanding amount of the class of 

securities being offered and sold— 

would be retained with no changes. The 

considerations that motivate us to 

propose raising the alternative 

percentage of assets cap and the $1 

million cap do not apply to the 

percentage of outstanding securities cap, 

and we continue to believe this cap is 

appropriate to prevent misuse of the 

exemption for capital-raising purposes. 

To facilitate the operation of 

compensatory plans following a merger 

or acquisition, we propose an 

amendment to provide that after 

completion of a business combination 

transaction, to calculate compliance 

with paragraph (d)(2) of this section, the 

acquiring issuer may use a pro forma 

balance sheet that reflects the 

transaction or a balance sheet for a date 

after the completion of the transaction 

that reflects the total assets and 

outstanding securities of the combined 

entity.82 Furthermore, in determining 

the amount of securities that it may offer 

pursuant to Rule 701 following a 

business combination transaction, as 

proposed, the acquiring issuer would 

not be required to include the aggregate 

sales price and amount of securities for 

which the acquired entity claimed the 

exemption during the same 12-month 

period. We believe that these changes 

would remove hurdles to potentially 

value-enhancing business combination 

transactions, consistent with investor 

protection. 

Request for Comment: 

27. Do the two proposed sales cap 

increases appropriately adjust the 

ceilings in a manner that benefits both 

issuers and securities recipients, 

consistent with investor protection? 

Should either cap be raised by a higher 

or lower amount? If so, what amount 

would be more appropriate? Should 

either cap remain unchanged? 

28. Should we retain the current 

structure of Rule 701(d) with three 

alternative sales caps? If not, how 

should the structure be changed? In 

particular, do the caps further the goal 

of facilitating only compensatory 

transactions in reliance on Rule 701? 

Are there alternative provisions that 

would serve this purpose? 

29. Does the cap based on 15% of the 

outstanding amount of the class of 

securities being offered and sold 

continue to play a useful and effective 

role in Rule 701? Does it prevent issuers 

from improperly relying on the rule to 

raise capital from employees? Have 

there been changes in the marketplace, 

as discussed above for the two other 

alternative caps, which suggest that this 

cap may inhibit beneficial 

compensatory transactions? Should this 

cap be raised? If so, what would be a 

more appropriate percentage? 

30. Does the proposal to permit use of 

a pro forma balance sheet, or a balance 

sheet for a date after the completion of 

the business combination transaction 

that reflects the total assets and 

outstanding securities of the combined 

entity, meaningfully facilitate the 

operation of compensatory plans 

following a business combination 

transaction? Are any other changes 

necessary to achieve this objective? 

31. Should we amend Rule 701(d), as 

proposed, to provide that following a 

business combination transaction, in 

determining the amount of securities 

that it may offer pursuant to Rule 701, 

the acquiring issuer need not include 

the aggregate sales price and amount of 

securities for which the acquired entity 

claimed the exemption during the same 

12-month period? 

C. Eligible Recipients 

1. Consultants and Advisors 

We propose to extend Rule 701 

consultant and advisor eligibility to 

entities meeting specified ownership 

criteria designed to assure that the 

securities compensate the performance 

of services. Currently, consultants and 

advisors may participate in Rule 701 

offerings only if: 

• They are natural persons; 

• They provide bona fide services to 

the issuer, its parents, its majorityowned subsidiaries or majority-owned 

subsidiaries of the issuer’s parent; and 

• The services are not in connection 

with the offer or sale of securities in a 

capital-raising transaction, and do not 

directly or indirectly promote or 

maintain a market for the issuer’s 

securities.83

Some commenters on the Concept 

Release addressed whether participation 

should be limited to natural persons and 

corporate alter egos, as currently 

permitted, or expanded to include 

entities. One commenter noted that staff 

has not objected to treating personal 

services businesses as corporate alter 

egos of natural persons with respect to 

the ability to participate in Form S–8 


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84See letter from Davis Polk. 

85See letters from Chamber and Indigo. 

86Sec. 502, 126 Stat. at 326. Section 501 of the 

JOBS Act [Sec. 601, 126 Stat. at 325] amended 

Section 12(g)(1) of the Exchange Act to require an 

issuer to register a class of equity securities (other 

than exempted securities) within 120 days after its 

fiscal year-end if, on the last day of its fiscal year, 

the issuer has total assets of more than $10 million 

and the class of equity securities is ‘‘held of record’’ 

by either (i) 2,000 persons, or (ii) 500 persons who 

are not accredited investors. Section 601 of the 

JOBS Act [Sec. 601, 126 Stat. at 326] further 

amended Exchange Act Section 12(g)(1) to require 

an issuer that is a bank or bank holding company, 

as defined in Section 2 of the Bank Holding 

Company Act of 1956 [12 U.S.C. 1841], to register 

a class of equity securities (other than exempted 

securities) within 120 days after the last day of its 

first fiscal year ended after the effective date of the 

JOBS Act, on which the issuer has total assets of 

more than $10 million and the class of equity 

securities is ‘‘held of record’’ by 2,000 or more 

persons. 

87 15 U.S.C. 78l(g)(5). 

88This statutory exclusion applies solely for 

purposes of determining whether an issuer is 

required to register a class of equity securities under 

the Exchange Act and does not apply to a 

determination of whether such registration may be 

terminated or suspended. 

89 17 CFR 240.12g5–1. 

90See Changes to Exchange Act Registration 

Requirements to Implement Title V and Title VI of 

the JOBS Act, Release No. 33–10075 (May 3, 2016) 

[81 FR 28689 (May 10, 2016)] (‘‘JOBS Act Release’’), 

adopting Exchange Act Rule 12g5–1(a)(8). 

91Proposed Rule 701(c)(1)(iii). These conditions 

are loosely modeled on, but have a different focus 

than, the Internal Revenue Code definition of a 

‘‘qualified personal service corporation. See 26 

U.S.C. 448(d)(2). 

92Rule 701(c)(1)(ii) and (iii), proposed to be redesignated as Rule 701(c)(1)(i) and (ii), respectively. 

93See Proposed Rule 701(a)(5), formerly 

Preliminary Note 5 to Rule 701. 

94Regulation Reg. Sec. 1.448–1T(e)(5)(i)(D) 

defines ‘‘substantially all’’ as 95% or more for 

purposes of a ‘‘personal service corporation’’ as 

defined in IRC Section 448(d)(2). 

offerings under existing employee, 

consultant and advisor categories, 

where such businesses are whollyowned by (or jointly owned with the 

spouse of) the natural person who 

provides services to the issuer.84 The 

commenter suggested that we expand 

eligible corporate alter egos to include 

entities wholly-owned by multiple 

natural person service providers or the 

management of the entities. Other 

commenters noted that service 

providers may be organized as entities 

in order to provide legal benefits such 

as tax and estate planning and stated 

that these providers should not have to 

choose between such benefits and 

receiving equity compensation.85

While we acknowledge these points, 

we are concerned that opening up Rule 

701 eligibility to entities that are more 

broadly held than the corporate alter ego 

of an individual consultant could 

undermine the compensatory nature of 

the exemption by permitting securities 

to be issued to passive investment 

vehicles rather than individuals who 

perform services for the issuer. This 

concern is amplified by the fact that a 

person who receives securities pursuant 

to the plan and participant conditions of 

Rule 701(c) is not considered a holder 

of record for purposes of Exchange Act 

Section 12(g) registration. Specifically, 

Section 502 of the Jumpstart Our 

Business Startups Act 86 (‘‘JOBS Act’’) 

amended Exchange Act Section 

12(g)(5) 87 to exclude from the definition 

of ‘‘held of record,’’ for purposes of 

determining whether an issuer is 

required to register a class of equity 

securities, securities that are held by 

persons who received them pursuant to 

an ‘‘employee compensation plan’’ in 

transactions exempted from the 

registration requirements of Section 5 of 

the Securities Act.88 To implement this 

statutory amendment, the Commission 

amended the definition of ‘‘held of 

record’’ in Exchange Act Rule 12g5–1 89

to exclude certain securities held by 

persons who received them pursuant to 

employee compensation plans in a 

transaction exempt from, or not subject 

to, the registration requirements of 

Section 5.90 This amendment also 

established a non-exclusive safe harbor 

for determining whether securities are 

‘‘held of record’’ for purposes of 

registration under Exchange Act Section 

12(g), providing that an issuer may 

deem a person to have received 

securities pursuant to an employee 

compensation plan if the plan and the 

person who received the securities 

pursuant to it met the plan and 

participant conditions of Rule 701(c). It 

is therefore important in expanding 

eligible participants under Rule 701(c) 

not to include passive investment 

vehicles that properly should be record 

holders for purposes of triggering 

Section 12(g) registration and the 

protections of Exchange Act reporting. 

The proposed amendments seek to 

strike a balance between, on the one 

hand, allowing service providers 

flexibility to obtain the legal benefits of 

organizing as entities and, on the other 

hand, preventing Rule 701 securities 

from being issued to passive investment 

vehicles that would not be record 

holders, by expanding consultant or 

advisor eligibility to an entity, subject to 

the following conditions: 

• Substantially all of the activities of 

the entity involve the performance of 

services; and 

• Substantially all of the ownership 

interests in the entity are held directly 

by: 

Æ No more than 25 natural persons, of 

whom at least 50 percent perform such 

services for the issuer through the 

entity; 

Æ The estate of a natural person 

specified above; and 

Æ Any natural person who acquired 

ownership interests in the entity by 

reason of the death of a natural person 

specified above.91

The proposal seeks to expand 

eligibility for consultant entities while 

helping to ensure that compensatory 

securities are issued only to entities 

through which services are provided 

that are owned by those service 

providers. We believe that the proposed 

conditions are appropriate to help 

achieve this objective. In particular, 

substantially all of the ownership 

interests would need to be held directly 

by no more than 25 natural persons, at 

least 50 percent of whom provide 

services to the issuer, and by the estates 

and heirs of those natural persons. An 

entity that satisfies these conditions 

would also—like a natural person— 

need to satisfy the existing requirements 

for consultant and advisory eligibility 

by providing bona fide services that are 

not in connection with the offer or sale 

of securities in a capital-raising 

transaction and do not directly or 

indirectly promote or maintain a market 

for the issuer’s securities.92

Request for Comment: 

32. Should we extend consultant and 

advisor eligibility to entities meeting 

specified ownership criteria designed to 

link the securities to the performance of 

services for the issuer, as proposed? 

33. Does the proposed standard for 

consultant and advisor entity eligibility 

appropriately balance a consultant’s 

needs to obtain the legal benefits of 

entity organization with the rule’s 

purpose to exempt from Securities Act 

registration offerings of securities issued 

in compensatory circumstances? 93

34. The proposed standard would 

require that substantially all of the 

ownership interests of the entity be held 

by no more than 25 natural persons, of 

whom at least 50 percent perform 

services for the issuer through the 

entity, their estates, and natural persons 

who acquired ownership interests due 

to their death. Are the proposed 

conditions appropriate? Are there 

different or additional conditions we 

should consider? Should the rule 

specify criteria defining what 

‘‘substantially all’’ would mean for this 

purpose? For example, should 95 

percent ownership be required to 

establish ‘‘substantially all’’? 94

35. To ensure that securities are 

issued to compensate persons who 

provide services to the issuer and not to 


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95 In this regard, we note that to qualify for S 

corporation status, a corporation may have no more 

than 100 shareholders. See generally IRC Sections 

1361(a)(2) and 1361(b). 

96See letter from Sullivan. 

97See letter from Davis Polk. 

98See Section III.C.1, infra. 

99Consistent with Exchange Act Rule 12g5– 

1(a)(8)(i)(B), we are using the language ‘‘in 

substitution or exchange for’’ to cover the various 

methods by which issuer securities may be received 

in place of acquired entity securities that were 

issued in compensatory transactions, such as upon 

exercise or conversion of those securities. See JOBS 

Act Release at Section III.B.3. 

100 General Instruction A.1(a)(3) to Form S–8, 

which as discussed in Section III.C.1, infra, would 

similarly be amended to expand eligibility for 

former employees and former employees of an 

entity acquired by the issuer. 

101Rule 405 defines ‘‘subsidiary’’ for purposes of 

the Securities Act as an affiliate controlled by such 

person directly, or indirectly through one or more 

intermediaries. Rule 405 defines ‘‘control’’ as the 

possession, direct or indirect, of the power to direct 

or cause the direction of the management and 

policies of a person, whether through the 

ownership of voting securities, by contract, or 

otherwise. 

102Under the proposal, ‘‘subsidiary’’ would 

replace ‘‘majority-owned subsidiary’’ in each place 

in Rule 701(c) where ‘‘majority-owned subsidiary’’ 

currently appears. 

103The term ‘‘majority-owned subsidiary’’ is 

defined as a subsidiary more than 50 percent of 

whose outstanding securities representing the right, 

other than as affected by events of default, to vote 

for the election of directors, is owned by the 

subsidiary’s parent and/or one or more of the 

Continued 

passive investors, is it necessary to 

specify a maximum number of natural 

person owners for an entity to be 

eligible, as proposed? Should the 

number be larger or smaller? 95 Should 

the entity’s eligibility to receive 

securities be conditioned on at least 50 

percent of those natural person owners 

performing services for the issuer, as 

proposed? Should that percentage be 

larger or smaller? 

36. To assure that a compensatory 

purpose is maintained, would it be 

necessary to further restrict ownership 

by persons who acquire the securities by 

reason of the death of a current or 

former service provider to a two-year 

period beginning on the date of death, 

as in the Internal Revenue Code 

definition of a qualified personal service 

corporation? 

37. As noted above, a person who 

receives securities pursuant to the plan 

and participant conditions of Rule 

701(c) is not considered a holder of 

record for purposes of Exchange Act 

Section 12(g) registration. How should 

this provision influence the limitations 

we place on those persons eligible to 

receive Rule 701 securities? Are any 

other restrictions or conditions needed 

to ensure that Rule 12g5–1(a)(8) 

excludes from the definition of held of 

record securities received as 

compensation for services that the 

recipients provided to the issuer? 

2. Former Employees 

We are proposing to expand Rule 701 

eligibility for former employees to 

specified post-termination grants and to 

former employees of acquired entities. 

Rule 701 currently exempts offers and 

sales to former employees, directors, 

general partners, trustees, officers, or 

consultants and advisors only if such 

persons were employed by or providing 

services to the issuer at the time the 

securities were offered. 

In response to the Concept Release, 

one commenter stated that Form S–8 

should be available to register new 

grants to former employees that are 

made as compensation for prior service 

during the 12-month period after 

retirement or termination.96 Another 

commenter suggested expanding eligible 

participants to include former 

employees of an acquired issuer that 

were granted equity awards in an 

acquisition in exchange for securities 

issued as compensation while such 

former employees were still employed 

by the acquired issuer.97

We believe that expanding Form S–8 

eligibility to encompass former 

employees as suggested by commenters 

could benefit both issuers and securities 

recipients by facilitating compensatory 

transactions consistent with the 

purposes of the form.98 We believe that 

this rationale applies equally to Rule 

701 and Form S–8. Accordingly, we 

propose to expand the eligibility of 

former employees under Rule 701 to 

include offers and sales to: 

• Persons who were employed by or 

providing services to the issuer, its 

parents, its subsidiaries, or subsidiaries 

of the issuer’s parent and who are 

issued securities after resignation, 

retirement, or other termination as 

compensation for services rendered 

during a performance period that ended 

within 12 months preceding such 

termination; and 

• former employees of an entity that 

was acquired by the issuer if the 

securities are issued in substitution or 

exchange for 99 securities that were 

issued to the former employees of the 

acquired entity on a compensatory basis 

while such persons were employed by 

or providing services to the acquired 

entity. 

The proposal also would define 

‘‘employee’’ for purposes of Rule 701 to 

include executors, administrators, and 

beneficiaries of the estates of deceased 

employees, guardians or members of a 

committee for incompetent former 

employees, or similar persons duly 

authorized by law to administer the 

estate or assets of former employees. 

This amendment would conform to the 

corresponding provision relating to 

former employee eligibility in Form S– 

8.100

Request for Comment: 

38. Should we make Rule 701 

available for new offers and sales to 

former employees as compensation for 

their service while employed by the 

issuer in the preceding 12 months, as 

proposed? Would expanding the 

exemption in this way facilitate 

compensatory transactions consistent 

with the purpose of the rule? To what 

extent do issuers grant awards on such 

a retrospective basis? Does ‘‘following 

resignation, retirement, or other 

termination’’ clearly describe the 

relationship of the award to former 

employment? Should the rule 

specifically address any other scenarios, 

such as expiration of the term of 

employment? 

39. Should Rule 701 be available to a 

former employee of an acquired entity 

for securities substituted or exchanged 

for acquired entity securities issued as 

compensation for the former employee’s 

work for the acquired entity, as 

proposed? Would this be consistent 

with the underlying rationale that the 

Rule 701 exemption is available based 

on the compensatory relationship with 

the issuer? 

40. Would amending the rule, as 

proposed, to extend eligibility to 

executors, administrators, and 

beneficiaries of employees’ estates and 

others duly authorized by law to 

administer the estates or assets of former 

employees facilitate the administration 

of compensatory plans relying on the 

exemption? If not, how should this 

proposal be modified to facilitate that 

objective? 

3. Employees of Subsidiaries 

In an effort to harmonize Rule 701 

and Form S–8, we also propose to 

amend Rule 701(c) by substituting the 

term ‘‘subsidiaries’’ 101 for ‘‘majorityowned subsidiaries.’’ The proposed 

amendment would make the exemption 

available for offers and sales of 

securities under a written compensatory 

benefit plan (or written compensation 

contract) established by the issuer, its 

parents, its subsidiaries, or subsidiaries 

of the issuer’s parent.102 Like Form S– 

8, Rule 701 would be available for the 

issuance of issuer securities to 

employees of its subsidiaries, without 

regard to whether those subsidiaries are 

majority-owned.103 We are not aware of 


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parent’s other majority-owned subsidiaries. See 

Rule 405. 

104 In the 1999 Adopting Release at Section at 

Section II.D, n. 41, the Commission rejected a view 

expressed by the staff in certain no-action letters 

that such physicians were eligible as consultants or 

advisors in light of the narrower definition of 

consultant or advisor adopted in that release. Under 

Financial Accounting Standards Board Accounting 

Standards Codification Subtopic 810–10, 

Consolidation—Overall, a medical practice is often 

a variable interest entity. An issuer that has a 

controlling financial interest in such a medical 

practice generally would consolidate it. As a result, 

physicians employed by the medical practice would 

become eligible as employees of the issuer’s 

subsidiary. 

105See Form S–8, General Instruction A.1.(a). 

106See generally Registration of Securities 

Offered Pursuant to Employees Stock Purchase 

Plans, Release No. 33–3480 (June 16, 1953) [18 FR 

3688 (June 27, 1953)]. 

107 ‘‘Employee benefit plan’’ is defined in 

Securities Act Rule 405. 

108See Form S–8, General Instruction A.1. 

109 ‘‘Shell company’’ is defined in Securities Act 

Rule 405. When a company ceases to be a shell 

company, by combining with a formerly private 

operating business, General Instruction A.1 to Form 

S–8 provides that it then becomes eligible to use 

Form S–8 60 days following the filing of Form 10- 

equivalent information with the Commission. 

110See, e.g., 17 CFR 230.462(a) (allowing Form S– 

8 to go effective automatically without review by 

the staff or other action by the Commission); Item 

3 and General Instruction G of Form S–8 (allowing 

the incorporation by reference of certain past and 

future reports required to be filed by the issuer 

under Section 13 or 15(d) under the Exchange Act); 

17 CFR 230.428(a)(1) (providing an abbreviated 

disclosure format that eliminated the need to file a 

separate prospectus and permitting the delivery of 

regularly prepared materials to advise employees 

about benefit plans to satisfy prospectus delivery 

requirements); Rule 416(c) and Rule 457(h)(2) 

(providing for registration of an indeterminate 

amount of plan interests and providing that there 

is no separate fee calculation for registration of plan 

interests, respectively); and General Instruction E to 

Form S–8 (providing a procedure for the filing of 

a simplified registration statement covering 

additional securities of the same class to be issued 

pursuant to the same employee benefit plan). 

111See letters from ABA, Davis Polk, and NASPP. 

112See letter from ABA. 

113See letters from NASPP and ABA. 

114See letter from NASPP. 

115See 17 CFR 230.144(a)(3)(ii) and letter from 

Chamber. 

116See 15 U.S.C. 77k and 77l(a)(2). 

any reason to limit Rule 701 to 

employees of majority-owned 

subsidiaries. Expanding Rule 701 

eligibility in this manner could facilitate 

the continued operation of 

compensation programs when nonreporting issuers transition to reporting 

status and are only eligible to use Form 

S–8 rather than Rule 701. 

By broadening the exemption to 

include all subsidiaries, as defined, 

rather than only those that are majorityowned, the proposal would, among 

other things, expand eligibility to 

subsidiaries consolidated by the issuer 

as variable interest entities, such as 

physicians employed by medical 

practices controlled by the issuer.104

Request for Comment: 

41. Should we harmonize the Rule 

701 and Form S–8 eligibility 

requirements by broadening the Rule 

701 exemption to include all 

subsidiaries, as proposed? Would the 

proposal facilitate a non-reporting 

issuer’s transition to reporting issuer 

status and its subsequent registration of 

compensatory offerings on Form S–8? 

42. Unlike Form S–8, the Rule 701 

exemption currently is available to 

majority-owned subsidiaries of the 

issuer’s parent rather than only 

subsidiaries of the issuer itself.105

Should we amend Form S–8 to further 

harmonize the scope of Rule 701 and 

Form S–8 by making Form S–8 available 

to employees of all subsidiaries of the 

issuer’s parent? Are there any other 

harmonizing amendments we should 

consider? 

43. Are there any reasons not to 

extend Rule 701 eligibility to persons 

employed by subsidiaries that are 

consolidated by the issuer as variable 

interest entities? For example, are there 

any reasons not to extend Rule 701 

eligibility to physicians employed by 

medical practices controlled by the 

issuer, based on their employment by a 

subsidiary of the issuer? 

III. Form S–8 

Form S–8 was originally adopted in 

1953, as a simplified form for the 

Securities Act registration of securities 

to be issued pursuant to employee stock 

purchase plans.106 Form S–8 is available 

for the registration of securities to be 

offered under any employee benefit plan 

to an issuer’s employees or employees 

of its subsidiaries or parents.107

Registration on Form S–8 is used for 

many different types of employee 

benefit plans, including Internal 

Revenue Code Section 401(k) plans and 

similar defined contribution retirement 

savings plans, employee stock purchase 

plans, nonqualified deferred 

compensation plans, and incentive 

plans that provide for issuance of 

options, restricted stock, or RSUs. The 

form may be used by any issuer that is 

subject, at the time of filing, to the 

reporting requirements of Section 13 or 

15(d) of the Exchange Act and has filed 

all reports required during the 

preceding 12 months or such shorter 

period that it was subject to those 

requirements.108 Form S–8 is not 

available for shell companies.109

Over time, the Commission has made 

revisions to the Form S–8 requirements 

to simplify the use of the form and 

streamline the form’s requirements 

where such simplification is consistent 

with investor protection.110 In the 

Concept Release, the Commission asked 

whether Form S–8 registration is still 

necessary, and if so, how the 

Commission could further streamline 

Form S–8 registration. Among other 

things, the Concept Release solicited 

comment on the potential elimination of 

Form S–8 in favor of allowing Exchange 

Act reporting issuers to use the Rule 701 

exemption and whether Form S–8 

incentivized issuers to remain current in 

their Exchange Act reporting 

obligations. Commenters who addressed 

this issue generally supported 

eliminating the form, while expressing 

some reservations.111 One commenter 

stated that the principal advantage of 

such an approach would be the 

elimination of compliance costs 

associated with filing and maintaining 

an effective Form S–8.112 A few other 

commenters indicated that keeping 

Form S–8 is not necessary to provide an 

incentive for reporting issuers to remain 

current in their Exchange Act reporting 

obligations.113

At the same time, commenters noted 

a number of potential disadvantages 

with eliminating Form S–8. One 

commenter stated that reporting issuers 

would find it a significant disadvantage 

if failure to register on Form S–8 would 

subject an issuance of employee benefit 

plan shares to registration under state 

blue sky laws.114 A different commenter 

stated that reporting issuers would not 

migrate to Rule 701 if securities issued 

under the exemption would be 

restricted securities, as defined in Rule 

144, and observed that, unlike Rule 701 

offerings, securities issued as part of an 

offering registered on Form S–8 are not 

‘‘restricted securities’’ as defined in 

Rule 144.115

In evaluating this potential change, 

we considered these and other 

disadvantages that would result from 

eliminating Form S–8 and allowing 

reporting issuers to use Rule 701, such 

as: 

• Employees’ loss of the information 

required in Part I of Form S–8 that is 

part of the prospectus that must be 

provided to them; and 

• Employees’ potential loss of the 

protections provided by Section 11 and, 

in some cases, Section 12(a)(2) liability 

in the case of material misstatements or 

omissions.116

On balance, we believe that Form S– 

8 continues to provide a useful and 

effective means of registering securities 

to be issued in compensatory offerings 

under the Securities Act. Accordingly, 

we are proposing amendments to the 


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117See letter from ABA. 

