SECURITIES AND EXCHANGE COMMISSION
17 CFR PARTS 228, 229, 230 AND 239
[RELEASE NO. 33-7646, 34-41109; File No. S7-2-98]
RIN 3235-AG94
REGISTRATION OF SECURITIES ON FORM S-8
AGENCY: Securities and Exchange Commission
ACTION: Final Rule
SUMMARY: The Securities and Exchange Commission (“we„ or
“Commission„) is adopting amendments to Form S-8, related
rules under the Securities Act, and Regulations S-K and S-B.
Some of the amendments restrict the use of Form S-8 for the
offer and sale of securities to consultants and advisors.
Other amendments allow the use of Form S-8 for the exercise
of stock options by family members of employee optionees.
EFFECTIVE DATE: The amendments are effective April 7, 1999,
except that currently effective registration statements on
Form S-8 need not comply with amended Section 230.405 and
amended General Instruction A.1.(a)(1) to Form S-8 (referenced
in Section 239.16b) until May 10, 1999.
FOR FURTHER INFORMATION CONTACT: Anne M. Krauskopf, Special
Counsel, Office of Chief Counsel, Division of Corporation
Finance, at (202) 942-2900.
SUPPLEMENTARY INFORMATION: We are adopting amendments to
Rules 401[1] and 405[2] under the Securities Act of 1933
(“Securities Act„),[3] Item 402[4] of Regulations S-B and S-
K, and Securities Act Forms S-3[5] and S-8.[6]
I. EXECUTIVE SUMMARY
Today we adopt rule amendments that address two
separate concerns involving the use of Form S-8 to register
the offer and sale of employee benefit plan securities.
* First, we adopt amendments designed to restrict the
availability of streamlined registration on Form S-8 in
order to deter abuse of the form. In particular, the
form has been misused to sell securities to the general
public through employees and nominal “consultants and
advisors,„ and to register securities issued to stock
promoters. We are adopting these amendments as part of
our comprehensive agenda to deter registration and
trading abuses, including microcap fraud.[7]
* Second, we are expanding Form S-8 to cover stock option
exercises by employees’ family members, so that the rules
governing use of the form do not impede legitimate intra-
family transfers of options by employees. These
amendments will facilitate transfers for estate planning
purposes and transfers under domestic relations orders.
Form S-8 is available to register the offer and sale of
securities to the issuer’s employees[8] in a compensatory or
incentive context. In 1990, we adopted substantial
revisions to Form S-8,[9] including making the form
effective immediately upon filing and abbreviating the
disclosure format. We permitted the delivery of regularly
prepared materials advising employees about benefit plans to
satisfy Securities Act prospectus delivery requirements,
eliminating the need to file and deliver a separate
prospectus that duplicates this information. This treatment
reflected a distinction we traditionally have drawn between
offerings to employees primarily for compensatory and
incentive purposes and offerings for capital-raising
purposes. The compensatory purpose of the offering and
employees’ familiarity with the issuer’s business through
the employment relationship justify the use of abbreviated
disclosure that would not be adequate in a capital-raising
transaction.[10]
The 1990 revisions also made Form S-8 available for
offers and sales of securities to consultants and advisors.
To be eligible, a consultant must provide the issuer bona
fide services not in connection with the offer or sale of
securities in a capital-raising transaction. There did not
appear to be a reason to distinguish between transactions
with regular employees and transactions with consultants or
advisors, as long as securities are issued for compensatory
rather than capital-raising purposes.
A. Abuses of Form S-8
Since the 1990 revisions, some issuers and promoters
have misused Form S-8 as a means to distribute securities to
the public without the protections of registration under
Section 5 of the Securities Act. For example, the issuer
registers on Form S-8 securities nominally offered and sold
to employees or, more commonly, to so-called “consultants.„
These persons then resell the securities in the public
markets, at the direction of the issuer or a promoter. In
some cases, the consultants or employees perform limited or
no additional services for the issuer. The consultants or
employees then either remit to the issuer the proceeds from
these resales, or apply those proceeds to pay expenses of
the issuer that are not related to any service provided by
the consultants or employees.[11]
Registration of the shares on Form S-8 does not
accomplish Section 5 registration of these public sales.
The transaction that takes place (a capital-raising
transaction with the public) is a different transaction from
the transaction registered on Form S-8 (a compensatory
transaction with employees, including consultants).
Although the issuer purports to sell securities to
employees, the securities instead are sold to the public.
The “employees„ act as conduits by selling the securities to
the public and distributing the proceeds (or their economic
benefit) to the issuer. This public sale of securities by
the issuer has not been registered, although the Securities
Act requires registration. The failure to register this
sale of securities deprives public investors of the
protections afforded by the Securities Act.
Form S-8 also has been misused to register securities
issued to compensate “consultants„ and “advisors„ for
promoting the issuer’s securities.[12] This practice
facilitates securities fraud by providing compensation as
incentive to persons who hype the issuer’s stock, and may
result in these persons conditioning the market for resales
of the issuer’s securities.
Today we are adopting some of the amendments that we
proposed in February 1998 which are designed to prevent
these abuses.[13] The amendments will:
* clarify that Form S-8 is not available for consultants
and advisors who directly or indirectly promote or
maintain a market for the issuer’s securities; and
* provide that certain registration statements and post-
effective amendments that automatically become effective
upon filing will not be presumed filed on the proper form
if the Commission does not object to the form before the
effective date.
We are not adopting today the 1998 proposal to require
disclosure in Part II of Form S-8 of the names of, number of
securities to be received by, and specific services to be
provided by consultants and advisors (the “Part II
disclosure proposal„), nor are we taking any action on the
other matters on which we solicited comment. Many
commenters viewed these means of addressing consultant
abuses as overly broad and burdensome to legitimate
compensatory securities offerings.
Instead, in a companion release we have issued a new
proposal that is targeted to prevent abuse of Form S-8 by
the types of issuers who have shown the greatest inclination
to abuse the form while, to the extent possible, keeping the
form available to register legitimate compensatory
transactions.[14] In the companion release, we also have
extended the comment period on the Part II disclosure
proposal and various requests for comment that were included
in the Proposing Release (together, the “remaining
proposals„)[15] for the duration of the comment period on
the new proposal.
We may adopt any combination of the remaining
proposals, the new proposal and new solicitations of comment
set forth in the companion release. We no longer are
considering our 1998 request for comment whether each
consulting or advisory agreement should be filed as an
exhibit to the Form S-8, and do not intend to adopt an
amendment based on this request for comment.
B. Option Exercises by Family Member Transferees;
Executive
Compensation Disclosure
Currently, Form S-8 is available for the exercise of
employee benefit plan stock options only if the option is
exercised by the employee/optionee. If an issuer wants to
permit an employee’s family member transferee to exercise an
employee benefit plan option, it must register the sale of
the underlying securities upon exercise on a separate, less
streamlined registration statement.[16]
An employee may obtain significant estate tax savings
under current tax law if the employee, during his or her
lifetime, transfers a vested option to a family member, who
then exercises it. From a tax standpoint, exercise of the
option by the employee, with the underlying security later
passing to a family member through the employee’s taxable
estate, is more costly. Our 1996 amendments to the rules
under Exchange Act Section 16[17] facilitated employees’
transfers of options and other derivative securities to
their immediate family members (and trusts and partnerships
for their benefit) for estate planning purposes.
In the Proposing Release, we proposed amendments that
would make Form S-8 available for registration of employee
benefit plan stock options exercised by an employee’s family
member. Today, we adopt amendments that will:
* Make Form S-8 available for the exercise of employee
benefit plan options by an employee’s family member who
has acquired the options from the employee through a gift
or domestic relations order. For this purpose, “family
member„ will include nieces and nephews, a former spouse,
any person sharing the employee’s household (other than a
tenant or employee), and specified family-related trusts,
foundations and other entities, as well as the relatives
listed in the definition as originally proposed;
* Make Form S-8 available to former employees for the
exercise of transferable, as well as non-transferable,
options; and
* Revise executive compensation disclosure requirements to
clarify how options and stock appreciation rights
(“SARs„) that have been transferred should be reported.
We also adopt amendments to Form S-3 to make that form
equally available for the offer and sale of securities
underlying both warrants and options, in each case whether
or not the securities are transferable.
II. ABUSES OF FORM S-8
A. Consultants and Advisors Eligible for Form S-8
Transactions
1. General
To prevent further abuse of Form S-8 as a vehicle to
make unregistered securities distributions to the general
public and to register securities issued to stock promoters,
we are amending the instructions to Form S-8[18] and the
Securities Act definition of “employee benefit plan.„[19]
Currently, the instructions to Form S-8 allow the form to be
used only to register the offer and sale of an issuer’s
securities to the issuer’s employees (or employees of its
parents or subsidiaries) under an employee benefit plan.
The Form S-8 definition of “employee„ and the Securities Act
definition of “employee benefit plan„ both permit
participation by a consultant or advisor who provides bona
fide services to the issuer other than in connection with
the offer or sale of securities in a capital-raising
transaction. In response to telephone inquiries, the staff
has interpreted these standards to preclude the issuance of
securities on Form S-8 to consultants or advisors either:
* as compensation for any service that directly or
indirectly promotes or maintains a market for the
issuer’s securities; or
* as conduits for distributing securities to the general
public.
The staff also has stated that a consultant or advisor must
be a natural person, the consulting contract must be between
the issuer and this natural person, and the issuer must
issue the securities directly to this natural person.[20]
Despite these express limitations, some issuers
improperly have taken advantage of the abbreviated
disclosure requirements and automatic effectiveness of Form
S-8[21] (and the related absence of staff review) to
register securities that are issued in capital-raising
transactions. In these cases, a company issues shares
registered on Form S-8 to purported employees or other
nominees, designated as “consultants„ or “advisors,„ who
often do not provide any services to the company that
properly may be compensated with securities registered on
Form S-8. By prearrangement, these nominees resell the
shares on an unregistered basis, remitting the proceeds to
the company or its affiliates, or using them to pay the
company’s expenses. These unregistered resales deprive the
real public purchasers of the protections of Securities Act
registration. Some companies have repeated this process
through a series of Forms S-8, distributing a significant
percentage -- if not most -- of the company’s outstanding
shares in this manner.[22]
In distributing securities to the public on the
issuer’s behalf, these consultants or employees act as
“underwriters.„[23] The Form S-8 registration statement
registers only offers and sales of securities to the
company’s employees and consultants or advisors. But the
securities issued to these people do not come to rest.
Instead, these people act as conduits for unregistered
offers and sales of securities to the public for which no
exemption is available.[24] In these circumstances, we have
charged both issuers and consultants acting as nominees with
violating Sections 5(a) and 5(c) of the Securities Act.[25]
We also have charged violations of the antifraud provisions
of the Securities Act and the Exchange Act[26] for
misrepresentations in the Form S-8 that the securities are
issued as compensation for consulting services rather than
to raise capital for the issuer.[27]
Issuers also have misused Form S-8 to register
securities issued to consultants and advisors as
compensation for their services as stock promoters. Public
investors who purchase these securities in effect compensate
promoters for their services to the issuer, which sometimes
include the dissemination of material fraudulent
information. These transactions are outside the scope of
transactions permitted to be registered on Form S-8.
