34958 Federal Register / Vol. 83, No. 142 / Tuesday, July 24, 2018 / Proposed Rules 

1See, e.g., Release No. 33–3469–X (Apr. 10, 1953) 

[18 FR 2182 (Apr. 17, 1953)] and Registration of 

Securities Offered Pursuant to Employees Stock 

Purchase Plans, 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. 

2See 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)] at n. 82, stating ‘‘The 

‘‘no sale’’ theory relates to the issuance of 

compensatory grants made by employers to broad 

groups of employees pursuant to broad-based stock 

bonus plans without Securities Act registration 

under the theory that the awards are not an offer 

or sale of securities under Section 2(a)(3) of the 

Securities Act [15 U.S.C. 77b(a)(3)].’’ Where 

securities are awarded to employees at no direct 

cost through broad based bonus plans, the staff has 

taken the position generally that there has been no 

sale since employees do not individually bargain to 

contribute cash or other tangible or definable 

consideration to such plans. Where securities are 

awarded to or acquired by employees pursuant to 

individual employment arrangements, however the 

staff has expressed the view that such arrangements 

involve separately bargained consideration, and a 

sale of the securities has occurred. See Employee 

Benefit Plans: Interpretations of Statute, Release 

No. 33–6188 (Jan. 15, 1981) [29 FR 8960 (Feb. 11, 

1980)] at Section II.A.5.d and n. 84. 

21°28′41′′ N, long. 157°58′19′′ W, thence 

clockwise along a 3.7-mile radius of the 

airport to lat. 21°25′46′′ N, long. 158°04′24′′ 

W; to lat. 21°26′52′′ N, long. 158°04′31′′ W; 

to lat. 21°27′17′′ N, long. 158°05′45′′ W; to lat. 

21°29′14′′ N, long. 158°04′50′′ W; to lat. 

21°30′18′′ N, long. 158°03′59′′ W; thence to 

the point of beginning; excluding that 

airspace below 1,800 feet MSL beyond 3.3 

miles from the airport from the 89° bearing 

clockwise to the 218° bearing from the 

airport. 

Paragraph 6005 Class E Airspace Areas 

Extending Upward From 700 Feet or More 

Above the Surface of the Earth. 

* * * * * 

AWP HI E5 Honolulu, HI [Amended] 

Wheeler AAF, HI 

(Lat. 21°28′53′′ N, long. 158°02′16′′ W) 

That airspace extending upward from 700 

feet above the surface within a 4.2-mile 

radius of Wheeler AAF, excluding that 

portion within Restricted Area R–3109, when 

active. 

Issued in Seattle, Washington, on July 17, 

2018. 

Shawn M. Kozica, 

Group Manager, Operations Support Group, 

Western Service Center. 

[FR Doc. 2018–15738 Filed 7–23–18; 8:45 am] 

BILLING CODE 4910–13–P 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Part 230 

[Release No. 33–10521; File No. S7–18–18] 

RIN 3235–AM38 

Concept Release on Compensatory 

Securities Offerings and Sales 

AGENCY: Securities and Exchange 

Commission 

ACTION: Concept release; request for 

comment. 

SUMMARY: The Securities and Exchange 

Commission (‘‘Commission’’) is 

publishing this release to solicit 

comment on the exemption from 

registration under the Securities Act of 

1933 (the ‘‘Securities Act’’) for securities 

issued by non-reporting companies 

pursuant to compensatory 

arrangements, and Form S–8, the 

registration statement for compensatory 

offerings by reporting companies. 

Significant evolution has taken place 

both in the types of compensatory 

offerings issuers make and the 

composition of the workforce since the 

Commission last substantively amended 

these regulations. Therefore, as we 

amend the exemption as mandated by 

the Economic Growth, Regulatory 

Relief, and Consumer Protection Act 

(the ‘‘Act’’), we seek comment on 

possible ways to modernize the 

exemption and the relationship between 

it and Form S–8, consistent with 

investor protection. 

DATES: Comments should be received on 

or before September 24, 2018. 

ADDRESSES: Comments may be 

submitted by any of the following 

methods: 

Electronic Comments 

• Use the Commission’s internet 

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

rules/concept.shtml); or 

• Send an email to rule-comments@

sec.gov. Please include File Number S7– 

18–18 on the subject line. 

Paper Comments 

• Send paper comments to Brent J. 

Fields, Secretary, Securities and 

Exchange Commission, 100 F Street NE, 

Washington, DC 20549–1090. 

All submissions should refer to File 

Number S7–18–18. This file number 

should be included on the subject line 

if email is used. 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/concept.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. 

FOR FURTHER INFORMATION CONTACT: 

Anne M. Krauskopf, Senior Special 

Counsel, and Adam F. Turk, Special 

Counsel, Office of Chief Counsel, 

Division of Corporation Finance, at 

(202) 551–3500. 

SUPPLEMENTARY INFORMATION: 

Table of Contents 

I. Overview 

II. Rule 701 

A. Background 

B. Rule 701(c) Eligible Plan Participants 

C. Rule 701(e) Disclosure Requirements 

1. General 

2. Timing and Manner of Rule 701(e) 

Disclosure 

3. Options and Other Derivative Securities/ 

RSUs 

D. Rule 701(d) Exemptive Conditions 

III. Form S–8 

A. Background 

B. Form S–8 Eligible Plan Participants 

C. Administrative Burdens 

D. Form S–8 Generally 

IV. Conclusion 

I. Overview 

Under the Securities Act, every offer 

and sale of securities must be registered 

or subject to an exemption from 

registration. The Commission has long 

recognized that offers and sales of 

securities as compensation present 

different issues than offers and sales 

that raise capital for the issuer of the 

securities.1 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—17 CFR 230.701 (Rule 

701)—for certain compensatory 

securities transactions as well as a 

specialized form—Form S–8—for 

registering certain compensatory 

transactions. Both Rule 701 and Form 

S–8 require the issuer to make specific 

disclosures. However, depending on the 

circumstances, compensatory 

transactions also may be conducted 

under the Securities Act Section 4(a)(2) 

exemption from registration or under a 

‘‘no sale’’ theory,2 which would not 

require specific disclosures. 

Equity compensation can be an 

important component of the 

employment relationship. Using equity 

for compensation can align the 

incentives of employees with the 

success of the enterprise, facilitate 


jstallworth on DSKBBY8HB2PROD with PROPOSALS
Federal Register / Vol. 83, No. 142 / Tuesday, July 24, 2018 / Proposed Rules 34959 

3See Executive Compensation and Related 

Person Disclosure, Release No. 33–8732A (Aug. 29, 

2006) [71 FR53158 (Sept. 6, 2006)] at Section II.A.1. 

4 17 CFR 239.16b. 

5Section 507 of the Act directs the Commission, 

not later than 60 days after the date of enactment, 

to amend Rule 701(e) to increase this threshold. See 

Public Law 115–174, sec. 507, 132 Stat. 1296 

(2018). In Release 33–10520, we adopt an 

amendment to Rule 701(e) to implement this 

change. 

6 15 U.S.C. 77a et seq. 

7See Compensatory Benefit Plans and Contracts, 

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

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

8 15 U.S.C. 78m. 

9 15 U.S.C. 78o(d). 

10 15 U.S.C. 80a–1 et seq. 

11 15 U.S.C. 77e. 

12A ‘‘compensatory benefit plan’’ is defined in 

Rule 701(c)(2) [17 CFR 230.701(c)(2)] as ‘‘any 

purchase, savings, option, bonus, stock 

appreciation, profit sharing, thrift, incentive, 

deferred compensation, pension or similar plan.’’ 

13As the Commission stated in re-proposing Rule 

701, ‘‘The essential concern [. . .] remains the 

same—many privately-held companies have found 

the costs of complying with the registration 

requirements of the Securities Act and the 

subsequent reporting obligations under section 

15(d) of the Exchange Act so burdensome that 

employee incentive arrangements are not being 

provided by them. As a consequence, employees 

must forego [sic] potentially valuable means of 

compensation. The Commission historically has 

recognized that when transactions of this nature are 

primarily compensatory and incentive oriented, 

some accommodation should be made under the 

Securities Act.’’ See Employee Benefit and 

Compensation Contracts Release No. 33–6726 (Jul. 

30, 1987) [52 FR 29033 (Aug. 5, 1987)] (‘‘Rule 701 

Proposing Release’’) at Section I. 