118See letters from Council, Davis Polk and 

NASPP. 

119After discussing these clarifications, we 

discuss the proposed amendments regarding plans 

that authorize additional securities in Section 

III.A.2, infra. 

120 17 CFR 230.428. 

121See 17 CFR 230.464 and Rule 456. Item 9 of 

Form S–8 requires an issuer to make the 

undertaking set forth in Item 512(a)(1)(iii) of 

Regulation S–K in a post-effective amendment. The 

undertaking in Item 512(a)(1)(iii) states that the 

registrant will include any material information 

with respect to the plan of distribution not 

previously disclosed in the registration statement or 

any material change to such information in the 

registration statement to disclose a material change 

in the plan of distribution. For example, in certain 

circumstances, a material change may be the 

identification on the registration statement cover 

page of a new plan that is being added to an already 

existing Form S–8. 

122 Id. This would include, for example, if the 

2010 plan included outstanding options that 

expired unexercised and the underlying shares 

became authorized for issuance under the 2020 

plan. Using other aspects of the proposed 

amendments, if necessary, issuers would also be 

able to add securities to an existing Form S–8 as 

described below. See Section III.A.3, infra. 

123See 17 CFR 230.464. 

124See Rule 457(p). Under current rules, the 

issuer may be unable to avail itself of Rule 457(p) 

to transfer the fees previously paid for plans on 

other Forms S–8 because Rule 457(p) permits filing 

fees to be transferred only after the registered 

offering has been completed or terminated or the 

registration statement has been withdrawn. As a 

result, in our example, the issuer would not be able 

to transfer the fees associated with any remaining 

shares under the 2010 plan until it completes or 

terminates the 2010 plan offering registered on the 

existing Form S–8. 

125See proposed amendments to the Cover Page 

of Form S–8. 

form and related rules that maintain the 

current non-reporting issuer-reporting 

issuer distinction between Rule 701 and 

Form S–8, but we are proposing 

amendments to simplify the use of Form 

S–8. The proposed amendments should 

significantly reduce the compliance 

burdens of filing and maintaining an 

effective Form S–8, while retaining the 

protection that registration under the 

Securities Act provides to investors. 

Finally, we are proposing amendments 

that would harmonize the requirements 

of Rule 701 and Form S–8. 

Request for Comment: 

44. Should we eliminate Form S–8? If 

so, what exemption or other registration 

statement should the Commission 

replace it with? What should the 

requirements and conditions of such 

exemption or registration statement be? 

If such an approach were adopted, what 

other steps should the Commission take 

to preserve companies’ ability to offer 

equity-based compensation to 

employees (e.g., preemption of state 

blue sky laws) and to protect investors? 

A. Addition of Plans and Securities or 

Classes of Securities to Form S–8 

1. Addition of Plans to Form S–8 

To maximize the utility of Form S–8 

for legitimate compensatory purposes, 

we are clarifying and proposing changes 

to our rules and to Form S–8 to provide 

additional flexibility for compensatory 

offerings, similar to provisions available 

to issuers in capital raising shelf 

offerings. The Concept Release solicited 

comment on whether we should permit 

an issuer to register on a single form the 

offers and sales pursuant to all 

employee benefit plans that it sponsors. 

One commenter stated that there is not 

currently an explicit requirement under 

Form S–8 that only shares under a 

single employee benefit plan may be 

registered on a specific registration 

statement but nonetheless 

recommended that the Commission 

clarify this point in any amendments to 

the form.117 Other commenters were 

generally supportive of permitting offers 

and sales of securities pursuant to 

multiple plans to be registered on a 

single Form S–8.118

We are clarifying that issuers may add 

additional plans to an existing Form S– 

8. Specifically, issuers may file an 

automatically effective post-effective 

amendment to a previously filed Form 

S–8 to add employee benefit plans 

where the new plan does not require the 

authorization and registration of 

additional securities for offer and 

sale.119 For example, assume an issuer 

has an effective Form S–8 that registers 

sales of common stock to be issued 

under the issuer’s 2010 equity 

compensation plan and has recently 

adopted a new 2020 equity 

compensation plan to replace the 2010 

plan that does not authorize additional 

securities. Upon effectiveness of the 

2020 plan, no further awards may be 

granted pursuant to the 2010 plan and 

any shares covered by an award under 

the 2010 plan are now duly authorized 

for issuance under the 2020 plan. In 

order to sell under the 2020 plan, the 

issuer may register the securities to be 

offered and sold pursuant to the new 

plan on a new Form S–8. Alternatively, 

under the current requirements of Form 

S–8 or Rule 428,120 the issuer could file 

an automatically effective post-effective 

amendment to the previously filed Form 

S–8 to add employee benefit plans, such 

as the 2020 plan in the example. The 

post-effective amendment to include the 

additional plan would be required to 

disclose any material change in the plan 

of distribution, including that a new 

plan is being added to an existing Form 

S–8.121 This post-effective amendment 

would need to describe how shares that 

will not be issued under the previous 

plans may become authorized for 

issuance under the current plans. The 

post-effective amendment also must 

identify all covered plans on the cover 

page and describe, if applicable, how 

the shares that were registered for 

previous offerings on the Form S–8 

pursuant to other plans have instead 

become authorized for issuance under 

the newly added plan.122

At the time of the filing of any posteffective amendment to Form S–8, the 

issuer must continue to meet the 

requirements of the form.123 The issuer 

would also add the signatures and file 

the required opinions of counsel with 

the post-effective amendment. The 

issuer would thereafter deliver or cause 

to be delivered in accordance with Rule 

428(b)(2)(i) the documents identified in 

Rule 428(a) as part of the prospectus 

that describes the new plan. 

We believe that clarifying the ability 

to add plans to an existing Form S–8 via 

an automatically effective post-effective 

amendment will reduce the 

administrative burdens to the extent 

issuers previously believed that the 

filing an entirely new Form S–8 for each 

new plan was required. This approach 

also will help facilitate the use of a 

single Form S–8 for all employee benefit 

plans, if the issuer chooses to do so. In 

addition, it will reduce the problems 

associated with fee transfers between 

multiple registration statements that 

have registered ongoing offers and sales 

that cannot be terminated (e.g., 

outstanding options that require 

continuous ongoing registration of the 

underlying shares).124 Similar to 

permitting the allocation of securities 

between plans on Form S–8, which we 

discuss below, we do not believe that 

amendments to the current disclosure 

requirements of Form S–8 or Rule 428 

are required to implement the proposed 

clarification. We are proposing, 

however, a minor modification to the 

cover page of Form S–8 to clarify that 

the full title of multiple plans may be 

listed.125

Request for Comment: 

45. Is the clarification regarding the 

ability of issuers to register offers and 

sales of securities pursuant to multiple 

plans on a single Form S–8 sufficient, or 

is additional guidance needed? Should 

we instead amend Form S–8 to prohibit 

issuers from adding plans to an existing 

Form S–8? 

46. Would registering multiple plans 

on a single Form S–8 work well in 

practice? For example, would 

registering incentive plans on the same 

Form S–8 as a 401(k) plan or other 

defined contribution plan cause 

administrative difficulties or investor 


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126We note that this clarification regarding 

allocation of securities will not apply to defined 

contribution plans if the amendments are adopted 

as proposed. Forms S–8 registering securities to be 

offered and sold pursuant to defined contribution 

plans will be deemed to have registered an 

indeterminate amount of securities to be offered 

and sold pursuant to those plans. See Section 

III.B.1, infra and Proposed Rule 416(d). 

127See proposed changes to the Cover Page of 

Form S–8. 

128See id. 

129 Id. 

130See letters from ABA, Council, Davis Polk, 

NASPP and Shearman. 

131See letter from ABA. 

132See letter from NASPP. 

133See letter from Davis Polk. 

134See letter from NASPP. 

135Exchange listing rules generally require 

shareholder approval of incentive plans. See NYSE 

Listed Company Manual Section 303A.08 

(Shareholder Approval of Equity Compensation 

Plans), and NASDAQ Listing Rule 5635(c) (Equity 

Compensation). 

136See Item 17 CFR 229.601(b)(23) of Regulation 

S–K Footnote 5 to the Item 601 Exhibit Table. 

137 General Instruction G.2 to Form S–8 provides 

that registrant information shall be updated by the 

filing of Exchange Act reports, which are 

incorporated by reference in the registration 

statement and the Section 10(a) prospectus. See also 

Footnote 5 to the Exhibit Table in Item 601 of 

Regulation S–K, and the Note to the Required 

Information in Form 11–K. Auditor consents 

typically make reference to each registration 

statement into which the consent is incorporated. 

138See 17 CFR 230.428 and Part I of Form S–8. 

confusion? Would issuers use this 

feature principally to update and refresh 

their incentive compensation plans? 

47. Are there additional or different 

disclosures that should be required 

when a plan is added to an existing 

Form S–8? 

2. Securities Allocation Among 

Incentive Plans 

In addition to clarifying the ability to 

add additional plans using a posteffective amendment, as discussed in 

Section III.A.1 above, we are clarifying 

that issuers are not required to allocate 

registered securities among incentive 

plans and may use a single Form S–8 for 

multiple incentive plans.126 Although 

we do not believe that amendments to 

the current disclosure requirements of 

Form S–8 or Rule 428 are necessary to 

permit an issuer’s use of a single Form 

S–8, we are proposing several related 

clarifying amendments.127

For issuers utilizing this flexibility, 

the initial registration statement would 

be required to list the types of securities 

covered by the registration statement 

and identify the plan or plans pursuant 

to which the issuer intended to issue 

securities as of that date.128 The full title 

of each plan would be required to be 

listed on the face of the registration 

statement on the appropriate line.129

The Part I information delivered 

pursuant to Rule 428 with respect to 

each plan would be required to be 

specific to that plan. If any Part II 

information relates specifically to one 

plan, the issuer would be required to 

disclose that relationship clearly. The 

registration statement would not need to 

assign or allocate the securities to 

particular incentive plans. In this way, 

the form may be used to create a pool 

of registered shares that may be issued 

under the issuer’s various incentive 

plans as necessary. However, issuers 

would need to track their offers and 

sales of securities to ensure they have 

sufficient capacity registered in order to 

fulfill the needs of the various incentive 

plans identified on the form. 

In the Concept Release, the 

Commission solicited comment on 

whether the ability to file a single Form 

S–8 with respect to multiple plans and 

pay filing fees based on the aggregate 

dollar amount of securities to be 

registered would effectively reduce 

administrative burdens. Commenters 

were generally supportive of the 

Commission permitting the use of a 

single Form S–8 to register securities to 

be issued under multiple plans.130 One 

commenter stated that a single 

‘‘omnibus’’ Form S–8 registration 

statement would reduce administrative 

burdens of registering transactions for 

multiple plans.131 According to another 

commenter, issuers find it to be a 

‘‘frustrating limitation’’ that currently 

the pools of securities registered for 

offer and sale pursuant to separate plans 

on separate Forms S–8 cannot be used 

interchangeably.132 Other commenters 

stated that while it may not be 

practicable for issuers to include all 

plans in a single Form S–8, they would 

benefit from combining at least some 

with similar characteristics,133 with one 

of these commenters noting that 401(k) 

plans are administered separately from 

long-term incentive plans.134

We believe that clarifying the ability 

to use Form S–8 to create a pool of 

registered shares that may be issued 

under the issuer’s various incentive 

plans will promote efficiency and 

flexibility because it will eliminate any 

doubt about whether authorized but 

unissued shares under a plan that 

expires would be immediately available 

for issuance under another authorized 

plan.135 In addition, this clarification 

will reduce administrative burdens for 

those issuers that now believe they must 

use a separate Form S–8 for each plan. 

Specifically, issuers using a single Form 

S–8 to register the offer and sale of 

shares issuable pursuant to multiple 

plans simultaneously could avoid 

collecting signatures for multiple, 

independent Form S–8 filings and 

multiple consents of auditors and other 

experts whose reports are incorporated 

by reference.136 In addition, issuers are 

required to file the consent of auditors 

with respect to audit opinions appearing 

in Exchange Act reports that are 

incorporated into Securities Act 

registration statements.137 In such a 

situation, issuers using a single Form S– 

8 registration statement would only 

need to inform the auditors that there is 

a single Form S–8 into which the 

auditor’s opinion is being incorporated 

by reference (along with any other 

outstanding registration statements on 

other forms). 

Furthermore, we note that when 

shares are offered pursuant to a plan 

previously identified on the Form S–8, 

issuers must continue to prepare and 

deliver a plan-specific prospectus, 

according to current requirements, and 

thus investors would continue to 

receive the same information as is 

currently required for any Form S–8 

offering.138 Issuers also retain the option 

to register securities to be issued 

pursuant to individual incentive plans 

on separate Forms S–8. 

Request for Comment: 

48. Is the clarification regarding the 

ability of issuers to allocate securities 

among incentive plans on a single Form 

S–8 sufficient, or is additional guidance 

needed? Should we instead adopt 

amendments to prohibit allocation of 

securities among incentive plans? 

49. Would allocation of securities 

among incentive plans on a single Form 

S–8 result in a more efficient process of 

registration? 

50. Would allocation of securities 

among incentive plans result in 

disclosure that is confusing to investors? 

51. Are there additional or different 

amendments (other than the proposed 

changes to the cover page of Form S–8) 

that we should make to facilitate the 

allocation of securities among various 

incentive plans? 

3. Addition of Securities or Classes of 

Securities to Form S–8 

In addition to adding plans to a Form 

S–8, from time-to-time, issuers may find 

that they need to add additional 

securities to the registration statement 

as well. Accordingly, after considering 

the comments received on the Concept 

Release, we are proposing amendments 

to Rule 413 that would permit issuers to 

add securities to an existing Form S–8 

by filing an automatically effective posteffective amendment. 

The Concept Release solicited 

comment on whether issuers should be 


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139See letter from Sullivan; Rule 413; and Form 

S–8, General Instruction E. 

140See letters from Davis Polk and NASPP. 

141See letter from Davis Polk. 

142See letter from NASPP. 

143See Proposed Rule 413(c). 

144The registration of the offer and sale of 

additional securities pursuant to proposed Rule 

413(c) could be accomplished in the same 

automatically effective post-effective amendment 

used to add a new plan to a registration statement, 

as described in Section III.A.1, supra. 

145As proposed, the current method of registering 

additional shares of the same class on Form S–8 by 

filing a new registration statement pursuant to 

General Instruction E of the form also would remain 

available for use in registering additional securities. 

146An issuer adopting a new plan that did not 

include a new class of security may be able to 

amend the registration statement in the manner 

described in Section III.A.1, supra, to the extent 

that the new plan did not require the addition of 

new securities. 

147As discussed in Section III.A.1, supra, 

adoption of a new plan to be included in the 

registration statement would require disclosure of a 

material change in the existing plan of distribution, 

as well as other information. 

148See, e.g., Item 4 Form of Form S–8, 

Description of Securities. 

149See Item 3(c) of Form S–8. 

150See Section III.A.1, supra. 

151See Proposed Rule 413(c) and the proposed 

checkbox on Form S–8. 

152 Id. 153See Section III.A.1, supra, and Proposed Rule 

413(c). 154The proposed amendments would not 

eliminate the requirement to register plan interests 

as separate securities. Nevertheless, where a 

registration statement on Form S–8 relates to 

securities to be offered pursuant to an employee 

benefit plan, including interests in such plan that 

constitute separate securities required to be 

registered under the Securities Act, such 

registration statement is deemed to register an 

indeterminate amount of such plan interests. No 

separate fee is required with respect to the 

registered plan interests. See Rule 416(c) and Rule 

457(h)(2). Furthermore, the proposed amendments 

would not eliminate the requirement to file an 

Exchange Act annual report on Form 11–K [17 CFR 

249.311] with respect to those plan interests. 

155See Proposed Rule 413(c). 

156 If all of the amendments proposed today are 

adopted, in this circumstance, for the 401(k) plan, 

the issuer would be deemed to register an 

indeterminate amount of defined contribution plan 

securities on the registration statement. See Section 

III.B.1, supra, and Proposed Rule 416(d). 

able to add securities to an existing 

Form S–8 by automatically effective 

post-effective amendment. As certain 

commenters noted, Rule 413 currently 

does not permit an issuer to register the 

offer and sale of additional securities by 

means of a post-effective amendment, 

and therefore an issuer must instead file 

a new Form S–8 to register the offer and 

sale of those securities.139 A few 

commenters supported enabling an 

issuer to add securities to its existing 

Form S–8 by automatically effective 

post-effective amendment.140 One of 

these commenters stated that this would 

be necessary in order to allow a single 

Form S–8 to cover securities offered 

under new plans established by the 

issuer and new authorizations of shares 

under then-existing plans.141 Another 

commenter supported this approach 

noting that it would create a pool of 

shares that could be issued under the 

issuer’s various benefit plans as 

necessary.142

We are proposing to amend Rule 413 

to permit issuers to register the offer and 

sale of additional securities or classes of 

securities on Form S–8 by post-effective 

amendment.143 Under the proposed 

amendments, an issuer that has an 

effective registration statement for a 

previous incentive plan, would no 

longer be required to file a new Form S– 

8 to register the offering of additional 

shares under an existing or new 

incentive plan.144 Instead, the issuer 

could file an automatically effective 

post-effective amendment to the existing 

Form S–8 to register the offer and sale 

of the additional securities.145 Similarly, 

if an issuer were to adopt a new 

employee benefit plan which made 

available a new class of security on a 

compensatory basis,146 the issuer would 

only be required to file an automatically 

effective post-effective amendment to its 

existing Form S–8 to add the new plan 

and the new class of security to the 

registration fee table and any additional 

disclosure 147 that would be required to 

inform investors about the new class of 

securities.148 However, issuers adding 

new classes of securities in this manner 

would be required to satisfy all of the 

requirements of the form upon filing the 

post-effective amendment. This would 

include either filing the information 

required by Item 4. Description of 

Securities in the post-effective 

amendment to Form S–8 or 

incorporating such information by 

reference if the class has already been 

registered pursuant to Section 12 of the 

Exchange Act.149

Proposed Rule 413(c) would provide 

additional flexibility in that issuers 

registering compensatory offerings on 

Form S–8 would not need to predict 

how many securities would be required 

to fulfill obligations under each 

individual plan or even the types of 

securities that might be authorized for 

issuance pursuant to a plan in the 

future. For example, assume an issuer 

has an existing Form S–8 on file and 

intends to adopt a new incentive plan 

that would include awards in the form 

of issuer stock, stock options, restricted 

stock, stock appreciation rights or other 

share-based awards. Upon taking the 

necessary steps to approve the incentive 

plan and obtaining any necessary 

approvals to register the offer and sale 

of shares to be issued pursuant to the 

plan, the issuer could file an 

automatically effective post-effective 

amendment to its existing registration 

statement to name the newly authorized 

incentive plan on the cover page and 

provide all of the disclosures required 

by Rule 428 and Form S–8 for the new 

plan.150 In the same post-effective 

amendment, the issuer could add the 

securities associated with the plan to 

the registration statement by listing the 

securities in the Calculation of 

Registration Fee table and checking the 

proposed new checkbox on the cover 

page of the amended Form S–8 to 

indicate that the sale of the newly 

included securities is registered 

pursuant to proposed Rule 413(c).151 If 

this issuer later takes the necessary 

steps to increase the number of shares 

issuable under the plan, a new posteffective amendment could be filed that 

would register the offer and sale of the 

additional securities.152 Similarly, if an 

issuer takes the necessary steps to adopt 

a new plan to include a new class of 

securities such as preferred stock, the 

issuer could file a post-effective 

amendment to the existing Form S–8 to 

add both the new class of securities and 

new plan to the registration statement 

simultaneously.153

Alternatively, assume an issuer that 

has maintained a 401(k) employee 

savings plan for several years decides to 

add its common stock as an investment 

option for employee contributions to the 

plan. As a result, both the 401(k) plan 

interests and the employer stock to be 

offered as an investment option would 

become subject to Securities Act 

registration requirements.154 The ability 

to add new plans to an existing Form S– 

8 used in combination with proposed 

Rule 413(c), would permit both the plan 

interests and the issuer’s stock to be 

added to the issuer’s existing Form S– 

8 for an already-existing plan.155 The 

issuer would be required to file a posteffective amendment, which would 

include the offer and sale of any shares 

of employer stock and plan interests 

required to be registered,156 and the 

types of information described in the 

previous example. 

Request for Comment: 

52. Should we permit issuers to add 

securities to an existing Form S–8 

registration statement by means of 

automatically effective post-effective 

amendments, as proposed? 

53. Are there concerns associated 

with allowing issuers to register the 

offer and sale of additional securities or 

classes of securities by post-effective 

amendment to an existing Form S–8 

instead of on a new registration 

statement? 


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80248 Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Proposed Rules 

157See letters from ABA, Davis Polk, Shearman 

and Sullivan. 158For a discussion of sales and registration of 

securities to be issued pursuant to employee benefit 

plans, see generally Employee Benefit Plans: 

Interpretations of Statute, Release No. 33–6188 

(Feb. 1, 1980) [45 FR 8960 (Feb. 11, 1980)] (‘‘1980 

Employee Benefit Plans Release’’), and Employee 

Benefit Plans, Release No. 33–6281 (Jan. 15, 1981) 

[46 FR 8446 (Jan. 27, 1981)] . 

159We note that registration fee payments 

pursuant to Section 6(b)(1) of the Securities Act [15 

U.S.C. 77f(b)(1)] are not refundable. See 17 CFR 

230.111. 

160See letter from Sullivan. 

161Proposed amendment to Rule 405. 

162See letter from Shearman. 

163 Id. 

164See Rule 457(o). 

165See Proposed Rule 457(h)(4) and proposed 

Note 3 under Calculation of Registration Fee. We 

understand that issuers may have previously used 

existing Rule 457(o) to calculate registration fees 

based on the maximum aggregate offering price of 

the securities registered on Form S–8 for defined 

contribution plans. If these amendments are 

adopted, all issuers registering shares to be offered 

and sold pursuant to defined contribution plans, 

including issuers previously using 457(o) to 

calculate registration fees, would thereafter make 

use of Rule 416(d) to register an indeterminate 

amount of securities to be offered and sold pursuant 

to defined contribution plans and Rules 457(h)(4) 

and 456(e) to calculate and pay the required fee, 

respectively. Where necessary, issuers should refer 

to such fee calculation in the ‘‘Calculation of 

Registration Fee Table’’ in the Form S–8 registration 

statement or post-effective amendment to Form S– 

8 filed to pay the required fee. 

166See Section III.B.2, infra. 

54. Would the interplay between 

adding new plans and registering the 

offer and sale of new securities by posteffective amendment to Form S–8 cause 

problems for particular types of issuers 

or plans? If so, please explain how. 

55. If we adopt proposed Rule 413(c) 

for the registration of the offer and sale 

of additional securities on Form S–8, 

should we rescind current General 

Instruction E, which permits the filing 

of a new, abbreviated registration 

statement to register the offer and sale 

of additional securities of the same class 

relating to a plan for which a Form S– 

8 registration statement is already 

effective? 

B. Fee Calculation and Fee Payments on 

Form S–8 for Defined Contribution 

Plans 

As described below, we are proposing 

changes that we believe should ease 

potential challenges for issuers with 

respect to timing and calculation of fees 

for offerings of securities pursuant to 

defined contribution plans on Form S– 

8. First, we propose to amend Rule 457 

to require registration based on the 

aggregate offering price of all the 

securities registered. Second, we are 

proposing a new fee payment method 

that would require issuers to pay the fee 

for all sales made pursuant to defined 

contribution plan offerings during a 

given fiscal year no later than 90 days 

after the issuer’s fiscal year end. We are 

also soliciting additional comments on 

the topic of fee calculation to determine 

whether we should clarify how issuers 

should count shares or amounts offered 

and sold pursuant to defined 

contribution plans. 