To deter these abuses of Form S-8, we proposed to
include in the Form S-8 instruction regarding consultant and
advisor eligibility further restrictions on compensable
consulting services. We proposed to require a consultant or
advisor to provide the registrant bona fide services that do
not directly or indirectly promote or maintain a market for
the registrant’s securities. This would be in addition to
the existing limitation that consultant services may not be
in connection with the offer and sale of securities in a
capital-raising transaction. To preclude the use of
consultant entities as underwriters, we also proposed to
codify the requirement that a consultant or advisor must be
a natural person who contracts directly with the registrant.
We proposed parallel amendments to the Securities Act
definition of “employee benefit plan,„ so that the standards
for consultant participation would be uniform. We are
adopting these proposals, modified slightly as described
below.[28]
While commenters agreed that these proposed amendments
could help deter the abusive use of Form S-8, they asked us
to provide interpretive guidance to assist issuers in
determining what consultant services properly may be
compensated with securities registered on Form S-8.
Commenters were particularly concerned that a broad range of
legitimate financial consultants whose services do not
involve underwriting, market making or stock promotion would
be precluded from using Form S-8. In this release we
provide interpretive guidance to issuers, and also rewrite
the current requirements to put them in plain English.
We agree with commenters that it should not matter if
the consulting contract is with an entity or a natural
person, as long as the securities registered are issued to
the natural persons working for the consulting entity who
provide bona fide services to the issuer. Where the
securities are issued to these persons, contracting with a
consulting entity would not abuse Form S-8. We have revised
the amendments to eliminate the proposed requirement that
issuers contract only with natural persons, while retaining
the requirement that the securities must be issued to
natural persons.[29]
As adopted, the amended Form S-8 instruction and the
parallel amendment to the Rule 405 definition of “employee
benefit plan„ permit consultants and advisors to be treated
like employees only if:
* the consultants and advisors are natural persons;
* the consultants and advisors provide bona fide services
to the registrant; and
* the services provided by the consultants and advisors 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
registrant’s securities.
2. Interpretive Guidance
Following adoption of these amendments, we will
continue to take the view that Form S-8 is not available to
register offers and sales of securities to either
traditional employees or consultants and advisors where:
* by prearrangement or otherwise, the issuer or a promoter
controls or directs the resale of the securities in the
public market;[30] or
* the issuer or its affiliates directly or indirectly
receive a percentage of the proceeds from such
resales.[31]
In other circumstances, Form S-8 will remain available
to register securities issued as compensation for the
services of traditional employees, without regard to the
specific character of the service. However, as to
consultants and advisors, the character of the service
provided will determine whether Form S-8 is available, as
described below.
Brokers, dealers and persons who find investors will be
excluded from receiving securities registered on Form S-8
because their services, as securities industry
professionals, are inherently capital-raising. Consultants
who provide investor relations or shareholder communications
services also will be excluded, because of the promotional
nature of their services.
We also will interpret the amendments to prohibit the
issuance of securities registered on Form S-8 to persons who
arrange or effect mergers that take private companies
public. For example, a merger into a thinly capitalized
“shell„ company with a class of securities registered under
the Exchange Act, or a subsidiary of such a company, will
fall into this category. These mergers commonly are used to
develop a market for the merged entity’s securities, often
as part of a scheme to “pump and dump„ those securities.
Persons who arrange “put together„ mergers, in which the
consolidation of numerous businesses is conditioned on the
combined entity’s going public, also will be precluded from
being compensated with securities registered on Form S-8.
The prohibition relating to services that directly or
indirectly promote or maintain a market for securities is
aimed at services that may reasonably be expected to raise
(or sustain) the market price of the registrant’s
securities. For example, persons who hype the issuer’s
securities in an Internet newsletter, or otherwise publish
or disseminate information that reasonably may be expected
to influence the price of the issuer’s securities, must not
be compensated with Form S-8 registered securities, whether
or not receipt of compensation from the issuer is
disclosed.[32]
Consultants who publish legitimate scientific or
medical research in publications generally circulated only
within the scientific or medical community typically will
not run afoul of this prohibition. However, consultants who
circulate this kind of research to a broader audience in a
manner reasonably expected to raise or sustain the market
price of the registrant’s securities may not be compensated
with Form S-8 registered securities. Similarly, consultants
who provide product or corporate image advertising usually
will be able to receive Form S-8 registered securities.
However, whether activities that nominally promote the
issuer’s products or image have the purpose or effect of
promoting or maintaining a market for the issuer’s
securities would depend on the facts and circumstances. The
more the services reflect traditional advertising practices,
the more likely they are to be viewed as product-oriented.
The revised instruction will not prevent all financial
consultants from being compensated with securities
registered on Form S-8. Instead, eligibility will depend on
the specific character of the services provided. For
example, business development consultants retained to
identify another company as a potential partner for
technology development may be compensated with securities
registered on the form. A consultant who advises the issuer
on business strategy or compensation policies also will be
eligible.
A consultant who arranges a bank credit line for the issuer
similarly will be eligible. In contrast, a consultant who
arranges a financing that involves any securities issuance -
-whether equity or debt -- will not be eligible.
Whether a consultant retained to perform management
functions traditionally performed by an employee, such as a
consultant chief financial officer, is eligible will not be
determined based on the person’s title. Instead,
eligibility will depend on the primary character of the
services provided. Where the services are primarily
capital-raising or promotional, Form S-8 will not be
available to register securities issued as compensation.
The independence requirements of generally accepted
auditing standards (“GAAS„) effectively prohibit accountants
who audit the issuer’s financial statements from receiving
the issuer’s securities as compensation for their
services.[33]
Attorneys[34] who represent an issuer in matters that
are not related to its securities, such as litigation
defense, securing U.S. Food and Drug Administration approval
of a drug, or obtaining a patent, will be eligible.
Attorneys who prepare the issuer’s Exchange Act reports and
proxy statement will be eligible whether or not these
documents are incorporated into a Securities Act
registration statement. However, any consultant or advisor,
including an attorney, who prepares or circulates an
Exchange Act report or proxy statement that is part of a
promotional scheme that violates federal securities laws
will not be eligible.
Attorneys serving as counsel to the issuer, its
underwriters or any participating broker-dealer in a
securities offering will not be eligible. Attorneys and
other consultants who assist an issuer in identifying
acquisition targets, or in structuring mergers or other
acquisitions in which securities are issued as
consideration, will be eligible, unless the acquisition
takes a private company public, as described above.
3. Harmonization with Rule 701
Consultants and advisors also may be issued securities
under Rule 701, the Securities Act exemption for offers and
sales of securities by non-reporting companies as employee
compensation. In the Proposing Release, we stated that we
were considering interpreting “consultants and advisors„ for
Rule 701 purposes in the narrower manner we traditionally
have interpreted these terms for Form S-8 eligibility, and
requested comment about interpreting the terms consistently
for both purposes. As stated in today’s release adopting
amendments to Rule 701,[35] we are concerned that Rule 701
also may become subject to abuse once Form S-8 is
amended.[36] Accordingly, the amended Form S-8 instructions
and the interpretations described above will apply equally
for purposes of both regulations.[37] However, issuers may
continue to use securities registered on Form S-8, or issued
under Rule 701, to compensate persons who have a de facto
employment relationship with them. Such a relationship may
exist where a person not employed by a company provides the
company with bona fide services[38] that traditionally are
performed by an employee, and the compensation paid by the
company for those services is the primary source of the
person’s earned income.[39]
4. Insurance Agents
We also asked in the Proposing Release if Form S-8
eligibility for insurance agents should continue to be
limited to exclusive agents, or if non-exclusive insurance
agents also should be permitted to use the form. We are
persuaded that any insurance agent who derives more than 50%
of his or her annual income from the issuer should be
permitted to receive securities issued under Form S-8,
whether or not the agency relationship is exclusive.[40]
Agents who depend on the issuer for this percentage of their
income are likely to possess sufficient information about
the issuer whose insurance products they sell to justify
reliance on the abbreviated disclosure of Form S-8. We have
amended Form S-8 accordingly.[41]
B. Requirement as to Proper Securities Act Form
Securities Act Rule 401(g) provides that any
registration statement or amendment is deemed filed on the
proper form unless the Commission objects to the use of the
form before the effective date. The rule requires the
Commission and the registrant to resolve whether a filing is
on the appropriate form before effectiveness. Use of the
proper form is important because the disclosure requirements
of different forms are tailored for the particular
transactions that we designed the forms to register. In
some cases, registration on a form other than the form
prescribed for the specific transaction may deprive public
investors of the disclosure benefits of Securities Act
registration.
Because we have no opportunity to object in a timely
manner to the improper use of Form S-8 and other forms that
become effective immediately upon filing,[42] we proposed to
amend Rule 401(g) so that all registration statements and
post-effective amendments that become effective
automatically upon filing would be excluded from its
scope.[43] Although significant abuses in this area appear
to have been limited to Form
S-8, we did not limit the proposed amendment to Form S-8, in
order to deter abuse involving other automatically effective
forms.
We are adopting the amendment to Rule 401(g) as
proposed. As a result, issuers will bear the risk of
assuring that automatically effective registration
statements are filed on the proper form. Where a form that
is available solely for a specified purpose is used for a
different type of transaction, the registration may not be
valid. Where a registration statement is filed on a form
that is available only for the offer and sale of securities
to a class of persons other than the persons to whom the
securities are actually offered and/or sold, we will, in
appropriate cases, continue to assert that the securities
are offered and sold in violation of Section 5.[44]
**FOOTNOTES**
[1]: 17 CFR 230.401.
[2]: 17 CFR 230.405.
[3]: 15 U.S.C. 77a et seq.
[4]: 17 CFR 228.402 and 17 CFR 229.402.
[5]: 17 CFR 239.13.
[6]: 17 CFR 239.16b.
[7]: See also Securities Act Release No. 7505 (Feb. 17, 1998) [63 FR
9632], adopting amendments to Regulation S [17 CFR 230.901 et seq.];
Release No. 39670 (Feb. 17, 1998) [63 FR 9661] under the Securities
Exchange Act of 1934 (“Exchange Act„) [15 U.S.C. 78a et seq.], proposing
amendments to Exchange Act Rule 15c2-11 [17 CFR 240.15c2-11]; Securities
Act Release No. 7541 (May 21, 1998) [63 FR 29168], proposing amendments
to Rule 504 [17 CFR 230.504]; Securities Act Release No. 7644 (Feb. 25,
1999), adopting amendments to Rule 504; and Exchange Act Release No.
41110 (Feb. 25, 1999), reproposing amendments to Rule 15c2-11.
[8]: For this purpose, “employees„ also includes the employees of the
issuer’s subsidiaries or parents. See General Instruction A.1(a) to
Form S-8.
[9]: Securities Act Release No. 6867 (June 6, 1990) [55 FR 23909].
[10]: Form S-8 also permits incorporation by reference of the
registrant’s Exchange Act reports without regard to the length of the
issuer’s reporting history or the aggregate market value of its
securities held by the nonaffiliated public (the issuer’s “public
float„). Incorporation by reference from Exchange Act reports into a
Securities Act registration statement is not otherwise available unless
the issuer satisfies the eligibility requirements for Form S-2 [17 CFR
239.12], Form S-3, Form F-2 [17 CFR 239.32] or Form F-3 [17 CFR 239.33].
