Joint Statement on the Proposal to Facilitate Non-Cash Compensation for Certain Gig Workers
Nov. 24, 2020
A broad swath of companies in the U.S. now rely on workers who are not treated as traditional employees. Indeed, depending on how you define the term, alternative or contingent workers may make up as much as 40 percent of the workforce.[1] Today the Commission singles out one narrowly-defined subset of companies who depend on these workers—companies that provide services through internet platforms—and proposes to create a new exemption from traditional registration requirements just for them. The proposed exemption would expressly permit these internet platform companies, and only these internet platform companies, to pay a portion of compensation to alternative workers with equity in the company rather than cash. Whatever the potential merits of equity compensation for alternative workers, the proposal does not establish a basis for selectively conferring a benefit on this particular business model. Consequently, we cannot support it.
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The changes proposed today concern Rule 701 and Form S-8, two mechanisms through which companies may issue securities as a form of compensation without being subject to the usual registration requirements.[2] The exemptions afforded by Rule 701 and Form S-8 recognize that different issues arise from the issuance of securities as compensation than for capital raising purposes, and seek to balance the potential benefits of equity compensation to an employment relationship with appropriate investor protections. In 2018, the Commission issued a concept release seeking public comment on potential updates to these rules.[3] Today the Commission is publishing two proposals that flow from that concept release – one we support, and one we do not.
First, the Commission proposes a package of technical updates to Rule 701 and Form S-8 in response to specific issues identified by the staff and commenters. We support the publication of that proposal for comment because it appears to include tailored adjustments designed to enhance the functioning of our rules for all market participants. We hope that commenters will weigh in and help make sure we get those technical adjustments right, and maintain or enhance appropriate investor protections where we should.
Second, the majority proposes a pilot program that would create an exemption for the issuance of equity compensation to a newly defined category of workers: so-called internet “platform workers.” Unfortunately we cannot support this proposal because 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.
The Proposing Release discusses the “gig” economy generally and explains that the proposal is meant to accommodate this evolving feature of our employment landscape. But the data cited in support of this proposition is broadly inclusive of all manner of alternative work arrangements, discussing independent contractors, freelancers, temporary help agency workers, on-call workers, contract workers, and other types of informal paid activities.[4] These various types of alternative workers have been a feature of our economy for a long time.[5] The category proposed for this exemption, however, singles out platform workers, a narrowly defined sub-category of alternative workers.[6]
The release does not reconcile the discrepancy between the broader data set analyzed, and the more narrow subset of workers identified for this new treatment under Rule 701 and Form S-8, except to assert broadly there has been an increase in the use of internet or technology-based platforms in the last few years.[7] Indeed we cannot find any principled basis for the policy choice to single out a specific platform-based business model for a particular competitive advantage.[8]
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We thank the staff in the Division of Corporation Finance, Division of Economic and Risk Analysis, and Office of the General Counsel for their diligent and thoughtful work on both proposals. Unfortunately we cannot support the proposal that validates a particular business model by singling it out for an exemption without a principled basis for doing so. We respectfully dissent.
[1] U.S. Government Accountability Office (GAO), Contingent Workforce: Size, Characteristics, Earnings, and Benefits (Apr. 20, 2015) (“Applying a broad definition to analysis of 2005 CWS data, our prior work estimated that 30.6 percent of the employed workforce could be considered contingent. Applying this broad definition to our analysis of data from the General Social Survey (GSS), we estimate that such contingent workers comprised 35.3 percent of employed workers in 2006 and 40.4 percent in 2010.”).
[2] Rule 701 promulgated under the Securities Act of 1933 provides an exemption from registration for securities issued by non-reporting issuers pursuant to compensatory arrangements, and Form S-8 is the simplified form of registration statement used by reporting issuers to register certain compensatory offerings. See Temporary Rules to Include Certain “Platform Workers” in Compensatory Offerings under Rule 701 and Form S-8, Proposed Rule, Rel. No. 33-[], 5-7 (Nov. 24, 2020) (Proposing Release).
[3] Concept Release on Compensatory Securities Offerings and Sales, Rel. No. 33-10521 (Jul. 18, 2018).
[4] See Proposing Release at n.111 (citing a study that includes temporary help agency workers, on-call workers, contract workers, and independent contractors or freelancers.). The Proposing Release also relies on the Federal Reserve’s Survey of Household Economics and Decision Making, which defines gig work to include informal, infrequent paid activities. See Federal Reserve, Report on the Economic Well-Being of U.S. Households in 2018 (May 2019) (“Informal, infrequent paid activities—referred to here as gig work—are another source of income for some adults. In this survey, gig work covers personal service activities, such as child care, house cleaning, or ride-sharing, as well as goods-related activities, such as selling goods online or renting out property (table 8). This definition of gig work includes both online and offline activities, underscoring the fact that most of these activities predate the internet.”). The Proposing Release further relies on studies that broadly examine rates of self-employment. See Proposing Release at 55.
[5] See GAO, supra note 1. See also Concept Release Comment Letter from Senator Brown (Mar. 7, 2019) (“Though it is true that internet-based methods of delivering and procuring goods and services are a recent development, the gig economy is not a new phenomenon. For decades, employers have pursued nontraditional employer-employee relationships, including by misclassifying workers as independent contractors, to reduce their labor costs.”).
[6] Just how small a subset of alternative workers this constitutes is unclear, but data cited in the Proposing Release suggests it may be as little as ten percent. See Proposing Release at 56 (citing the Federal Reserve 2018 Survey of Household Economics and Decision Making finding that while 30 percent of adults surveyed engaged in gig economy work, only three percent of adults surveyed participated in gig economy work enabled by the internet or a mobile app to connect to customers.).
[7] See Proposing Release at 59 (“Concerning online platform work specifically, the trends are relatively clear in that there has been a significant expansion of both online platforms and individuals using these online platforms to generate income in the last few years.”).
[8] See Proposing Release at 61 (“Thus, we expect that the proposed amendments likely would enhance the ability of affected issuers to compete in the labor market. This benefit likely would be more important if these issuers compete with traditional issuers for the same pool of workers, particularly for workers with specialized skills.”).