14A ‘‘foreign private issuer’’ is defined in 17 CFR 

230.405 (Securities Act Rule 405) 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. 

15Preliminary Note 5 to Rule 701 provides ‘‘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 [Securities] Act. In 

any of these cases, registration under the 

[Securities] Act is required unless another 

exemption is available.’’ 

16Preliminary Note 4 to Rule 701. 

17 Id. 

18Preliminary Note 2 to Rule 701. 

19See Rule 701—Exempt Offerings Pursuant to 

Compensatory Arrangements, Release No. 33–7645 

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

Adopting Release’’). 

20Rule 701(d) [17 CFR 230.701(d)]. 

21The 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. 

22See Rule 701(d)(3)(ii) [17 CFR 

230.701(d)(3)(ii)]. 

23 Id. 

24Preliminary Note 1 to Rule 701 (‘‘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.’’). 

25Rule 701(e) [17 CFR 230.701(e)]. 

26Rule 701(e). This amount will change to $10 

million upon effectiveness of the final rule 

amendment that raises this threshold. See n. 5, 

above, See also n. 49 and Section II.C.1, below. 

27The Employee Retirement Income Security Act 

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

recruitment and retention, and preserve 

cash for the company’s operations.3

Since Rule 701 and Form S–8 4 were 

last amended, forms of equity 

compensation have continued to evolve, 

and new types of contractual 

relationships between companies and 

the individuals who work for them have 

emerged. In light of these developments, 

as well as the Act’s mandate to increase 

to $10 million the Rule 701(e) threshold 

in excess of which the issuer is required 

to deliver additional disclosure to 

investors, which we are implementing 

in a separate release,5 we believe this is 

an appropriate time to revisit the 

Commission’s regulatory regime for 

compensatory securities transactions. 

We therefore solicit comment on 

possible ways to update the 

requirements of Rule 701 and Form 

S–8, consistent with investor protection. 

We also solicit comment on what effects 

any revised rule or form may have on 

a company’s decision to become a 

reporting company. 

II. Rule 701 

A. Background 

In 1988, the Commission adopted 

Rule 701 under the Securities Act 6 to 

allow non-reporting companies to sell 

securities to their employees without 

the need to register the offer and sale of 

such securities.7 Only issuers that are 

not subject to the reporting 

requirements of Section 13 8 or 15(d) 9 of 

the Securities Exchange Act of 1934 

(‘‘Exchange Act’’) and are not 

investment companies registered or 

required to be registered under the 

Investment Company Act of 1940 10 are 

eligible to use Rule 701. The rule 

provides an exemption from the 

registration requirements of Section 5 of 

the Securities Act 11 for offers and sales 

of securities under compensatory 

benefit plans 12 or written agreements 

relating to compensation. In adopting 

the rule, the Commission determined 

that it would be an unreasonable burden 

to require these non-reporting 

companies, many of which are small 

businesses, to incur the expenses and 

disclosure obligations of public 

companies where their sales of 

securities were to employees.13 In 

addition to domestic non-reporting 

companies, Rule 701 is also available for 

foreign private issuers.14

The rule provides an exemption from 

registration only for securities issued in 

compensatory circumstances and is not 

available for plans or schemes 

inconsistent with this purpose, such as 

to raise capital.15 The exemption is 

available only to the issuer of the 

securities, not to its affiliates, and does 

not cover resales of securities by any 

person.16 The rule exempts only the 

transactions in which the securities are 

offered or sold, and not the securities 

themselves.17 In addition to complying 

with Rule 701, the issuer also must 

comply with any applicable state law 

relating to the offer and sale of 

securities.18

Since 1999,19 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: 20

• $1 million; 

• 15% of the total assets of the 

issuer,21 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, without regard to when 

it becomes exercisable.22 For deferred 

compensation plans, the calculation is 

made at the time of the participant’s 

irrevocable election to defer.23 There is 

no separate limitation on the amount of 

securities that may be offered. 

In all cases, the issuer must deliver to 

investors a copy of the compensatory 

benefit plan or contract. Further, Rule 

701 transactions are subject to the 

antifraud provisions of the federal 

securities laws.24

In addition, if the aggregate sales price 

or amount of securities sold during the 

12-month period exceeds $5 million,25

the issuer must deliver to investors a 

reasonable period of time before the 

date of sale: 26

• A copy of the summary plan 

description required by ERISA,27 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 


jstallworth on DSKBBY8HB2PROD with PROPOSALS
34960 Federal Register / Vol. 83, No. 142 / Tuesday, July 24, 2018 / Proposed Rules 

28Regulation A Offering Statement [17 CFR 

239.90]. 

29Rule 701(e)(4) [17 CFR 230.701(e)(4)]. 

30Rule 701(e)(6) [17 CFR 230.701(e)(6)]. As 

described in Section II.C.3, below, for options and 

other derivative securities, whether the issuer is 

obligated 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. 

31See 1999 Adopting Release at Section II.B. 

32Rule 701(c) [17 CFR 230.701(c)]. The rule also 

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 at 

the time the securities were offered. 

33Rule 701(c)(3) [17 CFR 230.701(c)(3)] defines 

‘‘family member’’ for this purpose. 

34Rule 701(c)(1) [17 CFR 230.701(c)(1)]. Where 

the consultant or advisor performs services for the 

issuer through a wholly-owned 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 S–8 Adopting Release’’) 

addressing such a corporate alter ego in the Form 

S–8 context. 

35 1999 Adopting Release at Section II.D. 

36 1999 Adopting Release at n. 39. See also 1988 

Adopting Release (‘‘Consequently, the rule has been 

modified to extend to consultants and advisers who 

provide bona fide services to a company, its parents 

or majority-owned subsidiaries.’’). 

37Rule 701(f) [17 CFR 230.701(f)]. 

38Preliminary Note 3 to Rule 701. 

39Rule 701(g) [17 CFR 230.701(g)]. Ninety days 

after the issuer becomes subject to the reporting 

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

Exchange Act of 1934 [15 U.S.C. 78m or 78o(d)], 

securities issued under Rule 701 may be resold by 

non-affiliates in reliance on Rule 144 without 

compliance with Rules 144(c) and (d), and by 

affiliates without compliance with Rule 144(d). 

40Sec. 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. 

41 15 U.S.C. 78l(g)(5). 

42See 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)]. 

43See The Rise and Nature of Alternative Work 

Arrangements in the United States, 1995–2015, 

Lawrence F. Katz and Alan B.Krueger, National 

Bureau of Economic Research, available at http:// 

www.nber.org/papers/w22667 (defining alternative 

work arrangements as temporary help agency 

workers, on-call workers, contract workers, and 

independent contractors or freelancers). 

• Financial statements required to be 

furnished by Part F/S of Form 1–A28

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 701.29

This disclosure should be provided to 

all investors before sale. For options and 

other derivative securities, the issuer 

must deliver disclosure a reasonable 

period of time before the date of 

exercise or conversion.30 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 

during the 12-month period.31

The exemption covers securities 

offered or sold under a plan or 

agreement between a non-reporting 

company (or its parents, majority-owned 

subsidiaries or majority-owned 

subsidiaries of its parent) and the 

company’s employees, officers, 

directors, partners, trustees, consultants 

and advisors.32 Rule 701 is also 

available for sales, such as option 

exercises, to their family members 33

who acquire such securities through 

gifts or domestic relations orders. 

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.34

In adopting these restrictions on the 

range of eligible consultants and 

advisors, the Commission also provided 

that a person in a de facto employment 

relationship with the issuer, such as a 

non-employee providing services that 

traditionally are performed by an 

employee, with compensation paid for 

those services being the primary source 

of the person’s earned income, would 

qualify as an eligible person under the 

exemption.35 Such services, however, 

must not be in connection with the offer 

or sale of securities in a capital-raising 

transaction, and must not directly or 

indirectly promote or maintain a market 

for the issuer’s securities.36

Offers and sales under Rule 701 are 

deemed part of a single discrete offering 

and are not subject to integration with 

any other offers or sales, whether 

registered under the Securities Act or 

exempt from registration.37 An issuer 

that attempts to comply with Rule 701, 

but fails to do so, may claim any other 

exemption that is available.38 Securities 

issued under Rule 701 are deemed to be 

‘‘restricted securities,’’ 39 as defined in 

17 CFR 230.144 (Securities Act Rule 

144). 