Several commenters noted difficulties 

currently involved with administering 

the registration of offers and sales 

pursuant to defined contribution plans 

and offered solutions that the 

commenters believed would reduce 

complexity and cost of compliance 

while retaining investor protection.157

For defined contribution plans, when 

employees elect to invest in issuer 

securities, the plan may acquire 

additional shares from the issuer, buy 

shares on the open market, or allocate 

shares divested by other plan 

participants to fulfill the purchase.158

As securities are sold to employees 

pursuant to the plan, issuers are 

required to account for the number of 

shares sold against the specified number 

of shares registered on the Form S–8. As 

described by one commenter, the issuer 

must estimate the number of shares to 

register on the original Form S–8, 

balancing the costs of registering a 

potentially excess number of securities 

for which fees have been paid,159 but 

that may go unsold against the 

possibility that the issuer could 

inadvertently violate Section 5 if the 

number of shares sold exceeds the 

number registered under the plan.160

We believe the proposed rules should 

help resolve many of the share-counting 

difficulties that arise when registering 

shares to be offered and sold pursuant 

to defined contribution plans such as 

401(k) plans. For this purpose, we 

propose to define a ‘‘defined 

contribution plan’’ as ‘‘an employee 

benefit plan (as defined in § 230.405) 

that provides for specified or 

determinable contributions by the 

employee, employer, or both to an 

individual account for each employee 

participant where the amount of 

benefits paid depends, in addition to the 

level of contributions, on the return on 

the investment.’’ 161

Request for Comment: 

56. As proposed, would the definition 

of ‘‘defined contribution plan’’ properly 

encompass the types of plans that 

would benefit from the fee calculation 

and payment methods outlined below? 

Should the definition be revised? If so, 

should it be broader or narrower? 

1. Calculation of the Registration Fee 

Using the Aggregate Offering Price 

One commenter recommended that 

the Commission permit registration of a 

dollar amount corresponding to an 

indeterminate number of shares because 

tracking dollar inflows to issuer stock 

funds would be less onerous than 

tracking the number of shares that 

remain available.162 The commenter 

noted that because defined contribution 

plans are unitized plans whose 

participants own units of a fund that 

holds issuer stock, plan administrators 

frequently experience difficulty tracking 

the number of shares of issuer stock that 

have been offered and sold under a 

Form S–8.163 As proposed, issuers 

relying on the new rules would be 

deemed to register an offering amount 

corresponding to an indeterminate 

number of securities that would be 

available for offer and sale through the 

issuer’s defined contribution plans. 

Currently, issuers may be calculating 

the registration fee based on the 

maximum aggregate offering price of all 

the securities (e.g., common stock, debt 

securities, convertible debt securities, 

preferred stock, and warrants) listed in 

the ‘‘Calculation of Registration Fee’’ 

table.164 We are proposing amendments 

to Rule 457 and Form S–8 to require 

that the registration fee for a defined 

contribution plan be calculated in a 

similar way, based on the aggregate 

offering price of all the securities 

sold.165 Upon the yearly calculation and 

payment of the registration fee within 

90 days of the issuer’s fiscal year end, 

as described below,166 issuers that had 

registered an indeterminate number of 

securities on the Form S–8 for defined 

contribution plans would need to 

calculate their registration fee in 

accordance with proposed Rule 

457(h)(4) by multiplying the aggregate 

offering price of securities sold during 

the fiscal year by the fee payment rate 

in effect on the date of the fee payment, 

and then pay such fee in accordance 

with the proposed requirements of Rule 

456(e). 

Under the proposed amendments, an 

issuer would calculate the fee based, in 

part, on the funds that plan participants 

have allocated via their payroll 

deductions to the purchase of issuer 

stock. Similarly, if an issuer contributes 

shares of issuer stock to satisfy its 

obligation to make matching 

contributions, the dollar amount of the 

matching obligation satisfied would be 

aggregated with the overall offering 

amount for the purpose of calculating 

the fees owed. 

We believe that a fee calculation 

based on the aggregate offering amount 

of securities sold pursuant to defined 

contribution plans could simplify plan 

administration by eliminating the need 


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Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Proposed Rules 80249 

167See Proposed Rules 416(d) and 456(e). 

168Section 6(b)(1) of the Securities Act [15 U.S.C. 

77f(b)(1)]. In some cases, unused filing fees may be 

carried forward to a new registration statement. See 

Rule 457(p) and the limitations described in note 

124, supra. 

169See letter from Sullivan. 

170See letters from ABA, Chamber, Davis Polk, 

Postmates, and Sullivan. 

171See letter from Davis Polk. 172See letters from ABA and Sullivan. 173See letter from ABA. 174See letters from Chamber and Council. See 

also the definition of well-known seasoned issuer 

in Rule 405. 175See letters from ABA, Council and Davis Polk. 176See letter from Sullivan. 

to track offers and sales of individual 

shares of issuer stock within unitized 

plans and should reduce the risks of 

violating Section 5 by allowing offers 

and sales to be accounted for and paid 

for based on a known aggregate offering 

dollar amount after contributions are 

made to the issuer stock fund. For plans 

that are not defined contribution plans, 

such as incentive plans, we believe that 

issuers will continue to register a 

maximum number of securities issuable 

under the plan that are covered by the 

registration statement as is currently 

contemplated by Rule 457(h)(1). An 

issuer may rely on these provisions on 

the same registration statement if the fee 

table clearly explains how the 

registration fees are being calculated. 

For example, the proposed amendments 

would permit an issuer to use Rule 

457(h)(1) to register the offer and sale of 

a specific number of securities that will 

be allocated to incentive plans and also 

to use proposed Rule 457(h)(4) to 

register the offer and sale of an 

indeterminate amount of securities 

pursuant to defined contribution plans 

on a single Form S–8. Alternatively, 

issuers may continue to file separate 

Forms S–8 for plans of different types. 

Request for Comment: 

57. Should we amend Rule 457 and 

Form S–8 to require registration based 

on the aggregate offering price of all the 

securities registered pursuant to defined 

contribution plans, as proposed? 

58. For defined contribution plans, 

would registration of the offer and sale 

of an aggregate amount of securities 

mitigate difficulties in counting 

registered offers and sales? 

59. Should the proposed fee 

calculation method be optional for 

issuers registering the offer and sale of 

shares to be issued pursuant to defined 

contribution plans? 

60. Should we adopt a transition 

period for the proposed amendments to 

Rule 457 and Form S–8? If so, how long 

should the transition period be? 

61. Should the proposed requirement 

to calculate registration fees based on an 

aggregate offering amount of securities 

be required only for defined 

contribution plans? Are there other 

types of plans whose administration 

would be simplified by a similar fee 

calculation? 

62. Would there be difficulties in 

using separate registration and fee 

instructions (e.g., Rule 457(h)(1) and 

proposed Rules 416(d) and 456(e)) on a 

single Form S–8? If so, would additional 

guidance on how the instructions apply 

be helpful? 

63. Would issuers register the offer 

and sale of shares for defined 

contribution plans on the same 

registration statement as that used for 

other types of plans? 

64. If an issuer wishes to use a single 

Form S–8 for all plans, would the 

proposed rules create difficulties for 

issuers that seek to register and pay fees 

for sales pursuant to incentive plans on 

the same form for which defined 

contribution plans are registered? 

2. New Fee Payment Method for Sales 

Pursuant to Defined Contribution Plans 

As discussed in the previous section, 

issuers may face difficulties with 

respect to calculating the number of 

securities that have been sold pursuant 

to defined contribution plans. In 

addition to the new fee calculation 

method described above, we are 

proposing a modernized approach to 

registration fee payment that would 

provide for the registration on Form S– 

8 of offers and sales of an indeterminate 

amount of securities of the issuer to be 

issued pursuant to defined contribution 

plans.167 As proposed, the issuer would 

subsequently pay the securities 

registration fees on a delayed basis, in 

arrears. 

In general, Form S–8 issuers today are 

required under the Securities Act to pay 

a registration fee to the Commission at 

the time of filing a registration 

statement, which is not refunded if the 

issuer does not sell the related 

securities.168 As noted by one 

commenter, for defined contribution 

plans, the current fee payment method 

results in issuers estimating the 

potential number of future sales off the 

registration statement, both with respect 

to the initial employee deferrals and 

subsequent investment elections, based 

on historical usage and expected future 

participation and election rates.169

Because this calculation and fee 

payment must occur at the time the 

registration statement is filed, issuers 

may over- or underestimate the number 

of securities to be offered and sold 

pursuant to the registration statement. 

In order to alleviate these difficulties, 

several commenters suggested that for 

securities to be issued pursuant to a 

plan, issuers should be permitted to 

register the offer and sale of an 

indeterminate amount of securities 

initially and then pay a periodic fee 

based on the total sales over a given 

period.170 Commenters that supported 

the registration of the offer and sale of 

an indeterminate amount of shares 

suggested different methods of 

calculating the fee owed for registration. 

One suggested a fee payment based on 

the size of the issuer (e.g., market 

capitalization).171 Some commenters 

suggested an issuer should measure 

usage by totaling the sales that occurred 

during the prior fiscal year and pay the 

fee based on the amount of shares 

offered and/or sold on an annual 

basis,172 such as at the time of the filing 

of the Form 10–K.173 Other commenters 

supported a pay-as-you-go fee payment 

system similar to that which currently 

exists for well-known seasoned issuers 

(‘‘WKSIs’’) by which WKSIs are able to 

pay filing fees on an as-needed basis 

rather than when the registration 

statement is initially filed.174 Several 

commenters recommended a cure 

provision to remedy inadvertent or 

nominal errors, enabling issuers to pay 

the registration fee after the original due 

date if the issuer makes a good faith 

effort to pay the fee on a timely basis 

and then pays the fee within a certain 

number of business days after the 

original due date.175 One commenter 

suggested that this type of fee payment 

method could be optional for issuers 

that have difficulty estimating the 

amount of securities to be offered and 

sold pursuant to the registration 

statement and calculating the fee under 

the current system.176

Consistent with our goal of further 

simplifying registration on Form S–8 

and in order to help alleviate the 

difficulties that currently exist when 

registering the offer and sale of 

securities pursuant to defined 

contribution plans, we are proposing a 

new fee payment method for defined 

contribution plans. We have proposed 

the annual fee payment method because 

we believe it would permit issuers to 

accurately determine how many shares 

were sold pursuant to defined 

contribution plans in the covered period 

after-the-fact, and therefore should 

eliminate the problem of inadvertently 

registering the offer and sale of too 

many or too few shares in these 

offerings. Under the new method, when 

registering the offer and sale of shares 

pursuant to defined contribution plans, 

issuers would be deemed to have 

registered the offer and sale of an 

indeterminate amount of securities 


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80250 Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Proposed Rules 

177See supra note 165. 178See Proposed Rule 456(e). 179The Commission has recently proposed 

amendments that would modernize filing fee 

disclosure and payment methods. The proposed 

amendments would revise most fee-bearing forms, 

schedules, statements, and related rules to require 

each fee table and accompanying disclosure to 

include all required information for fee calculation 

in a structured (i.e., tagged) format. As proposed, 

the amendments would add the option for fee 

payment via Automated Clearing House (‘‘ACH’’) 

and eliminate the option for fee payment via checks 

and money orders. We expect that improvements in 

the payment validation process made possible by 

the proposed tagging of the fee table and 

accompanying information with pre-submission 

validation by the filer would provide more certainty 

to issuers that the proper filing fee has been paid. 

See Filing Fee Disclosure and Payment Methods 

Modernization, Release No. 33–10720 (Oct. 24, 

2019) [84 FR 71580]. To the extent these changes 

are adopted, we expect that technical changes may 

be required to conform the new method proposed 

here to the other changes being proposed. 

180See Proposed Rule 456(e)(1). 

181See Note 2 to the Calculation of Registration 

Fee Table. 

pursuant to the plan.177 We believe the 

proposed amendments would therefore 

eliminate the need for issuers to 

estimate the number of shares that will 

be sold pursuant to the registration 

statement and avoid the possibility that 

an issuer would inadvertently sell more 

shares than it had estimated. The 

amendments also would eliminate the 

need for issuers to register additional 

offers and sales under these plans either 

by using a new registration statement or 

proposed Rule 413(c). 

Under the proposed annual fee 

payment method, any fees associated 

with sales made pursuant to a defined 

contribution plan in a given fiscal year 

would be required to be paid within 90 

calendar days after the plan’s fiscal year 

end.178 We believe 90 days after the 

closing of the plan’s fiscal year should 

provide issuers ample opportunity to 

calculate the total amount of the shares 

sold and the associated fee. An issuer 

would pay the fee by filing an 

automatically effective post-effective 

amendment to the Form S–8 registration 

statement. This post-effective 

amendment need only contain the cover 

page of the registration statement, 

including the calculation of the 

registration fee table, and the required 

signatures. In any such post-effective 

amendment, an issuer would also be 

required to check a newly proposed box 

on the post-effective amendment cover 

page to indicate that the amendment is 

being filed to pay filing fees using the 

method required by Rule 456(e).179 This 

post-effective amendment would only 

be used for the purpose of the payment 

of fees and not for any other purpose 

such as adding plans or securities to the 

registration statement as proposed 

elsewhere in this release.180

Issuers would continue to rely on the 

applicable provision of Rule 457 to 

calculate the fee to be paid. As 

described earlier, if the proposed 

amendments are adopted, the applicable 

provision for defined contribution plans 

would be Rule 457(h)(4). Consistent 

with current requirements, issuers 

would be required to clarify their fee 

calculation by providing specific details 

relating to the fee calculation in notes to 

the Calculation of the Registration Fee 

table, including references to the 

applicable provisions of Rule 457, if the 

basis of the calculation is not otherwise 

evident from the information presented 

in the table.181 If necessary, this would 

include specifying whether the issuer is 

relying on existing Rule 457(h)(1) or is 

otherwise registering the offer and sale 

of an indeterminate number of securities 

pursuant to a defined contribution plan 

and will pay the fees after fiscal yearend using proposed 457(h)(4) and Rules 

456(e) for the calculation and payment 

of the fees, respectively. 

In addition, proposed Rule 456(e) 

would include provisions designed to 

clarify the status of defined contribution 

plan securities where the fee is paid in 

accordance with the proposed rule as 

well as other provisions designed to 

ease the administration of the fee 

payments in certain circumstances. 

These proposed provisions include: 

• Instruction 1 to Rule 456(e)—on 

how to count the 90-day period after the 

end of a fiscal year; 

• Rules 456(e)(2) and (e)(3)— 

addressing the treatment of the offerings 

for purposes of Securities Act Sections 

5 and 6(a). 

• Rule 456(e)(4)—addressing when an 

issuer ceases operations or enters into a 

merger or other transaction between the 

sale of securities on Form S–8 and when 

the registration fees are due; and 

• Rule 456(e)(5)—on the amount of 

interest due for late payments. 

As proposed in Rule 456(e)(4), if an 

issuer ceases operations whether upon 

the merger, liquidation, or sale of 

substantially all issuer’s assets, the 

plan’s fiscal year would be deemed to 

end on the date of the merger, 

liquidation, or sale of substantially all 

issuer’s assets for the purposes of Rule 

456(e). Ninety days after such date, the 

issuer would be required to make a final 

payment for its securities that were sold 

pursuant to the defined contribution 

plan as of the plan’s last fiscal year-end. 

The fee payment method we are 

proposing today would be mandatory 

for issuers that register the offer and sale 

of shares pursuant to defined 

contribution plans, as we believe the 

after-fiscal year-end fee calculation 

would be easier for both issuers and the 

staff to administer. The proposed rule 

would not affect the amount of fees 

owed by issuers for previously 

registered defined contribution plan 

offerings on Form S–8 that paid the fee 

upon filing. If the rule is adopted as 

proposed, when the rule becomes 

effective, all newly filed registration 

statements on Form S–8 for offerings 

pursuant to defined contribution plans 

would be deemed to register the offer 

and sale of an indeterminate amount of 

employer securities, and the filing fee 

for those registration statements would 

be paid not later than 90 days after the 

plan’s fiscal year end. 

Request for Comment: 

65. Should we adopt a new 

registration fee payment method that 

would require issuers to pay the fee for 

all sales made pursuant to defined 

contribution plan offerings during a 

given fiscal year no later than 90 days 

after the plan’s fiscal year-end, as 

proposed? 

66. Would the proposed registration 

fee payment method help to address 

administrative issues regarding the 

difficulty of keeping track of offers and 

sales registered pursuant to defined 

contribution plans? 

67. Would the proposed fee payment 

method be workable in practice? If not, 

what changes should we make to render 

it more workable? 

68. Is 90 days after the plan’s fiscal 

year-end an appropriate period of time 

in which to calculate the required fee 

payment? If not, would a shorter or 

longer period be more appropriate? 

69. Instead of paying the fee 90 days 

after the plan’s fiscal year-end, should 

the rule be revised to require payment 

90 days after the issuer’s fiscal yearend? Should the payment due date be 

tied to some other date? 

70. Given that these proposed rules 

are designed to prevent inaccuracies in 

estimating the amounts to be offered 

and sold under, and the calculation of 

registration fees for, defined 

contribution plans, should we consider 

adopting an ‘‘insignificant deviations’’ 

provision for immaterial or 

unintentional failures to comply with 

the proposed rules? 

71. Should the proposed fee payment 

method be optional rather than 

mandatory? 

72. Should the new registration fee 

payment method be limited to certain 

classes of issuers (e.g., WKSIs or issuers 

with a proven compliance record)? 

73. Are there other types of plans for 

which the new fee payment method 

would be beneficial? For example, 

should this payment method apply to 


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Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Proposed Rules 80251 

182See letter from Council. 

183See Sections 5(a) and 5(c) of the Securities Act 

of 1933 [15 U.S.C. 77e(a) and (c)]. 

184See Proposed Rules 456(e) and 457(h)(4). 

185See Sections II.C. 1 and 2, supra. 

186See letters from ABA, Chamber, Davis Polk, 

NASPP and Sullivan. 

187See letter from NASPP. 

188See letter from Sullivan. 

nonqualified deferred compensation 

plans? 

74. Instead of requiring the 

registration fees for defined contribution 

plans to be paid on an annual basis, as 

proposed, should we permit all issuers 

registering securities for defined 

contribution plans on Form S–8 to make 

registration fee payments on a pay-asyou-go basis, as WKSIs are permitted to 

do for capital-raising offerings today? 

Should we adopt a pay-as-you-go fee 

payment procedure for other types of 

plans? 

75. As proposed, the payment of the 

fee would require the filing of an 

automatically effective post-effective 

amendment to Form S–8 not later than 

90 days after the plan’s fiscal year-end. 

Are there any problems with using this 

existing form type for the fee payment? 

In the alternative, should we instead 

require the fee payment with a different 

form or should we adopt a new form 

dedicated to the payment of the fees? If 

so, what information should that form 

require? 

76. If we were to require that filing fee 

information be tagged, is there a reason 

fee-tagging should not be required in the 

proposed post-effective amendments to 

Form S–8? 

77. In the case of a merger, 

liquidation, or sale of substantially all of 

an issuer’s assets, would the proposal to 

deem the closing of the plan’s fiscal year 

to be the date of such transaction work 

well in practice? Are there better ways 

to ensure correct payment of fees in 

these situations? 

78. Is a transition period needed to 

implement the proposed fee payment 

method? If so, what would be an 

appropriate transition period? For 

example, should we delay the effective 

date of the new fee payment method by 

one year? 

79. If the new fee payment method is 

adopted as proposed, are there any other 

rules or guidance we should adopt to 

ensure the fee payment rules work 

effectively? 

3. Additional Requests for Comment on 

Counting the Shares Registered on Form 

S–8 for Defined Contribution Plans 

We believe that the rules proposed 

today will aid issuers in paying accurate 

and timely fees when registering the 

offer and sale of securities pursuant to 

defined contribution plans. Below, we 

address some of the additional 

challenges associated with counting 

securities to be offered and sold 

pursuant to a registration statement on 

Form S–8 for defined contribution 

plans. One commenter requested 

clarification of how sales and purchases 

should be tracked and how any netting 

of shares affects the amount of offers 

and sales that should be registered.182

Difficulties in estimating the number of 

shares to be offered and sold may arise, 

for example, when employees 

participating in a defined contribution 

plan divest their holdings in the issuer 

stock fund, and the divested shares are 

used to satisfy another employee’s 

investment in the issuer stock fund 

pursuant to the plan. 

Currently, Section 5 of the Securities 

Act requires registration of the offer and 

sale of the securities to the investing 

employee under the plan because it is 

a separate transaction from the initial 

offer and sale of the securities to the 

divesting employee. Although current 

practice may vary, because each offer 

and sale of a security needs to be 

registered or exempt from 

registration,183 we preliminarily believe 

that when employees divest and other 

employees invest in issuer securities 

within the plan, an issuer should not 

‘‘net’’ or ‘‘offset’’ these plan transactions 

against each other in determining the 

number of shares to deduct from the 

total number of shares to be offered and 

sold pursuant to the Form S–8. If such 

securities become available for a 

subsequent sale, after their earlier sale 

pursuant to a registration statement, we 

preliminarily believe the fact that those 

shares may be the ‘‘same’’ shares that 

were part of a previous, registered 

transaction does not negate the fact that 

the subsequent sale involves a different 

transaction by the issuer and the plan. 

We are requesting additional input 

from commenters that would help us 

clarify how sales of shares pursuant to 

defined contribution plans should be 

counted for purposes of the Securities 

Act. In addition, if we adopt the changes 

to the fee payment calculation rules 184

described above, as proposed, issuers 

will not be able to ‘‘net’’ or ‘‘offset’’ 

employee investments against employee 

divestments when calculating the fees 

owed for sales made pursuant to the 

defined contribution plan. We are 

requesting additional comments on 

whether this would be an appropriate 

result. 

Request for Comment: 

80. Does counting the sales of 

securities pursuant to a defined 

contribution plan on a gross basis, as 

described above, cause difficulty in 

administering defined contribution 

plans? Would Commission guidance 

indicating that ‘‘netting’’ or ‘‘offsetting’’ 

is not permitted eliminate or further 

mitigate this difficulty? 

81. Should we permit the netting or 

offsetting of sales made within the 

defined contribution plan so that 

securities that were made available due 

to employee divestment from the issuer 

stock fund and sold pursuant to 

employee investment elections would 

not be counted against the number of 

securities for which sales were 

registered on Form S–8? 

82. Should we adopt the new fee 

payment method described above 

without netting or offsetting as 

proposed? Alternatively, if we adopt the 

new fee payment method, should we 

permit the netting or offsetting of sales 

made within the defined contribution 

plan to apply to the payment of fees for 

defined contribution plans? 

83. Should we provide additional 

guidance on this topic in the adopting 

release or elsewhere? 

C. Conforming Form S–8 to Rule 701 

The proposed amendments to Rule 

701 include, among other things, 

changes to the scope of individuals 

eligible to receive shares pursuant to the 

exemption.185 Several commenters 

indicated the scope of eligible 

individuals should remain consistent 

for Rule 701 and Form S–8 and 

recommended that, to the extent the 

Commission changes the scope of 

individuals eligible to receive securities 

under Rule 701, similar changes should 

be made to the scope of individuals 

eligible to receive securities where the 

offer and sale is registered on Form S– 

8.186 For example, one commenter 

stated that different eligibility standards 

would create unnecessary compliance 

burdens and impede the ability of 

issuers to implement consistent and 

beneficial equity compensation 

strategies without regard to reporting 

status.187 A different commenter noted 

that Rule 701 and Form S–8 promote the 

same goals (including recognizing the 

difference in the relationship between 

issuer and recipient in compensatory 

offerings compared to capital-raising 

transactions), and given the fact that 

issuers transition from non-reporting to 

reporting (or vice versa), suggested the 

two regimes should be aligned to the 

extent practicable.188 In view of the 

amendments we are proposing to Rule 

701, we are also proposing amendments 

to harmonize the scope of persons who 

are eligible to receive securities 


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189See Section II.C.2, supra. 

190See proposed General Instruction A.1(a)(3) of 

Form S–8. 

191 Id. 

192See Section II.C.1, supra. 

193See Release 33–7646 (Feb. 25, 1999) [64 FR 

11103 (Mar. 8, 1999)] (describing the requirements 

adopted in Securities Act Release No. 6867 (June 6, 

1990) [55 FR 23909]: ‘‘To be eligible, a consultant 

must provide the issuer bona fide services not in 

connection with the offer or sale of securities in a 

capital-raising transaction’’ (emphasis in original)). 

194Rule 405. 

195See the proposed revised definition of 

‘‘employee benefit plan’’ in Rule 405. 

196 17 CFR 229.601(b)(5)(ii) and (iii). 

197See Rev. Proc. 2016–37, 2016–29 I.R.B. 136. 

198See letters from ABA, Council, Davis Polk and 

Shearman. 

199See letters from ABA and Council. 

200See letter from ABA. 

201 Id. 

202See proposed Item 8(b) of Form S–8. 

