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US Securities and Exchange Commission

SEC Proposes to Update, Expand Equity Compensation Exemption

Thomson Reuters Tax & Accounting  

· 5 minute read

Thomson Reuters Tax & Accounting  

· 5 minute read

By Bill Flook

The SEC on November 24, 2020, proposed to update the exemption allowing private companies to offer equity compensation to their workers in Rule 701 under the Securities Act of 1933.

The SEC issued the proposal in Release No. 33-10891Modernization of Rules and Forms for Compensatory Securities Offerings and Sales. Comments are due 60 days following publication in the Federal Register.

The SEC, in Release No. 33-10891, said 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.”

The move springs from the SEC’s 2018 concept release in Release No. 33-10521Concept Release on Compensatory Securities Offerings and Sales, in which the commission addressed potential changes to Rule 701 to accommodate gig workers as well as broader updates to the rule and Form S-8, which public companies use to register securities offered through employee benefit plans. The proposal in Release No. 33-10891 also includes updates designed to streamline Form S-8.

Rule 701 subjects companies that issue more than $10 million in securities under the rule in a year to enhanced disclosure requirements. The proposal in Release No. 33-10892 would revise those additional disclosure requirements, “including how the disclosure threshold applies, the type of financial disclosure required, and the frequency with which it must be updated,” according to the proposal.

The proposal also would raise some of the caps on the amount of securities a private company can sell in a 12-month period; revise the timing for disclosures for certain derivative securities; and allow a company’s subsidiaries to use the exemption for offer and sale of securities under compensatory benefit plans, whether that subsidiary is majority-owned or not, among other changes.

The SEC, at the same time, separately proposed rules that would allow companies to award equity compensation to certain gig workers, subject to several limitations. The changes would be temporary, running for five years.

Some Internet-based companies and Republican lawmakers have for years sought to expand the applicability of the Rule 701 exemption to so-called “gig workers” and other non-employees.

The SEC issued that proposal in Release No. 33-10892Temporary Rules to Include Certain “Platform Workers” in Compensatory Offerings under Rule 701 and Form S-8. Comments are also due 60 days following publication in the Federal Register.

Release No. 33-10892 would enable certain “platform workers” to receive equity compensation under Rule 701, subject to a set of conditions that include limiting the securities to 15 percent of a worker’s compensation during a 12-month period and up to $75,000 during a 36-month period. That proposal would apply to both the exemption in Rule 701 and Form S-8.

The proposal describes platform workers as “workers who provide services available through the issuer’s internet-based marketplace platform or through another widespread, technology-based marketplace platform or system.”

The SEC’s two Democratic commissioners – Caroline Crenshaw and Allison Herren Lee – in a joint statement said they supported the proposed Rule 701 amendments in Release No. 33-10892 but did not agree with the proposal to extend equity compensation to a specific category of gig workers in Release No. 33-10892.

The two wrote that “there is no sound policy justification for singling out a subtype of alternative workers for this exemption – those who provide services through internet- or technology-based platforms.”


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