Section 502 of the Jumpstart Our 

Business Startups Act 40 (‘‘JOBS Act’’) 

amended Exchange Act Section 

12(g)(5) 41 to exclude from the definition 

of ‘‘held of record,’’ for the 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. This 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. The 

Commission amended the definition of 

‘‘held of record’’ in 17 CFR 240.12g5–1 

(Exchange Act Rule 12g5–1) 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 5.42

This amendment also established a nonexclusive 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). These provisions help enable 

private companies to offer securities to 

their employees under Rule 701 without 

triggering the obligation to register the 

class of securities and file periodic 

reports with the Commission. 

Questions have arisen about whether 

the current requirements of Rule 701 

would benefit from updates in light of 

developments since the Commission 

last substantively revised the rule. 

Forms of equity compensation that were 

not typically used at that time, 

particularly restricted stock units 

(‘‘RSUs’’), have become common, and 

new types of contractual relationships 

between companies and individuals 

involving alternative work arrangements 

have emerged in the so-called ‘‘gig 

economy.’’ 43 In this release, we solicit 

comment on various aspects of Rule 701 


jstallworth on DSKBBY8HB2PROD with PROPOSALS
Federal Register / Vol. 83, No. 142 / Tuesday, July 24, 2018 / Proposed Rules 34961 

44They may also not be ‘‘employees’’ for 

purposes of labor, tax and other regulatory regimes. 

to determine whether and if so, how, the 

rule should be amended to address 

these concerns and developments. Our 

evaluation of any potential changes will 

focus on retaining the compensatory 

purpose of Rule 701 and avoiding 

potential abuse of the rule for capitalraising purposes, consistent with the 

Commission’s investor protection 

mandate. Comments are of greatest 

assistance if accompanied by supporting 

data and analysis of the issues 

addressed in those comments. 

B. Rule 701(c) Eligible Plan Participants 

Due in large part to the internet, new 

types of contractual relationships are 

arising between companies and 

individuals in the labor markets and the 

workplace economy. These can involve 

short-term, part-time or freelance 

arrangements, where the individual— 

rather than the company—may set the 

work schedule. Typically, this involves 

the individual’s use of the company’s 

internet ‘‘platform’’ for a fee to find 

business, whether that involves the 

individual providing services to end 

users, or using the platform to sell goods 

or lease property. Platforms are 

available that offer end users such 

services as ride-sharing, food delivery, 

household repairs, dog-sitting, and tech 

support. Other platforms offer handmade craft objects, lodging, or car 

rentals. An individual who provides 

services or goods through these 

platforms may have similar 

relationships with multiple companies, 

through which the individual may 

engage in the same or different business 

activities. 

Individuals participating in these 

arrangements do not enter into 

traditional employment relationships, 

and thus may not be ‘‘employees’’ 

eligible to receive securities in 

compensatory arrangements under Rule 

701.44 Similarly, they also may not be 

consultants or advisors, or de facto 

employees under Rule 701. As with 

traditional employees, however, 

companies may have the same 

compensatory and incentive 

motivations to offer equity 

compensation to these individuals. 

Accordingly, we solicit comment 

regarding these ‘‘gig economy’’ 

relationships to better understand how 

they work and determine what 

attributes of these relationships 

potentially may provide a basis for 

extending eligibility for the Rule 701 

exemption. 

Our comment requests focus on what 

activities an individual should need to 

engage in to be eligible to participate in 

exempt compensatory offerings: 

1. To what extent should definitions 

of ‘‘employee’’ under other regulatory 

regimes guide our thinking on eligible 

participants in compensatory securities 

offerings? Which regulatory regimes 

should we consider for this purpose? 

Should any new test apply equally to all 

companies, or would there be a reason 

to apply different tests based on the 

nature of the working relationship? 

2. Would the application of Rule 701 

to consultants and advisors in any 

circumstances cover the alternative 

work arrangements described above? 

3. What, if any, services should an 

individual participating in the ‘‘gig 

economy’’ need to provide to the issuer 

to be eligible under Rule 701? Do these 

individuals in fact provide services to 

the issuer, or instead to the issuer’s 

customers or end users? Should this fact 

make any difference for purposes of 

Rule 701 eligibility? 

4. Should we consider a test that 

identifies Rule 701 eligible participants 

as individuals who use the issuer’s 

platform to secure work providing 

lawful services to end users? 

a. Are any other factors necessary to 

establish any level of control by the 

issuer, such as requiring the work to be 

assigned by the issuer? Or is it necessary 

that the issuer control what the 

individual charges end users for 

services, such as by setting hourly rates 

or ride fares? Should a written 

contractual relationship between the 

issuer and individual be necessary? 

Why or why not? 

b. Does it matter whether the 

individual goes through a vetting or 

screening process by the issuer to use 

the platform? 

c. Does it matter whether the issuer 

controls when and how the individual 

receives monetary compensation for the 

services provided? 

5. Would it be sufficient for an 

individual to use the issuer’s platform to 

sell goods, to earn money from leasing 

real estate or personal property, or to 

conduct a business activity? Would the 

individual be considered to be 

providing a service to either or both the 

company and its end-users or 

customers? Does it matter whether that 

business activity provides a service 

typically provided by an employee or is 

of a more entrepreneurial nature? How 

do the answers to these questions affect 

whether there is a sufficient nexus 

between the individual and the issuer to 

justify application of the exemption for 

compensatory transactions? 

6. Should it make a difference 

whether the end user pays the issuer for 

the goods or leased property, and the 

issuer then provides a monetary 

payment to the individual, or the end 

user pays the individual directly, who 

then pays a fee to the issuer? 

Our comment requests also focus on 

whether a potential eligibility test 

should consider the individual’s level of 

dependence on the issuer, or, 

conversely, the issuer’s degree of 

dependence on the individuals: 

7. For example, should it matter what 

percentage of the individual’s earned 

income is derived from using the 

issuer’s platform? If so, should this be 

based on earned income during the last 

year, a series of consecutive years, or 

current expectations? Should there be a 

minimum percentage? How should this 

be verified? How should such a test be 

applied where the individual provides 

services to multiple companies? How 

would the issuer be able to determine 

how much of an individual’s income is 

derived from using the issuer’s 

platform? 

8. Alternatively, where the individual 

provides services, should eligibility be 

based on information objectively 

verifiable by the issuer, such as amount 

of income earned, or percentage of time 

or number of hours worked? 

9. Where use of the platform relates to 

leasing a property, should the test focus 

on how frequently the property is 

available, how often it actually is leased, 

the revenues generated by the property, 

or other factors? 

10. Should the test focus on the extent 

to which the individual uses the issuer’s 

platform to obtain business on a regular 

basis? Should it consider the duration of 

time over which the individual has so 

used the issuer’s platform? 

11. Should the test instead focus on 

the extent to which the issuer’s business 

is dependent on individuals’ use of the 

issuer’s platform? If so, why, and how 

should that dependence be measured? 

12. What test or tests would leave an 

issuer best positioned to determine 

whether it could rely on Rule 701? 

We are mindful that extending 

eligibility to individuals participating in 

the ‘‘gig economy’’ could increase the 

volume of Rule 701 issuances. In this 

regard: 

13. Would revising the rule have an 

effect on a company’s decision to 

become a reporting company? Would 

such revisions encourage companies to 

stay private longer? 

14. Would investors be harmed if the 

exemption is expanded to individuals 

participating in the ‘‘gig economy,’’ 

potentially resulting in higher levels of 

equity ownership in the hands of 

persons who would not be shareholders 

of record for purposes of triggering 


jstallworth on DSKBBY8HB2PROD with PROPOSALS
34962 Federal Register / Vol. 83, No. 142 / Tuesday, July 24, 2018 / Proposed Rules 

45See 1988 Adopting Release. 

46 15 U.S.C. 77c(b). 

47Public Law 104–290, 110 Stat. 3416 (1996). 

48 1999 Adopting Release at Section II.A. 

49 1999 Adopting Release at Section II.B. In 

adopting this requirement, the Commission stated 

it would have investor protection concerns in the 

context of offerings of securities with an aggregate 

sales price or amount of securities sold during the 

12-month period exceeding $5 million without 

imposing specific disclosure requirements. The 

Commission noted that, ‘‘[m]oreover, we believe 

that many of these companies already have 

prepared the type of disclosure required in their 

normal course of business, either for using other 

exemptions, such as Regulation D or for other 

purposes.’’ 