203See proposed Item 601(b)(5)(iii) of Regulation 

S–K. 

pursuant to the Rule 701 exemption 

with those eligible to receive securities 

where the offer and sale is registered on 

Form S–8. 

1. Scope of ‘‘Former Employee’’ 

As discussed above, we are proposing 

to expand Rule 701 eligibility for former 

employees to specified post-termination 

grants and to former employees of 

acquired entities.189 We believe that 

expanding Form S–8 eligibility to 

encompass former employees in these 

ways could benefit both issuers and 

securities recipients by facilitating 

compensatory transactions consistent 

with the purposes of the form. 

Accordingly, we propose to amend 

Form S–8 such that it may be used to 

register acquisitions of issuer securities 

by former employees as compensation 

for such a former employee’s service to 

the issuer during a performance period 

ending within 12 months preceding the 

former employee’s resignation, 

retirement or other termination.190 We 

are also proposing that former 

employees of an acquired entity would 

be eligible to receive securities the offer 

and sale of which is registered on the 

form.191 These individuals would be 

able to participate in an acquiring 

issuer’s employee benefit plan with 

respect to equity awards granted in 

connection with the acquisition to 

replace awards issued by the target 

while employed there. 

Request for Comment: 

84. Should we conform the ‘‘former 

employee’’ eligibility provisions of Rule 

701 and Form S–8, as proposed? Are 

there any unique considerations with 

respect to including former employees 

in compensatory offerings registered on 

Form S–8? 

2. Consultants and Advisors 

As discussed above, we are proposing 

to amend Rule 701 to expand eligibility 

to certain consultants and advisors that 

have chosen to organize their business 

as an entity.192 Form S–8 may not be 

used by issuers offering securities to 

consultants who set up passive 

investment vehicles for a noncompensatory or capital raising 

purpose.193 Therefore, consistent with 

the compensatory purpose of Form S–8, 

we propose to make conforming 

amendments to the form with the same 

conditions as Rule 701, which we 

believe would prevent issuers from 

using Form S–8 to offer and sell 

securities to third-party investors who 

did not actually perform services for the 

issuer. We also are proposing 

conforming changes to the definition of 

‘‘employee benefit plan’’ in Rule 405 194

to ensure that the scope of consultants 

or advisors that are eligible to 

participate in an employee benefit plan 

is consistent with our changes to Form 

S–8.195

We believe the proposed limitations 

on the use of Form S–8 to offer and sell 

securities to consultants and advisors 

that organize as entities would mitigate 

the risk that the form would be used to 

compensate investors that do not 

provide bona fide services to the issuer 

or for capital-raising transactions. As is 

currently the case, the instruction 

would continue to condition consultant 

and advisor eligibility on the provision 

of bona fide services to the issuer that 

are not in connection with the offer or 

sale of securities in a capital-raising 

transaction and do not directly or 

indirectly promote or maintain a market 

for the issuer’s securities. In addition, 

the instruction would permit use of 

Form S–8 to compensate those entities 

that are owned by the individuals who 

are actually performing services for the 

issuer. 

Request for Comment: 

85. Should we adopt the same 

treatment of consultants and advisors 

under Rule 701 and Form S–8? Are 

there any unique considerations with 

respect to including consultants or 

advisors organized as entities in 

compensatory offerings registered on 

Form S–8? 

D. Conforming Form S–8 Instructions 

With Current IRS Plan Review Practices 

Item 8(b) of Form S–8 currently 

specifies that in lieu of providing an 

opinion of counsel regarding 

compliance with the requirements of 

ERISA or an Internal Revenue Service 

determination letter, as required by Item 

601(b)(5)(ii) and (iii) of Regulation S– 

K,196 the issuer may undertake to 

submit the plan and any amendments to 

the plan to the IRS in a timely manner 

and to make all changes required by the 

IRS in order to qualify the plan. The 

IRS, however, is only issuing 

determination letters for amendments to 

previously qualified plans under very 

limited circumstances.197

Given the IRS’s changed practice, 

several commenters supported 

modifying or eliminating this 

requirement in Form S–8.198 A few 

commenters stated that requiring the 

determination letter or legal opinion for 

plan modifications is overly 

burdensome on issuers and should be 

eliminated.199 One commenter stated 

that it would be helpful to provide 

guidance that those issuers that have 

adopted a prototype or volume 

submitter plan may satisfy the IRS 

determination letter requirement by 

providing a copy of the IRS letter 

regarding the prototype or volume 

submitter plan that was issued to the 

sponsor of the plan that the issuer 

adopted.200 The same commenter stated 

that the Item 8 undertaking should 

recognize the IRS correction program 

with respect to qualification of plans by 

having the issuer undertake to make 

corrections in order to maintain the 

qualification of the plan as required by 

the IRS.201

We are proposing amendments that 

take into account the IRS’s changed 

practices for plan amendments, while 

continuing to protect investors with 

respect to the plan’s compliance with 

ERISA. We propose to amend Item 8(b) 

to eliminate the requirement that issuers 

undertake to submit any amendment to 

the plan to the Internal Revenue 

Service.202 We are likewise amending 

Item 601(b)(5)(iii) of Regulation S–K to 

remove the requirement to file a copy of 

the IRS determination letter that the 

amended plan is qualified under 

Section 401 of the Internal Revenue 

Code.203 The proposal would revise 

Item 8(b) to permit an undertaking that 

issuers will maintain the plan’s 

compliance with ERISA and will make 

all changes required to maintain such 

compliance in a timely manner. 

However, if the issuer does not provide 

the undertaking required by Item 8(b), 

as proposed to be revised, the 

requirements of Regulation S–K Item 

601(b)(5)(iii) would continue to apply 

with regard to plan amendments and 

therefore require the issuer to file with 

respect to any amendment a legal 

opinion confirming compliance of the 


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204 Id. 

205We note that the pre-approved program, as 

described in Rev. Proc. 2015–36, 2015–27 I.R.B. 20 

provided for two types of pre-approved plan 

programs: Master & prototype (‘‘M&P’’) and volume 

submitter. Those programs were merged into a 

single pre-approved program in Rev. Proc. 2017–41, 

2017–29 I.R.B. 92 (‘‘Rev. Proc. 2017–41’’). 

206See Section 4.06 of Rev. Proc. 2017–41. 

207See proposed Item 8(c) of Form S–8. 

208See proposed revisions to Item 1(f) of Form S– 

8. 

209See letter from Davis Polk. 

210See letter from Davis Polk, referencing IRC 

Section 199A. 

211 General Instruction A.1(a)(1) defines 

‘‘employee’’ to include certain consultants and 

advisors. 

212See letters from Council and Davis Polk. 

213See letters from Council and Davis Polk. 

214See the signature block of Form S–8, which 

requires the trustees or other persons who 

administer the employee benefit plan to have duly 

caused the registration statement to be signed on its 

behalf. See also 15 U.S.C. 77k and 77l(a)(2). 

215See Section 11(a)(1) of the Securities Act [15 

U.S.C. 77k(a)(1)]. 

216Where plan interests are being registered, 

Form S–8 requires the plan, at the time of filing, 

either to (a) have been subject to Exchange Act 

Section 15(d) for at least 90 days and be current in 

its filings thereunder; or (b) file, concurrently with 

the filing of the Form S–8 registration statement, an 

annual report on Form 11–K for its latest fiscal year 

(or, if the plan has not yet completed its first fiscal 

year, for a period ending not more than 90 days 

prior to the filing date). However, the requirement 

to file an annual report on Form 11–K does not 

apply if the plan was established less than 90 days 

prior to the Form S–8 filing date. Therefore, the 

form may be used for the initial registration of 

interests in a newly established plan. 

amended provisions of the plan with the 

requirements of ERISA.204

In addition, in lieu of compliance 

with Item 601(b)(5) and notwithstanding 

the undertaking required by Item 8(b) of 

Form S–8, the proposed amendments 

would eliminate the issuer-specific 

determination letter or opinion 

requirements in Item 601(b)(5)(ii) and 

the opinion requirement in Item 

601(b)(5)(iii) for those issuers that adopt 

a third-party pre-approved plan 205 that 

has been approved by the IRS if such 

issuers file the IRS opinion letter 206

issued to the pre-approved plan’s 

provider.207 Issuers relying on proposed 

Item 8(c) would not need to obtain their 

own determination letter from the IRS 

or otherwise provide an opinion of 

counsel unless the issuer makes 

revisions to the pre-approved plan that 

may call into question whether the 

revised plan is still qualified. 

Request for Comment: 

86. Should we adopt the proposed 

amendments to conform the Form S–8 

requirements to current IRS practices? 

87. Do the proposed amendments 

provide investors adequate assurance of 

the plan’s qualified status? 

88. Do the proposed amendments ease 

administrative burdens for adopters of 

pre-approved plans? Are there any 

changes to the requirements for adopters 

of these types of plans that we should 

consider? 

89. Is the undertaking for plan 

amendments with respect to 

maintaining ERISA qualification 

necessary? Are there alternative 

approaches to ensuring plan 

qualification under ERISA that would 

protect investors? 

E. Revisions to Item 1(f) of Form S–8; 

Tax Effects of Plan Participation 

We are proposing revisions to the 

disclosure requirements in Form S–8 to 

eliminate the description of the tax 

effects, if any, on the issuer.208 One 

commenter asked us to reconsider the 

Item 1(f) requirement to describe the tax 

effect that may accrue to employees as 

a result of participating in a plan, and 

the tax effects, if any, on the issuer.209

In a Form S–8, investors are not making 

a decision whether to approve or 

disapprove a plan; rather, the 

investment decision is whether to 

participate in an existing plan. We are 

therefore proposing revisions to Form 

S–8 that would remove the requirement 

to briefly describe the tax consequences 

of the plan for the issuer. 

With respect to the requirement to 

disclose the tax consequences for 

employees, the same commenter stated 

that tax effects depend on individual 

circumstances, which can vary among 

participants, especially for consultants 

in light of the new deduction for 

qualified business income under IRC 

Section 199A.210 Nevertheless, we are 

not proposing to eliminate the 

requirement in Form S–8 to describe the 

tax consequences to employees 211 and 

to state whether or not the plan is 

qualified under Section 401(a) of the 

Internal Revenue Code. We continue to 

believe such disclosure could provide 

relevant information for investors as 

they assess the tax consequences of their 

participation in the plan. We are 

soliciting further comments, however, 

about the usefulness of this disclosure 

for investors. 

Request for Comment: 

90. Should we revise the disclosure 

requirements in Form S–8 to eliminate 

the description of the tax effects, if any, 

on the issuer, as proposed? 

91. Are disclosures regarding the tax 

effects of plan participation useful to 

investors in the context of a Form S–8 

registration statement? If so, how? 

92. Are there other ways, outside of 

the registration statement, that investors 

receive the same information regarding 

the tax consequences to them of plan 

participation, such that disclosure from 

the issuer would not provide additional 

or material information? 

93. Are disclosures regarding the 

description of tax effects of plan 

participation that may accrue to 

employees helpful? If not, how should 

we address this concern? 

F. Additional Requests for Comment 

About Form S–8 

1. Plan Trustee Signatures on Form S– 

8 

Where interests in a plan are being 

registered, Form S–8 requires the 

registration statement to be signed by 

the plan. For the plan signature, Form 

S–8 indicates that it may be signed by 

the trustees or other persons who 

administer the employee benefit plan. 

Some commenters stated that it is 

unnecessary and burdensome to require 

the plan trustee to sign the Form S–8.212

Instead, the commenters suggested the 

employer/sponsor of the plan whose 

interests are being registered should be 

able to sign Form S–8 on behalf of the 

plan.213

As noted above, we continue to 

believe that Form S–8 plays a useful and 

effective role in registering the offer and 

sale of securities issued in 

compensatory offerings under the 

Securities Act. This is true, in part, 

because the Securities Act registration 

statement provides employees with the 

liability protections of Section 11 and 

Section 12(a)(2) in the case of material 

misstatements or omissions of 

information contained in the 

registration statement or prospectus, 

respectively.214 Securities Act Section 

11 imposes liability on every person 

who signs the registration statement.215

Furthermore, the plan and its 

administrators are responsible for a 

portion of the disclosure investors will 

receive in connection with the 

registered offering,216 and the signature 

of the plan trustee or other persons who 

administer the employee benefit plan 

acknowledges that responsibility. As a 

result, we are not proposing changes to 

the signature requirements of Form S– 

8 at this time. We are, however, 

soliciting additional comment about the 

legal and practical consequences of the 

commenters’ recommended approach. 

Request for Comment: 

94. Assuming that having the 

employer sign on behalf of the plan 

would be legally sufficient to meet the 

requirements in Section 11, such that 

liability would attach for plan 

disclosures included in the registration 

statement, could a plan legally authorize 

the employer to sign on its behalf? If so, 

how would this be done? 


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80254 Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Proposed Rules 

217The offer and sale of securities pursuant to 

ESPPs, when not exempt from registration, are 

typically registered on Form S–8. See 1980 

Employee Benefit Plans Release at Section II.A.5.a. 

218See letters from Davis Polk and NASPP. 

219See letter from NASPP. 

220See letters from Davis Polk and NASPP. 

221See letter from Davis Polk. See also Section 

5(c) of the Securities Act. 

222See General Instruction A.1. of Form S–8 

requiring that Form S–8 eligible issuers be subject 

to the requirement to file reports pursuant to 

Section 13 (15 U.S.C. 78m) or 15(d) (15 U.S.C. 

78o(d)) of the Exchange Act. 

223See letters from Davis Polk and NASPP. 

224 Id. 

225See letter from NASPP. 

226We believe that most, if not all, issuances 

under Rule 701 will be equity-based securities, 

although the scope of the proposed rules is broader 

than ‘‘equity-based’’ compensation. 

227Section 2(b) of the Securities Act [15 U.S.C. 

77b(b)], Section 3(f) of the Exchange Act [15 U.S.C. 

78c(f)], and Section 2(c) of the Investment Company 

Act of 1940 [15 U.S.C. 80a–2(c)] require us, when 

engaging in rulemaking that requires us to consider 

or determine whether an action is necessary or 

appropriate in (or, with respect to the Investment 

Company Act, consistent with) the public interest, 

to consider, in addition to the protection of 

investors, whether the action will promote 

efficiency, competition and capital formation. In 

addition, Section 23(a)(2) of the Exchange Act [15 

U.S.C. 78w(a)(2)] requires us to consider the effects 

on competition of any rules that the Commission 

adopts under the Exchange Act and prohibits the 

Commission from adopting any rule that would 

impose a burden on competition not necessary or 

appropriate in furtherance of the purposes of the 

Exchange Act. 

2. Bridging the IPO Gap for Employee 

Stock Purchase Plans 

It is common for issuers that are 

completing an initial public offering 

(‘‘IPO’’) to also implement an employee 

stock purchase plan (‘‘ESPP’’). Such 

stock purchase plans permit employees 

to purchase stock of their employer 

through payroll deductions or 

otherwise, typically at a discount to 

market.217 The stock may be acquired 

either directly from the employer or in 

open market purchases effected by the 

plan. 

A few commenters cited difficulty in 

implementing ESPPs for issuers that 

plan to conduct an IPO.218 According to 

one of these commenters, most issuers 

want employees to be enrolled in the 

ESPP on the IPO date to give employees 

the benefit of the IPO price for the first 

offering under the plan.219 Commenters 

indicated that the registration 

requirement is a ‘‘significant obstacle’’ 

in this process because when employees 

authorize contributions to an ESPP to be 

made via payroll deductions, such 

authorization is viewed as an 

investment decision on the part of the 

employee, even if the employee retains 

the right to withdraw contributions 

prior to the purchase.220

Where employees elect to participate 

in the ESPP, the pre-IPO enrollment of 

employees would constitute an offer 

and sale of securities to the participant 

employees, which would need to be 

either registered or exempt. One 

commenter noted that, without a valid 

exemption, the employer would be 

unable to solicit employees for 

participation in the plans prior to the 

IPO.221 Consequently, for the offer and 

sale of shares purchased under the ESPP 

to be covered by a Form S–8 

registration, the Form S–8 must be 

effective prior to the date that 

employees authorize the payroll 

deductions, which cannot occur because 

the issuer is not yet a reporting 

company, and therefore does not meet 

the requirements to use Form S–8.222

Commenters stated that to avoid the 

communication and registration issues, 

issuers implementing an ESPP that 

starts at the time of the IPO 

automatically enroll all of their eligible 

employees in their ESPPs, and then 

have employees withdraw from or 

confirm their enrollment before the first 

purchase is made under the ESPPs.223

According to these commenters, this is 

an awkward solution because it requires 

them to enroll all the employees before 

they can communicate about the 

plan.224 One commenter further stated 

that solving the issue of planning for an 

ESPP around the time of an IPO would 

remove a barrier that issuers face when 

undertaking an IPO.225 We are not 

proposing specific amendments at this 

time but are soliciting additional 

comments on how to best address this 

issue. 

Request for Comment: 

95. Would extending Rule 701 to 

offers to participate in an ESPP made 

before the IPO and sales pursuant to 

ESPPs made after the IPO facilitate the 

use of ESPPs? If so, how could we limit 

such exempt sales to IPO employee 

stock purchase plans? 

96. If Rule 701 were extended to 

reporting issuers for this purpose, 

would we also need to address the 

resale limitations set forth in Rule 

701(g)? If so, how should we do so? 

97. Aside from the Rule 701 

exemption, are there alternative 

solutions that we could adopt that 

would allow employees to participate in 

ESPPs during an IPO? 

98. Would the ability to communicate 

about the ESPP prior to the IPO without 

pre-IPO plan enrollment be sufficient to 

allow employee participation at the IPO 

price? If so, what types of 

communications should we exempt and 

for how long a time period prior to the 

IPO? 

IV. General Request for Comments 

We request and encourage any 

interested person to submit comments 

on any aspect of our proposals, other 

matters that might have an impact on 

the proposed amendments, and any 

suggestions for additional changes. With 

respect to any comments, we note that 

they are of greatest assistance to our 

rulemaking initiative if accompanied by 

supporting data and analysis of the 

issues addressed in those comments and 

by alternatives to our proposals where 

appropriate. 

V. Economic Analysis 

Compensatory practices, and the 

composition of the workforce have 

evolved significantly since the 

Commission last amended the Rule 701 

exemption and the Form S–8 

registration statement. For example, 

businesses have become less assetintensive, and there have been nontrivial inflationary effects over the last 

20 years. Under the current Rule 701 

provisions, start-up non-reporting 

issuers may not be able to offer the 

amount of compensatory securities 226

that would attract and retain human 

capital and provide incentives to 

employees. The proposed amendments 

to Rule 701 are in response to such 

changes in the business environment 

and intended to update the rule’s 

provisions to current business 

environment conditions. 

We are proposing several 

amendments to Rule 701, Form S–8, and 

related rules to modernize the 

requirements for compensatory 

transactions. We are mindful of the 

costs imposed by and the benefits 

obtained from our rules and the 

proposed amendments.227 The 

discussion below addresses the 

potential economic effects of the 

proposed amendments. These include 

the likely benefits and costs of the 

proposed amendments and reasonable 

alternatives thereto, as well as the 

potential effects on efficiency, 

competition, and capital formation. We 

attempt to quantify these economic 

effects whenever possible; however, due 

to data limitations, in many cases we are 

unable to do so. Particularly for Rule 

701, we are unable to quantify the 

economic effects due to lack of data on 

non-reporting issuers. Where we are 

unable to provide a quantitative 

assessment, we provide a qualitative 

discussion of the economic effects 

instead. 

A. Economic Baseline 

The baseline for the economic 

analysis consists of the current 


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228Based on staff analysis of EDGAR filings in 

calendar year 2019, there were approximately 

17,071 non-reporting operating companies 

conducting Regulation D offerings. In addition, 

there were 73 Regulation A issuers that were not 

Exchange Act reporting companies and that did not 

file a Form D or amendment to it. Finally, 693 nonreporting companies conducted offerings solely 

under Regulation Crowdfunding in 2019 

(companies conducting both Regulation D and 

Regulation Crowdfunding offerings or both 

Regulation A and Regulation Crowdfunding 

offerings in 2019 are included in the number for 

Regulation Crowdfunding offerings). 

229Although Rule 12b–2 [17 CFR 240.12b–2] 

defines the terms ‘‘accelerated filer’’ and ‘‘large 

accelerated filer,’’ it does not define the term ‘‘nonaccelerated filer.’’ If an issuer does not meet the 

definition of accelerated filer or large accelerated 

filer, it is considered a non-accelerated filer. 

230An ‘‘emerging growth company’’ is defined, in 

part, as an issuer that had total annual gross 

revenues of less than $1.07 billion during its most 

recently completed fiscal year. See Rule 405 and 17 

CFR 240.12b–2. See also Rule 405; 15 U.S.C. 

77b(a)(19); 15 U.S.C. 78c(a)(80); and Inflation 

Adjustments and Other Technical Amendments 

under Titles I and II of the JOBS Act, Release No. 

33–10332 (Mar. 31, 2017) [82 FR 17545 (Apr. 12, 

2017)]. 

‘‘Smaller reporting company’’ is defined in 17 

CFR 229.10(f) as an issuer that is not an investment 

company, an asset-backed issuer (as defined in 17 

CFR 229.1101), or a majority-owned subsidiary of 

a parent that is not a smaller reporting company 

and that: (i) Had a public float of less than $250 

million; or (ii) had annual revenues of less than 

$100 million and either: (A) No public float; or (B) 

a public float of less than $700 million. 

231We estimate that 712 issuers filed a form 11– 

K for fiscal year 2019. Of these issuers, 230 also 

filed a Form S–8 during 2019. We assume that 

Forms S–8 filed by these 230 issuers are in regard 

to a retirement related plan. 

232 17 CFR 239.90. 

233 17 CFR 230.251 through 230.263. 

regulatory requirements applicable to 

issuers issuing securities to their 

employees as part of their compensation 

arrangements. Non-reporting issuers are 

able to rely on Rule 701 to offer 

compensatory securities to their 

employees. Reporting issuers are able to 

register compensatory securities 

offerings to their employees on Form S– 

8. 

1. Rule 701 

The proposed amendments to Rule 

701 would affect many of the 

requirements associated with the 

exemption, including the timing and 

content of disclosure for certain 

offerings, the overall ceiling applicable 

to offerings under the exemption, and 

the eligible recipients of compensatory 

securities under Rule 701. 

We can approximate the number of 

growth companies with external 

financing needs using data on 

companies conducting exempt 

securities offerings under Regulation D, 

Regulation A, and Regulation 

Crowdfunding. This group may be likely 

to rely on Rule 701 for the purpose of 

offering competitive compensation 

packages to attract and retain 

individuals. Based on filings in 2019, 

we estimate there are approximately 

17,837 non-reporting companies 

conducting exempt offerings of 

unregistered securities under the 

aforementioned exemptions.228

However, we do not have any data 

regarding the current utilization of the 

Rule 701 exemption that would allow us 

to quantify the effect of the proposed 

amendments. Accordingly, in the 

discussion below, we provide a 

qualitative assessment of the potential 

effects and encourage commenters to 

provide data and information that 

would help quantify the benefits, costs, 

and the potential impacts of the 

proposed amendments on efficiency, 

competition, and capital formation. 

2. Form S–8 

The proposed amendments to Form 

S–8 would affect reporting issuers that 

currently offer, or seek to offer, 

securities pursuant to employee benefit 

plans. We estimate that 1,753 unique 

issuers filed 2,006 Forms S–8 with the 

Commission during calendar year 2019. 

The majority of these issuers filed one 

Form S–8 during 2019. There were 

1,522 issuers filing one, 201 issuers 

filing two, and 30 issuers filing three or 

more Forms S–8 during 2019. 

Among the issuers that filed at least 

one Form S–8 during 2019, 1,610 were 

domestic reporting issuers and 143 were 

FPIs. Among the domestic Form S–8 

filers, approximately 41% were large 

accelerated filers, 27% were accelerated 

filers, and 32% were non-accelerated 

filers.229 In addition, we estimate that 

40% of domestic Form S–8 filers were 

smaller reporting companies (‘‘SRCs’’), 

and 28% were emerging growth 

companies (‘‘EGCs’’).230 Approximately 

20% of domestic Form S–8 filers were 

both EGCs and SRCs. Among the FPIs 

that filed at least one Form S–8 during 

2019, approximately 23% were large 

accelerated filers, 15% were accelerated 

filers, and 46% were non-accelerated 

filers. Among these FPIs, 48% were 

EGCs. We further estimate that of the 

1,753 unique issuers filing at least one 

Form S–8 during 2019, at least 85% 

(1,523 companies) filed a Form S–8 to 

register the sale of compensatory 

securities for a non-retirement related 

plan.231

B. Benefits and Costs to Proposed 

Amendments to Rule 701 and Form S– 

8 

1. Proposed Amendments to Rule 701(e) 

Rule 701(e) specifies the disclosure 

requirements for non-reporting issuers 

relying on the Rule 701 exemption to 

offer securities as compensation to 

employees if the aggregate sales price or 

amount of securities sold during any 

consecutive 12-month period exceeds 

$10 million. For non-reporting issuers 

that exceed this threshold, the required 

disclosure includes: A copy of the 

summary plan description required by 

ERISA or a summary of the plan’s 

material terms if it is not subject to 

ERISA; information about the risks 

associated with investment in the 

securities sold under the plan or 

contract; and financial statements 

required to be furnished by Part F/S of 

Form 1–A 232 under Regulation A.233

Such financial statements must be as of 

a date no more than 180 days before the 

sale of securities relying on Rule 701. 