[11]: See, e.g., In the Matter of Spectrum Information Technologies,
Inc. (“Spectrum„), Securities Act Release No. 7426, Exchange Act Release
No. 38774, Accounting and Auditing Enforcement Release No. 930 (June 25,
1997); SEC v. Hollywood Trenz, Inc. (“Hollywood Trenz„), Litigation
Release No. 15730, Accounting and Auditing Enforcement Release No. 1032
(May 4, 1998).
[12]: See, e.g., SEC v. Softpoint, Litigation Release No. 14480,
Accounting and Auditing Release No. 666 (Apr. 27, 1995).
[13]: Securities Act Release No. 7506 (Feb. 17, 1998) [63 FR 9648]
(“Proposing Release„). We received 17 comment letters on the Proposing
Release. These comment letters and a Comment Summary are available for
inspection and copying in the Commission’s Public Reference Room under
file number S7-2-98. Comments that were submitted electronically are
available on the Commission’s website (http://www.sec.gov).
[14]: Securities Act Release No. 7647 (Feb. 25, 1999).
[15]: The remaining proposals are described in greater detail in Section
II.C, below.
[16]: See Use of Form S-3 for Transferred Options (Aug. 7, 1997), which
allows options transferred by gift from employees to their immediate
family members to be treated like “transferable warrants„ for purposes
of registration on Securities Act Form
S-3.
[17]: 15 U.S.C. 78p. The Section 16 amendments are discussed in greater
detail in Section III.A.1, below.
[18]: General Instruction A.1(a).
[19]: Securities Act Rule 405.
[20]: See Image Entertainment (Mar. 6, 1992). However, where the
consultant or advisor performs services for the issuer through a wholly-
owned corporate alter ego, the issuer may contract with, and register
securities on Form S-8 as compensation to, that corporate entity. See
Aaron Spelling Productions, Inc. (July 1, 1987).
[21]: Under Rule Securities Act 462(a) [17 CFR 230.462(a)], a Form S-8
registration statement becomes effective as soon as it is filed with the
Commission. Under Rule 464(a) [17 CFR 230.464 (a)], a post-effective
amendment filed on Form S-8 also becomes effective upon filing.
[22]: See, e.g., In the Matter of Sky Scientific, Inc. (“Sky
Scientific„), Securities Act Release No. 7372, Exchange Act Release No.
38049, Accounting and Auditing Enforcement Release No. 863 (Dec. 16,
1996), in which the company conducted an unregistered distribution to
the public by misusing 106 registration statements and post-effective
amendments on Form S-8, distributing approximately 30 million shares of
common stock.
[23]: “Underwriter„ is defined in Section 2(a)(11) of the Securities Act
[15 U.S.C. 77b(a)(11)] to include “any person who has purchased from an
issuer with a view to, or offers or sells for an issuer in connection
with, the distribution of any security, or participates or has a direct
or indirect participation in any such undertaking, or participates or
has a participation in the direct or indirect underwriting of any such
undertaking . . . .„
[24]: In particular, the “resale„ exemption of Securities Act Section
4(1) [15 U.S.C. 77d(1)] for “any person other than an issuer,
underwriter or dealer„ is not available because these nominees act as
underwriters, as explained above.
[25]: See, e.g., Sky Scientific, cited at n. 22 above; Spectrum, cited
at n. 11 above; and Hollywood Trenz, cited at n. 11 above. See also SEC
v. Charles O. Huttoe, et al. (“Huttoe„), Litigation Release No. 15153
(Nov. 7, 1996).
[26]: Section 17(a) of the Securities Act [15 U.S.C. 77q(a)], Section
10(b) of the Exchange Act [15 U.S.C. 78j(b)] and Rule 10b-5 thereunder
[17 CFR 240.10b-5].
[27]: See, e.g., SEC v. Softpoint, Inc., cited at n. 12 above; and
Hollywood Trenz, cited at n. 11 above.
[28]: Today we also adopt a similar amendment to Securities Act Rule 701
[17 CFR 230.701], the Securities Act exemption for offers and sales of
securities by non-reporting companies as employee compensation.
[29]: However, in the limited circumstance where a consultant or advisor
performs services for the issuer through a wholly-owned corporate alter
ego, we will continue to permit issuers to register on Form S-8
securities issued as compensation to that corporate entity. See Aaron
Spelling Productions, cited at n. 20 above.
[30]: This test focuses on the issuer’s power to make a resale happen,
or to make it happen at a particular time. This test is not directed
at, and is not intended to foreclose, an issuer’s ability to prevent
resales from happening for a specified period of time, such as through
traditional restrictive legends.
[31]: This test will be satisfied where the issuer or its affiliates
receive an economic benefit from the resale proceeds, such as when the
proceeds are used to pay the issuer’s operating expenses or are paid to
the issuer’s control persons.
[32]: Section 17(b) of the Securities Act [15 U.S.C. 77q(b)] makes it
unlawful to publish any communication describing a security (whether or
not the publication offers the security) where the publishing party
receives payment from the issuer, an underwriter or dealer, without
fully disclosing that such payment has been (or will be) received and
the amount paid.
[33]: Rule 2-01 of Regulation S-X [17 CFR 210.2-01], and AICPA
Interpretation 101-1 of Statement of Auditing Standards No. 1.
[34]: The discussion of attorneys in this section refers to attorneys in
law firms engaged by the issuer, not to “in-house counsel,„ who would be
employees of the issuer.
[35]: Securities Act Release No. 33-7645 (Feb. 25, 1999) (“Rule 701
Adopting Release„).
[36]: Securities issued under Rule 701 are “restricted securities,„ as
defined in Securities Act Rule 144(a)(3) [17 CFR 230.144(a)(3)].
However, 90 days after a Rule 701 issuer becomes subject to the
reporting requirements of the Exchange Act, Rule 701(c)(3) lifts the
Rule 144 current public information, holding period, volume and notice
restrictions for non-affiliates -- and the holding period restriction
for affiliates -- who wish to resell the securities.
[37]: See Section II.D of the Rule 701 Adopting Release.
[38]: These services 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.
[39]: See Foundation Health Corporation (Jul. 12, 1993), which permitted
registration on Form S-8 of stock underlying benefit plan options
granted to physicians employed by an affiliated professional corporation
to provide medical services at the registrant’s HMO, where the company
had the right to require the physicians to provide medical services
exclusively at the HMO.
[40]: Whether an insurance agent satisfies this income test can be
determined by reference to the agent’s most recent income tax return.
[41]: See General Instruction A.1(a)(2) to Form S-8, as revised. We
also have amended Rule 701 in the same manner.
[42]: Securities Act Rule 462 [17 CFR 230.462] makes the following
registration statements effective immediately upon filing: (a) Rule
462(a) covers Forms S-3 and F-3 for dividend and interest reinvestment
plans, and Form S-8; (b) Rule 462(b) covers registration statements
filed in specified limited circumstances to increase by no more than 20%
the number of shares of the same class previously registered for the
same offering, and post-effective amendments to those registration
statements; (c) Rule 462(c) covers post-effective amendments filed in
specified limited circumstances to provide only price-related
information omitted from the registration statement in reliance on Rule
430A; and (d) Rule 462(d) covers post-effective amendments filed solely
to add exhibits. Where the issuer continues to meet the requirements
for filing on the appropriate form, Rule 464 [17 CFR 230.464] makes
effective upon filing post-effective amendments on Form S-8; Forms S-3,
F-2 and F-3 relating to dividend or interest reinvestment plans; and
Form S-4 [17 CFR 239.25] (if filed in reliance on General Instruction G
to that form).
[43]: Securities Act Rules 485(b) [17 CFR 230.485(b)] and 486(b) [17 CFR
230.486(b)] make investment company registration statements and post
effective amendments effective immediately upon filing. These
registration statements and post-effective amendments are not affected
by the amendment to Rule 401(g).
[44]: See, e.g., Sky Scientific, cited at n. 22 above; Spectrum, cited
at n. 11 above; Hollywood Trenz, cited at n. 11 above; and Huttoe, cited
at n. 25 above.
2
C. Remaining Proposals and Requests for Comment
To prevent the use of consultants and advisors as
conduits for unregistered public offerings, we proposed to
amend Part II of Form S-8 to require an issuer to name any
consultants or advisors to whom securities will be sold
under the registration statement,
specify the number of securities to be issued to each of
these persons, and
describe specifically the services that each of these
persons will provide to the issuer.
As proposed, this information would need to be filed by post-effective
amendment before the securities are sold to the consultants
or advisors if the information was not available when the
Form S-8 originally was filed. This proposal was designed
to discourage the use of Form S-8 as a vehicle for making
unregistered distributions and to permit objective
verification that the services are bona fide, non-capital-
raising and non-promotional services that legitimately may
be compensated with securities registered on Form S-8.
In addition to (or as alternatives to) this proposed
Part II disclosure, we requested comment:
* whether issuers should be required to disclose Form S-8
issuances of securities to consultants in their Exchange
Act reports -- either in Forms 10-K and 10-Q, or on Form
8-K;[45] and
* whether issuers should be required to file consulting and
advisory contracts as exhibits to Form S-8.
We also requested comment on whether the proposed Part II
disclosure would effectively combat the problem, and whether
this disclosure would be unduly burdensome.
Commenters divided in their assessment of the potential
effectiveness of the proposed Part II (and/or Exchange Act)
disclosure proposal. While some agreed that it would have a
chilling effect on the use of consultants as underwriters,
others expressed skepticism that violators who are not
deterred by the existing requirements would be deterred by
the proposed disclosure requirements.
Most commenters suggested that the proposed disclosure
could cause potential competitive harm to legitimate
registrants that would outweigh the proposal’s prospects for
preventing abuse of Form S-8. In particular, the proposals
to disclose the identity of consultants and the specific
services they provide could require issuers to reveal to
competitors critical information concerning their business
strategy. Commenters also stated that the proposal to
disclose the number of securities issued could cause issuers
competitive harm by permitting competitors who seek the
named consultants’ services to design more attractive
incentive packages.[46]
Further, commenters stated that the proposal would
impose excessive burdens and costs, particularly for issuers
who conduct a significant portion of their business through
legitimate consultants and use securities to pay for their
services, because these issuers would continually be filing
post-effective amendments to make the required disclosure.
Commenters opposed a requirement to file consulting
contracts as exhibits because of confidentiality concerns,
noting that the Commission can obtain these contracts as
supplemental information upon request under Securities Act
Rule 418.[47]
We do not adopt today, but instead defer for further
consideration, the Part II disclosure proposal and the
related comment request regarding Exchange Act disclosure of
Form S-8 issuances to consultants and advisors. However,
we have decided not to adopt a requirement to file all
consulting and advisory contracts as exhibits to Form S-8.