50 Id. 

51Based on data provided by the U.S. Department 

of Labor, Bureau of Labor Statistics, $5 million in 

1999 dollars would be approximately $7.5 million 

in 2018. 

52See n. 5, above. 

53U.S. Securities and Exchange Commission 

Advisory Committee on Small and Emerging 

Companies, Recommendation Regarding Securities 

Act Rule 701 (Sept. 21, 2017) (‘‘Advisory 

Committee Recommendation’’), available at: 

https://www.sec.gov/info/smallbus/acsec/acsecrule-701-recommendation-2017-09-21.pdf. Among 

other things, the Advisory Committee 

Recommendation expresses concern that crossing 

the disclosure threshold could result in the loss of 

the exemption for earlier Rule 701 transactions in 

the same 12-month period for which the Rule 701(e) 

disclosure was not provided a reasonable time 

before sale. 

54Advisory Committee Recommendation. 

Exchange Act registration and 

reporting? 

15. Should the amount of securities 

issuable pursuant to Rule 701 to 

individuals participating in the ‘‘gig 

economy’’ in a 12-month period be 

subject to a separate ceiling rather than 

the current Rule 701(d) ceilings? If so, 

how should that ceiling be designed and 

measured? 

16. Should additional disclosures be 

provided? If so, what and when? 

Employers have many reasons for 

compensating employees with 

securities. These can include aligning 

the company’s interests with those of 

employees’, retaining staff, and offering 

higher compensation than the company 

may be able to pay in cash or other 

benefits. 

17. Do companies utilizing ‘‘gig 

economy’’ workers issue securities as 

compensation to those individuals? If 

so, how prevalent is this practice? 

18. How might companies benefit 

from the ability to offer securities to a 

broader range of individuals by 

expanding Rule 701 eligibility to 

individuals participating in the ‘‘gig 

economy’’? 

19. What effect would the use of Rule 

701 for ‘‘gig economy’’ companies have 

on competition among those companies 

and newer companies and more 

established companies vying for the 

same talent? 

The ‘‘gig economy’’ has enabled even 

very small companies to conduct crossborder operations. 

20. Do existing regulations affect the 

ability of employers to use Rule 701 to 

compensate overseas employees through 

securities? 

21. To the extent that U.S. companies 

would seek to use Rule 701 to 

compensate non-U.S. based workers in 

a ‘‘gig economy’’ model, would there be 

any competitive effects? 

C. Rule 701(e) Disclosure Requirements 

1. General 

When Rule 701 was originally 

adopted in 1988,45 the Commission 

relied on Section 3(b) of the Securities 

Act 46 to exempt offers and sales of up 

to $5 million per year. In 1999, the 

Commission amended Rule 701 to 

reflect that the National Securities 

Markets Improvement Act of 1996 

(‘‘NSMIA’’) 47 had given the 

Commission authority to provide 

exemptive relief in excess of $5 million 

for transactions such as these.48

The 1999 adoption of the $5 million 

disclosure threshold reflected concern 

that eliminating the overall $5 million 

ceiling on the annual amount of 

securities sold during a 12-month 

period ‘‘could result in some very large 

offerings of securities without the 

protections of registration, even though 

made pursuant to compensatory 

arrangements.’’ 49 Because the 

Commission had not witnessed abuse of 

Rule 701 in offerings below the prior $5 

million ceiling, it did not believe 

imposing the burdens of preparing and 

disseminating additional disclosure for 

these smaller offerings would justify 

potential benefits to employee-investors. 

In contrast, large non-reporting 

companies could issue substantial 

amounts of securities exceeding $5 

million. Based on comments received, 

the Commission believed that many of 

these companies already prepared the 

same types of disclosure in their normal 

course of business, such as for using 

other exemptions, so that the disclosure 

requirement generally would be less 

burdensome for them. If these 

companies did not want to provide the 

new disclosures, the Commission noted 

that they could keep the amount sold 

below $5 million in the 12-month 

period.50

Inflation since 1999 51 has made it 

more likely for non-reporting issuers, 

regardless of size, to cross this threshold 

in a 12-month period. In circumstances 

where the required disclosure is 

inadvertently not provided to all 

investors before the $5 million 

threshold is crossed, issuers may not 

rely on the exemption. Accordingly, the 

current structure of the rule results in 

issuers needing to anticipate, up to 12 

months before exceeding the $5 million 

threshold, the possibility that they may 

do so, and to supply plan participants 

with the additional disclosures for that 

period. 

As noted above, in a separate release, 

the Commission is amending Rule 

701(e) to implement the Act’s mandate 

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.52

Because the amendment does not 

otherwise revise Rule 701(e), the rule 

will continue to operate in the same 

manner as it has under the previous $5 

million threshold. 

While the adopted amendment may 

provide non-reporting issuers flexibility 

in further utilizing the exemption, it 

does not address some of the concerns 

we have heard regarding Rule 701(e). In 

particular, although the threshold is 

higher, the need to anticipate the 

consequences of crossing it remains.53

Concern also has been expressed that 

some non-reporting companies are not 

necessarily familiar with Regulation A 

financial disclosure and that 

compliance can be burdensome, 

especially for companies first utilizing 

Rule 701.54

In light of these concerns, we request 

comment: 

22. Should Rule 701(e) continue to 

require more disclosure for a period that 

precedes the threshold amount being 

exceeded? If so, should the consequence 

for failure to deliver continue to be loss 

of the exemption for the entire offering? 

23. To what extent are non-reporting 

companies that issue securities in an 

amount that would exceed the new 

threshold already preparing forms of 

financial disclosure, such as in 

connection with 17 CFR 230.500 

through 230.508 (Regulation D) or 

Regulation A? 

24. Alternatively, should the 

consequence for failing to provide the 

disclosure be loss of the exemption only 

for transactions in offerings that occur 

after the threshold is crossed and for 

which disclosure was not provided? 

a. If disclosure is required only for 

transactions that occur after the $10 

million threshold is crossed, should 

disclosure be required for all 

transactions immediately following that 

event, or should an interval of time be 

provided to permit the disclosure to be 

prepared before it must be delivered? If 


jstallworth on DSKBBY8HB2PROD with PROPOSALS
Federal Register / Vol. 83, No. 142 / Tuesday, July 24, 2018 / Proposed Rules 34963 

55 17 CFR 210.1–01 through 201.12–29. Tier 2 

offerings require audited financial statements. See 

Part F/S of Form 1–A [17 CFR 239.90]. 56 1999 Adopting Release at Section II.B. 57 Id. 

58Advisory Committee Recommendation. 

59FASB ASC Topic 718. 

60 26 U.S.C. 409A. 

61 1999 Adopting Release at Section II.C. 

62 17 CFR 249.220f. See Item 8A.5 of Form 

20–F. 

63Rule 701(d)(3)(ii) provides that the aggregate 

sales price for options is determined when an 

option grant is made (without regard to when it 

becomes exercisable). Use of this measure for both 

Rule 701(d) and (e) simplifies the operation of the 

rule. 

64Rule 701(e)(6). 

so, how long should that time interval 

be? 

b. Should the disclosure subsequently 

also be made available to investors in 

transactions that occurred before the 

$10 million threshold is crossed? 

25. Alternatively, should there instead 

be a grace period, such that if the 

threshold is crossed, the issuer has an 

opportunity to provide the required 

disclosure before losing the exemption 

for the entire offering? 

26. Should we provide a regulatory 

option whereby all Rule 701(e) 

information would be disclosed to all 

investors, so that all would receive 

equal information and there would be 

no risk of losing the exemption in the 

manner there is today? Should we 

provide a different regulatory alternative 

that would provide all investors all Rule 

701(e) information other than the 

financial statement disclosure? 

Part F/S of Form 1–A prescribes that 

financial statements are required for 

Regulation A Tier 1 and Tier 2 offerings. 