Moreover, the rule requires that the 

associated disclosures be delivered to 

all investors if the $10 million threshold 

is surpassed, and not only for the sales 

that exceed the $10 million threshold. 

For FPIs, Rule 701(e) requires financial 

statements that are not prepared in 

accordance with U.S. GAAP or IFRS to 

be reconciled to U.S. GAAP. We are 

proposing multiple amendments to Rule 

701(e). 

The proposed amendments would 

change various aspects of the disclosure 

required if the aggregate sales price or 

amount of securities sold during a 

consecutive 12-month period under 

Rule 701 exceeds $10 million. The 

proposed amendments would affect 

these disclosure requirements for all 

non-reporting issuers relying on the 

exemption, both domestic and FPIs. As 

proposed, such issuers would be 

required to provide financial statements 

that are no more than 270 days old (as 

compared to the current 180-day 

requirement), similar to the Regulation 

A disclosure requirement. FPIs that are 

eligible for the Rule 12g3–2(b) 

exemption would be able to provide 

such financial statements prepared in 

accordance with home country 

accounting standards without 

reconciliation to U.S. GAAP if financial 

statements prepared in accordance with 

U.S. GAAP or IFRS are not otherwise 

available. In lieu of financial statements, 

non-reporting issuers would be able to 

disclose a Section 409A independent 

valuation report, as described in more 

detail below. 

In general, these proposed 

amendments would lower the cost to 

non-reporting issuers that rely on, or 

seek to rely on, the Rule 701 exemption, 

particularly the associated disclosure 

burden. Lower costs related to the use 

of the exemption may lead to an 

increase in the use of the exemption by 

non-reporting issuers, to the extent that 


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80256 Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Proposed Rules 

234Non-reporting issuers have more opaque 

information environments, and with few exceptions 

their securities are not traded in an active market. 

As such, there is more inherent uncertainty about 

their value due to elevated liquidity and valuation 

risks, as compared to reporting companies. Such 

uncertainty is likely to exist for the value of 

compensatory securities offered and may 

potentially attenuate the incentive effects of equitybased pay for non-management employees. 

the current disclosure costs discourage 

non-reporting issuers from relying on it. 

In the context of securities-based 

compensation, we expect that the 

information contained in financial 

statements assists employees in valuing 

their compensation packages. However, 

we lack information as to how 

employees use the existing financial 

statement disclosures to interpret the 

value of offered securities-based 

compensation or to make investment 

decisions. To the extent that the 

proposed disclosure requirement leads 

to less information about the value of 

the non-reporting issuer being available 

to employees, economic theory suggests 

that increased uncertainty about such 

value may weaken the expected benefits 

associated with the use of equity-based 

pay.234

Below, we discuss the costs and 

benefits of each proposed amendment to 

Rule 701(e) individually. 

(a) Disclosure Requirement for the 

Period Preceding the Threshold Amount 

Being Exceeded 

The first proposed amendment to 

Rule 701(e) would limit the transactions 

that are subject to the rule’s additional 

disclosure requirements when sales of 

securities under Rule 701 exceed $10 

million in a 12-month period. Currently, 

disclosure must be provided a 

reasonable period of time before the 

date of sale to all investors to whom 

securities are sold during any 

consecutive 12-month period in which 

the $10 million threshold is exceeded. 

If disclosure has not been provided to 

all such investors before sale, the nonreporting issuer will lose its ability to 

rely on the exemption for the entire 

offering. The proposed amendment 

would require disclosure to only those 

investors receiving securities that 

exceed the $10 million threshold. The 

proposal would thus eliminate the 

‘‘look-back’’ aspect of the disclosure 

requirement, which may facilitate nonreporting issuers’ efforts to plan their 

compensatory programs or respond 

efficiently to unforeseen situations. 

This proposed amendment is likely to 

provide more certainty to non-reporting 

issuers regarding their compliance with 

disclosure obligations under the rule. 

The proposed amendment also would 

allow non-reporting issuers the 

flexibility to offer compensatory 

securities as needed throughout the year 

to take advantage of opportunities to 

attract human capital, without the risk 

of retroactively losing the exemption if 

the required disclosure was not 

provided to investors involved in sales 

below the $10 million threshold. To the 

extent that the current disclosure 

requirement constrains non-reporting 

issuers from fully utilizing the 

exemption and the potential benefits 

that may accrue from the use of 

employee securities-based pay, the 

proposed amendment would likely 

loosen such constraint and allow for 

more efficient use of securities-based 

pay. We also expect employees to 

benefit from the proposed amendment 

as they would be able to further 

participate in a securities-based 

compensation program that might be 

currently constrained due to the existing 

disclosure requirements. 

We do not expect this proposed 

amendment to generate any costs for 

employees and issuers. However, the 

proposed revision could create an 

information asymmetry among 

employees receiving compensatory 

securities, with some employees being 

provided more information about the 

non-reporting issuer’s value than others. 

This asymmetry could affect the value 

that employees with different 

information assign to such 

compensation (higher value generally 

being associated with greater 

disclosure). Consequently, the benefits 

from using such compensation, such as 

the alignment of incentives between 

employees and other investors, could be 

weaker for the group of employees that 

do not receive the prescribed disclosure. 

Non-reporting issuers could choose to 

voluntarily provide the disclosure to all 

employees, if it is net beneficial for the 

non-reporting issuer. 

(b) Age of Financial Statements 

Another proposed amendment to Rule 

701(e) would increase the maximum 

permissible age of the financial 

statements required to be provided to 

investors to harmonize the requirement 

with the corresponding requirements for 

capital-raising transactions under 

Regulation A. Currently, non-reporting 

issuers subject to the Rule 701(e) 

disclosure requirement must provide 

financial statements that are dated no 

more than 180 days before the 

securities’ date of sale. As a practical 

matter, such a requirement compels 

non-reporting issuers to update their 

financial statements on a quarterly basis 

in order to make continuous offerings in 

compliance with the rule. The proposed 

revision would require non-reporting 

issuers to provide financial statements 

that are dated less than 270 days before 

the securities’ date of sale, which would 

permit issuers to satisfy the disclosure 

requirement through semi-annual 

updating of their financial statements. 

For non-reporting issuers that would 

otherwise not prepare quarterly 

financial statements, increasing the 

maximum age of the financial 

statements to be provided to investors 

would lower the compliance costs 

associated with the rule. Such a 

decrease in the costs of complying with 

the rule’s disclosure requirement could 

lead to an increase in the number of 

non-reporting issuers that rely on the 

exemption to compensate their 

employees or other eligible parties with 

securities to the extent such nonreporting issuers anticipate exceeding 

Rule 701’s $10 million threshold for 

additional disclosure. 

As mentioned above, more flexibility 

in the use of securities-based 

compensation may increase the ability 

of non-reporting issuers that are eligible 

to use the exemption to attract and 

retain employees, among other potential 

benefits. The proposed amendment 

would lower compliance costs for nonreporting issuers that do not otherwise 

prepare financial statements more 

frequently than semi-annually. For 

example, the proposed amendments 

would lower compliance costs relative 

to current Rule 701 for Tier 2 Regulation 

A issuers that are not Exchange Act 

reporting companies that utilize Rule 

701 to offer compensatory securities and 

thus already are required to provide 

financial statement disclosure on a 

semi-annual basis. 

We do not expect this proposed 

amendment to generate any costs for 

employees and issuers. We lack 

information as to how or the extent to 

which employees use these disclosures 

to make investment decisions, but to the 

extent that less frequent disclosure leads 

to less timely information about the 

value of the non-reporting issuer, 

increased uncertainty about such value 

may weaken the expected benefits 

associated with the use of equity-based 

pay. 

(c) Financial Statement Content 

Requirements for FPIs 

A third proposed amendment would 

permit FPIs that are eligible for the 

exemption from Exchange Act 

registration provided by Exchange Act 

Rule 12g3–2(b) to provide financial 

statements prepared in accordance with 

home country accounting standards, if 

financial statements prepared in 

accordance with U.S. GAAP or IFRS are 

not otherwise available. Such FPIs 


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Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Proposed Rules 80257 

235 It is also possible that the requirement to 

reconcile local/country GAAP financial statements 

to U.S. GAAP or IFRS may have resulted in 

financial statements with increased reliability, if an 

independent third party performed such exercise. 

236See Treasury Reg. 1.409A–1(b)(5)(iv)(A). 

237The frequency of the proposed valuation 

disclosure is less than the current financial 

statement disclosure requirement, which would 

lower compliance costs for non-reporting issuers. 

The requirement that such valuation reports be 

prepared by an independent party would increase 

the cost of the proposed disclosure option, to the 

extent that non-reporting issuers do not currently 

use an independent party to prepare such 

valuations for tax purposes. 

238There are multiple ways a valuation could be 

derived, based on facts and circumstances specific 

to the issuer. Estimation of the sum of present value 

of anticipated future cash-flows is one method to 

derive a valuation, which could be based on 

information from existing financial statements and 

projections about anticipated future cash flows. 

would experience lower compliance 

costs under the proposed amendment 

because they would not incur the cost 

of reconciling their financial statements 

in order to offer more than $10 million 

in securities in a 12-month period. Also, 

to the extent that the cost of the required 

reconciliation to U.S. GAAP discourages 

Rule 12g3–2(b)-eligible FPIs from 

relying on the exemption, we expect 

that the proposed amendment would 

likely increase the number of such FPIs 

that may rely on the exemption in the 

future. Lowering the costs of 

compliance for such FPIs may increase 

their ability to attract and retain human 

capital through offering securities-based 

pay. 

With respect to costs, the proposed 

amendment could generate some 

uncertainty for employees or increase 

their cost of processing the information 

disclosed in financial statements if 

those employees are less familiar with 

the home country’s accounting 

standards than U.S. GAAP or IFRS, or 

if those accounting standards do not 

require the disclosure of as much 

material information.235 However, to the 

extent that employees are more familiar 

with the home country’s accounting 

standards, we do not expect the 

proposed amendment to increase their 

cost of processing the related 

information. 

(d) Alternative Valuation Disclosure 

A fourth proposed amendment to 

Rule 701(e) would permit non-reporting 

issuers to provide valuation disclosure 

using a Section 409 independent 

valuation report. The proposal would 

require the Section 409A independent 

valuation report to be prepared pursuant 

to an independent appraisal to reduce 

potential risks that may arise from an 

issuer providing its own valuation. The 

proposal also would require the Section 

409A independent valuation report to 

be updated at six-month intervals. Rule 

12g3–2(b)-eligible FPIs would be 

permitted to disclose the fair market 

value of the securities to be sold 

consistent with the Section 409A rules 

applicable to stock readily tradeable on 

an established securities market.236

To the extent that the proposed 

valuation disclosure is a less costly 

alternative to the applicable financial 

statement requirements, the proposed 

amendment is likely to lower 

compliance costs for at least some nonreporting issuers that issue securities 

under the Rule 701 exemption.237 A 

decrease in compliance costs could lead 

to more non-reporting issuers relying on 

the exemption, or to an increase in the 

amount of compensatory securities 

issued by non-reporting issuers that 

were discouraged to offer compensatory 

securities in excess of $10 million so as 

to not trigger the disclosure 

requirement. Moreover, if the 

requirement for disclosure of financial 

statements presents a potential risk of 

unauthorized release of competitively 

sensitive information, the proposed 

alternative could reduce such risks (to 

the extent that valuation disclosure is 

less likely to have that consequence). 

One difference in the information 

content of a Section 409A independent 

valuation report versus the information 

content of financial statements is that 

financial statements mostly provide 

information about past economic 

transactions as captured by applicable 

accounting standards, whereas Section 

409A valuations are based on 

assumptions about future performance. 

It is possible that a Section 409A 

independent valuation report could 

simplify or enhance an employee’s 

understanding of the value of his or her 

compensation as the report would 

provide valuation information that 

could be more practical for such 

purpose and, depending on the 

valuation method applied, does not 

necessarily need to be derived from the 

financial statements.238 However, 

valuations rely on multiple 

assumptions, which could introduce 

some uncertainty with regard to the 

perceived value of compensatory 

securities. The proposed requirement 

that such a valuation report be prepared 

pursuant to an independent appraisal 

should lower the risk that valuation 

assumptions are inaccurate or 

opportunistic, and increase the 

reliability of such valuations. 

Under the proposed amendment, Rule 

12g3–2(b)-eligible FPIs that have stock 

readily tradeable on an established 

securities market would disclose the 

stock price on the most recent trading 

day preceding the date of sale to satisfy 

the rule’s disclosure requirements. 

Because the stock price for these FPIs is 

readily observable and available, we 

expect the proposed amendment to 

lower compliance costs for these FPIs. 

Moreover, a valuation derived from the 

value of tradable stock on an established 

securities market is likely to represent a 

fair and objective value of the securities 

offered as compensation. To the extent 

that the market conditions for these FPIs 

lead to a fair and objective value, then 

disclosure of the stock price could 

increase the reliability of such 

valuation. The foreign listing of a Rule 

12g3–2(b)-eligible FPI helps assure that 

there is a foreign jurisdiction that 

principally regulates and oversees the 

trading of the issuer’s securities and its 

disclosure obligations to investors, and 

increases the likelihood that the issuer’s 

pricing determinants are located outside 

the United States. While stock price 

alone does not provide the same level of 

analysis as an independent valuation 

report, the combination of the home 

country disclosure required in 

connection with the foreign listing and 

the stock price typically provides a 

significant amount of information that is 

available for recipients of compensatory 

securities under Rule 701. 

(e) Disclosure Requirements for 

Derivative Securities 

A fifth proposed amendment to Rule 

701(e) would distinguish between 

derivative securities that involve a 

decision to exercise or convert, and 

those that do not, such as RSUs, for 

purposes of determining when 

disclosure is required to be delivered. 

As discussed in Section II.A.5, the 

timing of an investment decision, if any, 

is not universal for the various 

compensatory instruments that are 

derivative securities. Consistent with 

the rule’s general requirement that 

disclosure be provided a reasonable 

period of time before the date of sale, 

the proposal would generally require 

delivery of disclosure to recipients of 

derivative securities under the rule at 

the time most relevant to making an 

investment decision. 

A stock option or similar instrument 

may expire without being exercised or 

converted, and accordingly, does not 

result in delivery of the underlying 

shares to the holder absent an 

affirmative investment decision to 

exercise or convert. In contrast, a 

restricted stock unit or similar 

instrument settles automatically in the 

underlying shares at maturity, without 

need for any investment decision by the 

holder. Because such instruments settle 

by their terms without action by the 


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239These academic studies examine the effects of 

compensatory benefit plans for publicly traded 

companies. The findings may not fully generalize 

to non-reporting issuers that rely on the Rule 701 

exemption to provide equity-based pay. For 

example, as discussed earlier, the value of nonreporting companies is likely to be more uncertain 

relative to the value of reporting companies due to 

differences such as the information environment. 

This may increase the risk that equity-based pay for 

non-reporting companies imposes for employees 

receiving such compensation and thereby affect the 

strength of the incentives provided. 

240See Xin Chang et al., Non-Executive Employee 

Stock Options and Corporate Innovation, 115 J. Fin. 

Econ. 168 (2015) (‘‘Chang et al. (2015)’’), which uses 

a sample of S&P1500 companies over the 1998– 

2003 period to examine the effect of stock options 

to non-executive employees on corporate 

innovation, as measured by patent applications and 

patent citations. The study documents a positive 

relation between the use of stock options to 

compensate non-executive employees and proxies 

for corporate innovation. The study also finds that 

the effect of employee stock options on innovation 

is due mostly to the risk-taking incentive that stock 

options provide to employees rather than the 

incentive to exert effort. See also Yael V. Hochberg 

& Laura Lindsey, Incentives, Targeting, and Firm 

Performance: An Analysis of Non-Executive Stock 

Options, 23 Rev. Fin. Stud. 4148 (2010) (‘‘Hochberg 

& Lindsey (2010)’’), which uses a sample of 

S&P1500 companies over the 1997–2004 period to 

examine the effect of employee stock options on 

company performance. The study documents a 

positive relation between implied incentives from 

employee stock options and future operating 

performance, on average. The study also documents 

that the positive relation between employee stock 

options and firm performance is concentrated in 

smaller firms and firms with significant growth 

options. Moreover, the study shows that such effect 

is stronger for broad-based option plans as they 

induce a mutual monitoring effect within 

employees. 241See John E. Core & Wayne R. Guay, Stock 

Option Plans for Non-Executive Employees, 61 J. 

Fin. Econ. 253 (2001) (‘‘Core & Guay (2001)’’), 

which examines detailed information about nonexecutive employee stock option holdings, grants, 

and exercises for 756 companies during the 1994– 

1997 period. Among other findings, the study’s 

results support the hypothesis that options are 

granted to non-executives more intensively when 

firms have greater financing needs and face 

financing constraints. See also Ilona Babenko, 

Michael Lemmon, & Yuri Tserlukevich, Employee 

Stock Options and Investment, 66 J. Fin. 981 (2011) 

(‘‘Babenko et al. (2011)’’), which studies a sample 

of 1,773 companies over the period 2000 to 2005 

with regard to their broad-based employee stock 

option programs. The study finds evidence 

consistent with the idea that stock options can relax 

financing constraints by substituting for cash wages 

at the time of the grant, and by providing significant 

cash inflows at the time of exercise, conditional on 

a high stock price. The study further estimates that 

$0.34 of each dollar of cash inflow received by the 

firm from the exercise of stock options is allocated 

to increasing capital and R&D expenditures. 

242See Hochberg & Lindsey (2010), supra note 

240. 

holder, the relevant investment 

decision, if any, likely takes place at the 

date of grant. 

As proposed, if the sale involves a 

stock option or other derivative security 

that involves a decision to exercise or 

convert, the non-reporting issuer would 

continue to be required to deliver Item 

701(e) disclosure a reasonable period of 

time before the date of exercise or 

conversion. If the sale involves a 

restricted stock unit or other derivative 

security that does not involve a decision 

to exercise or convert, the proposal 

would require the non-reporting issuer 

to deliver disclosure a reasonable period 

of time before the date the restricted 

stock unit or similar derivative security 

is granted. However, if the sale involves 

a restricted stock unit or other 

derivative security that does not involve 

a decision to exercise or convert and is 

in connection with the hire of a new 

employee, the disclosure would be 

considered timely delivered if provided 

within 14 calendar days after the date 

the person begins employment. The 

proposed amendment could benefit 

non-reporting issuers by limiting 

potential leaks of competitively 

sensitive information by individuals 

who seek, but do not accept, 

employment with the non-reporting 

issuer. If securities-based compensation 

is a significant component of the 

compensation offered to new hires, not 

providing the disclosure required by 

Rule 701(e) before such grants are 

awarded could limit the ability of 

securities-based compensation to attract 

talent. However, we expect nonreporting issuers to weigh this potential 

effect and choose the timing of the 

required disclosure in a way that 

maximizes their expected net benefit. 

(f) Disclosure Requirements Following 

Business Combination Transactions 

A sixth proposed amendment to Rule 

701(e) would clarify disclosure delivery 

obligations for the derivative securities 

of an acquired entity that the acquiring 

non-reporting issuer assumed in a 

business combination transaction. 

Where an acquired entity complied with 

Rule 701 at the time it originally granted 

the derivative securities, the exercise or 

conversion of acquired entity derivative 

securities assumed by the acquiring 

non-reporting issuer would be exempt 

from registration, subject to the 

acquiring non-reporting issuer’s 

compliance with Rule 701(e), where 

applicable. If the acquired entity was 

required to provide disclosure pursuant 

to Rule 701(e) and the derivative 

securities are exercised or converted 

after completion of the business 

combination transaction, the acquiring 

non-reporting issuer would assume that 

disclosure obligation, and would be 

required to provide information meeting 

the requirements of Rule 701(e) about 

itself, consistent with the timing 

requirements of Rule 701(e)(6), as 

amended. Further, in determining 

whether the amount of securities the 

acquiring non-reporting issuer sold 

during any consecutive 12-month 

period exceeds $10 million for purposes 

of triggering Rule 701(e) disclosure, the 

acquiring non-reporting issuer would 

need to consider only the securities that 

it sold in reliance on Rule 701 during 

that period, and would not be required 

to include any securities sold by the 

acquired entity pursuant to the rule 

during the same 12-month period. This 

proposal would clarify disclosure 

delivery obligations following a 

business combination transaction, and 

permit affected non-reporting issuers to 

plan their compensation programs with 

more certainty as to how a potential 

future business combination transaction 

would affect the non-reporting issuer’s 

Rule 701(e) disclosure obligations. 

2. Proposed Amendments to Rule 701(d) 

Currently, for a non-reporting issuer 

to be eligible to rely on Rule 701, total 

sales of securities over a consecutive 12- 

month period may not exceed the 

greatest of three alternatives: (i) 

$1,000,000 (‘‘dollar cap’’), (ii) 15% of 

the issuer’s total assets (‘‘asset cap’’), or 

(iii) 15% of the outstanding amount of 

securities of the class. We are proposing 

to amend two of these three alternative 

caps: The dollar cap would be raised to 

$2,000,000, and the asset cap would be 

raised to 25% of an issuer’s total assets. 

The proposed increases in the dollar 

and asset caps would provide nonreporting issuers with more flexibility to 

structure employee compensation 

contracts. We anticipate that nonreporting issuers would benefit from 

this increased flexibility as it would 

allow them to design compensatory 

arrangements that may better fit their 

individual circumstances. For example, 

the increased flexibility would permit a 

non-reporting issuer entering a market 

to grant larger individual awards in an 

effort to attract talent from competitors. 

There is academic literature studying 

the use of forms of non-executive 

employee compensation.239 Most of 

these studies focus on non-executive 

employee stock options. In general, 

there is evidence that the use of stock 

options in employee compensation 

contracts correlates to increases in 

future operating performance, higher 

levels of innovation, and firm value.240

The studies also find that employee 

stock options are more likely to be used 

by issuers that are capital-constrained 

and by issuers that need to attract 

certain types of human capital.241 In 

addition, one study finds that employee 

stock options are more effective in 

younger and high growth issuers and 

when such plans are implemented more 

broadly within issuers.242 Other forms 


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243See Francesco Bova et al., Non-Executive 

Employee Ownership and Corporate Risk, 90 Acct. 

Rev. 115 (2015), which uses U.S. Department of 

Labor Form 5500 filings to construct stockholdings 

which include employee stock ownership plans 

(ESOPs), 401(k) plans, deferred profit sharing plans 

invested in company stock, and employer stock 

bonus plans. It finds that a higher level of such 

employee stock ownership is related to lower risktaking by employees. The study emphasizes the 

difference in employee incentives created by the 

various forms of equity-based pay and their 

interaction. 

244See Serdar Aldatmaz, Paige Ouimet, & Edward 

D. Van Wesep, The Option to Quit: The Effect of 

Employee Stock Options on Turnover, 127 J. Fin. 

Econ. 136 (2018), which examines the effect of 

broad based stock option plans on employee 

retention. The study finds decreased employee 

turnover following the initiation of the plan and 

increased employee turnover in the third year of the 

grant. 

245The absence of an active market for securities 

of non-reporting issuers introduces uncertainty as 

to their fair value. Holders of compensatory 

securities of non-reporting issuers also have to bear 

liquidity risk that arises from the absence of an 

active market for these securities. 