In announcing this decision, we remind issuers that, in the
absence of an exhibit requirement, issuers remain obligated
to furnish these agreements as supplemental information to
the Commission staff promptly upon request under Securities
Act Rule 418.[48]
Other potential amendments that we did not propose, but
requested comment on, were:
* whether the aggregate percentage of securities that may
be sold to consultants and advisors on Form S-8 during
the registrant’s fiscal year should be limited to a
particular percentage of the number of securities of the
same class outstanding;
* whether the existing requirement that the registrant
certify “that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form S-8„
should be expanded also to require certification that any
consultant or advisor who receives securities registered
on the form is not hired for capital-raising or
promotional activities; and
* whether the Form S-8 cover page should include a box that
the registrant would be required to check if any of the
securities registered will be offered and sold to
consultants and advisors.
Commenters were divided in their assessment of these
other potential amendments. Commenters representing high
technology companies expressed particular concern that any
“cap„ on the amount of securities that may be issued to
consultants and advisors on Form S-8 would arbitrarily
interfere with companies’ ability to conduct their business
in the most economically efficient manner. While some
commenters endorsed an expanded certification as a means of
reminding issuers of their responsibility for compliance,
others questioned whether it would be more effective than
the existing certification requirement. Although most
commenters did not object to checking a box, some questioned
its usefulness. They pointed out that many plans are
drafted broadly to permit issuances to consultants, but
securities may not actually be issued to consultants
immediately, if at all.
In the companion release issued today, we have extended
the comment period on these items. We will continue to
consider them while we request comment on the new proposal
and new solicitations of comment set forth in the companion
release. We may adopt any combination of the Part II
(and/or Exchange Act) disclosure proposal, the other
potential amendments described in the Proposing Release
(other than a requirement to file consulting and advisory
contracts as an exhibit to Form S-8), the new proposal and
the new comment solicitations.
**FOOTNOTES**
[45]: 17 CFR 249.310, 17 CFR 249.308a, and 17 CFR 249.308,
respectively.
[46]: Commenters also objected that disclosure of the number of
securities issued would violate legitimate consultants’ privacy.
[47]: 17 CFR 230.418.
[48]: See Proposing Release at n. 37. Companies also must consider
whether they are required to file these contracts as “material contract„
exhibits to other filings, as required by Item 601(b)(10) of Regulations
S-B and S-K. [17 CFR 228.601(b)(10) and 229.601(b)(10)].
3
III. TRANSFERABLE OPTIONS AND PROXY REPORTING
A. Form S-8 Availability for Family Member
Transferees
1. General
We are adopting amendments to Form S-8 to make it available for
the exercise of employee benefit plan stock options by an employee’s
family member who acquires the options from the employee through a gift
or a domestic relations order. The amendments reflect the view that
streamlined registration on Form S-8 should be available for these
transactions, as well as transactions with employees, because of their
compensatory character and access to information about the issuer
flowing from the employment relationship. The eligibility standard that
an issuer may use Form S-8 only if it is required to file Exchange Act
reports provides a further safeguard.
These amendments also are consistent with the 1996
amendments to the rules under Section 16 of the Exchange
Act.[49] In particular, the Section 16 amendments
eliminated the requirement of former Rule 16b-3 that a
derivative security issued under an employee benefit plan be
non-transferable.[50] Another amendment simplified
transfers of securities to a former spouse in divorce
proceedings.[51] These changes have made the issuance of
transferable options more attractive and more common.
For purposes of defining transferees eligible to
exercise options on Form S-8, we proposed to define “family
member„ the same way as Exchange Act Rule 16a-1(e)[52]
defines “immediate family.„[53] This definition includes
any child, stepchild, grandchild, parent, stepparent,
grandparent, spouse, sibling, mother-in-law, father-in-law,
son-in-law, daughter-in-law, brother-in-law, or sister-in-
law, including adoptive relationships. In addition, the
Form S-8 definition of “family member„ as proposed included
trusts for the exclusive benefit of these persons, and any
other entity owned solely by these persons.[54]
As described in greater detail below, we are adopting
our proposal with some modifications to expand Form S-8
availability to an employee’s family members for the
exercise of transferable employee benefit plan options.[55]
In doing so, however, we want to emphasize that this rule
change does not require any issuer to permit options to be
transferred in this manner. Any decision whether to permit
option transfers remains entirely at the discretion of each
individual issuer.[56] We also have restated the amended
instruction in plain English, so that it is easier to
understand.
2. Permissible Transferees
We asked commenters whether any other relatives, such
as nieces and nephews, should be added to the Form S-8
definition of “family member,„ particularly to facilitate
estate planning transactions. If so, we asked whether the
same relatives should be added to the Rule 16a-1(e)
“immediate family„ definition. Amending Rule 16a-1(e) this
way would result in a Section 16 insider being deemed to
have an indirect pecuniary interest in securities held by
these relatives if the relatives share the insider’s
household.[57]
Commenters responded that nieces and nephews are
frequent and appropriate beneficiaries of testamentary
bequests and other gifts for whom Form S-8 should be
available. In contrast, commenters divided as to whether
nieces and nephews should be included within “immediate
family„ for Section 16 purposes.
We are persuaded that the family relationship to an
employee and the compensatory character of the transaction
makes the abbreviated disclosure format of Form S-8 suitable
for option exercises by nieces and nephews, as well as the
other persons included in the proposed definition of “family
member.„ Accordingly, we have included nieces and nephews
in the definition of “family member„ as adopted. However,
we are not persuaded that the likelihood of abusive
transactions in which insiders realize indirect gains is
sufficiently high to include nieces and nephews within the
Rule 16a-1(e) definition of “immediate family.„ As a
result, we have not amended Rule 16a-1(e).
Commenters also expressed concern that former spouses
should be included within the “family member„ definition,
particularly because a transfer under a domestic relations
order typically is to a former spouse, rather than to a
current spouse. We have revised the definition of “family
member„ as adopted to include former spouses. As a result,
Form
S-8 will be available for exercises of options transferred
to a former spouse pursuant to a domestic relations order,
or by gift.
Some commenters expressed other concerns that the
proposed definition of “family member„ was too narrow
because it would exclude unrelated persons who are the
object of the employee’s generosity. Specifically, some
commenters argued that no family limitation is necessary in
the absence of consideration for the option’s transfer.
Other commenters suggested that each issuer should be
permitted to craft its own definition of “family members„
for whom Form S-8 would be available to exercise options
transferred by gift.
We are not persuaded that either of these formulations
is acceptable, given the history of Form S-8 abuse and the
need for objective definitions of permissible offerees to
deter future abuse. However, we believe that there is a
legitimate need for increased flexibility to facilitate
donative transfers of options to persons who are not “family
members„ as proposed. Option exercises by these persons are
consistent with the compensatory, non-capital raising
purposes of Form S-8. To this end, we have included “any
person sharing the employee’s household (other than a tenant
or employee)„ in the “family member„ definition as adopted.
Of course, it is up to the issuer to determine whether it
wishes to permit transfers to these persons.
We believe that sharing the employee’s household
generally will provide the transferee with access to
information about the issuer that flows from the
employee/optionee’s employment relationship. Moreover, the
shared household suggests a sufficiently close relationship
between the transferee and optionee to presume that the
transfer is a bona fide gift,[58] and not effected as a ruse
to evade the registration requirements of the Securities
Act.
As proposed, Form S-8 would be available to the “family
member„ of any person who satisfies the Form S-8 definition
of “employee,„ including consultants and advisors.
We are persuaded that consultants and advisors should be
treated the same as traditional employees for this purpose,
as they are for other purposes under Form S-8. In
particular, the amendments directed at deterring consultant
abuses that we adopt and propose today should relieve
concerns that equal treatment for family members of
consultants or advisors is not appropriate.
We requested comment whether trusts that are primarily
-- rather than solely -- for the benefit of family members,
and entities that are primarily -- rather than solely --
owned by family members should be included within the Form
S-8 “family member„ definition. Commenters responded that
the wide range of possible estate planning structures
providing for remote or contingent interests requires a more
flexible standard than exclusive benefit or sole ownership.
We are persuaded that entities in which family members
(or the employee) own more than 50 percent of the voting
interests and trusts in which family members have a more
than 50 percent beneficial interest should be included
within the “family member„ definition. Where more than 50
percent of an entity’s voting interests are owned by family
members or the employee, the employee’s family retains
control over the entity’s assets. Where family members have
a more than 50 percent beneficial interest in a trust, the
donative purpose of the trust is primarily for the benefit
of the employee’s family. The theories of compensatory
purpose and access to information make Form S-8 equally
appropriate for option exercises by these entities and
trusts.
Regarding the entity standard, we are not specifying
any particular type of entity, such as a general
partnership, that must be used. Any type of entity will
qualify as long as it meets the more than 50 percent of the
voting interests ownership test. This approach should
foster flexibility in estate planning. For example, this
standard will permit Form S-8 to be used by family-
controlled partnerships, corporations and limited liability
corporations. Of course, sales by these entities of the
securities received upon exercising the options must qualify
for an exemption or be registered under the Securities
Act.[59]
We have provided a separate test for foundations, which
usually are organized either as corporations or trusts,
because anomalous attributes of foundations make the general
tests for trusts and other entities not suitable. Because
the corporate form generally used by foundations involves a
“membership„ structure rather than a stock structure, the
entity test will not be available. Foundations organized as
trusts typically will not satisfy the trust test because the
beneficial interest will be primarily charitable.
Nevertheless, family control of the assets held by
foundations, whether formed as trusts or corporations,
justifies making Form S-8 equally available for option
exercises by these entities. Accordingly, we have included
in the definition of “family member„ a foundation in which
family members (or the employee) control the management of
assets.[60]
In contrast, theories relying on primary family
ownership, control or benefit do not support expanding Form
S-8 availability for option exercises by other entities,
such as Section 501(c)(3)[61] charities. Some commenters
requested that Form S-8 be made available for exercises of
employee benefit plan options transferred by gift to
charities. These commenters believed that facilitating
transfers to charities would be consistent with the purposes
of Form S-8 because option exercises by charities would not
raise concerns about use of the form for capital-raising.
We are not persuaded by this argument. Although an
option exercise by a Section 501(c)(3) charity, for example,
may not abuse Form S-8 for capital-raising purposes, the
charity is not likely to have a pre-existing relationship
with the issuer that would justify use of the abbreviated
Form S-8 disclosure. While we seek to facilitate employees’
estate planning through the amendments we adopt today, we
must keep in mind that investor protection is our primary
objective. To permit entities that are not controlled by,
or for the primary benefit of, an employee’s family members
to exercise options on Form S-8 would suggest that the
abbreviated Form S-8 disclosure is adequate for the offer
and sale of securities to non-employees generally. As
discussed above,[62] we remain firmly persuaded of the
contrary view.
3. Permissible Transfers
As proposed, Form S-8 would be available only if the
option is transferred by gift or under a domestic relations
order. We believe it is not consistent with the purpose of
Form S-8 to allow the form to be used for option exercises
when the option is sold by the employee to another party.
Accordingly, we have provided that Form S-8 will not be
available for the exercise of employee benefit options
transferred for value.
We have modified the amendment as adopted to clarify
that:
* Form S-8 is not available for the exercise of options
transferred for value;
* a transfer under a domestic relations order in settlement
of marital property rights is not a prohibited transfer
for value; and
* a transfer to an entity more than fifty percent owned by
the optionee’s family members in exchange for an interest
(such as a limited partnership interest) in that entity
is not a prohibited transfer for value.