In Regulation A offerings, companies 

include two years of consolidated 

balance sheets, statements of income, 

cash flows, and changes in stockholders’ 

equity.55 Issuers relying on Rule 701 

may choose to provide financial 

statements that comply with the 

requirements of either Tier. This 

information must be provided as of a 

date no more than 180 days before the 

date of sale. As a result, for issuers 

seeking to maintain current information, 

this has the effect of requiring financial 

statements to be available on at least a 

quarterly basis, and to be completed 

within three months after the end of 

each quarter, for sales to be permitted 

continuously. The Commission, in 

adopting the current version of Rule 

701, stated that because of the preexisting relationship a compensated 

individual has with the issuer, the 

disclosures provided in Rule 701(e) are 

appropriate.56 It also noted that the 

‘‘amount and type of disclosure required 

for this person is not the same as for the 

typical investor with no particular 

connection with the issuer.’’ 57

27. Should the type of information 

provided depend on who is the 

recipient of the securities? For example, 

should more disclosure be provided to 

the types of recipients described in 

Section II.B. above? Why or why not? If 

so, what, specifically, should be added 

to the disclosures and why? 

28. Should this disclosure be updated 

less frequently than currently required? 

For example, should we require updates 

once a year unless an event results in a 

material change to the company’s 

enterprise value or value of the 

securities issued? 58 Should the 

frequency of disclosure depend on who 

is the recipient of the securities? For 

example, should the frequency be 

greater for recipients described in 

Section II.B, above? Why or why not? If 

so, what is the appropriate frequency 

and why? 

29. Should we consider other 

alternatives to the Regulation A 

financial statements, such as the issuer’s 

most recent balance sheet and income 

statement as of a date no more than 180 

days before the sale of securities? 

30. Should we provide a regulatory 

option that would provide valuation 

information regarding the securities in 

lieu of, or in addition to, financial 

statements? If so, what valuation 

method should be used? Would ASC 

Topic 718 59 grant date fair value 

information be informative? Would 

Internal Revenue Code Section 409A 60

valuation information be informative? If 

so, would issuers be able to determine 

Section 409A valuations regardless of 

whether the offering involves securities 

other than options? 

Under existing Rule 701, foreign 

private issuers are required to provide 

financial information on the same 

schedule as domestic issuers.61 Foreign 

private issuers may issue securities in 

reliance on Rule 701 throughout the 

year, which could lead them to update 

their financial statements more 

frequently than required under Form 

20–F.62

31. Because foreign private issuers 

that are subject to the Exchange Act 

reporting requirements generally are not 

required to submit quarterly financial 

statements, should non-reporting 

foreign private issuers that rely on Rule 

701 be subject to the condition to 

provide quarterly financial statements if 

they are continuing to sell securities 

throughout the year? Why or why not? 

32. Should we amend any other 

aspect of the Rule 701 financial 

statement requirements that apply to 

foreign private issuers? If so, what 

should we amend and why? 

2. Timing and Manner of Rule 701(e) 

Disclosure 

Rule 701(e) requires the prescribed 

disclosure to be delivered ‘‘a reasonable 

period of time before the date of sale.’’ 

However, the rule does not prescribe the 

manner or medium in which disclosure 

should be delivered. We are aware that 

non-reporting companies are sensitive 

to maintaining the confidentiality of 

financial information so that it does not 

fall into the hands of competitors. 

To determine if the rule needs further 

clarification, we request comment: 

33. Do we need to clarify what it 

means to deliver disclosure ‘‘a 

reasonable period of time before the 

date of sale’’? Should that mean any 

time before sale such that the recipient 

has an opportunity to review the 

disclosure? Should any new standard 

further clarify that the disclosure 

provided to the recipient must remain 

current during that time? 

34. Should we specify a different time 

for providing disclosure? If so, when 

should that be and why? 

35. Should we also specify the 

manner or medium in which disclosure 

should be delivered? Should we specify 

how to deliver information 

electronically? Should we require a 

method for confirming receipt of the 

information? If so, what vehicles would 

best give effect to the purpose of 

disclosure without undermining issuers’ 

confidentiality concerns? 

36. Should the rule specify that 

confidentiality safeguards should not be 

so burdensome that intended recipients 

cannot effectively access the required 

disclosures? 

3. Options and Other Derivative 

Securities/RSUs 

For options and other derivative 

securities, whether the issuer is 

obligated to deliver Rule 701(e) 

disclosure is based on whether the 

option or other derivative security was 

granted during a 12-month period 

during which the disclosure threshold is 

exceeded.63 If so, the issuer must deliver 

Rule 701(e) disclosure a reasonable 

period of time before the date of 

exercise or conversion.64

This approach simplifies the 

operation of Rule 701 for options and 

other derivative securities for which the 

recipient must make an investment 

decision to exercise or convert. 

However, because instruments such as 

RSUs settle by their terms without the 

recipient taking such an action, the 

relevant investment decision for the 

RSU, if there is one, likely takes place 


jstallworth on DSKBBY8HB2PROD with PROPOSALS
34964 Federal Register / Vol. 83, No. 142 / Tuesday, July 24, 2018 / Proposed Rules 

65Advisory Committee Recommendation. But see, 

e.g., Edward M. Zimmerman, Late Stage Startups 

Trip SEC Rule 701 Long Before IPO, Forbes (Aug. 

2, 2016) (stating that ‘‘[b]ecause the test [provided 

in Rule 701(d)] is analyzed on the basis of a 12- 

month period, because the test excludes Exempt 

Issuances and because founders and investors have 

significant business reasons for limiting the dilutive 

impact of compensatory equity awards, startups 

rarely come near the Rule 701(d) thresholds.’’). 

66Rules 701(d)(2)(ii) and (iii). 

67See Rule 701 Proposing 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 1988 

Adopting Release. 

68See 1988 Adopting Release at Section I.A.(2). 

69NSMIA enacted Securities Act Section 28 [15 

U.S.C. 77z–3], giving the Commission general 

exemptive authority. Because the Commission 

relied on this authority in the 1999 Adopting 

Release, the Securities Act Section 3(b) absolute 

limit of $5,000,000 no longer applies to Rule 701. 

70Advisory Committee Recommendation. 

71Registration of Securities Offered Pursuant to 

Employees Stock Purchase Plans, Release No. 33– 

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

72 In addition, General Instruction C to Form S– 

8 permits registrants to file a resale prospectus for 

control securities, and restricted securities issued 

under any employee benefit plan of the issuer that 

were acquired by the selling security holder prior 

to the filing of the Form S–8. 

73See e.g., Registration and Reporting 

Requirements for Employee Benefit Plans, Release 

No. 33–6867 (June 6, 1990) [55 FR 23909 (June 13, 

1990)] (‘‘1990 Adopting Release’’). 

74The abbreviated disclosure format of Form 

S–8 reflects the Commission’s historic distinction 

between offerings made to employees for 

compensatory and incentive purposes and offerings 

made for capital-raising purposes. See 1990 

Adopting Release. 

75 ‘‘Employee benefit plan’’ is defined in 

Securities Act Rule 405 and includes the same 

restrictions on the scope of eligible consultants and 

advisors as set forth in Rule 701. 

76 26 U.S.C. 401(k). 

77See General Instruction A.1 to Form S–8. 

78 ‘‘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, it is required to file Form 10 

equivalent information with the Commission. 

General Instruction A.1 to Form S–8 provides that 

it then becomes eligible to use Form S–8 60 days 

following that filing. 

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 award is granted. Concern 

has been expressed, however, that 

disclosure of financial information 

before an RSU is granted could compel 

disclosure to recipients at a time when 

they are negotiating their employment 

contracts before joining the company. 

In light of this concern, we request 

comment: 

37. Should Rule 701 be amended to 

specifically address when disclosure is 

required for RSUs? If so, when should 

Rule 701(e) disclosure be required for an 

RSU? Should we revisit the concept of 

‘‘convert or exercise’’ as providing the 

relevant date for disclosure? For new 

hires who receive RSUs, should we 

require that disclosure be provided 

within 30 days after commencing 

employment? If not, when should Rule 

701(e) disclosure be required for RSUs 

issued to new hires? 

38. Should we clarify that RSUs 

should be valued for Rule 701 purposes 

based on the value of the underlying 

securities on the date of grant? If not, 

how should they be valued? 

39. Are there any other instruments 

that should be specifically addressed in 

the rule? 

D. Rule 701(d) Exemptive Conditions 

Questions have arisen whether the 

current 12-month sales cap of the 

greater of 15% of the total assets of the 

issuer or 15% of the total outstanding 

amount of the class of securities being 

offered and sold in reliance on the rule, 

subject to the annual availability of a $1 

million cap if greater than either of 

these tests, is unduly restrictive, 

particularly for smaller and start-up 

companies that may be more dependent 

on equity compensation to attract and 

retain necessary talent.65 Each of the 

15% amounts is measured as of the 

issuer’s most recent balance sheet date, 

if no older than its last fiscal year end.66

In proposing the original version of the 

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.’’ 67 The alternatives 

based on 15% of total assets or 15% of 

the outstanding amount of the class of 

securities were intended to increase the 

flexibility and utility of the 

exemption.68 The $1 million alternative 

provides an amount that any issuer can 

use, regardless of size. 