246See Brian J. Hall & Kevin J. Murphy, Stock 

Options for Undiversified Executives, 33 J. Acct. & 

Econ. 3 (2002), which shows that there is a 

difference between the value of a stock option to 

an executive versus the cost of the option to the 

company, due to the executive’s risk aversion and 

undiversified portfolio. See Core & Guay (2001), 

supra note 241. 

of securities-based compensation could 

provide different incentives and lead to 

different outcomes. For example, a 

study that examines the effects of nonexecutive employee stock ownership in 

retirement savings vehicles finds an 

inverse relationship between employee 

stock ownership levels and risktaking.243

Relatedly, the proposed amendments 

may affect non-reporting issuers’ ability 

to attract and retain talent. For example, 

a non-reporting issuer would likely 

benefit if it is competing for talent with 

reporting companies that are relatively 

less constrained in their ability to offer 

securities-based incentives to attract 

talent. Moreover, such benefit would 

likely be particularly important for nonreporting issuers that are capital 

constrained. On a similar note, the 

increased ability to offer securitiesbased compensation may provide nonreporting issuers with an additional tool 

to achieve higher employee retention. 

An academic study finds that the use of 

broad based employee stock options 

leads to increased retention rates after 

the grant, but such increased retention 

is followed by higher turnover when the 

options vest.244

The proposed increases in the dollar 

cap and the asset cap may also allow 

non-reporting issuers to reallocate 

relatively limited cash resources to 

other productive uses. This expected 

benefit may be particularly important 

for non-reporting issuers that are 

resource-constrained and for nonreporting issuers whose business 

models rely on human capital (and are 

less asset-intensive). We expect the 

proposed increase to both caps to 

provide additional flexibility to nonreporting issuers in terms of allocating 

scarce resources. 

While we expect the proposed 

amendments to Rule 701(d) to benefit 

non-reporting issuers as described 

above, there is some uncertainty as to 

the extent of the expected benefits from 

the proposed amendments. Specifically, 

securities-based compensation carries 

liquidity and valuation risks, and these 

risks are likely to be relatively higher for 

compensatory securities of nonreporting issuers.245 Higher liquidity 

and valuation risks may blunt the 

anticipated economic effects of 

proposed amendments to Rule 701(d) on 

employee attraction, retention, and 

incentive alignment.246

The proposed amendments also 

would provide that after completion of 

a business combination transaction, to 

calculate compliance with paragraph 

(d)(2) of Rule 701, the acquiring nonreporting issuer may use a pro forma 

balance sheet that reflects the 

transaction or a balance sheet for a date 

after the completion of the transaction 

that reflects the total assets and 

outstanding securities of the combined 

entity. In addition, in determining the 

amount of securities that it may offer 

pursuant to Rule 701 following a 

business combination transaction, the 

acquiring non-reporting issuer would 

not be required to include the aggregate 

sales price and amount of securities for 

which the acquired entity claimed the 

exemption during the same 12-month 

period. These proposed changes would 

allow non-reporting issuers to plan their 

compensation programs without 

uncertainty as to the effect of a potential 

future business combination 

transaction. Further, permitting an 

acquiring issuer to compute the asset 

cap based on the combined entity may 

result in an increase in the maximum 

dollar amount of securities that may be 

sold over a 12-month period under the 

exemption. 

3. Proposed Amendments to Rule 701(c) 

Eligible Participants 

(a) Consultants and Advisors 

We are proposing to extend the 

eligibility of consultants and advisors to 

receive Rule 701 compensatory 

securities to entities meeting specified 

ownership criteria designed to link the 

securities compensation to the 

performance of services and to prevent 

such securities from being issued to 

passive investment vehicles. Currently, 

only natural persons are eligible to 

receive securities pursuant to Rule 701 

for providing services to the nonreporting issuer. The proposed 

amendment would expand the scope of 

eligible consultants or advisors to whom 

non-reporting issuers may issue 

securities as compensation for services. 

The proposed extension of consultant 

and advisor eligibility would allow nonreporting issuers to use securities-based 

compensation to engage a wider 

spectrum of service providers, which 

could enable these non-reporting issuers 

to gain access to potentially higher 

quality and/or lower cost outside 

expertise and services. These expected 

benefits likely would be greater for nonreporting issuers that are capitalconstrained, and non-reporting issuers 

whose business models rely on such 

outside expertise. We do not anticipate 

any significant costs related to this 

proposal. 

(b) Former Employees 

The proposed amendments would 

extend eligibility to receive securities 

under Rule 701 to former employees of 

the non-reporting issuer who are issued 

specified post-termination grants and 

former employees of an entity that was 

acquired by the non-reporting issuer 

who are issued securities in substitution 

or exchange for securities issued as 

compensation while such persons were 

still employed by or providing services 

to the acquired issuer. We expect these 

amendments would benefit nonreporting issuers by making 

compensation planning and structure 

more efficient, as there would be less 

uncertainty and lower administrative 

costs in cases of employee turnover or 

business combination transactions. We 

do not anticipate any significant costs 

related to this proposal. 

(c) Employees of Subsidiaries 

Further, the proposed amendments 

would expand availability of the Rule 

701 exemption to securities offered to 

employees of any subsidiary of the nonreporting issuer, consistent with the 

scope of eligibility for Form S–8, rather 

than only employees of majority-owned 

subsidiaries. This proposed amendment 

likely would lower administrative 

burdens for non-reporting issuers 

relying on the Rule 701 exemption 

when they transition to reporting status 

and become eligible to use Form S–8. 

We also expect the proposed 

amendment to benefit non-reporting 

issuers and their employees by 

providing certainty for this expanded 

group of eligible employees about their 

securities-based compensation awards 


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80260 Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Proposed Rules 

247See Section VII.C, infra. We monetize the 

internal burden hours by multiplying them by $400, 

the cost per burden hour for outside professional 

help. Thus, the value of the internal burden hours 

is 115 * $400 = $46,000. 

when business combination transactions 

occur. We do not anticipate any 

significant costs to issuers or eligible 

participants related to this proposed 

amendment. 

4. Benefits and Costs to Proposed 

Amendments to Form S–8 

We are proposing multiple 

amendments regarding the use of Form 

S–8 by reporting issuers. The proposed 

amendments would expand the scope of 

participants that are eligible to receive 

compensatory securities issued 

pursuant to a Form S–8 registration 

statement and conform that scope with 

the corresponding proposed 

amendments to Rule 701. Moreover, the 

proposed amendments would reduce 

both the complexities associated with 

registration on Form S–8 and the risk of 

inadvertent non-compliance by 

reporting issuers using the form. 

(a) Benefits and Costs From Changes to 

the Scope of Eligible Participants 

The proposed amendments would 

expand the scope of participants eligible 

to receive compensatory securities 

issued pursuant to a Form S–8 

registration statement to include former 

employees of the reporting issuer for 

specified post-termination grants and 

former employees of an entity that was 

acquired by the reporting issuer in 

exchange for securities issued as 

compensation while such former 

employees were still with the acquired 

issuer. We expect these proposed 

amendments would benefit reporting 

issuers by reducing uncertainty and 

administrative costs for these issuers’ 

compensation programs in cases of 

employee turnover, or business 

combination transactions, which may 

make compensation planning and 

structuring more efficient. 

The proposed amendments would 

permit reporting issuers to offer 

compensatory securities to consultants 

and advisors that have chosen to 

organize their business as an entity, 

provided that the entity meets specified 

ownership criteria designed to link the 

securities compensation with services 

performed for the issuer, and not issued 

to passive investment vehicles. We 

expect the proposed expansion of 

consultant and advisor eligibility would 

benefit reporting issuers as the ability to 

use securities-based compensation to 

engage a wider spectrum of service 

providers could enable these companies 

to gain access to potentially higher 

quality and/or lower cost outside 

expertise and services. The expected 

benefits likely would be greater for 

reporting issuers that are resource 

constrained and whose business models 

rely on such outside expertise. We do 

not expect any significant costs to 

issuers or eligible participants 

associated with the proposed 

amendments. 

(b) Benefits and Costs From Other 

Amendments to Form S–8 

We also are providing clarifications 

and proposing amendments to Form S– 

8 that are intended to simplify 

registration and to reduce compliance 

and administrative costs while 

increasing the utility of Form S–8 for 

reporting issuers. 

We expect the main economic effect 

of these clarifications and proposed 

amendments to Form S–8 to be the 

reduction of compliance costs for 

issuers. For example, we are clarifying 

that reporting issuers may allocate 

securities among multiple incentive 

plans on a single Form S–8 and 

proposing amendments that would 

permit the addition of securities to an 

existing Form S–8 by an automatically 

effective post-effective amendment. 

These clarifications and proposed 

amendments should reduce the number 

of Form S–8 filings, thus reducing 

reporting issuers’ compliance costs. 

Reporting issuers would still have to file 

post-effective amendments, which 

means they would incur some 

compliance costs associated with those 

filings, but we expect the costs of filing 

an amendment to Form S–8 to be less 

than those of filing the initial form. 

Likewise, we expect that the proposed 

amendments to Rule 457 and Form S– 

8 to require the registration of the offer 

and sale of a maximum aggregate 

offering price of securities pursuant to 

defined contribution plans would 

reduce compliance costs for reporting 

issuers by eliminating the need to track 

offers and sales of individual shares of 

issuer stock. For PRA purposes, we 

estimate the reduction in compliance 

costs associated with the proposed 

amendments to be approximately 

$46,000.247 We note that the PRA costs 

relate to paperwork burdens and thus 

may not encompass all compliance 

costs. Accordingly, the PRA estimate 

may underestimate the reduction in 

compliance costs due to the proposed 

amendments. 

We also expect that the clarifications 

and proposed amendments to Form S– 

8 would provide reporting issuers with 

flexibility to adjust their compensatory 

benefit plans and should eliminate the 

risks of over- or underestimating the 

number of securities required for 

compensatory offerings, thereby also 

reducing the associated risk of 

inadvertent noncompliance. For 

example, under proposed Rule 413(c), 

reporting issuers would not need to 

anticipate how many securities will be 

needed to fulfill obligations under each 

individual plan or even the types of 

securities that might be authorized for 

issuance pursuant to a plan in the 

future. Additionally, clarifying the 

ability to file a single Form S–8 for 

multiple plans will facilitate its use, 

especially in connection with incentive 

plans, because to the extent a plan 

expires with authorized but unissued 

shares, those shares would be 

immediately available for issuance 

under another authorized plan. By 

requiring registration of the offer and 

sale of a maximum aggregate offering 

price of securities pursuant to defined 

contribution plans, the proposed 

amendment would simplify 

administration of defined contribution 

plans and avoid inadvertent noncompliance with Section 5 of the 

Securities Act. 

The proposed amendments would 

implement several improvements to 

simplify fee payments. Revised Form S– 

8 would include a new fee payment 

method for registration of offers and 

sales pursuant to defined contribution 

plans. The proposed amendment to the 

fee payment method would require 

reporting issuers to pay the registration 

fee for all sales made pursuant to a 

defined contribution plan during a fiscal 

year in arrears, based on the aggregate 

offering amount, no later than 90 days 

after the plan’s fiscal year end. The 

proposed fee payment method would 

simplify administration of defined 

contribution plans and potentially 

eliminate the problem of inadvertently 

over- or underestimating the number of 

securities to be sold. As a result, it could 

create savings for issuers because 

instead of paying a registration fee to the 

Commission at the time of filing a 

registration statement, reporting issuers 

would pay the fee after the end of the 

fiscal year, when the number of 

transactions will have been definitively 

determined. 

Finally, the proposed amendments 

would align Form S–8 instructions with 

current IRS plan review practices. This 

proposed amendment would eliminate 

the requirement that issuers undertake 

to submit any amendment to the plan to 

the IRS and file a copy of the IRS 

determination letter confirming that the 

amended plan is qualified under 

Section 401 of the IRC with the 

Commission. We are also proposing to 

revise Item 1(f) of Form S–8 to eliminate 


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Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Proposed Rules 80261 

the requirement to describe the tax 

effects of plan participation on the 

issuer but are proposing to retain the 

requirement to describe the tax 

consequences to employees. These 

proposed amendments would align 

Form S–8 to current IRS review 

practices and streamline the content of 

Form S–8 without sacrificing potentially 

useful disclosure regarding the tax 

effects of participation in the plan for 

plan participants. We also expect these 

amendments to reduce the compliance 

costs for participants, but we are unable 

to quantify the cost reduction. 

Overall, we expect that the economic 

impact to reporting issuers from the 

proposed technical amendments to be 

limited to reducing administrative 

burdens and complexity associated with 

registering offerings of compensatory 

securities. We do not anticipate any 

significant costs related to the proposed 

technical amendments. 

C. Anticipated Effects on Efficiency, 

Competition, and Capital Formation 

As described above, we believe that 

the proposed amendments could have 

positive effects on efficiency, 

competition, and capital formation. The 

proposed amendments to Rule 701 

would enable non-reporting issuers to 

expand the use of securities as 

compensation for a wider range of 

outside expertise and services. We 

expect this to lead to improvements in 

the operational efficiency of these 

issuers. We expect a similar result from 

the proposed amendments to the scope 

of eligible participants who may receive 

compensatory securities for reporting 

issuers in offerings registered on Form 

S–8. We expect the proposed increase to 

two of the three alternative Rule 701(d) 

offering caps to improve affected 

issuers’ ability to compete for talent by 

increasing their ability to provide 

equity-based pay packages. The 

proposed amendments to Rule 701(d) 

also may allow non-reporting issuers 

that are cash-constrained to re-allocate 

scarce resources to other productive 

uses and, as a result, lead to increased 

efficiency. Increased efficiency may be 

achieved because non-reporting issuers 

could further the use of securities-based 

compensation for incentive alignment at 

a lower cost compared to cash. 

Although offerings made pursuant to 

Rule 701(d) may not be used for capitalraising purposes, the proposed 

amendments could lead to improved 

utilization of limited resources by cashconstrained non-reporting issuers, 

which would enhance overall capital 

formation. 

The proposed technical amendments 

to Form S–8 also may enhance 

efficiency as they are likely to lower 

administrative burdens and compliance 

uncertainty for reporting issuers offering 

securities-based compensation to 

employees. For example, the proposed 

amendments are likely to increase the 

ability of reporting issuers to react to 

changing conditions by adjusting their 

compensatory offerings by adding new 

securities or plans to an existing 

registration statement, and to pay fees 

for securities sold pursuant to defined 

contribution plans without the risk of 

inadvertent non-compliance. 

D. Reasonable Alternatives 

In broad terms, the proposed 

amendments to Rule 701 are likely to 

have three main effects: 

(i) Increase the amount of securitiesbased compensation non-reporting 

issuers may provide pursuant to the 

Rule 701 exemption by increasing the 

rule’s dollar amount and asset caps 

(Rule 701(d)); 

(ii) Expand the scope of eligible 

consultants, advisors and employees 

that may receive securities-based 

compensation under Rule 701 in 

exchange for services provided (Rule 

701(c)); and 

(iii) Lower the compliance and 

disclosure costs for non-reporting 

issuers relying on, or seeking to rely on, 

the exemption to provide exempt 

securities-based compensation (Rule 

701(e)). 

As an alternative to the proposed 

amendments, we could use different 

caps on the amount of annual securitiesbased compensation that a nonreporting issuer could provide under the 

Rule 701 exemption and/or adjust the 

third alternative cap (currently set at 

15% of the maximum number of shares 

outstanding). Higher caps would allow 

non-reporting issuers more flexibility in 

using the Rule 701 exemption as a tool 

to compensate, attract, and retain 

employees (and vice versa for lower 

caps). However, due to the fact that nonreporting issuers are more opaque and 

their securities are less liquid, further 

increasing Rule 701(d) caps could lead 

to diminishing marginal benefits. 

As another alternative, we could 

choose not to expand Rule 701 and 

Form S–8 eligibility to consultants or 

advisors organized as entities with 

prescribed characteristics, or to expand 

Rule 701 and Form S–8 to consultant 

and advisor entities that do not conform 

to the proposed ownership 

requirements. Given the tax and legal 

incentives that such consultants or 

advisors have to organize as entities, not 

including such entities under the 

exemption would result in a limited set 

of choices for non-reporting issuers to 

seek such services from third parties. In 

seeking the highest quality services at 

the lowest cost, cash-constrained issuers 

could be at a disadvantage to more 

established issuers facing fewer resource 

constraints. We also could expand Rule 

701 and Form S–8 eligibility to any 

consultant or advisor, regardless of 

ownership structure. Such an 

alternative may provide an even wider 

range of options to issuers to engage 

outside expertise but would increase the 

risk that such compensatory securities 

would be issued to passive investment 

vehicles rather than individuals who 

perform services for the issuer. 

Another alternative that we could 

have pursued is to extend the Rule 701 

exemption to offers to participate in an 

ESPP made before the IPO and sales 

pursuant to ESPPs made after the IPO. 

This would facilitate employees’ 

participation in the ESPP to obtain 

shares at the IPO price, which could be 

lower than the subsequent trading price. 

Such a proposal could present 

disadvantages, such as employees’ loss 

of the information in the prospectus 

they receive pursuant to Part I of Form 

S–8, employees’ loss of the legal 

protections provided by Securities Act 

liability in the case of material 

misstatements or omissions, and 

employees’ receipt of restricted stock 

pursuant to Rule 701. However, as such 

an alternative could facilitate the use of 

ESPPs and allow issuers to better align 

incentives of their employees, the 

release requests comment on this 

alternative. 

Finally, we could make different 

amendments to the Rule 701(e) 

disclosure requirements. For example, 

instead of harmonizing the Rule 701(e) 

disclosure requirements with those of 

Regulation A offerings in terms of age of 

financial statements, we could require 

less frequent updating of this disclosure, 

for example on an annual basis. Less 

frequent updating would provide less 

certainty to holders of these securities 

regarding their value and potentially 

weaken incentive effects from the 

provision of securities-based 

compensation. However, less frequent 

disclosure of financial statements would 

be less costly for non-reporting issuers 

and could lead to increased use of 

compensatory securities by nonreporting issuers. 

As another alternative, we could 

permit the use of a Section 409A 

valuation report in lieu of financial 

statement disclosure but without 

requiring it to be independently 

prepared. Such an alternative could 

provide a lower cost option for affected 

non-reporting issuers to satisfy the 

disclosure requirement of Rule 701(e). 


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80262 Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Proposed Rules 

248See 15 U.S.C. 77k and 77l(a)(2). 

249See 44 U.S.C. 3501 et seq. 

250 44 U.S.C. 3507(d) and 5 CFR 1320.11. 

251See Rule 701(e). 

However, such alternative could give 

rise to conflicts of interest that would 

undermine the reliability of the 

valuation report. A lower quality 

valuation report would increase 

uncertainty about the value of the nonreporting issuer and the offered 

compensatory securities, and as a result, 

would attenuate the expected benefits 

from the provision of equity-based 

compensation. 

Finally, we could eliminate Form S– 

8 and allow reporting issuers to rely on 

the Rule 701 exemption instead. Such 

alternative would lower compliance 

costs for reporting issuers and could 

promote further use of securities-based 

compensation by reporting issuers. 

However, such alternative could cause 

employees to receive less information 

than would be required to be provided 

pursuant to Part I of Form S–8, which 

could lead to more uncertainty about 

their compensation and potentially 

weaken the expected benefits from the 

provision of equity-based compensation. 

Eliminating Form S–8 also would cause 

employees to lose the protections 

provided by Section 11 and, in some 

cases, Section 12(a)(2) liability in the 

case of material misstatements or 

omissions.248

Request for Comment: 

We request comments on all aspects 

of our economic analysis, including the 

potential costs and benefits of the 

proposed amendments and alternatives 

thereto, and whether the proposed 

amendments, if adopted, would 

promote efficiency, competition, and 

capital formation or affect investor 

protection. In addition, we also seek 

comment on alternative approaches to 

the proposed amendments and the 

associated costs and benefits of these 

approaches. Commenters are requested 

to provide data, estimation 

methodologies, and other factual 

support for their views, in particular, 

costs and benefits estimates. 

Specifically, we seek comment with 

respect to the following questions: Are 

there any costs and benefits to any 

entity that are not identified or 

misidentified in the above analysis? Are 

there any effects on efficiency, 

competition, and capital formation that 

are not identified or are misidentified in 

the above analysis? Should we consider 

any of the alternative approaches 

outlined above instead of the proposed 

amendments? If so, which approach and 

why? Are there any other potential 

alternative approaches we should 

consider that would promote the ability 

of companies to compete in the market 

for talent consistent with investor 

protection? 

VI. Paperwork Reduction Act 

A. Summary of the Collection of 

Information 

Certain provisions of our rules and 

forms that would be affected by the 

proposed amendments contain 

‘‘collection of information’’ 

requirements within the meaning of the 

Paperwork Reduction Act of 1995 

(‘‘PRA’’).249 The Commission is 

submitting the proposal to the Office of 

Management and Budget (‘‘OMB’’) for 

review in accordance with the PRA.250

The hours and costs associated with 

preparing and filing the forms and 

reports constitute reporting and cost 

burdens imposed by each collection of 

information. An agency may not 

conduct or sponsor, and a person is not 

required to respond to, a collection of 

information requirement unless it 

displays a currently valid OMB control 

number. 

Compliance with the information 

collections is mandatory. Responses to 

the information collections are not kept 

confidential and there is no mandatory 

retention period for the information 

disclosed. The titles for the affected 

collections of information are: 

‘‘Rule 701’’ (OMB Control No. 3235– 

0522); and 

‘‘Form S–8’’ (OMB Control No. 3235– 

0066). 

The Commission adopted Form S–8 

and Rule 701 pursuant to the Securities 

Act. Form S–8 sets forth the disclosure 

requirements for a registration statement 

for securities to be offered by a reporting 

issuer under an employee benefit plan 

to its employees, or employees of a 

subsidiary or parent company, to help 

such investors make informed 

investment decisions. Rule 701 provides 

an exemption from registration for offers 

and sales of securities pursuant to 

certain compensatory benefit plans and 

contracts relating to compensation by 

non-reporting issuers. Issuers 

conducting compensatory benefit plan 

offerings in excess of $10 million in 

reliance on Rule 701 during any 

consecutive 12-month period are 

required to provide plan participants 

with certain disclosures, including 

financial statement disclosures.251 This 

disclosure constitutes a collection of 

information. A description of the 

proposed rule amendments, including 

the need for the information and its 

proposed use, as well as a description 

of the likely respondents, can be found 

in Sections II and III above, and a 

discussion of the economic effects of the 

proposed amendments can be found in 

Section IV above. 

B. Summary of the Proposed 

Amendments’ Effects on the Collections 

of Information 

The following table summarizes the 

estimated effects of the proposed 

amendments on the paperwork burdens 

associated with the affected collections 

of information. 

PRA TABLE 1—ESTIMATED PAPERWORK BURDEN EFFECTS OF THE PROPOSED AMENDMENTS

Collection of 

information Proposed amendment Expected estimated PRA effect of proposed amendment 

Current 

number of 

average 

annual 

responses 

Estimated 

change in 

number of 

average 

annual respondents 

Form S–8 .......... • Clarify that registrants may add multiple plans and allocate securities among multiple plans on a single 

Form S–8; permit addition of securities or classes of 

securities by automatically effective-post effective 

amendment; permit registration of an indeterminate 

amount of securities for Defined Contribution Plans; 

implement a new fee calculation and payment method 

for Defined Contribution Plan. 

• These proposed amendments are expected to reduce 

the number of initial Forms S–8 filed annually, and 

correspondingly increase the number of post-effective 

amendments to Form S–8 filed annually. We expect 

the net effect to be no change in the PRA burden per 

response and no change in the number of responses. 

2,140 0 

• Conform Form S–8 instructions to current IRS plan review practices and eliminate the requirement to describe the tax effects of plan participation on the registrant. • Decrease PRA burden per response by 1 hour. 


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252We recognize that the costs of retaining 

outside professionals may vary depending on the 

nature of the professional services, but for purposes 

of this PRA analysis, we estimate that such costs 

would be an average of $400 per hour. This estimate 

is based on consultations with several registrants, 

law firms, and other persons who regularly assist 

registrants in preparing and filing reports with the 

Commission. 

253 In both PRA Table 3 and PRA Table 4, the 

estimated number of Form S–8 responses is 230, 

reflecting the number of Forms S–8 filed during 

2019 in regards to retirement related plans. See n. 

231, supra. 

PRA TABLE 1—ESTIMATED PAPERWORK BURDEN EFFECTS OF THE PROPOSED AMENDMENTS—Continued 

Collection of 

information Proposed amendment Expected estimated PRA effect of proposed amendment 

Current 

number of 

average 

annual 

responses 

Estimated 

change in 

number of 

average 

annual respondents 

• Expand eligibility to specified consultant entities and 

specified former employees of the registrant and acquired companies. 

• No change in PRA burden per response or number of 

responses. 

Rule 701 ............ • Require Rule 701(e) disclosure to be delivered to investors only for sales that exceed the $10 million 

threshold. 

• Elimination of the requirement to provide Rule 701(e) 

disclosure to investors who purchase before the $10 

million threshold is crossed would permit issuers who 

did not provide such disclosure to continue relying on 

the exemption after crossing the $10 million threshold. 

