SEC Proposes Temporary Rules to Facilitate Measured Participation by Certain "Platform Workers" in Compensatory Offerings Under Rule 701 and Form S-8

The Securities and Exchange Commission today voted to propose rules that, on a temporary basis and subject to percentage limits (no more than 15% of annual compensation), dollar limits (no more than $75,000 in three years) and other conditions, would permit an issuer provide equity compensation to certain "platform workers" who provide services available through the issuer's technology-based platform or system.

The proposed rules reflect the significant evolution that has taken place in the composition and participation of the workforce since the Commission last substantively amended Rule 701 or Form S-8, particularly the development of the so-called "gig economy," which has resulted in new work relationships. Issuers operating internet-based marketplace platforms may have the same compensatory and incentive motivation to offer equity compensation to individuals participating in their platform-based businesses as they do to their employees, but they currently are unable to provide that equity compensation under Rule 701 or on Form S-8.

"Work relationships have evolved along with technology, and workers who participate in the gig economy have become increasingly important to the continued growth of the broader U.S. economy," said SEC Chairman Jay Clayton. "The rules we are proposing today are intended to allow platform workers to participate at a measured level — up to 15% of their compensation — in the growth of the companies that their efforts support."

Additionally, in a companion release, the Commission also proposed additional amendments to Rule 701 and Form S-8 to modernize the framework for compensatory securities offerings more generally to allow employees and other workers to receive equity compensation from their company while maintaining important investor protections.

The proposed amendments  to Securities Act Rule 701 and Form S-8 are substantially informed by public comment received in response to the Commission's July 2018 Concept Release on Compensatory Security Offerings and Sales. The proposal will have a 60-day public comment period following its publication in the Federal Register.

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FACT SHEET

Temporary Rule Amendments to Include Certain "Platform Workers"

Compensatory Offerings under Rule 701 and Form S-8

Background

In July 2018, the Commission published a concept release to solicit comment on whether and how best to modernize the exemption under Rule 701 and to update Form S-8. In the release, the Commission requested comment on how to address, consistent with investor protection, the significant evolution that has taken place in the types of issuer compensatory offerings and the composition of the workforce since the Commission last substantively amended this rule and form. Regarding workforce changes, the Commission focused on the new types of work relationships between companies and individuals that have emerged in the so-called "gig economy."  These have arisen in large part due to the internet and typically have involved an individual’s use of a company’s internet "platform" to find a particular type of work, or "gig" (i.e., task or job). The work could involve the individual providing services to end users, such as ride-sharing, food delivery, household repairs, dog-sitting, or tech support, or using the platform to sell goods or lease property to third parties.

Several commenters on the concept release noted that these platform workers might not be employees, consultants, advisors, or de-facto employees eligible to receive securities in compensatory arrangements under Rule 701 or on Form S-8. Those commenters recommended expanding the scope of Rule 701 and Form S-8 to include offerings to such platform workers.

Highlights

The proposed rules would amend Rule 701 by adding a temporary rule provision that, for five years, would enable issuers to use Rule 701 to compensate certain platform workers, subject to specified conditions. Under the amendments, an issuer would be able to use the Rule 701 exemption to offer and sell its securities on a compensatory basis to platform workers who, pursuant to a written contract or agreement, provide bona fide services by means of an internet-based platform or other widespread, technology-based marketplace platform or system provided by the issuer if:

• the issuer operates and controls the platform, as demonstrated by its ability to provide access to the platform, to establish the principal terms of service for using the platform and terms and conditions by which the platform worker receives payment for the services provided through the platform, and by its ability to accept and remove platform workers participating in the platform;
• the issuance of securities to participating platform workers is pursuant to a compensatory arrangement, as evidenced by a written compensation plan, contract, or agreement, and is not for services that are in connection with the offer or sale of securities in a capital-raising transaction, or services that directly or indirectly promote or maintain a market for the issuer’s securities;
• no more than 15% of the value of compensation received by a participating worker from the issuer 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 issuer during a 36-month period, shall consist of securities, with such value determined at the time the securities are granted;
• 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 between payment in securities or cash; and
• the issuer must take reasonable steps to prohibit the transfer of the securities issued to a platform worker pursuant to this exemption, other than a transfer to the issuer or by operation of law.

The proposed amendments would also permit an Exchange Act reporting company to make registered securities offerings to its platform workers using Form S-8. The same conditions proposed for Rule 701 issuances would apply to issuances to platform workers on Form S-8, except for the proposed transferability restriction.

The proposed amendments would not permit the issuance of securities for platform worker activities relating to the sale or transfer of permanent ownership of discrete, tangible goods. Depending on the results of the initial expanded use of Rule 701 and Form S-8, if adopted, the Commission could consider expanding eligibility to other activities, such as selling goods or other non-service providing activities in the future.

The Commission is proposing these amendments on a temporary basis to allow it to assess whether issuances of securities to platform workers under Rule 701 or Form S-8 are being made for legitimate compensatory purposes, and not for capital-raising purposes. The Commission would also be able to assess whether such issuances have the expected beneficial effects for issuers in the "gig economy" and their investors, including those platform workers who have received securities as compensation, and whether such issuances have resulted in any unintended consequences. These assessments, in turn, should help the Commission determine whether to modify or expand the scope of Rule 701 and Form S-8 on an extended or permanent basis. In order to help in the evaluation of the proposed expanded scope of Rule 701 and Form S-8, the proposed amendments would require an issuer that sells securities to platform workers to furnish certain information to the Commission at six-month intervals.

What’s Next?

The proposal will be subject to a 60-day public comment period.