Recently, however, concern has been 

expressed that because there is no 

longer any statutorily imposed ceiling 

on the exemption,69 compliance with an 

annual regulatory ceiling requires an ongoing analysis with no clear benefit.70

At the same time, the implications of 

qualifying for the Rule 701 exemption 

have expanded, as securities held by 

persons who receive them in 

transactions exempted by Rule 701 are 

excluded from the definition of ‘‘held of 

record,’’ for the purposes of determining 

whether an issuer is required to register 

a class of equity securities under the 

Exchange Act. 

In light of these factors, we request 

comment: 

40. Is there a continuing need for any 

annual regulatory ceiling for Rule 701 

transactions? Why or why not? Would 

investors be harmed if the ceiling is 

eliminated or raised significantly? Does 

an annual ceiling provide benefits in 

curbing potential abuse of the rule for 

non-compensatory sales? If so, how? 

41. If a ceiling is retained, should it 

be raised? If so, what threshold would 

be appropriate, and why? Would 

compliance be easier if issuers are 

permitted to measure the 15% 

alternatives as of last fiscal year-end, 

rather than at the issuer’s most recent 

balance sheet date? 

III. Form S–8 

A. Background 

Form S–8 was originally adopted in 

1953, as a simplified form for the 

registration of securities to be issued 

pursuant to employee stock purchase 

plans.71 It retains certain disclosure 

obligations. For example, it requires that 

employees receiving securities as 

compensation receive public company 

disclosure to which the full spectrum of 

Securities Act protections apply. In 

addition, reporting company securities 

received pursuant to Form S–8 

registration are generally not 

restricted.72 As described below, from 

time to time the Commission has 

amended Form S–8 to streamline its 

operations, such as by providing 

immediate effectiveness upon filing and 

updating of the registration statement 

through incorporation by reference.73

Form S–8 is available solely to register 

compensatory sales of securities to 

‘‘employees,’’ including consultants and 

advisors and de facto employees. The 

form is not available for the registration 

of securities offered for the purpose of 

raising capital.74

Form S–8 is available for the 

registration of securities to be offered 

under any employee benefit plan 75 to a 

registrant’s employees or employees of 

its subsidiaries or parents. Form S–8 

registration is utilized for many 

different types of employee benefit 

plans, including Internal Revenue Code 

Section 401(k) 76 plans and similar 

defined contribution retirement savings 

plans, employee stock purchase plans, 

nonqualified deferred compensation 

plans, and incentive plans that issue 

options, restricted stock, or RSUs. The 

form may be used by any issuer that is 

subject, at the time of filing, to the 

periodic 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.77 Form S–8 is not 

available for shell companies.78


jstallworth on DSKBBY8HB2PROD with PROPOSALS
Federal Register / Vol. 83, No. 142 / Tuesday, July 24, 2018 / Proposed Rules 34965 

79 15 U.S.C. 77j(a). 

80The resale prospectus is prepared in 

accordance with the requirement of Part I of Form 

S–3 (or, if the registrant is a foreign private issuer, 

in accordance with Part I of Form F–3) and filed 

with the registration statement on Form S–8 or, in 

the case of control securities, a post-effective 

amendment thereto. Restricted securities must have 

been acquired by the holder before the Form S–8 

is filed and the resale prospectus for them must be 

filed with the initial Form S–8. See General 

Instruction C to Form S–8. 

81See 1999 S–8 Adopting Release. 

82Since the adoption of the 1999 amendments, 

the Commission has brought enforcement actions 

related to Form S–8 abuse, particularly the misuse 

of the form for capital-raising activities involving 

coordinated unregistered resales into the public 

market by the purported ‘‘consultants’’ or 

employees acting as underwriters, funding the 

company with the proceeds and denying Securities 

Act protection to the genuine public purchasers. 

See, e.g., SEC. v. Phan, 500 F.3d 895 (9th Cir. 2007) 

(holding the resale of publicly traded stock, which 

had the effect of supplying the company with 

capital from the public at the company’s behest, 

could not be covered by a Form S–8 registration 

statement); SEC v. East Delta Resources Corp., No. 

10–CV–0310 (SJF/wdw) 2012 WL 10975938 

(E.D.N.Y. 2012) (finding violations of Sections 5 

notwithstanding the existence of a Form S–8 

registration statement and consulting agreement 

where the defendant’s consulting role was capitalraising and promotional and thus contrary to the 

eligibility requirements for effective Form S–8 

registration); and SEC v. Esposito, No. 8:08–CV– 

494–T–26EAJ, 2011 WL 13186000 (M.D. Fla. June 

24, 2011) (finding defendants violated Section 5 

where Form S–8 was used to register shares 

received by consultant as compensation for 

arranging a reverse merger). 

83 1999 Adopting Release at Section II.D. 

84See Section II.A, above. 

85See Section II.B, above. 

86 17 CFR 230.457(h) and (c). 

87 17 CFR 230.457(h)(3). 

88See, e.g., Release No. 33–5767 (November 22, 

1976) [41 FR 52701 (Dec. 1, 1976)], Amendments to 

Registration Statement Form S–8 and Related New 

and Amended Rules Under the Securities Act of 

1933, Release No. 33–6190 (February 22, 1980) [45 

FR 13438 (Feb. 29, 1980)] (‘‘1980 S–8 Adopting 

Release’’) and 1990 Adopting Release. 

89 In the 1980 S–8 Adopting Release the 

Commission initially provided that automatic 

effectiveness for Form S–8 occurred 20 days after 

filing, while post-effective amendments became 

effective upon filing. Now, all registration 

statements on Form S–8 become effective upon 

filing with the Commission. See 17 CFR 230.462(a) 

and 1990 Adopting Release. 

90See Item 3 and General Instruction G of Form 

S–8. 

91 17 CFR 230.428(a)(1). 

92 17 CFR 230.416(c) and 17 CFR 230.457(h)(2), 

respectively. 

93See General Instruction E to Form S–8. 

Form S–8 does not require that a form 

of prospectus be filed with the 

registration statement for employee 

benefit plan offerings. Instead, 17 CFR 

230.428 (Rule 428) specifies the 

documents that, together, constitute a 

prospectus that meets the requirements 

of Securities Act Section 10(a): 79

• Certain documents containing the 

employee benefit plan information 

required by Item 1 of the Form; 

• the statement of availability of 

company information, employee benefit 

plan annual reports and other 

information required by Item 2 of the 

Form; and 

• the documents containing registrant 

information and employee benefit plan 

annual reports that are incorporated by 

reference in the registration statement 

pursuant to Item 3 of the Form. 

Companies are also permitted to file 

a resale prospectus covering only 

control securities or restricted securities 

acquired pursuant to an employee 

benefit plan.80

B. Form S–8 Eligible Plan Participants 

To prevent abuse of Form S–8 to 

register securities issued in capitalraising transactions, in 1999 the 

Commission revised the eligibility 

standards for ‘‘consultants and 

advisors’’ for the purposes of Form 

S–8.81 In so doing the Commission 

sought to preclude the issuance of 

securities on Form S–8 to consultants 

either (i) as compensation for any 

service that directly or indirectly 

promotes or maintains a market for the 

registrant’s securities, or (ii) as conduits 

for a distribution to the general public.82

At the same time, the Commission 

revised the Rule 701 ‘‘consultants and 

advisors’’ definition to be consistent 

with Form S–8.83 In adopting the 

changes, the Commission also noted 

that issuers may continue to use 

securities registered on Form S–8, or 

issued under the Rule 701 exemption, to 

compensate persons with whom they 

have a de facto employment 

relationship.84 We are soliciting 

comment regarding the continued 

harmonization of the scope of 

‘‘consultants and advisors’’ between 

Form S–8 and Rule 701, and more 

broadly whether the scope of eligible 

individuals should be the same under 

both the form and the exemption. 

Specifically: 

42. To the extent we change the 

application of Rule 701 by changing the 

scope of individuals eligible for 

compensatory offerings, such as to 

include individuals participating in the 

‘‘gig economy,’’ 85 should we make 

corresponding changes to Form S–8? 