It would also allow issuers to avoid providing such disclosure as a precautionary measure in offerings where 

it is unclear whether the threshold will be crossed. We 

expect the net effect on the number of responses to 

be 40 additional responses with no change in the PRA 

burden per response. 

800 40 

• Reduce the frequency of Rule 701(e) financial statement updates; allow Rule 12g3–2(b) eligible foreign 

private issuers to disclose financial statements that are 

not reconciled to U.S. GAAP; and allow issuers to disclose valuation information consistent with IRC Section 

409A rather than financial statements. 

• Decrease PRA burden per response by 0.5 hours. 

• Increase the assets cap to 25% and increase dollar 

cap to $2 million and expand eligibility to specified 

consultant entities, employees of all subsidiaries, and 

specified former employees of issuer and acquired 

companies. 

• No change in PRA burden per response or number of 

responses. 

C. Incremental and Aggregate Burden 

and Cost Estimates for the Proposed 

Amendments 

Below we estimate the incremental 

and aggregate change in paperwork 

burden as a result of the proposed 

amendments. These estimates represent 

the average burden for all registrants, 

both large and small. In deriving our 

estimates, we recognize that the burdens 

will likely vary among individual 

issuers based on a number of factors, 

including the nature of their business. 

For purposes of the PRA, the burden is 

to be allocated between internal burden 

hours and outside professional costs. 

The table below sets forth the 

percentage estimates we typically use 

for the burden allocation for each 

affected collection of information. We 

also estimate that the average cost of 

retaining outside professionals is $400 

per hour.252

PRA TABLE 2—STANDARD ESTIMATED BURDEN ALLOCATION FOR SPECIFIED COLLECTIONS OF INFORMATION

Collection of information Internal 

(%) 

Outside 

professionals 

(%) 

Form S–8 ................................................................................................................................................................. 50 50 

Rule 701 .................................................................................................................................................................. 25 75 

For Rule 701, we estimate that the 

proposed amendments would change 

both the frequency of responses to, and 

the burden per response of, the existing 

collections of information. We believe 

that increasing the Rule 701 asset and 

dollar caps and making the exemption 

available for additional participants 

would increase the number of securities 

to be issued and expand eligibility to 

receive securities but would not 

increase the number of responses. For 

Form S–8 we believe the amendments 

would change only the burden hours. 

The revised burden estimates were 

calculated by multiplying the revised 

estimated number of responses by the 

revised estimated average amount of 

time it would take to prepare and 

review the disclosure required under 

the affected collection of information. 

The table below illustrates the 

incremental change to the annual 

compliance burden of the affected 

collection of information, in hours and 

in costs.253


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80264 Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Proposed Rules 

254We request comment pursuant to 44 U.S.C. 

3506(c)(2)(B). 

255 5 U.S.C. 601 et seq. 

256 5 U.S.C. 603(a). 

PRA TABLE 3—CALCULATION OF THE INCREMENTAL CHANGE IN BURDEN ESTIMATES OF CURRENT RESPONSES

RESULTING FROM THE PROPOSED AMENDMENTS

Collection of information 

Number of 

estimated 

affected 

respondents 

Burden hour 

annual 

decrease per 

affected 

respondent 

Decrease in 

burden hours 

for affected 

respondents 

Decrease in 

internal burden 

hours for 

affected 

respondents 

Decrease in 

professional 

hours for 

affected 

respondents 

Decrease in 

professional 

costs for 

affected 

respondents 

(A) (B) (C) = (A) × (B) (D) = (C) × 0.5 

or 0.25 

(E) = (C) × 0.5 

or 0.75 

(F) = (E) × 

$400 

Form S–8 ................................................. 230 (1) (230) (115) (115) ($46,000) 

Rule 701 ................................................... 840 (0.5) (420) (105) (315) (126,000) 

The table below illustrates the 

program change expected to result from 

the proposed rule amendments together 

with the total requested change in 

reporting burden and costs. 

PRA TABLE 4—REQUESTED PAPERWORK BURDEN UNDER THE PROPOSED AMENDMENTS

Form 

Current burden Program change Requested change in burden 

Current 

annual 

responses 

Current 

burden 

hours 

Current cost 

burden 

Number of 

affected 

responses 

Change in 

company 

hours 

Change in 

professional 

costs 

Requested 

annual 

responses 

Requested 

burden 

hours 

Cost burden 

(A) (B) (C) (D) (E) (F) (G) (H) (I) 

Form S–8 .................... 2,140 28,890 $11,556,000 230 (115) ($46,000) 2,140 1 28,775 2 $11,510,000 

Rule 701 ...................... 800 400 480,000 840 3 (85) 4 (102,000) 840 5 315 6 378,000 

1This equals the sum of (or difference between) Form S–8 current burden hours and the change in company hours. 

2This equals the sum of (or difference between) the current cost burden and the change in professional costs. 

3This represents a reduction of (.25 × 400) in the burden hours of the existing 800 respondents, as the PRA burden per response declines from 2 to 1.5 hours, 

plus (40 × 1.5 × .25) for the additional burden hours attributable to 40 additional responses. 4This represents $120,000 reduction in existing cost for existing 800 respondents, plus $18,000 additional cost from adding 40 responses. 5This equals 840 issuers × 1.5 hours × 25%. 6This equals 840 issuers × 1.5 hours × 75% × $400 per hour. 

D. Request for Comment 

Request for Comment: 

We request comment in order to: 

• Evaluate whether the proposed 

collection of information is necessary 

for the proper performance of the 

functions of the agency, including 

whether the information would have 

practical utility; 

• Evaluate the accuracy of our 

estimate of the burden of the proposed 

collection of information; 

• Determine whether there are ways 

to enhance the quality, utility, and 

clarity of the information to be 

collected; 

• Evaluate whether there are ways to 

minimize the burden of the collection of 

information on those who are to 

respond, including through the use of 

automated collection techniques or 

other forms of information technology; 

and 

• Evaluate whether the proposed 

amendments would have any effects on 

any other collections of information not 

previously identified in this section.254

Any member of the public may direct 

to us any comments about the accuracy 

of these burden estimates and any 

suggestions for reducing these burdens. 

Persons submitting comments on the 

collection of information requirements 

should direct the comments to the 

Office of Management and Budget, 

Attention: Desk Officer for the 

Securities and Exchange Commission, 

Office of Information and Regulatory 

Affairs, Washington, DC 20503, and 

should send a copy to Vanessa A. 

Countryman, Secretary, Securities and 

Exchange Commission, 100 F Street NE, 

Washington, DC 20549–1090, with 

reference to File No. S7–20. Requests for 

materials submitted to OMB by the 

Commission with regard to these 

collections of information should be in 

writing, refer to File No. S7–20, and be 

submitted to the Securities and 

Exchange Commission, Office of FOIA 

Services, 100 F Street NE, Washington, 

DC 20549–2736. OMB is required to 

make a decision concerning the 

collection of information between 30 

and 60 days after publication of this 

release. Consequently, a comment to 

OMB is best assured of having its full 

effect if OMB receives it within 30 days 

of publication. 

VII. Initial Regulatory Flexibility Act 

Analysis 

This Initial Regulatory Flexibility Act 

Analysis (‘‘IRFA’’) has been prepared, 

and made available for public comment, 

in accordance with the Regulatory 

Flexibility Act (‘‘RFA’’).255 It relates to 

the proposed amendments to Securities 

Act Rule 701 and Form S–8 to 

modernize the two principal means by 

which issuers grant securities to 

employees in compensatory 

transactions. As required by the RFA, 

this IRFA describes the impact of these 

proposed amendments on small 

entities.256

A. Reasons for, and Objectives of, the 

Proposed Action 

The proposed amendments are 

designed to modernize Rule 701, an 

exemption from Securities Act 

registration for certain compensatory 

securities transactions by non-reporting 

issuers, and Form S–8, a form for 

registering certain compensatory 

securities transactions by reporting 

companies. The Commission has 

recognized that the relationship 

between the issuer and recipient of 

securities is often different in 

compensatory, rather than capital 

raising, transactions. The proposed 

amendments reflect changes in 

compensatory practices, including the 


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257 5 U.S.C. 601(6). 258This estimate is based on staff analysis of 

issuers, excluding co-registrants, with EDGAR 

filings of Form 10–K, 20–F and 40–F, or 

amendments, and an S–8 registration filed during 

the calendar year of January 1, 2019 to December 

31, 2019. This analysis is based on data from XBRL 

filings, Compustat, and Ives Group Audit Analytics. 

259For purposes of the Paperwork Reduction Act, 

we estimate a decrease of 0.5 burden hour per 

response for Rule 701 and a decrease of 1 burden 

hour per response for Form S–8. See Section VI, 

supra. 

260See the discussion of the proposed 

amendments’ economic effects on all affected 

parties, including small entities, in Section V, 

supra. 

types of securities offered, and are 

intended to modernize and simplify 

administrative requirements. 

B. Legal Basis 

We are proposing the amendments 

contained in this release under the 

authority set forth in Sections 3(b), 6, 7, 

8, 10, 19(a) and 28 of the Securities Act, 

as amended, and Sections 3(b), 12, 13, 

15, 23(a), and 36 of the Exchange Act. 

C. Small Entities Subject to the 

Proposed Amendments 

The proposed amendments would 

affect some issuers that are small 

entities. The RFA defines ‘‘small entity’’ 

to mean ‘‘small business,’’ ‘‘small 

organization,’’ or ‘‘small governmental 

jurisdiction.’’ 257For purposes of the 

RFA, under 17 CFR 240.0–10(a), an 

issuer, other than an investment 

company, is a ‘‘small business’’ or 

‘‘small organization’’ if it had total 

assets of $5 million or less on the last 

day of its most recent fiscal year and, 

under 17 CFR 230.157, is also engaged 

or proposing to engage in an offering of 

securities that does not exceed $5 

million. Under 17 CFR 230.157 and 17 

CFR 240.0–10(a), an investment 

company is considered to be a small 

entity if it, together with other 

investment companies in the same 

group of related investment companies, 

has net assets of $50 million or less as 

of the end of its most recent fiscal year. 

The proposed amendments would 

affect both reporting and non-reporting 

issuers. We estimate that approximately 

52 currently reporting issuers that filed 

a Form S–8 in 2019 qualify as small 

entities that would be eligible to rely on 

the proposed amendments, but lack 

sufficient data to similarly estimate the 

number of small, non-reporting issuers 

who may be affected.258 We therefore 

are soliciting comment on the number of 

small entities that would be affected by 

the proposed amendments. 

D. Reporting, Recordkeeping and other 

Compliance Requirements 

The proposed amendments to Rule 

701 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; and 

• 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. 

Because these two proposals affect 

only Rule 701 offerings that exceed $10 

million, it is unlikely that they would 

affect small entities that are small 

businesses or small organizations, 

which, as defined for purposes of the 

RFA, are subject to a $5 million offering 

limit. 

The remaining proposed amendments 

would apply to small entities to the 

same extent as other issuers, 

irrespective of size. The remaining 

proposed amendments to Rule 701 

would: 

• Raise two of the three alternative 

regulatory ceilings that cap the overall 

amount of securities that a nonreporting company 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 (or 

written compensation contract) 

established by the issuer’s subsidiaries, 

whether or not majority-owned. 

With respect to Form S–8, the 

proposals would: 

• Implement improvements and 

clarifications to simplify registration on 

the form, including: 

Æ Clarify the ability to add multiple 

plans to a single Form S–8; and 

Æ Clarify the ability to allocate 

securities among multiple incentive 

plans on a single Form S–8; 

Æ Permit 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: 

Æ Permit the registration of an 

aggregate dollar amount of securities; 

and 

Æ Implement a new fee payment 

method for registration of offers and 

sales pursuant to Defined Contribution 

Plans; 

Æ Conform Form S–8’s instructions 

with current IRS plan review practices; 

and 

• Revise Item 1(f) of Form S–8 to 

eliminate the requirement that the tax 

effects of plan participation on the 

registrant be described. 

Finally, for both the 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. 

The proposed amendments are 

expected to modernize and simplify 

compensatory securities offerings for all 

issuers. As a result, we expect that the 

impact of the proposed amendments 

would be a reduction in the paperwork 

burden for all issuers, including small 

entities.259 We expect that the nature of 

any benefits and costs imposed by the 

proposed amendments to be similar for 

large and small entities.260

The proposed amendments would not 

impose any new reporting or 

recordkeeping requirement, except that 

the new fee payment method for 

registration of offers and sales pursuant 

to Defined Contribution Plans would 

require such plans to file a post-effective 

amendment annually within 90 days 

after the end of the plan’s fiscal year to 

pay the registration fee, in arrears, based 

on aggregate sales by the plan during the 

fiscal year. Currently, Defined 

Contribution Plans are required to keep 

track of the number of shares sold, so 

that they can maintain registration of 

sufficient shares to continue 

compensatory offers and sales without 

violating Section 5 of the Securities Act. 

The proposed fee payment method 

would simplify plan administration by 

eliminating the need to track individual 

offers and sales of shares and permit 

fees to be paid based on a known 

aggregate dollar amount after 

contributions are allocated to company 

stock. This should significantly simplify 

plan administration and reduce related 

costs for all reporting companies 

sponsoring Defined Contribution Plans 

that offer company stock, regardless of 

size. 

E. Duplicative, Overlapping or 

Conflicting Federal Rules 

We believe that the proposed 

amendments would not duplicate, 

overlap or conflict with other federal 

rules. 

F. Significant Alternatives 

The RFA directs us to consider 

alternatives that would accomplish our 

stated objectives, while minimizing any 

significant economic impact on small 

entities. In connection with the 


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261 5 U.S.C. 801 et seq. 

proposed amendments, we considered 

the following alternatives: 

• Establishing different compliance or 

reporting requirements that take into 

account the resources available to small 

entities; 

• Clarifying, consolidating, or 

simplifying compliance and reporting 

requirements under the rules for small 

entities; 

• Using performance rather than 

design standards; and 

• Exempting small entities from all or 

part of the requirements. 

We considered establishing different 

compliance or reporting requirements or 

further clarifying, consolidating, or 

simplifying compliance and reporting 

requirements for small entities. We have 

not proposed such alternatives, 

however, because we believe that 

investor protection is better served by 

the proposals we have chosen. In 

addition, some of the proposals, such as 

the proposed amendment to Rule 701(e), 

are unlikely to affect small entities due 

to the offering size involved. 

With respect to performance versus 

design standards, the proposed 

amendments generally apply 

performance standards. For example, 

the proposed amendments provide 

issuers with discretion in crafting 

disclosures that meet broad principles 

and standards. We believe that it is not 

appropriate to apply design standards or 

different performance standards to small 

entities given that compensatory 

relationship between the issuer and 

employees and related investor 

protection concerns would be the same 

for small entities and other issuers. The 

proposed amendments generally would 

simplify, harmonize and improve the 

framework for compensatory securities 

offerings, including for the offering 

exemption used by small entities. With 

respect to Rule 701, we believe that the 

proposed amendments would provide 

small entities greater flexibility to make 

compensatory securities offerings at 

lower costs. With respect to Form S–8, 

the proposed amendments would not 

establish any significant new reporting, 

recordkeeping, or compliance 

requirements for small entities, and 

would relieve them of burdens currently 

associated with registration of 

compensatory offerings. Accordingly, 

we do not believe it is necessary to 

exempt small entities from all or part of 

the proposed amendments. 

G. Request for Comments 

Request for Comment: 

We encourage the submission of 

comments with respect to any aspect of 

this 

IFRA. In particular, we request 

comments regarding: 

• How the proposed rule and form 

amendments can achieve their objective 

while lowering the burden on small 

entities; 

• The number of small entity 

companies that may be affected by the 

proposed rule and form amendments; 

• The existence or nature of the 

potential effects of the proposed 

amendments on small entity companies 

discussed in the analysis; 

• How to quantify the effects of the 

proposed amendments; and 

• Whether the proposed amendments 

would duplicate, overlap or conflict 

with other federal rules. 

Commenters are asked to describe the 

nature of any effect and provide 

empirical data supporting the extent of 

the effect. Comments will be considered 

in the preparation of the Final 

Regulatory Flexibility Analysis, if the 

proposed amendments are adopted, and 

will be placed in the same public file as 

comments on the proposed amendments 

themselves. 

VIII. Small Business Regulatory 

Enforcement Fairness Act 

For purposes of the Small Business 

Regulatory Enforcement Fairness Act of 

1996 (SBREFA),261 the Commission 

must advise OMB as to whether the 

proposed amendments constitute a 

‘‘major’’ rule if it results in, or is likely 

to result in: 

• A major increase in costs or prices 

for consumers or individual industries; 

or 

• Significant adverse effects on 

competition, investment, or innovation. 

• An annual effect on the U.S. 

economy of $100 million or more; 

We request comment on whether our 

proposal would be a ‘‘major rule’’ for 

purposes of the SBREFA. In particular, 

we request comment and empirical data 

on: 

• The potential effect on the U.S. 

economy on an annual basis; 

• Any potential increase in costs or 

prices for consumers or individual 

industries; and 

• Any potential effect on competition, 

investment, or innovation. 

IX. Statutory Authority 

The amendments contained in this 

release are being proposed under the 

authority set forth in Sections 3(b), 6, 7, 

8, 10, 19(a) and 28 of the Securities Act, 

as amended, and Sections 3(b), 12, 13, 

15, 23(a), and 36 of the Exchange Act. 

List of Subjects in 17 CFR Parts 229, 

230, and 239 

Administrative practice and 

procedure, Reporting and recordkeeping 

requirements, Securities. 

Text of Proposed Rule and Form 

Amendments 

In accordance with the foregoing, we 

are proposing to amend title 17, chapter 

II of the Code of Federal Regulations as 

follows: 

PART 229—STANDARD 

INSTRUCTIONS FOR FILING FORMS 

UNDER SECURITIES ACT OF 1933, 

SECURITIES EXCHANGE ACT OF 1934 

AND ENERGY POLICY AND 

CONSERVATION ACT OF 1975— 

REGULATION S–K 

■ 1. The authority citation for part 229 

continues to read in part as follows: 

Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 

77k, 77s, 77z–2, 77z–3, 77aa(25), 77aa(26), 

77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 

77nnn, 77sss, 78c, 78i, 78j, 78j–3, 78l, 78m, 

78n, 78n–1, 78o, 78u–5, 78w, 78ll, 78 mm, 

80a–8, 80a–9, 80a–20, 80a–29, 80a–30, 80a– 

31(c), 80a–37, 80a–38(a), 80a–39, 80b–11 and 

7201 et seq.; 18 U.S.C. 1350; sec. 953(b), Pub. 

L. 111–203, 124 Stat. 1904 (2010); and sec. 

102(c), Pub. L. 112–106, 126 Stat. 310 (2012). 

* * * * * 

■ 2. Amend § 229.601 by revising 

paragraph (b)(5)(iii) to read as follows: 

§ 229.601 (Item 601) Exhibits. 

* * * * * 

(b) * * * 

(5) * * * 

(iii) If the securities being registered 

are issued under a plan that is subject 

to the requirements of the Employment 

Retirement Income Security Act of 1974, 

as amended, (29 U.S.C. 1001 et seq.) 

(‘‘ERISA’’) and the plan has been 

amended subsequent to the filing of the 

documents required by paragraph 

(b)(5)(ii)(A) or (B) of this section, furnish 

an opinion of counsel that confirms the 

compliance of the amended provisions 

of the plan with the requirements of 

ERISA pertaining to such provisions. 

* * * * * 

PART 230—GENERAL RULES AND 

REGULATIONS, SECURITIES ACT OF 

1933 

■ 3. The authority citation for part 230 

continues to read as follows: 

Authority: 15 U.S.C. 77b, 77b note, 77c, 

77d, 77f, 77g, 77h, 77j, 77r, 77s, 77z–3, 77sss, 

78c, 78d, 78j, 78l, 78m, 78n, 78o, 78o–7 note, 

78t, 78w, 78ll(d), 78mm, 80a–8, 80a–24, 80a– 

28, 80a–29, 80a–30, and 80a–37, and Pub. L. 

112–106, sec. 201(a), sec. 401, 126 Stat. 313 

(2012), unless otherwise noted. 

* * * * * 


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■ 4. Amend § 230.405 by adding in 

alphabetical order a definition for 

‘‘Defined contribution plan’’ and 

revising the definition of ‘‘Employee 

benefit plan’’ to read as follows: 

§ 230.405 Definitions of terms. 

* * * * * 

Defined contribution plan. The term 

defined contribution plan means an 

employee benefit plan (as defined in 

§ 230.405) that provides for specified or 

determinable contributions by the 

employee, employer or both to an 

individual account for each employee 

participant where the amount of 

benefits paid depends, in addition to the 

level of contributions, on the degree of 

investment success. 

* * * * * 

Employee benefit plan. The term 

employee benefit plan means any 

written purchase, savings, option, 

bonus, appreciation, profit sharing, 

thrift, incentive, pension or similar plan 

or written compensation contract solely 

for employees, directors, general 

partners, trustees (where the registrant 

is a business trust), officers, or 

consultants or advisors. However, 

consultants or advisors may participate 

in an employee benefit plan only if: 

(1) They are: 

(i) Natural persons; or 

(ii) An entity, substantially all of the 

activities of which involve the 

performance of services; and 

substantially all of the ownership 

interests of which are held directly by: 

(A) No more than 25 natural persons, 

of whom at least 50 percent perform 

such services for the issuer through the 

entity; 

(B) The estate of a natural person 

specified in paragraph (1)(ii)(A) of this 

definition; and 

(C) Any natural person who acquired 

ownership interests in the entity by 

reason of the death of a natural person 

specified in paragraph (1)(ii) (A) of this 

definition. 

(2) They provide bona fide services to 

the registrant; and 

(3) The services are not in connection 

with the offer or sale of securities in a 

capital-raising transaction, and do not 

directly or indirectly promote or 

maintain a market for the registrant’s 

securities. 

* * * * * 

■ 5. Amend § 230.413 by revising 

paragraph (a) and adding paragraph (c) 

to read as follows: 

§ 230.413 Registration of additional 

securities and additional classes of 

securities. 

(a) Except as provided in section 24(f) 

of the Investment Company Act of 1940 

(15 U.S.C. 80a–24(f)) and in paragraphs 

(b) and (c) of this section, where a 

registration statement is already in 

effect, the registration of additional 

securities shall only be effected through 

a separate registration statement relating 

to the additional securities. 

* * * * * 

(c) Notwithstanding paragraph (a) of 

this section, the following additional 

securities or additional classes of 

securities may be added to a Form S– 

8 registration statement already in effect 

by filing a post-effective amendment to 

that Form S–8 registration statement: 

(1) Securities of the same class as 

those already registered on a previously 

effective Form S–8 registration 

statement; and 

(2) Securities of a class different than 

those registered on the effective Form 

S–8 registration statement. 

■ 6. Amend § 230.416 by adding 

paragraph (d) to read as follows: 

§ 230.416 Securities to be issued as a 

result of stock splits, stock dividends and 

anti-dilution provisions and interests to be 

issued pursuant to certain employee benefit 

plans. 

* * * * * 

(d) Where a registration statement on 

Form S–8 relates to securities to be 

offered pursuant to a defined 

contribution plan, such registration 

statement shall be deemed to register an 

indeterminate amount of such 

securities. 

■ 7. Amend § 230.456 by adding 

paragraph (e) to read as follows: 

§ 230.456 Date of filing; timing of fee 

payment. 

* * * * * 

(e)(1) Notwithstanding paragraph (a) 

of this section, an issuer that registers 

securities on Form S–8 to be offered 

pursuant to a defined contribution plan 

is not required to pay a registration fee 

at the time of filing but instead must pay 

a registration fee to the Commission not 

later than 90 days after the end of the 

defined contribution plan’s fiscal year. 

The registration fee must be calculated 

in the manner specified in section 6(b) 

of the Act and § 230.457(h)(4) (Rule 

457), based on the aggregate offering 

price for which the issuer’s securities 

were sold pursuant to registration of an 

indeterminate amount of securities 

under this subsection during the plan’s 

previous fiscal year, provided that: Not 

later than 90 days after the end of the 

relevant plan fiscal year during which it 

has publicly offered such securities, the 

issuer files a post-effective amendment 

to the Form S–8 with the Commission. 

Such post-effective amendment must be 

filed for the sole purpose of paying the 

fees owed by the issuer for sales 

pursuant to a defined contribution plan, 

and not for any other purpose. The posteffective amendment is required to 

contain only the registration statement 

cover page including the calculation of 

the registration fee table and the 

required signatures. The post-effective 

amendment also must be accompanied 

by the payment by the issuer of a 

registration fee with respect to the 

offering amount of the securities sold 

during the plan’s previous fiscal year as 

required in this section. 