As proposed, a family member transferee would not be
required to receive the option directly from the employee
for Form S-8 to be available. Instead, a subsequent
transferee who is a “family member„ would be able to
exercise the option on Form S-8, if he or she received the
option by gift or through a domestic relations order from
another “family member„ of the employee.
Commenters responded favorably to this proposal, noting
that it would facilitate estate planning by the direct
transferee family member, as well as the employee/optionee.
Commenters also stated that issuers should be able to decide
for themselves whether the record-keeping requirements that
would flow from permitting subsequent transfers are too
burdensome.
We believe that Form S-8 should be equally available to
indirect family member transferees, as long as each transfer
of the option is from another family member of the
employee/optionee, and either by gift or pursuant to a
domestic relations order. Whether the transfer is a direct
one from the employee/optionee, or indirect through another
“family member,„ the family member transferee will have a
sufficient pre-existing relationship with the issuer to
justify reliance on the abbreviated Form S-8 disclosure. Of
course, by making Form S-8 available to these indirect
transferees, we are not in any way requiring issuers to
permit indirect option transfers. This decision, like the
decision to permit any option transfers, remains entirely at
the discretion of each issuer.
We requested comment whether Form S-8 should be
available for “reload„ options[63] issued directly to family
members, following their exercise of transferred employee
benefit plan options. Commenters stated that although
option plans typically permit the award of options only to
employees, consultants and advisors, situations may arise
where an issuer decides to authorize the issuance of reload
options directly to transferees. Commenters supported Form
S-8 availability to family member transferees for reload
options issued directly to the transferees.
We believe that the pre-existing relationship with the
issuer, by virtue of the transferee’s membership in the
employee/optionee’s family, that justifies the adequacy of
abbreviated Form S-8 disclosure for the transferee’s
exercise of the original option applies equally to a reload
option. As a result, the amendment will permit the use of
Form S-8 for the exercise by family member transferees of
reload options that the issuer issues directly to those
transferees.
4. Permitted Transactions by Transferees
Under the amendment, family member transferees will
be treated like employees for all purposes under Form S-8.
We have expanded General Instruction A.1(a)(5) to specify
resale of the securities underlying transferred options as a
transaction for which Form S-8 will be available to an
employee’s “family member.„ This revision clarifies our
intent that under General Instruction C to Form S-8, the
Form S-3 resale prospectus[64] will be available for:
* the resale by a “family member„ who is an affiliate of
the issuer of securities that were registered on the Form
S-8; and
* the resale by a “family member„ of restricted securities
acquired upon the exercise of transferred employee
benefit plan options before the Form S-8 was filed.
Similarly, if the employee/optionee leaves the company
before or after the option transfer, Form S-8 will remain
available to the “family member„ for option exercises to the
same extent as the form is available to a former employee,
including a former consultant.
Consistent with current staff interpretive positions,
registration of shares underlying employee benefit plan
options will continue to be permitted at any time before the
option is exercised, without regard to when the option
becomes exercisable.[65] This position is a departure from
the general requirement that a registration statement must
be filed before an option becomes exercisable -- the time at
which an offer of the underlying security is deemed made --
if the exercise will be registered. We have historically
based this exception from the general requirement on a
policy determination that transactions registered on Form S-
8 should be allowed more flexibility because of the unique
character of the employee/employer relationship and the
compensatory purpose involved. 5. Prospectus Delivery and
Disclosure of Tax Effects.
The Proposing Release did not address prospectus
delivery standards that should apply to option exercises by
employees’ family members, or whether the Form S-8
prospectus materials should disclose material estate and
gift tax consequences of option transfers. However,
commenters requested that we provide guidance on these
issues. We agree that the applicable requirements should be
made clear.
As to prospectus[66] delivery generally, we want to
clarify that:
* an employee transferor will not be required to provide a
prospectus to the family member transferee in connection
with a transfer by gift or pursuant to a domestic
relations order; but
* existing prospectus delivery requirements that apply to
employee optionees will apply equally to family member
transferees. Accordingly, the issuer will be required to
deliver a prospectus, updated to reflect material
changes, to the family member transferee at or before the
transferee’s exercise of the option.
Commenters also requested guidance as to on-going
requirements to deliver updated prospectus materials to
transferees. The same standards would apply as for an
employee/optionee:
* The information delivered as a Form S-8 prospectus must
be updated in writing in a timely manner to reflect any
material changes during any period in which offers or
sales are being made.[67]
* For plan participants, including option transferees, who
already received a prospectus from the issuer, the issuer
needs to furnish only the updating material.
* However, the issuer must deliver the basic prospectus as
well as all updates to new plan participants, including
option transferees. For option transferees, the issuer
will provide the basic prospectus at the time of the
update rather than the time the employee transfers the
option.
Regarding shareholder communications, an issuer must
furnish to all employees participating in a stock option
plan (and their transferees) who do not otherwise receive
this information all shareholder communications and other
reports furnished to shareholders on a continuing basis.[68]
As to the tax consequences of an option transfer, the
Form S-8 prospectus materials must describe “the tax effects
that may accrue to employees as a result of plan
participation.„[69] If the Form S-8 registers options
issued under an employee benefit plan[70] that permits the
options to be transferred, this discussion should address
the material estate and gift tax consequences to an
employee/optionee of an option transfer.
B. Technical Change to Form S-8 to Allow Registration
of Shares
Underlying Transferable Options
To permit family member transferees to exercise
employee benefit plan options, Form S-8 must be available
for the registration of shares to be issued upon exercise of
transferable options. Current General Instruction A.1(a) to
Form S-8 makes the form available to former employees, and
guardians and executors of both current and former employees
(collectively, “former employees„),[71] for the exercise of
non-transferable employee benefit plan stock options and the
subsequent sale of the underlying securities, if these
exercises and sales are not prohibited under the plan.[72]
We proposed to eliminate this non-transferability
restriction in its entirety, but requested comment whether
the restriction should be lifted only for options that may
be transferred to “family members„ by gift or through a
domestic relations order.
In the interest of providing issuers flexibility and
simplifying option plan administration, we are adopting this
amendment as proposed. As a result, employee benefit plan
options that are transferable to anyone may be registered on
Form S-8, but may be exercised on Form S-8 only by employees
and their family members, as defined in the form.[73]
**FOOTNOTES**
[49]: These amendments were adopted in Exchange Act Release
No. 37260 (May 31, 1996) [61 FR 30376].
[50]:
Former Exchange Act Rule 16b-3(a)(2) provided that the exemption
was not available for derivative securities that were transferable,
except for transfers (i) by will or the laws of descent and
distribution, or (ii) pursuant to a qualified domestic relations order
as defined by the Internal Revenue Code.
[51]: Exchange Act Rule 16a-12 [17 CFR 240.16a-12] makes the acquisition
or disposition of equity securities through a domestic relations order
exempt from both the reporting requirements of Section 16(a) and the
short-swing profit recovery requirements of Section 16(b).
[52]: 17 CFR 240.16a-1(e).
[53]: Rule 16a-1(a)(2)(ii)(A) [17 CFR 240.16a-1(a)(2)(ii)(A)] provides
that a Section 16 insider has an indirect pecuniary interest in
securities held by members of the insider’s immediate family (as defined
in Rule 16a-1(e)) sharing the same household.
[54]: Rule 16a-1(e) does not include these entities. Instead, whether
an insider has a pecuniary interest in securities held by a trust or
other entity is determined by reference to Rules 16a-8(b) [17 CFR
240.16a-8(b)] and 16a-1(a)(2), respectively.
[55]: Because option exercises by an employee’s family member
transferees will be permitted on Form S-8, these exercises also will be
allowed on a “cashless exercise„ basis pursuant to Federal Reserve
System Regulation T. See 12 CFR 220.3(e)(4).
[56]: In making this decision, we believe that issuers will consider,
among other things, Rev. Rul. 98-21, which states that the transfer of
an unvested option is not a completed gift for gift tax purposes until
vesting has occurred. 1998-18 I.R.B. 7 (May 4, 1998). Typically, this
means that the gift will not be complete until the employee has
performed additional service for the issuer. Issuers also may consider
Rev. Proc. 98-34, which provides a safe harbor for valuing options.
1998-18 I.R.B. 15 (May 4, 1998).
[57]: Rule 16a-1(a)(2)(ii)(A).
[58]: In addition, when the transferee exercises the option, the
employee/optionee will recognize taxable income equal to the excess of
the fair market value of the underlying stock over the exercise price.
Treas. Reg. 1.83-7(a). At that time, the employer will be entitled to
deduct the same amount. Treas. Reg. 1.83-6(a).
[59]: As discussed in Section II.A.1 above, the resale exemption of
Securities Act Section 4(1) is not available for any person who acts as
an underwriter by taking securities from the issuer with a view to their
distribution. You also will need to consider whether a “family member„
is an “affiliate,„ as defined in Securities Act Rule 144(a)(1) [17 CFR
230.144(a)(1)].
[60]: We presume that persons who control the foundation’s assets would
decide whether and when an option is exercised.
[61]: 26 U.S.C. 501(c)(3).
[62]: See Section II.A.1, above.
[63]: “Reload„ options generally are replacement options granted upon
the exercise of an earlier-granted option.
[64]: As part of the Securities Act Reform Release (Securities Act
Release No. 7606A (Nov. 13, 1998) [63 FR 67174]), we have proposed a new
approach to the registration of resale transactions that would eliminate
Form S-3 resale prospectuses entirely, including the Form S-3 resale
prospectus provided by General Instruction C to Form S-8. However, the
Securities Act Reform Release requests comment whether there are
compelling reasons to retain a different resale treatment for employee
benefit plan securities that would not apply in other resale contexts.
That release does not propose to rescind Form S-8. See Securities Act
Reform Release at Section V.A.2.h.
[65]: See Division of Corporation Finance Manual of Publicly Available
Telephone Interpretations (July 1997), at Section G (Securities Act
Forms), Interpretation No. 61.
[66]: Instead of disseminating a customary prospectus included in a
registration statement, Form S-8 issuers fulfill prospectus delivery
obligations by providing plan participants: (1) document(s) containing
the plan information required by the form (updated as necessary); and
(2) a written statement listing the documents incorporated by reference
and advising participants of their availability upon request. Under
Securities Act Rule 428(a)(1) [17 CFR 230.428(a)(1)], the delivered
documents and the documents incorporated by reference constitute a
prospectus meeting the requirements of Securities Act Section 10(a) [15
U.S.C. 77j(a)].
[67]: Rule 428(b)(1)(i). Company information is updated through
incorporation by reference to the company’s Exchange Act reports and
other documents, which the company must make available without charge.
See Part I, Item 2 of Form S-8.
[68]: Rule 428(b)(5).
[69]: Part I, Item 1(f) of Form S-8.
[70]: As defined in Securities Act Rule 405, “employee benefit plan„
includes written compensation contracts in addition to traditional
plans.
[71]: Instruction A.1(a) also makes Form S-8 available to former
employees for the acquisition of registrant securities through intra-
plan transfers among plan funds, to the extent permitted by the specific
plan.