Why or why not? If the scope of 

individuals who are eligible for Form 

S–8 offerings were expanded, would 

there be concerns about misuse of the 

form for capital-raising activities? If so, 

how could we safeguard against those 

concerns? 

43. Would differences between the 

eligibility standards of Rule 701 and 

Form S–8 cause problems for issuers or 

recipients? 

C. Administrative Burdens 

Issuers register a specified number of 

company shares on Form S–8. For 

registration fee purposes, if the offering 

price is not known, the fee is computed 

based on the price of securities of the 

same class, in the same manner as for 

other offerings at fluctuating market 

prices.86 No additional fee is assessed 

for securities offered for resale.87

The Commission has sought to reduce 

the costs and burdens incident to 

registration of securities issued through 

such plans, where consistent with 

investor protection,88 for example by: 

• Allowing Form S–8 to go effective 

automatically without review by the 

staff or other action by the 

Commission; 89

• 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; 90

• adopting 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; 91

• providing for registration of an 

indeterminate amount of plan interests 

and providing that there is no separate 

fee calculation for registration of plan 

interests; 92 and 

• 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.93

We remain interested in simplifying 

the requirements of Form S–8 and 

reducing the complexity and cost of 

compliance to issuers for securities 

issuances to employees and other 

eligible employee benefit plan 

participants while retaining appropriate 

investor protections. We therefore seek 

comment on ways we could further 

reduce the burdens associated with 

registration on Form S–8: 

44. What effects would stem from 

revising the form in this way? Would 

such revisions encourage more 

companies to become reporting 

companies? 

45. Should we further simplify the 

registration requirements of Form S–8? 

For example, does registering a specific 

number of shares result in Section 5 

compliance problems when plan sales 

exceed the number of shares registered, 

such as for Section 401(k) plans and 

similar defined contribution retirement 

savings plans? If so, how should we 

address this issue? 


jstallworth on DSKBBY8HB2PROD with PROPOSALS
34966 Federal Register / Vol. 83, No. 142 / Tuesday, July 24, 2018 / Proposed Rules 

94Cf. Simplification of Registration Procedures 

for Primary Securities Offerings, Release No. 33– 

6964 (October 22, 1992) [57 FR 48970 (Oct. 29, 

1992)] (adopting the unallocated shelf procedure). 

See also Securities Offering Reform, Release No. 

33–8591 (December 1, 2005) [70 FR 44722 (Aug. 3, 

2005)] (‘‘Securities Offering Reform Adopting 

Release’’). 

95For example, in unallocated shelf offerings 

conducted under 17 CFR 203.415(a)(1)(x) (Rule 

415(a)(1)(x)) and 17 CFR 230.430B (Rule 430B), 

prospectus supplements are filed to disclose 

information that would have been previously 

omitted from a prospectus filed as part of the 

effective registration statement. See 17 CFR 

230.424(b)(2) and Rule 430B. 

96This would be analogous to how well-known 

seasoned issuers are currently permitted to add 

other securities or even new classes of securities at 

any time by post-effective amendment to an existing 

automatic shelf registration statement on Form S– 

3. See 17 CFR 230.413(b)(1). See also, Securities 

Offering Reform Adopting Release. 

97For example, Form S–8 filers update their 

registration statement through the incorporation by 

reference of Exchange Act reports. Such updates 

require the consent of an auditor where the 

auditor’s report is contained in the Exchange Act 

report which is automatically incorporated by 

reference into a previously filed Securities Act 

filing, such as a Form S–3 or Form S–8. See 17 CFR 

229.601(b)(23) (Item 601(b)(23) of Regulation S–K) 

and 17 CFR 229.601, footnote 5 of the exhibit table 

(Footnote 5 of the Item 601 Exhibit Table). The 

primary purpose of obtaining a consent or 

acknowledgement letter is to assure that the auditor 

is aware of the use of its report and the context in 

which it is used. Where such consents are required 

in an update to a registration statement, the auditor 

frequently refers to all active Securities Act 

registration statements. The ability to file a single 

Form S–8 for all securities to be issued pursuant to 

employee benefit plans would mean that the 

auditor’s consent would refer to a single Form 

S–8. 

98 17 CFR 249.311. 

99See 17 CFR 230.456(b) and 17 CFR 230.457(r). 

100 17 CFR 230.456(b)(1)(i). 

101 15 U.S.C. 77f(c). 

102 Keith F. Higgins, Is It Time to Retire Form 

S–8?, Insights: Corporate and Securities Law 

Advisor, September 2017 at 16. 

103 Item 3 of Form S–8. 

104 Item 3 of Form S–8. 

105Rule 428(b)(2). 

106Part II, Item 3 to Form S–8. 

107 15 U.S.C. 77k. 

108 15 U.S.C. 77l(a)(2). 

109 17 CFR 239.33. 

46. Should Form S–8 allow an issuer 

to register on a single form the offers 

and sales pursuant to all employee 

benefit plans that it sponsors? 94 When 

shares are authorized for issuance by a 

given plan what information would 

need to be disclosed that would have 

been previously omitted from the 

effective registration statement? 95

47. If we facilitate a single registration 

statement for all employee benefit plan 

securities, should the number of shares 

to be registered continue to be specified 

in the initial registration statement? 

Alternatively, should issuers be able to 

add securities to the existing Form S–8 

by an automatically effective posteffective amendment? 96 If so, what 

would be the best way to implement 

such a system? 

48. With respect to either alternative 

above, would the ability to have a single 

Form S–8 reduce administrative 

burdens given that many issuers 

currently monitor and track multiple 

registration statements on Form S–8? 97

Would this be practicable where the 

securities to be registered relate to 

different forms of plans, such as Section 

401(k) plans and incentive plans? 

Would it be practicable if some of the 

plans involved the issuance of plan 

interests, which trigger the individual 

plan’s obligation to file an Exchange Act 

annual report on Form 11–K? 98 Would 

the offer and sale of shares pursuant to 

multiple plans registered on the same 

Form S–8 create difficulties keeping 

track of which registered shares are 

being issued pursuant to which plan? 

For example, upon the expiration of a 

plan, would there be difficulties 

transferring shares between plans? 

49. Well-known seasoned issuers are 

permitted, at their option, to pay filing 

fees on a ‘‘pay-as-you-go’’ basis at the 

time of each takedown off the shelf 

registration statement in an amount 

calculated for that takedown.99 Should 

we adopt a similar ‘‘pay-as-you-go’’ fee 

structure for Form S–8 pursuant to 

which all issuers eligible to use Form S– 

8 could, at their option, pay filing fees 

on Form S–8 on an as needed basis 

rather than when the form is originally 

filed? What, if any, variations from the 

pay-as-you-go fee structure would be 

needed to adapt it to employee benefit 

plan registration statements? 

a. For well-known seasoned issuers 

using the pay-as-you-go fee structure, a 

cure is available that allows such issuers 

to pay required filing fees after the 

original payment due date if the issuer 

makes a good faith effort to pay the fee 

timely and then pays the fee within four 

business days of the original fee due 

date.100 If we adopted a pay-as-you-go 

fee structure for Form S–8, should we 

adopt a similar cure provision? What, if 

any, variations from the cure provision 

for well-known seasoned issuers would 

be needed to adapt it to employee 

benefit plan registration statements? 

50. Alternatively, should we require 

the payment of registration fees on a 

periodic basis with respect to the 

securities, the offer and sale of which 

were registered on Form S–8, during the 

prior period? How would such a system 

best be implemented? How could we 

structure such a system consistent with 

the requirements of Securities Act 

Section 6(c)? 101

51. Are there any other ways to 

reduce the administrative burdens 

associated with filing and updating 

Form S–8? If so, please explain. 

D. Form S–8 Generally 

We also are soliciting comment more 

broadly on Form S–8 itself: 

52. Does the current operation of 

Form S–8 present significant challenges 

to the use of employee benefit plans? If 

so, please explain how. 

53. It has been suggested that Form 

S–8 registration would no longer be 

necessary if the Commission were to 

extend the Rule 701 exemption to 

Exchange Act reporting companies.102

What would be the advantages and 

disadvantages of allowing Exchange Act 

reporting companies to use Rule 701 

and, in turn, eliminating Form S–8? 

Would permitting Exchange Act 

reporting companies to use Rule 701 

raise any investor protection concerns 

or be inconsistent with the purposes 

underlying Rule 701? 