(2) Where an issuer is registering an 

offering of an indeterminate amount of 

securities pursuant to a defined 

contribution plan under paragraph (e)(1) 

of this section, the securities sold will 

be considered registered, for purposes of 

section 6(a) of the Act, if the registration 

fee has been paid and a post-effective 

amendment is filed pursuant to 

paragraph (e)(1) of this section not later 

than the end of the 90-day period. 

(3) A registration statement filed 

relying on the registration fee payment 

provisions of paragraph (e)(1) of this 

section will be considered filed as to the 

securities identified in the registration 

statement for purposes of this section 

and section 5 of the Act when it is 

received by the Commission, if it 

complies with all other requirements 

under the Act, including this part. 

(4) For purposes of this section, if an 

issuer ceases operations, the date the 

issuer ceases operations will be deemed 

to be the end of the plan’s fiscal year for 

the purpose of this Rule 456. In the case 

of a liquidation, merger, or sale of all or 

substantially all of the assets (‘‘merger’’) 

of the issuer, the plan will be deemed 

to have ceased operations for the 

purposes of this section on the date the 

liquidation, merger or sale is 

consummated. 

(5) An issuer paying the fee required 

by paragraph (e)(1) of this section or any 

portion thereof more than 90 days after 

the end of the fiscal year of the issuer 

shall pay to the Commission interest on 

unpaid amounts, calculated based on 

the interest rate in effect at the time of 

the interest payment by reference to the 

‘‘current value of funds rate’’ on the 

Treasury Department’s Financial 

Management Service internet site at 

http://www.fms.treas.gov, or by calling 

(202) 874–6995, and using the following 

formula: I = (X) (Y) (Z/365), where: I = 

Amount of interest due; X = Amount of 

registration fee due; Y = Applicable 

interest rate, expressed as a fraction; Z 

= Number of days by which the 

registration fee payment is late. The 

payment of interest pursuant to this 

paragraph (e)(5) shall not preclude the 

Commission from bringing an action to 


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enforce the requirements of paragraph 

(e) of this section. 

Instruction 1 to paragraph (e): To 

determine the date on which the 

registration fee must be paid, the first 

day of the 90-day period is the first 

calendar day of the fiscal year following 

the fiscal year for which the registration 

fee is to be paid. If the last day of the 

90-day period falls on a Saturday, 

Sunday, or Federal holiday, the 

registration fee is due on the first 

business day thereafter. 

Instruction 2 to paragraph (e): For the 

purposes of this paragraph, the term 

‘‘issuer’’ refers to the registrant who is 

offering shares to be purchased as part 

of a defined contribution plan. The term 

does not refer to the defined 

contribution plan as issuer of plan 

interests. 

■ 8. Amend § 230.457 by adding 

paragraph (h)(4) to read as follows: 

§ 230.457 Computation of fee. 

* * * * * 

(h) * * * 

(4) If an issuer is registering an 

offering of an indeterminate amount of 

securities to be issued pursuant to a 

defined contribution plan in accordance 

with paragraph (e)(1) of § 230.456(e) 

(Rule 456(e)), the registration fee is 

calculated by multiplying the aggregate 

offering price of securities sold during 

the fiscal year by the fee payment rate 

in effect on the date of the fee payment. 

■ 9. Amend § 230.701 by removing the 

Preliminary Notes, and revising 

paragraphs (a), and (c) through (e) to 

read as follows: 

§ 230.701 Exemption for offers and sales 

of securities pursuant to certain 

compensatory benefit plans and contracts 

relating to compensation. 

(a) Exemption. Offers and sales made 

in compliance with all of the conditions 

of this section are exempt from section 

5 of the Act (15 U.S.C. 77e). 

(1) This section relates to transactions 

exempted from the registration 

requirements of section 5 of the Act (15 

U.S.C. 77e). These transactions are not 

exempt from the antifraud, civil 

liability, or other provisions of the 

federal securities laws. Issuers and 

persons acting on their behalf have an 

obligation to provide investors with 

disclosure adequate to satisfy the 

antifraud provisions of the federal 

securities laws. 

(2) In addition to complying with this 

section, the issuer also must comply 

with any applicable state law relating to 

the offer and sale of securities. 

(3) An issuer that attempts to comply 

with this section, but fails to do so, may 

claim any other exemption that is 

available. 

(4) This section is available only to 

the issuer of the securities. Affiliates of 

the issuer may not use this section to 

offer or sell securities. This section also 

does not cover resales of securities by 

any person. This section provides an 

exemption only for the transactions in 

which the securities are offered or sold 

by the issuer, not for the securities 

themselves. 

(5) The purpose of this section is to 

provide an exemption from the 

registration requirements of the Act for 

securities issued in compensatory 

circumstances. This section is not 

available for plans or schemes to 

circumvent this purpose, such as to 

raise capital. This section also is not 

available to exempt any transaction that 

is in technical compliance with this 

section but is part of a plan or scheme 

to evade the registration provisions of 

the Act. In any of these cases, 

registration under the Act is required 

unless another exemption is available. 

* * * * * 

(c) Transactions exempted by this 

section. This section exempts offers and 

sales of securities (including plan 

interests and guarantees pursuant to 

paragraph (d)(2)(ii) of this section) 

under a written compensatory benefit 

plan (or written compensation contract) 

established by the issuer, its parents, its 

subsidiaries or subsidiaries of the 

issuer’s parent, for the participation of 

their employees, directors, general 

partners, trustees (where the issuer is a 

business trust), officers, or consultants 

and advisors, and their family members 

who acquire such securities from such 

persons through gifts or domestic 

relations orders. This section exempts 

offers and sales to former employees, 

directors, general partners, trustees, 

officers, consultants and advisors only if 

such persons were employed by or 

providing services to the issuer, its 

parents, its subsidiaries or subsidiaries 

of the issuer’s parent at the time the 

securities were offered or during a 

performance period for which the 

securities are issued as compensation 

that ended within 12 months preceding 

the employee’s resignation, retirement 

or other termination. This section also 

exempts offers and sales to former 

employees of an acquired entity of 

securities issued in substitution or 

exchange for securities issued to such 

employees on a compensatory basis 

while such persons were employed by 

or providing services to the acquired 

entity. In addition, the term ‘‘employee’’ 

includes insurance agents who are 

exclusive agents of the issuer, its 

subsidiaries, parents, or subsidiaries of 

the issuer’s parent, or derive more than 

50% of their annual income from those 

entities. The term ‘‘employee’’ also 

includes executors, administrators and 

beneficiaries of the estates of deceased 

employees, guardians or members of a 

committee for incompetent former 

employees, or similar persons duly 

authorized by law to administer the 

estate or assets of former employees. 

(1) Special requirements for 

consultants and advisors. This section 

is available to consultants and advisors 

only if: 

(i) They provide bona fide services to 

the issuer, its parents, its subsidiaries or 

subsidiaries of the issuer’s parent; 

(ii) The services are not in connection 

with the offer or sale of securities in a 

capital-raising transaction, and do not 

directly or indirectly promote or 

maintain a market for the issuer’s 

securities; and 

(iii) They are: 

(A) Natural persons; or 

(B) An entity, substantially all of the 

activities of which involve the 

performance of services; and 

substantially all of the ownership 

interests of which are held directly by: 

(1) No more than 25 natural persons, 

of whom at least 50 percent perform 

such services for the issuer through the 

entity; 

(2) The estate of a natural person 

specified in paragraph (c)(1)(iii)(B)(1) of 

this section; and 

(3) Any natural person who acquired 

ownership interests in the entity by 

reason of the death of a natural person 

specified in paragraph (c)(1)(iii)(B)(1) of 

this section. 

(d) Amounts that may be sold—(1) 

Offers. Any amount of securities may be 

offered in reliance on this section. 

However, for purposes of this section, 

sales of securities underlying options 

must be counted as sales on the date of 

the option grant. 

(2) Sales. The aggregate sales price or 

amount of securities sold in reliance on 

this section during any consecutive 12- 

month period must not exceed the 

greatest of the following: 

(i) $2,000,000; 

(ii) 25% of the total assets of the 

issuer (or of the issuer’s parent if the 

issuer is a wholly-owned subsidiary and 

the securities represent obligations that 

the parent fully and unconditionally 

guarantees) measured at the issuer’s 

most recent balance sheet date (if no 

older than its last fiscal year end); or 

(iii) 15% of the outstanding amount of 

the class of securities being offered and 

sold in reliance on this section, 

measured at the issuer’s most recent 

balance sheet date (if no older than its 

last fiscal year end). 


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(3) Rules for calculating prices and 

amounts—(i) Aggregate sales price. The 

term aggregate sales price means the 

sum of all cash, property, notes, 

cancellation of debt or other 

consideration received or to be received 

by the issuer for the sale of the 

securities. Non-cash consideration must 

be valued by reference to bona fide sales 

of that consideration made within a 

reasonable time or, in the absence of 

such sales, on the fair value as 

determined by an accepted standard. 

The value of services exchanged for 

securities issued must be measured by 

reference to the value of the securities 

issued. Options must be valued based 

on the exercise price of the option. 

(ii) Time of the calculation. With 

respect to options to purchase 

securities, the aggregate sales price is 

determined when an option grant is 

made (without regard to when the 

option becomes exercisable). With 

respect to other securities, the 

calculation is made on the date of sale. 

With respect to deferred compensation 

or similar plans, the calculation is made 

when the irrevocable election to defer is 

made. 

(iii) Derivative securities. In 

calculating outstanding securities for 

purposes of paragraph (d)(2)(iii) of this 

section, treat the securities underlying 

all currently exercisable or convertible 

options, warrants, rights or other 

securities, other than those issued under 

this exemption, as outstanding. In 

calculating the amount of securities sold 

for other purposes of paragraph (d)(2) of 

this section, count the amount of 

securities that would be acquired upon 

exercise or conversion in connection 

with sales of options, warrants, rights or 

other exercisable or convertible 

securities, including those to be issued 

under this exemption. 

(iv) Other exemptions. Amounts of 

securities sold in reliance on this 

section do not affect ‘‘aggregate offering 

prices’’ in other exemptions, and 

amounts of securities sold in reliance on 

other exemptions do not affect the 

amount that may be sold in reliance on 

this section. 

(v) Merged entities. After completion 

of a business combination transaction, 

to calculate compliance with paragraph 

(d)(2) of this section, the acquiring 

issuer may use a pro forma balance 

sheet that reflects the business 

combination transaction or a balance 

sheet for a date after the completion of 

the business combination transaction 

that reflects the total assets and 

outstanding securities of the combined 

entity. 

(e) Disclosure that must be provided. 

The issuer must deliver to investors a 

copy of the compensatory benefit plan 

or the contract, as applicable. In 

addition, if the aggregate sales price or 

amount of securities sold during any 

consecutive 12-month period exceeds 

$10 million, the issuer must deliver to 

investors, for sales after the $10 million 

threshold is exceeded, the following 

disclosure a reasonable period of time 

before the date of sale: 

(1) If the plan is subject to the 

Employee Retirement Income Security 

Act of 1974 (‘‘ERISA’’) (29 U.S.C. 1104– 

1107), a copy of the summary plan 

description required by ERISA; 

(2) If the plan is not subject to ERISA, 

a summary of the material terms of the 

plan; 

(3) Information about the risks 

associated with investment in the 

securities sold pursuant to the 

compensatory benefit plan or 

compensation contract; and 

(4)(i) Financial statements required to 

be furnished by Part F/S of Form 1–A 

(Regulation A Offering Statement) 

(§§ 230.251 through 230.263), for either 

a Tier 1 or Tier 2 offering. Issuers must 

apply the age of financial statements 

requirements of Part F/S paragraphs 

(b)(3) and (4) at the time of sale. Foreign 

private issuers as defined in Rule 405 

must provide a reconciliation to 

generally accepted accounting 

principles in the United States (U.S. 

GAAP) if their financial statements are 

not prepared in accordance with U.S. 

GAAP or International Financial 

Reporting Standards (IFRS) as issued by 

the International Accounting Standards 

Board (IASB) (Item 17 of Form 20–F 

(§ 249.220f of this chapter)), provided 

that foreign private issuers that are 

eligible for the exemption from 

Exchange Act registration provided by 

Exchange Act Rule 12g3–2(b) 

(§ 240.12g3–2(b) of this chapter) may 

provide financial statements that are 

prepared in accordance with home 

country accounting standards without 

reconciliation to U.S. GAAP if financial 

statements prepared in accordance with 

U.S. GAAP or IFRS as issued by the 

IASB are not otherwise available. 

(ii) In lieu of the financial statements 

required by paragraph (e)(4)(i) of this 

section: 

(A) A foreign private issuer that is 

eligible for the exemption from 

Exchange Act registration provided by 

Exchange Act Rule 12g3–2(b) 

(§ 240.12g3–2(b) of this chapter) may 

provide the fair market value of the 

securities to be sold as determined 

consistent with the rules and 

regulations under Section 409A of the 

Internal Revenue Code (26 U.S.C. 409A) 

applicable to stock readily tradeable on 

an established securities market; and 

(B) Any other issuer may provide an 

independent valuation report of the fair 

market value of the securities to be sold 

as determined by an independent 

appraisal consistent with the rules and 

regulations under Section 409A of the 

Internal Revenue Code (26 U.S.C. 409A) 

applicable to determination of the fair 

market value of service recipient stock 

for stock not readily tradable on an 

established securities market, as of a 

date that is no more than 6 months 

before the sale of securities in reliance 

on this exemption. 

(5) If the issuer is relying on 

paragraph (d)(2)(ii) of this section to use 

its parent’s total assets to determine the 

amount of securities that may be sold, 

the parent’s financial statements must 

be delivered. If the parent is subject to 

the reporting requirements of section 13 

or 15(d) of the Exchange Act (15 U.S.C. 

78m or 78o(d)), the financial statements 

of the parent required by Rule 10–01 of 

Regulation S–X (§ 210.10–01 of this 

chapter) and Item 310 of Regulation D– 

B (§ 228.310 of this chapter), as 

applicable, must be delivered. 

(6) If the sale involves a stock option 

or other derivative security that involves 

a decision to exercise or convert, the 

issuer must deliver disclosure a 

reasonable period of time before the 

date of exercise or conversion. If the sale 

involves a restricted stock unit or other 

derivative security that does not involve 

a decision to exercise or convert, the 

issuer must deliver disclosure a 

reasonable period of time before the 

date the restricted stock unit or similar 

derivative security is granted; provided 

that, if the sale is in connection with the 

hire of a new employee, the disclosure 

must be delivered no later than 14 

calendar days after the date the person 

begins employment. For deferred 

compensation or similar plans, the 

issuer must deliver disclosure to 

investors a reasonable period of time 

before the date the irrevocable election 

to defer is made. 

(7) Merged entities. (i) In determining 

whether the amount of securities the 

acquiring issuer sold during any 

consecutive 12-month period exceeds 

$10 million, the acquiring issuer would 

not be required to include any securities 

sold by the acquired entity pursuant to 

the rule during the same 12-month 

period. 

(ii) As long as the acquired entity 

complied with Rule 701 at the time it 

originally granted the derivative 

securities assumed by the acquiring 

issuer in the business combination 

transaction, the exercise or conversion 

of the derivative securities would be 

exempted by this section, subject to 

compliance, where applicable, with 


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80270 Federal Register / Vol. 85, No. 239 / Friday, December 11, 2020 / Proposed Rules 

Rule 701(e). For assumed derivative 

securities for which the acquired entity 

was required to provide disclosure 

pursuant to Rule 701(e) that are 

exercised or converted after completion 

of the business combination transaction, 

the acquiring issuer would satisfy that 

obligation by providing information 

meeting the requirements of Rule 701(e) 

consistent with the timing requirements 

of Rule 701(e)(6). 

* * * * * 

PART 239—FORMS PRESCRIBED 

UNDER THE SECURITIES ACT OF 1933 

■ 10. The authority citation for part 239 

continues to read in part as follows: 

Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 

77s, 77z–2, 77z–3, 77sss, 78c, 78l, 78m, 78n, 

78o(d), 78o–7 note, 78u–5, 78w(a), 78ll, 

78mm, 80a–2(a), 80a–3, 80a–8, 80a–9, 80a– 

10, 80a–13, 80a–24, 80a–26, 80a–29, 80a–30, 

80a–37, and Sec. 71003 and Sec. 84001, Pub. 

L. 114–94, 129 Stat. 1312, unless otherwise 

noted. 

■ 11. Amend Form S–8 (referenced in 

§ 239.16b) by: 

■ a. Revising the cover page; 

■ b. Adding Note 3 under Calculation of 

Registration Fee; 

■ c. Revising General Instruction 

A.1(a)(1) 

■ d. Revising General Instruction 

A.1(a)(3); 

■ e. Re-designating the existing text of 

General Instruction E to be paragraph 1; 

■ f. Amending General Instruction E to 

include paragraph 2 

■ g. Revising paragraph (f) of Item 1; 

■ h. Revising paragraph (b) of Item 8; 

and 

■ i. Adding paragraph (c) to Item 8. 

The revisions and additions read as 

follows: 

Note: The text of Form S–8 does not, and 

these amendments will not, appear in the 

Code of Federal Regulations. 

UNITED STATES 

SECURITIES AND EXCHANGE 

COMMISSION 

Washington, DC 20549 

FORM S–8 

REGISTRATION STATEMENT UNDER 

THE SECURITIES ACT OF 1933 

* * * * * 

(Full title of the plan(s)) 

* * * * * 

If this Form is a post-effective 

amendment to a registration statement 

filed pursuant to General Instruction 

E.2, filed to register additional securities 

or additional classes of securities 

pursuant to Rule 413(c) under the 

Securities Act, check the following box. 

[checkbox] 

If this Form is a post-effective 

amendment to a registration statement 

filed pursuant to Rule 456(e)(1) solely to 

pay fees with respect to securities sold 

under defined contribution plans in the 

previous fiscal year, check the following 

box. [checkbox] 

* * * * * 

CALCULATION OF REGISTRATION 

FEE 

* * * * * 

Notes: 

* * * * * 

3. If the filing fee is calculated 

pursuant to Rule 457(h)(4) 

(§ 230.457(h)(4) of this chapter) under 

the Securities Act in a post-effective 

amendment filed pursuant to Rule 

456(e) (§ 230.456(e) of this chapter) for 

defined contribution plans, only the 

title of the class of securities to be 

registered, the aggregate offering price 

for that class of securities, and the 

amount of registration fee need to 

appear in the Fee Table. 

* * * * * 

GENERAL INSTRUCTIONS 

A. Rule as to Use of Form S–8 

1. * * * 

a. * * * 

(1) For purposes of this form, the term 

‘‘employee’’ is defined as any employee, 

director, general partner, trustee (where 

the registrant is a business trust), officer, 

or consultant or advisor. Form S–8 is 

available for the issuance of securities to 

consultants or advisors only if: 

(i) They provide bona fide services to 

the registrant; 

(ii) The services are not in connection 

with the offer or sale of securities in a 

capital-raising transaction, and do not 

directly or indirectly promote or 

maintain a market for the issuer’s 

securities; and 

(iii) They are: 

(A) Natural persons; or 

(B) An entity, substantially all of the 

activities of which involve the 

performance of services; and 

substantially all of the ownership 

interests of which are held directly by: 

(1) No more than 25 natural persons, 

of whom at least 50 percent perform 

such services for the issuer through the 

entity; 

(2) The estate of a natural person 

specified in paragraph (1); and 

(3) Any natural person who acquired 

ownership interests in the entity by 

reason of the death of a natural person 

specified in paragraph (1). 

(2) * * * 

(3) The term ‘‘employee’’ also 

includes former employees of the issuer, 

former employees of an entity acquired 

by the issuer, as well as executors, 

administrators or beneficiaries of the 

estates of deceased employees, 

guardians or members of a committee 

for incompetent former employees of 

the issuer or an entity acquired by the 

issuer, or similar persons duly 

authorized by law to administer the 

estate or assets of former employees of 

the issuer or an entity acquired by the 

issuer. The inclusion of all individuals 

described in the preceding sentence in 

the term ‘‘employee’’ is only to permit 

registration on Form S–8 of: 

(i) The exercise of employee beneÉt 

plan stock options and the subsequent 

sale of the securities, if these exercises 

and sales are permitted under the terms 

of the plan; 

(ii) the acquisition of registrant 

securities pursuant to intra-plan 

transfers among plan funds, if these 

transfers are permitted under the terms 

of the plan; 

(iii) the acquisition of registrant 

securities as compensation for a former 

employee’s service to the issuer during 

a performance period ending within the 

12 months preceding the former 

employee’s resignation, retirement or 

other termination; and 

(iv) with respect to former employees 

of an entity acquired by the issuer, the 

acquisition of securities issued in 

substitution or exchange for securities 

issued to such persons by the acquired 

entity on a compensatory basis while 

such persons were employed by the 

acquired entity. 

* * * * * 

E. Registration of Additional Securities 

1. With respect to the registration of 

additional securities of the same class as 

other securities for which a registration 

statement filed on this Form relating to 

an employee benefit plan is effective, 

the registrant may file a registration 

statement consisting only of the 

following: The facing page; a statement 

that the contents of the earlier 

registration statement, identified by file 

number, are incorporated by reference; 

required opinions and consents; the 

signature page; and any information 

required in the new registration 

statement that is not in the earlier 

registration statement. If the new 

registration statement covers restricted 

securities being offered for resale, it 

shall include the required reoffer 

prospectus. If the earlier registration 

statement included a reoffer prospectus, 

the new registration statement shall be 

deemed to include that reoffer 

prospectus; provided, however, that a 

revised reoffer prospectus shall be filed, 

if the reoffer prospectus is substantively 

different from that filed in the earlier 


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registration statement. The filing fee 

required by the Act and Rule 457 

(§ 230.457) shall be paid with respect to 

the additional securities only. 

2. An issuer may register additional 

securities or classes of securities, 

pursuant to Rule 413(c) by filing a posteffective amendment to the effective 

registration statement. The issuer may 

add subsidiaries as additional 

registrants, whose securities are eligible 

to be sold as part of the Form S–8 by 

filing a post-effective amendment 

identifying the additional registrants, 

and the registrant and the additional 

registrants and other persons required to 

sign the registration statement must sign 

the post-effective amendment. The posteffective amendment must consist of the 

facing page; any disclosure required by 

this Form that is necessary to update the 

registration statement to reflect the 

additional securities, additional classes 

of securities, any required opinions and 

consents; and the signature page. 

Required information, consents, or 

opinions may be included in the 

prospectus and the registration 

statement through a post-effective 

amendment or may be provided through 

a document incorporated or deemed 

incorporated by reference into the 

registration statement and the 

prospectus that is part of the registration 

statement. 

* * * * * 

Item 1. Plan Information. 

* * * * * 

(f) Tax Effects of Plan Participation 

Describe briefly the tax effect that may 

accrue to employees as a result of plan 

participation and whether or not the 

plan is qualified under Section 401(a) of 

the Internal Revenue Code. 

Note: If the plan is not qualified under 

Section 401 of the Internal Revenue 

Code of 1986, as amended, 

consideration should be given to the 

applicability of the Investment 

Company Act of 1940. See Securities 

Act Release No. 4790 (July 13, 1965). 

* * * * * 

Item 8. Exhibits. 

* * * * * 

(b) Neither an opinion of counsel 

concerning compliance with the 

requirements of ERISA nor an Internal 

Revenue Service determination letter 

that the plan is qualified under Section 

401 of the Internal Revenue Code shall 

be required for any plan amendment if, 

in lieu thereof, the response to this Item 

8 includes an undertaking that the 

registrant will maintain the plan’s 

compliance with the requirements of 

ERISA and will make all changes 

required to maintain such compliance 

in a timely manner. 

(c) Provided that if the plan adopted 

is a pre-approved plan that previously 

received an opinion letter from the 

Internal Revenue Service, neither an 

opinion of counsel concerning 

compliance with the requirements of 

ERISA nor an company-specific Internal 

Revenue Service opinion letter that the 

plan is qualified under Section 401 of 

the Internal Revenue Code shall be 

required if, in lieu thereof, the registrant 

files a copy of the IRS opinion letter 

approving the pre-approved plan that 

was issued to the provider of the plan, 

unless the company makes revisions to 

the pre-approved plan that may call into 

question whether the plan, as so 

revised, is still qualified. 

* * * * * 

By the Commission. 

Dated: November 24, 2020. 

Vanessa A. Countryman, 

Secretary. 

[FR Doc. 2020–26390 Filed 12–10–20; 8:45 am] 

BILLING CODE 8011–01–P 


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