[72]: By its terms, this non-transferability restriction applies only to
the exercise of options by former employees. However, issuers often
apply it to all Form S-8 optionees, particularly because of the
practical difficulties of replacing options when current employees
become former employees.
[73]: Issuers no longer will need to rely on the staff’s interpretive
position in Merrill Lynch & Co., Inc. (May 16, 1996), which permitted
former employees to exercise on Form S-8 options transferable only to
children, step-children, grandchildren or trusts established for their
exclusive benefit, if such options had not been transferred by the
original grantees.
4
C. Registration on Form S-3 of Shares Underlying
Transferable
Warrants or Options
General Instruction I.B.4 to Form S-3 allows issuers to
register on Form S-3 the offer and sale of securities to be
received upon the exercise of outstanding transferable
warrants issued by the same issuer.[74] As a condition to
Form S-3 availability, the Instruction requires that the
issuer have sent, within the twelve calendar months before
the Form S-3 is filed, specified annual report information
to all record holders of the transferable warrants.[75]
By interpretation, the staff of the Division of
Corporation Finance expressed the view that employee benefit
plan options transferred by gift from employees to their
immediate family members would be considered “transferable
warrants„ for purposes of Instruction I.B.4.[76] Upon
effectiveness of the amendments adopted today to permit
employees’ family members to exercise employee benefit plan
options on Form S-8, there will be no further need to rely
on this interpretation.[77]
However, upon considering this interpretation, we
proposed to treat options (including options not issued
under employee benefit plans) the same as warrants for
purposes of Form S-3 availability, in each case without
regard to transferability. Commenters were asked to address
whether transferability, or differences between an issuer’s
relationships with option holders and warrant holders, would
justify different treatment of the underlying securities for
purposes of Form S-3 availability. This issue generated
virtually no comment.
Securities offered pursuant to options, like securities
offered pursuant to rights, convertible securities and
warrants, are all offered to existing security holders of
the issuer, who are presumed to “follow„ the issuer through
corporate communications and Exchange Act filings.[78] This
presumption appears to apply equally to options as well as
warrants, in each case without regard to transferability.
Accordingly, we are adopting the amendment in the form
proposed.
D. Executive Compensation Disclosure of Transferred
Options
The Proposing Release proposed amendments to (and
solicited comment on other potential amendments to) the
executive compensation disclosure requirements of Item 402
of Regulations S-K and S-B[79] to address the reporting
treatment of transferred (or transferable) employee benefit
plan stock options. These issues arose under the summary
compensation table,[80] the option/SAR grants table,[81] and
the aggregated option/SAR exercises and fiscal year-end
option/SAR value table.[82] The amendments adopted today
reflect the staff’s view that the transfer of an option by
an executive does not negate the option’s status as
compensation that should be reported.
. 1. Summary Compensation Table
The summary compensation table prescribed by Item
402(b) requires a three-year reporting history of
compensation, including the number of securities for which
options were granted, for each person serving as the
issuer’s chief executive officer (the “CEO„) during the last
fiscal year and the four other most highly compensated
executive officers serving at the end of that year (together
with the CEO, the “named executive officers„). We proposed
to amend this item so that the sum of the number of
securities underlying stock options granted required to be
reported in column (g) of the table would include options
that subsequently were transferred by the named executive
officer.
Commenters considered this proposal appropriate, noting
that the compensatory character of the securities reported
is not changed if the named executive officer subsequently
transfers them. We are adopting this amendment without
modification. [83]
Consistent with the theory that an option retains its
compensatory character following transfer, the staff of the
Division of Corporation Finance is of the view that reload
options issued directly to transferees also should be
reported in Item 402 disclosure as new grants, both in the
summary compensation table and the option/SAR grants table.
2. Option/SAR Grants Table
Among other things, this table must show the number of
options granted during the most recent fiscal year to the
named executive officers. The table also must provide
footnote disclosure of the material terms of those options.
We proposed to amend this item so that the information
required by the table would apply to all options and SARs
granted during the year, including options and SARs that
subsequently were transferred.
Consistent with their reaction to the parallel
amendment to the summary compensation table, commenters also
considered this amendment appropriate. We are adopting this
amendment in the form proposed. [84]
In the Proposing Release, we expressed our view that
transferability is an option term that should be disclosed
in a footnote to this table. While we did not propose a
specific amendment to codify this position, we solicited
comment whether the item should be amended to include
transferability among the material terms requiring footnote
disclosure.[85] Commenters generally did not agree that
transferability is a material option term that should
require footnote disclosure in the option/SAR grant table.
In particular, commenters expressed the view that, over
time, transferability may become a standard feature of
options granted to executives.
We believe that transferability should continue to be
disclosed in a footnote to this table, since it is not
currently a feature of most options, and may be viewed as a
special benefit to the employee receiving the option. We
are not, however, amending this item to codify a requirement
to disclose option transferability in a footnote, since in
the future transferability may become a standard option
feature.
We also requested comment whether footnote disclosure
should be required to specify the date of any transfer of an
option or SAR that has occurred. While some commenters
supported this disclosure (and parallel footnote disclosure
in the summary compensation table), they did not believe
that naming the transferee would provide material
information to investors. While some commenters favored
disclosing the transferee’s status, such as “immediate
family member„ or “unaffiliated charity,„ others objected to
this disclosure, noting that named executive officers are
not required to disclose transfers of other elements of
their compensation, such as cash or stock.
We have concluded that the summary compensation table
and option/SAR grants table should not be amended to require
footnote disclosure of subsequent transfers, although such
disclosure may be included on a voluntary basis. The
purpose of these tables is to disclose the compensation
awarded to the named executive officers. While
clarification that an award must be reported even if
subsequently transferred furthers this purpose, disclosure
of an award’s subsequent transfer does not. This is because
the gain on the exercise of the transferred options, as
discussed below, continues to be imputed to the named
executive officer for Item 402 disclosure purposes.
3. Aggregated Option/SAR Exercises and Fiscal
Year-End
Option/SAR Value Table
This table must present, among other things, both the
option exercises by the named executive officers during the
last fiscal year and the value of options held by them at
fiscal year end. This value is computed based on the
difference between the exercise price of the options and the
year-end fair market value of the covered shares.
Without proposing a specific amendment, we solicited
comment whether it is necessary to amend this table so that
it includes all option and SAR compensation from which the
named executive officer’s family members continue to derive
benefits. We wanted to know whether such an amendment is
needed to ensure that investors continue to receive
meaningful disclosure of all option and SAR compensation
awarded by the issuer, especially if option and SAR
transfers to family members become more common following
adoption of our amendments to Form S-8.
We do not adopt any amendment to this table today. We
intend to conduct a general review of the Item 402
disclosure scheme for purposes of evaluating the need for
further amendments, and will consider further the comments
responsive to the Proposing Release concerning this table in
connection with that review.
In the meantime, the staff of the Division of
Corporation Finance continues to answer interpretive
questions concerning this table. In the staff’s view, a
named executive officer is presumed to continue to have a
compensatory interest in an option or SAR following its
transfer. As a result, an issuer should continue to report
in this table options and SARs held or exercised by
transferees of named executive officers. Issuers may, but
are not required to, include a footnote indicating that the
option or SAR is held or was exercised by a transferee.
IV. TRANSITION
The amendments adopted today become effective [30 days
after publication in the Federal Register] (the “effective
date„), except that currently effective registration
statements will be required to comply with certain
amendments as of May 10, 1999, as discussed below.
The amendment to Rule 401(g) will apply to all Forms S-
8 and other automatically effective registration statements
filed on or after the effective date, and all post-effective
amendments to those registration statements (including
Securities Act Section 10(a)(3)[86] updates accomplished
through incorporation by reference of the registrant’s Form
10-K) filed on or after the effective date.[87]
The amendments to Form S-8 and Rule 405 restricting
permissible consultants will apply to Forms S-8 filed
initially on or after the effective date. However,
currently effective registration statements on Form S-8 will
be required to comply with these amendments as of May 10,
1999. As a result, any securities issuance on or after May
10, 1999 under any currently effective Form S-8 must comply
with these amendments.
The amendments that allow Form S-8 to be used by
employees’ family members for the exercise of employee
benefit plan options transferred by gift or pursuant to a
domestic relations order will apply automatically, as of the
effective date, to any Form S-8 registering shares
underlying employee benefit plan options, even if the Form
S-8 became effective before the effective date. It will not
be necessary to post-effectively amend these forms for this
amendment to apply.
The amendments to Form S-3 apply to registration
statements filed initially on or after the effective date,
and to pre-effective amendments filed on or after that date.
The amendments to Item 402 of Regulations S-K and S-B
apply to all Securities Act and Exchange Act documents that
include this disclosure filed initially on or after the
effective date. Amendments to documents that initially were
filed before the effective date need not include the new
required disclosure. For example, if preliminary proxy
material containing Item 402 disclosure was filed before the
effective date, definitive material filed after the
effective date need not comply.
V. COST-BENEFIT ANALYSIS
As an aid to evaluate the costs and benefits of our
proposals, we requested the views of the public and other
supporting information. We received no comments in response
to these requests. We have concluded that the amendments
will not result in an increase in costs or prices for
consumers or individual industries, or significant adverse
effects on competition, employment, investment,
productivity, innovation or small business.
Some of the amendments are designed to deter the use of
Form S-8 to register transactions in which consultants or
employees act as conduits to distribute securities to the
public, or transactions in which consultants are compensated
for other capital-raising or promotional services. This will
discourage filers from misusing the form to register
transactions for which it is not available. We believe that
the elimination of this misuse will benefit investors and
enhance their confidence in the integrity of the securities
markets. Other forms remain available to register
securities for these purposes. The forms most likely to be
used are Forms S-1, SB-2, S-2 and S-3. The estimated burden
hours for using Form S-8 are 12 hours.[88] The estimated
burden hours[89] for the other forms are:
Form SB-2 138
Form S-3 398
Form S-2 470
Form S-1 1290
Because none of these forms becomes effective
automatically upon filing, unlike Form S-8, additional costs
may be incurred due to the resultant delay. However, we
believe that any additional costs of using these other forms
are justified in order to provide adequate information to
investors.
Our records indicate that approximately 5600 Forms S-8
were filed during the fiscal year ending September 30,
1998.[90] We do not have data to determine how many of
these filings would have been precluded if the amendments
had been in effect. Therefore, we cannot quantify the
impact. However, we believe that the rule change will only
impact transactions that were not intended to be registered
on the form.
The amendment to make Form S-8 available for employee
benefit plan option exercises and the subsequent resale of
the underlying securities by an employee’s family members
will reduce costs by eliminating the need to file a
different, less streamlined registration form for these
transactions. By reducing these costs for issuers, option
transferability may become more widespread, allowing
families to incur estate tax savings as a result. Because
information on intrafamily transfers is not reported and
option transferability is a relatively new and limited
practice, we do not have data upon which to quantify costs
that will be saved by the amendments.