54. Form S–8 requires issuers to 

remain current in their Exchange Act 

reports in order to be eligible to use the 

form,103 and Form S–8 disclosure relies 

upon incorporation by reference 104 and 

delivery 105 of these Exchange Act 

reports. Would the elimination of Form 

S–8 reduce an incentive for public 

companies to remain current in their 

Exchange Act reporting obligations? If 

we permit reporting companies to use 

Rule 701, should we require these 

companies to be current in their 

Exchange Act reports in order to rely on 

the exemption? 

55. Since Exchange Act reports are 

automatically incorporated by reference 

into Form S–8, would the lack of a filed 

registration statement for employee 

benefit plans result in reduced scrutiny 

of Exchange Act filings by issuers and 

their representatives? 106 Would the 

potential lack of Securities Act Section 

11 107 and Section 12(a)(2) 108 liability 

for these filings as a result of the 

elimination of Form S–8 have a 

meaningful impact on the quality of 

disclosure? 

56. If Form S–8 were rescinded, how 

would issuers be likely to register the 

resale of restricted securities issued 

pursuant to employee benefit plans? 

Would Form S–8 remain necessary as a 

method of registering resales of control 

securities or restricted securities 

acquired pursuant to an employee 

benefit plan? Alternatively, should the 

provisions of General Instruction C to 

Form S–8 be moved to Securities Act 

Form S–3? 109 If so, should Form S–3 

eligibility requirements be revised for 

this purpose? 


jstallworth on DSKBBY8HB2PROD with PROPOSALS
Federal Register / Vol. 83, No. 142 / Tuesday, July 24, 2018 / Proposed Rules 34967 

1Earthjustice first informed EPA about the failure 

to place the November 2017 version in the docket 

in an email dated July 9, 2018. Between July 10th 

through close of business on July 11th, EPA 

received requests for a 60 day-extension of the 

comment period from, or on behalf of, the: Utah 

Physicians for a Healthy Environment, Ohio Valley 

Environmental Coalition, the Union of Concerned 

Scientists, Coming Clean, Air Alliance Houston, 

Coalition For A Safe Environment, Clean Air 

Council, Sierra Club, the United Steelworkers, the 

United Autoworkers, and the States of New York, 

Illinois, Maine, Massachusetts, Oregon, Rhode 

Island, and Vermont. 

IV. Conclusion 

We are interested in the public’s 

opinions regarding the matters 

discussed in this concept release. We 

encourage all interested parties to 

submit comments on these topics. In 

addition, we solicit comment on any 

other aspect of Rule 701 and Form 

S–8 that commenters believe may be 

improved upon. 

By the Commission. 

Dated: July 18, 2018. 

Brent J. Fields, 

Secretary. 

[FR Doc. 2018–15731 Filed 7–23–18; 8:45 am] 

BILLING CODE 8011–01–P 

ENVIRONMENTAL PROTECTION 

AGENCY 

40 CFR Part 68 

[EPA–HQ–OEM–2015–0725; FRL–9981–07– 

OLEM] 

RIN 2050–AG95 

Accidental Release Prevention 

Requirements: Risk Management 

Programs Under the Clean Air Act; 

Notification of Data Availability and 

Extension of Comment Period 

AGENCY: Environmental Protection 

Agency (EPA). 

ACTION: Proposed rule; notification of 

data availability and extension of 

comment period. 

SUMMARY: EPA is providing notice that 

it is supplementing the record for the 

proposed Risk Management Program 

(RMP) Reconsideration rule published 

on May 30, 2018. We have placed into 

the rulemaking docket the November 

2017 version of the RMP database 

containing risk management plans 

submitted to EPA. EPA used this 

version to support analysis of changes 

in the RMP reporting facility universe 

discussed in the Regulatory Impact 

Analysis of the proposed 

Reconsideration rule. To afford the 

public an opportunity to comment on 

the updated RMP database and its 

impacts on the proposed 

Reconsideration rule, EPA is extending 

the comment period for the proposed 

rule. 

DATES: The comment period for the 

proposed rule published on May 30, 

2018 at 83 FR 24850, is extended. 

Comments and additional material must 

be received on or before August 23, 

2018. 

ADDRESSES: Submit comments and 

additional materials, identified by 

docket EPA–HQ–OEM–2015–0725 to 

the Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the online 

instructions for submitting comments. 

Once submitted, comments cannot be 

edited or removed from Regulations.gov. 

The EPA may publish any comment 

received to its public docket. Do not 

submit electronically any information 

you consider to be Confidential 

Business Information (CBI) or other 

information whose disclosure is 

restricted by statute. Multimedia 

submissions (audio, video, etc.) must be 

accompanied by a written comment. 

The written comment is considered the 

official comment and should include 

discussion of all points you wish to 

make. The EPA will generally not 

consider comments or comment 

contents located outside of the primary 

submission (i.e., on the web, cloud, or 

other file sharing system). For 

additional submission methods, the full 

EPA public comment policy, 

information about CBI or multimedia 

submissions, and general guidance on 

making effective comments, please visit 

https://www.epa.gov/dockets/ 

commenting-epa-dockets. 

FOR FURTHER INFORMATION CONTACT: 

James Belke, United States 

Environmental Protection Agency, 

Office of Land and Emergency 

Management, 1200 Pennsylvania Ave. 

NW (Mail Code 5104A), Washington, 

DC 20460; telephone number: (202) 

564–8023; email address: belke.jim@

epa.gov, or Kathy Franklin, United 

States Environmental Protection 

Agency, Office of Land and Emergency 

Management, 1200 Pennsylvania Ave. 

NW (Mail Code 5104A), Washington, 

DC 20460; telephone number: (202) 

564–7987; email address: 

franklin.kathy@epa.gov. 

SUPPLEMENTARY INFORMATION: Detailed 

background information describing the 

proposed RMP Reconsideration 

rulemaking may be found in a 

previously published document: 

Accidental Release Prevention 

Requirements: Risk Management 

Programs Under the Clean Air Act; 

Proposed Rule (83 FR 24850, May 30, 

2018). 

I. What action is EPA taking? 

During the week of July 9, 2018 

several stakeholders notified EPA that 

we had failed to provide in the 

rulemaking docket for the proposed 

RMP Reconsideration rule (referred to 

herein as the Reconsideration Proposal) 

the risk management plan data we used 

to compare the number of facilities 

reporting in the February 2015 version 

of the RMP database to those reporting 

in the November 2017 version. This 

analysis of the change in the number of 

facilities was presented in the 

Regulatory Impact Analysis (RIA) for the 

Reconsideration Proposal. Stakeholders 

requested that EPA supply the risk 

management plan data used in the RIA 

that supported the comparison analysis. 

They also requested that EPA extend the 

comment period for the Reconsideration 

Proposal for 60 days to allow the public 

to access and review the data so that 

they may have enough time to assess the 

impacts of the updated data on the 

proposal and provide comments.1

As a result, in this supplemental 

action, EPA is providing additional 

information in the docket for the 

proposed action. On July 11, 2018, EPA 

placed into the docket the November 

2017 version of the database containing 

risk management plans submitted by 

RMP facilities. This database does not 

contain the restricted offsite 

consequence analysis (OCA) data. This 

database (Docket ID: EPA–HQ–OEM– 

2015–0725–0989) consists of a digital 

versatile disc (DVD) containing the RMP 

database as a 1.4 gigabyte size file in 

.mdb format. The database file is too 

large to be provided online through 

regulations.gov. To view or receive a 

copy of the DVD, contact the EPA 

Docket Center, Public Reading Room, as 

follows: In person/writing: 

Environmental Protection Agency, 

Docket Center, 1301 Constitution Ave. 

NW, 2822T, Room 3334, Washington, 

DC 20004, telephone: 202–566–1744, 

fax: 202–566–9744, email: docketcustomerservice@epa.gov. EPA will 

address all comments received on the 

supplemental data being provided and 

any comments submitted in response to 

this action in our final rulemaking 

action. EPA is extending the comment 

period for Reconsideration Proposal 

through August 23, 2018. 

II. What is the background for this 

action? 

On May 30, 2018, EPA proposed a 

rule (Reconsideration Proposal) that 

seeks comment on various proposed 

changes to the final RMP Amendments 

rule (Amendments rule) issued on 


jstallworth on DSKBBY8HB2PROD with PROPOSALS