The Securities and Exchange Commission (the “SEC”) recently proposed temporary rules that would permit companies to offer equity compensation to “platform workers” who provide services available through the company’s technology-based platform. The proposed changes would amend Rule 701 promulgated under the Securities Act of 1933 (which permits non-reporting companies to issue equity compensation to employees) and Form S-8 (which permits simplified registration by reporting companies of securities to be issued as equity compensation).

In a separate proposal, the SEC proposed additional amendments to Rule 701 and Form S-8 designed to reduce compliance burdens and expand the group of service providers eligible to receive securities under Rule 701 and Form S-8. Both proposals are summarized below.

The SEC’s proposals reflect trends in the US economy that have given rise to a recent legislative and regulatory focus on the role of gig workers. On the legislative front, the Families First Coronavirus Response Act and the Coronavirus Aid, Relief, and Economic Security Act each contain groundbreaking provisions extending pandemic unemployment benefits to self-employed people, freelancers and other gig-economy workers. From a regulatory standpoint, the SEC is not the first agency to have recently issued proposals affecting gig workers. On September 22, 2020, as discussed in our September 25, 2020 OnPoint, the US Department of Labor proposed a high-profile regulation (expected to be finalized shortly) that would clarify how to determine whether a worker is an “employee” under the Fair Labor Standards Act or an independent contractor.

Comments on the proposals are due on or before February 9, 2021. If the proposals are enacted into law, companies that want to take advantage of the new rules should review their plans to assess whether they would need to amend their equity incentive plans to expand the eligible class of participants.

Proposal to Allow Offerings of Equity Compensation to “Gig” Workers

In 2018, the SEC solicited comments on whether and how best to modernize Rule 701 and Form S-8 to address significant changes in the composition of the workforce in the new so-called “gig economy.” According to the SEC, these new types of work relationships typically involve an individual’s use of an internet “platform” provided by a company to find a particular type of work, or “gig.” The SEC refers to this new category of service providers as “platform workers.” Based upon the public comments it received, the SEC is now proposing the changes described in this OnPoint.

The proposed rules would amend Rule 701, for a temporary five-year period, to allow companies to grant equity compensation to platform workers, subject to certain conditions. Under the proposed rules, a company would be permitted to offer and sell its securities on a compensatory basis to platform workers who provide bona fide services, pursuant to a written contract or agreement, by means of an “internet-based platform or other widespread, technology-based marketplace platform or system” provided by the company, if:

• the company operates and controls the platform;
• the securities are issued to a platform worker pursuant to a written compensatory arrangement (which may be a compensation plan, contract or agreement), and not for services in connection with a capital-raising transaction;
• the securities consist of no more than 15% of the value of the platform worker’s compensation received from the company for services provided by means of the platform during a 12-month period and no more than $75,000 of such compensation received from the company during a 36-month period, with such value determined at the time of the securities’ grant;
• the amount and terms of any securities issued to a platform worker may not be subject to individual bargaining or the worker’s ability to elect payment in securities or cash; and
• the company takes reasonable steps to prohibit the transfer of the securities issued to a platform worker, other than by operation of law.

The proposed rule would also permit a reporting company to offer registered securities to its platform workers using Form S-8. The same conditions listed above would apply to issuances to platform workers on Form S-8, except for the transferability restriction.

The SEC stated that it proposed these amendments on a temporary basis in order to allow it to assess whether issuances of these equity grants to platform workers under Rule 701 and Form S-8 are being made for legitimate compensatory purposes (as opposed to capital-raising purposes).

Proposal to Modernize Rule 701 and Form S-8

The SEC also proposed additional amendments to Rule 701 and Form S-8 that are intended to modernize the framework for securities offerings and sales to certain service providers. The amendments would allow employees and other service providers to receive equity compensation from their company while maintaining important investor protections, with the goal that service providers would share in the growth of the business. The proposed amendments are summarized below.

Rule 701

With respect to Rule 701, the proposed amendments would:

• revise the additional disclosure requirements under Rule 701 with respect to 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;
• increase two of the three alternative regulatory ceilings that cap the overall amount of securities that a non-reporting issuer may sell pursuant to the exemption during any consecutive 12-month period—namely, the cap of 15% of the issuer’s assets is raised to 25% and the $1 million limit is raised to $2 million; and
• make the exemption available for offers and sales of securities under a written compensatory benefit plan established by the issuer’s subsidiaries, whether or not majority-owned.

Form S-8

With respect to Form S-8, the proposed amendments would:

• implement improvements and clarifications to simplify registration on Form S-8, including:
  • clarifying the ability to add multiple plans to a single Form S-8;
  • clarifying the ability to allocate securities among multiple incentive plans on a single Form S-8; and
  • permitting the addition of securities or classes of securities by automatically effective post-effective amendment.
• implement improvements to simplify share counting and fee payments with respect to the Form S-8, including:
  • requiring the registration of an aggregate offering amount of securities for defined contribution plans;
  • implementing a new fee-payment method for registration of offers and sales pursuant to defined contribution plans; and
  • conforming Form S-8 instructions with current IRS plan-review practices.
• eliminate the Form S-8 requirement to describe the tax effects of plan participation on the issuer.

Rule 701 and Form S-8

With respect to both 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.