The amendment to make Form S-3 available for the
exercise of options to the same extent as it is available
for the exercise of warrants also will reduce costs by
making this streamlined registration form available for a
broader group of transactions. However, we do not have data
for quantifying this effect. The amendments to Item 402 of
Regulation S-B and S-K also will not increase costs because
they will not require the reporting of any compensatory
transactions that are not already required to be reported.
VI. SUMMARY OF FINAL REGULATORY FLEXIBILITY ANALYSIS
In accordance with 5 U.S.C. 604, we have prepared a
final Regulatory Flexibility Analysis (“FRFA„) regarding the
proposed amendments.
The analysis notes that the amendments to Form S-8 and
Rules 401 and 405 are designed to deter abusive practices in
which Form S-8 is used to make capital-raising distributions
of securities to the general public, or to compensate
consultants and advisors for promotional and other capital-
raising activities. These uses are contrary to the express
purposes of the form. Other amendments to Form S-8 and to
Item 402 of Regulations
S-B and S-K result from concerns expressed by
representatives of industry that the current limited scope
of persons permitted to exercise options under Form S-8 has
a chilling effect on intra-family transfers for estate
planning and other purposes. The amendments to Form S-3
result from the staff’s view that shares underlying options
should be treated the same as shares underlying warrants for
purposes of form availability. We believe that the
amendments will not result in any impairment of protection
for the investing public, and should result in improved
protection by assuring that capital-raising offerings are
registered on the forms prescribed for those offerings.
As the FRFA describes, the staff is aware of
approximately 815 Exchange Act reporting companies that
currently satisfy the definition of “small business„ under
Rule 157 of the Securities Act.[91] Overall, 13,577
companies are Exchange Act reporting companies. Based on a
random sample of the Forms S-8 filed during fiscal 1998, the
Commission estimates that approximately 380 of the 5600
Forms S-8 filed during 1998 were filed by small business
issuers, and that consultants or advisors were the sole
recipients of securities registered on approximately 185 of
the Forms S-8.
The amendments will not impose any new reporting,
recordkeeping or compliance burdens. The amendments
designed to deter the abuse of Form S-8 may require some
small businesses to use less streamlined forms to register
securities offerings that otherwise would have been
registered on Form S-8. In most cases, however, these will
be offerings for which Form S-8 was not in fact previously
available.
The amendment to make Form S-8 available for employee
benefit plan option exercises and the subsequent resale of
the underlying securities by an employee’s family members
should reduce recordkeeping and compliance burdens for
smaller businesses by eliminating the need to file a
different, less streamlined registration form for these
transactions. While we cannot quantify the number of small
businesses that would be affected, the average reporting and
recordkeeping burden that will be avoided by eliminating the
need to file a different form could be substantially
reduced.[92]
The amendment to make Form S-3 available for the
exercise of options to the same extent as it is available
for the exercise of warrants will further reduce
recordkeeping and compliance burdens by making this
streamlined registration form available for a broader group
of transactions.
The amendments to Item 402 of Regulation S-B should not
increase recordkeeping and compliance burdens because they
will not require reporting of compensatory transactions that
are not already required to be reported. Regulation S-K
generally does not apply to small issuers.
As discussed more fully in the FRFA, we considered
several possible significant alternatives to the amendments,
to minimize effects on small entities. These included: (a)
the establishment of different compliance or reporting
timetables that take into account the resources available to
small entities; (b) the clarification, consolidation, or
simplification of compliance and reporting requirements
under the rules and forms for small entities; (c) the use of
performance rather than design standards; and (d) a partial
or complete exemption from coverage of the rules and forms
for small entities.
We invited written comments on any aspect of the
Initial Regulatory Flexibility Analysis, but received no
specific comments in response to our request. In
particular, we sought comment on: (1) the number of small
entities that would be affected by the proposed rule
amendments; and (2) the determination that the proposed rule
amendments would reduce reporting, recordkeeping and other
compliance requirements for small entities. We received no
comments in response to these requests. A copy of the Final
Regulatory Flexibility Act Analysis may be obtained from
Anne M. Krauskopf, Office of Chief Counsel, Division of
Corporation Finance, Securities and Exchange Commission, 450
Fifth Street, N.W., Washington, D.C. 20549.
VII. PAPERWORK REDUCTION ACT ANALYSIS
Our staff consulted with the Office of Management and
Budget (“OMB„) and submitted the amendments as proposed for
review in accordance with the Paperwork Reduction Act of
1995 (“PRA„).[93] The title to the affected information
collection is: “Form S-8.„ An agency may not conduct or
sponsor, and a person is not required to respond to, a
collection of information unless it displays a currently
valid control number. This collection of information has
been assigned OMB Control No. 3235-0066.
The amendments designed to deter the abuse of Form S-8
may require some companies to use less streamlined forms to
register securities offerings that otherwise would have been
registered on Form S-8. In most cases, however, these will
be offerings for which Form S-8 was not in fact previously
available. We estimate that this may reduce the number of
registration statements filed on Form S-8 by approximately
one percent.
The amendments to Form S-8 will permit the form to be
used for the exercise of employee benefit plan options and
the resale of the underlying securities by family members of
employee optionees. By eliminating the need to file
different, less streamlined registration statements for
these transactions, the amendments may encourage registrants
to permit intra-family transfers of employee benefit plan
stock options. We believe that, to the extent registrants
have filed separate registration statements for option
exercises by family member transferees, the form most often
used was Form S-3. The Commission is unable to estimate
with certainty the number of Forms S-3 that have been filed
for this purpose, but believes it to be a negligible
percentage of the 3827 Forms S-3 filed during the fiscal
year ending September 30, 1998. Because option
transferability is a relatively new and limited practice, it
is difficult to quantify burden hours that will be saved by
the proposed amendments. However, by permitting family
members’ option exercises to be registered on the least
burdensome registration form, the amendments should make
transferability substantially more attractive. We estimate
that this will reduce the number of registration statements
filed on Form S-3 by a minimal percentage, but that this
reduction will be offset by an increased number of filings
on Form S-3 resulting from the amendment to General
Instruction I.B.4 to Form S-3.
This amendment will make Form S-3 available for the
registration of shares underlying options as well as
warrants, in each case without regard to transferability.
This will allow the registration of additional transactions
on Form S-3, a relatively streamlined registration form.
While we do not know the number of Forms S-3 filed during
fiscal 1998 that were filed in reliance on this instruction,
we estimate that it also was a relatively small percentage
of the 3827 Forms S-3 filed.
The OMB received no comments in response to our request
for comment regarding the information collection obligation.
VIII. STATUTORY BASIS AND TEXT OF AMENDMENTS
The amendments to Securities Act Forms S-8 and S-3 and
Rules 401(g) and 405 are adopted pursuant to the authority
set forth in Sections 6, 7, 8, 10 and 19 of the Securities
Act. The amendments to Item 402 of Regulations S-B and S-K
also are adopted pursuant to Exchange Act Sections 12, 13,
14, 15 and 23.
List of Subjects in 17 CFR Parts 228, 229, 230 and 239
Reporting and recordkeeping requirements, Securities.
**FOOTNOTES**
[74]: Instruction I.B.4 also makes Form S-3 available to
register securities offered upon exercise of outstanding
rights granted by the same issuer, under dividend or
interest reinvestment plans, or upon the conversion of
outstanding convertible securities. In each case, these
securities may be registered on Form S-3 whether or not the
issuer satisfies the $75 million public float test
applicable to primary offerings under Instruction I.B.1 to
Form S-3.
[75]: The Instruction refers to the information required by Exchange Act
Rule 14a-3(b) and Regulation S-K Items 401 (Directors, Executive
Officers, Promoters and Control Persons), 402 (Executive Compensation)
and 403 (Security Ownership of Certain Beneficial Owners and
Management).
[76]: Use of Form S-3 for Transferred Options (Aug. 7, 1997). This
interpretation applied the definition of “immediate family„ set forth in
Exchange Act Rule 16a-1(e).
[77]: However, registrants may continue to rely on a related letter,
Ropes & Gray
(Oct. 30, 1997), which distinguishes procedures for fee
transfers in other circumstances. This letter provides
generally that a post-effective amendment to the original
registration statement (other than a Form S-8) is not
necessary to deregister the unsold shares for which the
transferred fee originally was paid.
[78]: See Securities Act Release No. 6331 (Aug. 6, 1981). See also the
proposed treatment of offerings to existing security holders, including
option holders, in Section V.A.2.c of the Securities Act Reform Release.
[79]: An issuer must include, or incorporate by reference, this
disclosure in Securities Act registration statements filed on Forms S-1
[17 CFR 239.11], S-2, S-3, S-4, S-8, S-11 [17 CFR 239.18] and SB-2 [17
CFR 239.10]. An issuer also must include this disclosure in its
Exchange Act registration statement on Form 10 or Form 10-SB [together,
17 CFR 249.210], and its proxy or information statement (if action is to
be taken as to the election of directors or the approval of specified
director or executive compensation, as provided in Item 8 of Schedule
14A [17 CFR 240.14a-101]). Finally, an issuer must include, or
incorporate by reference from its definitive proxy or information
statement, this disclosure in its annual report on Form 10-K [17 CFR
249.310] or Form 10-KSB [17 CFR 249.310b].
[80]: Item 402(b) of Regulations S-B and S-K.
[81]: Item 402(c) of Regulations S-B and S-K.
[82]: Item 402(d) of Regulations S-B and S-K.
[83]: Revised Item 402(b)(2)(iv)(B).
[84]: Revised Item 402(c)(1).
[85]: Instruction 3 to Item 402(c) lists the material terms requiring
footnote disclosure.
[86]: 15 U.S.C. 77j(a)(3).
[87]: Securities Act Rule 401(b) [17 CFR 230.401(b)] generally requires
an amendment filed for purposes of satisfying Section 10(a)(3) to
conform to the applicable rules and forms in effect on the amendment’s
filing date.
[88]: The burden hour estimates discussed in this section were developed
for purposes of the Paperwork Reduction Act.
[89]: The estimated burden hours for Form S-8 and Form SB-2 assume that
only 25% of the total hours spent to prepare the form will be spent by
company employees. These estimates assume that the remaining 75% of the
total hours will be spent by hired professionals, such as attorneys or
accountants. These estimates therefore do not include within the burden
hours the remaining 75% of total hours, but instead account for that
time as costs. The estimated burden hours for Form S-2 and S-3 do not
follow this convention, but instead account for all estimated hours as
burden hours.
[90]: During the same period, 745 post-effective amendments were filed
on Form S-8.
[91]: 17 CFR 230.157.
[92]: See the Paperwork Reduction Act Analysis at Section VII, below.
[93]: 44 U.S.C. 3501 et seq.
5
TEXT OF THE AMENDMENTS
In accordance with the foregoing, Title 17, Chapter II
of the Code of Federal Regulations is amended as follows:
PART 228 - INTEGRATED DISCLOSURE SYSTEM FOR SMALL BUSINESS
ISSUERS
1. The authority citation for part 228 continues to
read as follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k,
77s, 77z-2, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh,
77jjj, 77nnn, 77sss, 78l, 78m, 78n, 78o 78u-5, 78w, 78ll,
80a-8, 80a-29, 80a-30, 80a-37, 80b-11, unless otherwise
noted.
2. In §228.402 paragraph (b)(2)(iv) introductory text
is republished and paragraph 402(b)(2)(iv)(B), and paragraph
402(c)(1) introductory text are revised to read as follows:
§228.402 (Item 402) Executive compensation.
* * * * *
(b) Summary compensation table -- (1) General * * *
(2) * * *
(iv) Long-term compensation (columns (f), (g) and (h)),
including:
(A) * * *
(B) The sum of the number of securities underlying
stock options granted (including options that subsequently
have been transferred), with or without tandem SARs, and the
number of freestanding SARs (column (g)); and
* * * * *
(c) Option/SAR grants table (1) The information
specified in paragraph (c)(2) of this item, concerning
individual grants of stock options (whether or not in tandem
with SARs) and freestanding SARs (including options and SARs
that subsequently have been transferred) made during the
last completed fiscal year to each of the named executive
officers shall be provided in the tabular format specified
below:
* * * * *
PART 229 - STANDARD INSTRUCTIONS FOR FILING FORMS UNDER
SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND
ENERGY POLICY AND CONSERVATION ACT OF 1975 - REGULATION S-K
3. The authority citation for part 229 continues to
read in part as follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k,
77s, 77z-2, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh,
77iii, 77jjj, 77nnn, 77sss, 78c, 78i, 78j, 78l, 78m, 78n,
78o, 78u-5, 78w, 78ll(d), 79e, 79n, 79t, 80a-8, 80a-29, 80a-
30, 80a-37, 80b-11, unless otherwise noted.
* * * * *
4. In §229.402 paragraph (b)(2)(iv) introductory text
is republished and paragraph 402(b)(2)(iv)(B) and paragraph
402(c)(1) introductory text are revised to read as follows:
§229.402 (Item 402) Executive compensation.
* * * * *
(b) Summary Compensation Table. (1) General. * * *
(2) * * *
(iv) Long-term compensation (columns (f), (g) and (h)),
including:
(A) * * *
(B) The sum of the number of securities underlying
stock options granted (including options that subsequently
have been transferred), with or without tandem SARs, and the
number of freestanding SARs (column (g)); and
* * * * *
(c) Option/SAR Grants Table. (1) The information
specified in paragraph (c)(2) of this item, concerning
individual grants of stock options (whether or not in tandem
with SARs) and freestanding SARs (including options and SARs
that subsequently have been transferred) made during the
last completed fiscal year to each of the named executive
officers shall be provided in the tabular format specified
below:
* * * * *
PART 230 - GENERAL RULES AND REGULATIONS, SECURITIES ACT OF
1933
5. The authority citation for part 230 continues to
read in part as follows:
Authority: 15 U.S.C. 77b, 77f, 77g, 77h, 77j, 77r,
77s, 77sss, 78c, 78d, 78l, 78m, 78n, 78o, 78w, 78ll(d), 79t,
80a-8, 80a-24, 80a-28, 80a-29, 80a-30, and 80a-37, unless
otherwise noted.
* * * * *
6. By amending §230.401 to revise paragraph (g) to
read as follows:
§230.401 Requirements as to proper form.
* * * * *
(g) Except for registration statements and post-
effective amendments that become effective automatically
pursuant to §§230.462 and 230.464, a registration statement
or any amendment thereto is deemed filed on the proper form
unless the Commission objects to the form before the
effective date.
7. By amending §230.405 to revise the definition of
"Employee benefit plan" to read as follows:
§230.405 Definitions of terms.
* * * * *
Employee benefit plan. The term employee benefit plan
means any written purchase, savings, option, bonus,
appreciation, profit sharing, thrift, incentive, pension or
similar plan or written compensation contract solely for
employees, directors, general partners, trustees (where the
registrant is a business trust), officers, or consultants or
advisors. However, consultants or advisors may participate
in an employee benefit plan only if:
(1) They are natural persons;
(2) They provide bona fide services to the registrant;
and
(3) 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 registrant's securities.
* * * * *
PART 239 - FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933
8. The authority citation for part 239 continues to
read in part as follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2,
77sss, 78c, 78l, 78m, 78n, 78o(d), 78u-5, 78w(a), 78ll(d),
79e, 79f, 79g, 79j, 79l, 79m, 79n, 79q, 79t, 80a-8, 80a-24,
80a-29, 80a-30 and 80a-37, unless otherwise noted.
* * * * *
9. By amending §239.13 to revise paragraph (b)(4) to
read as follows:
§239.13 Form S-3, for registration under the Securities
Act of 1933 of securities of certain issuers
offered pursuant to certain types of transactions.
* * * * *
(b) Transaction requirements. * * *
(4) Rights offerings, dividend or interest
reinvestment plans, and conversions, warrants and options.
(i) Securities to be offered:
(A) Upon the exercise of outstanding rights granted by
the issuer of the securities to be offered, if such rights
are granted on a pro rata basis to all existing security
holders of the class of securities to which the rights
attach;
(B) Under a dividend or interest reinvestment plan; or
(C) Upon the conversion of outstanding convertible
securities or the exercise of outstanding warrants or
options issued by the issuer of the securities to be
offered, or an affiliate of that issuer.
(ii) However, Form S-3 is available for registering
these securities only if the issuer has sent, within the
twelve calendar months immediately before the registration
statement is filed, material containing the information
required by §240.14a-3(b) of this chapter under the Exchange
Act to:
(A) All record holders of the rights;
(B) All participants in the plans; or
(C) All record holders of the convertible securities,
warrants or options, respectively.
(iii) The issuer also must have provided, within the
twelve calendar months immediately before the Form S-3
registration statement is filed, the information required by
Items 401, 402 and 403 of Regulation S-K (§§229.401 through
229.403 of this chapter) to:
(A) Holders of rights exercisable for common stock;
(B) Holders of securities convertible into common
stock; and
(C) Participants in plans that may invest in common
stock, securities convertible into common stock, or warrants
or options exercisable for common stock, respectively.
* * * * *
10. By amending Form S-3 (referenced in §239.13) by
revising paragraph B.4 of General Instruction I to read as
follows:
Note - The text of Form S-3 does not, and this
amendment will not, appear in the Code of Federal
Regulations.
Form S-3 Registration Statement under the Securities Act of
1933
* * * * *
General Instructions
* * * * *
I. Eligibility Requirements for Use of Form S-3
* * * * *
B. Transaction Requirements. * * *
4. Rights Offerings, Dividend or Interest Reinvestment
Plans, and Conversions, Warrants and Options.
(a) Securities to be offered (1) upon the exercise of
outstanding rights granted by the issuer of the securities
to be offered, if such rights are granted on a pro rata
basis to all existing security holders of the class of
securities to which the rights attach, (2) under a dividend
or interest reinvestment plan, or (3) upon the conversion of
outstanding convertible securities or the exercise of
outstanding warrants or options issued by the issuer of the
securities to be offered, or an affiliate of that issuer.
(b) However, Form S-3 is available for registering
these securities only if the issuer has sent, within the
twelve calendar months immediately before the registration
statement is filed, material containing the information
required by Rule 14a-3(b) (§240.14a-3(b) of this chapter)
under the Exchange Act to:
(1) all record holders of the rights,
(2) all participants in the plans, or
(3) all record holders of the convertible securities,
warrants or options, respectively.
(c) The issuer also must have provided, within the
twelve calendar months immediately before the Form S-3
registration statement is filed, the information required by
Items 401, 402 and 403 of Regulation S-K (§§229.401-229.403
of this chapter) to:
(1) holders of rights exercisable for common stock,
(2) holders of securities convertible into common
stock, and
(3) participants in plans that may invest in common
stock, securities convertible into common stock, or warrants
or options exercisable for common stock, respectively.
* * * * *
11. By amending §239.16b to revise paragraph (a)(1) to
read as follows:
§239.16b Form S-8, for registration under the Securities
Act of 1933 of securities to be offered to
employees pursuant to employee benefit plans.
* * * * *
(a) * * *
(1) Securities of the registrant to be offered to its
employees or employees of its subsidiaries or parents under
any employee benefit plan. The form also is available for
the exercise of employee benefit plan options by an
employee's family member (as defined in General Instruction
A.1(a)(5) to Form S-8) who has acquired the options from the
employee through a gift or a domestic relations order.
* * * * *
12. By amending Form S-8 (referenced in §239.16b) by
revising paragraph 1.(a) of General Instruction A to read as
follows:
Note - The text of Form S-8 does not, and this
amendment will not, appear in the Code of Federal
Regulations.
Form S-8 Registration Statement under the Securities Act of
1933
* * * * *
General Instructions
A. Rule as to Use of Form S-8.
1. * * *
(a) Securities of the registrant to be offered under
any employee benefit plan to its employees or employees of
its subsidiaries or parents. For purposes of this form, the
term "employee benefit plan" is defined in Rule 405 of
Regulation C (¶230.405).
(1) For purposes of this form, the term "employee" is
defined as any employee, director, general partner, trustee
(where the registrant is a business trust), officer, or
consultant or advisor. Form S-8 is available for the
issuance of securities to consultants or advisors only if:
(i) they are natural persons;
(ii) they provide bona fide services to the registrant;
and
(iii) 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 registrant's securities.
(2) In addition, the term "employee" includes
insurance agents who are exclusive agents of the registrant,
its subsidiaries or parents, or derive more than 50% of
their annual income from those entities.
(3) The term "employee" also includes former employees
as well as executors, administrators or beneficiaries of the
estates of deceased employees, guardians or members of a
committee for incompetent former employees, or similar
persons duly authorized by law to administer the estate or
assets of former employees. The inclusion of all
individuals described in the preceding sentence in the term
"employee" is only to permit registration on Form S-8 of:
(i) the exercise of employee benefit plan stock
options and the subsequent sale of the securities, if these
exercises and sales are permitted under the terms of the
plan; and
(ii) the acquisition of registrant securities pursuant
to intra-plan transfers among plan funds, if these transfers
are permitted under the terms of the plan.
(4) The term "registrant" as used in this Form means
the company whose securities are to be offered pursuant to
the plan, and also may mean the plan itself.
(5) The form also is available for the exercise of
employee benefit plan options and the subsequent resale of
the underlying securities by an employee's family member who
has acquired the options from the employee through a gift or
a domestic relations order. For purposes of this form,
"family member" includes any child, stepchild, grandchild,
parent, stepparent, grandparent, spouse, former spouse,
sibling, niece, nephew, mother-in-law, father-in-law, son-
in-law, daughter-in-law, brother-in-law, or sister-in-law,
including adoptive relationships, any person sharing the
employee’s household (other than a tenant or employee), a
trust in which these persons have more than fifty percent of
the beneficial interest, a foundation in which these persons
(or the employee) control the management of assets, and any
other entity in which these persons (or the employee) own
more than fifty percent of the voting interests. Form S-8
is not available for the exercise of options transferred for
value. The following transactions are not prohibited
transfers for value:
(i) a transfer under a domestic relations order in
settlement of marital property rights; and
(ii) a transfer to an entity in which more than fifty
percent of the voting interests are owned by family members
(or the employee) in exchange for an interest in that
entity.
* * * * *
By the Commission.
Jonathan G. Katz
Secretary
February 25, 1999