# Temporary Rules to Include Certain “Platform Workers” in Compensatory Offerings Under Rule 701 and Form S-8

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URL: https://www.frixlaw.com/law-library/documents/fr%3A2020-26374

## Record

- **Collection:** Federal Register
- **Document type:** Proposed Rule
- **Published:** December 11, 2020
- **Citation:** 85 FR 79936

## Text

SECURITIES AND EXCHANGE COMMISSION
17 CFR 230, 239, and 240
[Release Nos. 33-10892; 34-90948; File No. S7-19-20]
RIN 3235-AM79
Temporary Rules to Include Certain “Platform Workers” in Compensatory Offerings Under Rule 701 and Form S-8

AGENCY:

Securities and Exchange Commission.

ACTION:

Proposed rule.

SUMMARY:

The Securities and Exchange Commission (“Commission”) is proposing for public comment amendments to the exemption from registration under the rules of the Securities Act of 1933 (“Securities Act”) for securities issued by non-reporting companies pursuant to compensatory arrangements and to Form S-8, the registration statement for offerings by reporting companies pursuant to employee benefit plans. The amendments would establish a temporary provision under Securities Act rules that, on a trial basis, would permit a non-reporting issuer to offer and sell securities for a compensatory purpose to an expanded group of workers without having to register the offers and sales under the Securities Act, as long as certain conditions are met. Specifically, the proposed amendments would permit the issuer to offer and sell securities to those workers who provide services available through the issuer's internet-based marketplace platform or through another widespread, technology-based marketplace platform or system (“platform workers”). The amendments would similarly, on a trial basis, permit a reporting issuer to include such workers in compensatory offerings registered on Form S-8. These proposed rule amendments would expire, absent further action by the Commission, five years from the date of their effectiveness. We are also proposing to amend the rules under the Securities Exchange Act of 1934 (“Exchange Act”). The amendment would extend the exclusion from the definition of “held of record” and corresponding safe harbor, which currently applies to securities held by persons who received them pursuant to an employee compensation plan, to securities held by persons who received them pursuant to a compensation plan for platform workers under the proposed Securities Act rule amendment. The proposed exclusion and safe harbor for securities issued to platform workers under Exchange Act rules would not be temporary.

DATES:

Comments should be received on or before February 9, 2021.

ADDRESSES:

Comments may be submitted by any of the following methods:

Electronic Comments

• Use the Commission's internet comment form (
https://www.sec.gov/rules/submitcomments.htm
).

Paper Comments

• Send paper comments to Vanessa A. Countryman, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-19-20. To help us process and review your comments more efficiently, please use only one method. We will post all comments on our internet website (
https://www.sec.gov/rules/proposed.shtml
). Comments are also available for website viewing and printing in our Public Reference Room, 100 F Street NE, Washington, DC 20549 on official business days between the hours of 10 a.m. and 3 p.m. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly.

We or the staff may add studies, memoranda, or other substantive items to the comment file during this rulemaking. A notification of the inclusion in the comment file of any such materials will be made available on our website. To ensure direct electronic receipt of such notifications, sign up through the “Stay Connected” option at
www.sec.gov
to receive notifications by email.

FOR FURTHER INFORMATION CONTACT:

Elliot Staffin, Office of Rulemaking, at (202) 551-3430, in the Division of Corporation Finance, U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

We are proposing to amend 17 CFR 230.428 (“Rule 428”), 17 CFR 230.701 (“Rule 701”), and 17 CFR 239.16b (“Form S-8”) under the Securities Act,
1

and 17 CFR 240.12g5-1 (“Rule 12g5-1”) under the Exchange Act.
2

1
15 U.S.C. 77a
et seq.

2
15 U.S.C. 78a
et seq.

Table of Contents

I. Introduction

A. Rule 701, Form S-8, and the Concept Release

B. Summary of the Proposed Amendments

II. Description of the Proposed Amendments

A. Proposed Inclusion and Definition of “Platform Worker” Under Rule 701 and Form S-8

B. Additional Requirements for Issuances to Platform Workers Under Rule 701 and Form S-8

C. Integration of Proposed Rule 701(h) With the Existing Rule 701 Exemption

D. Integration With Exchange Act Rule 12g5-1

E. Considerations Specific to Form S-8

F. Requirement To Furnish Certain Information

G. Expiration of the Temporary Rules Authorizing Issuances to Platform Workers Under Rule 701 and Form S-8

III. General Request for Comments

IV. Economic Analysis

A. Economic Baseline

1. Overview of the Gig Economy

2. Characteristics of Gig Economy Workers

3. The Online Platform Economy

B. Broad Economic Considerations

C. Expected Economic Benefits and Costs

1. Expected Economic Benefits

2. Expected Economic Costs

D. Effects on Efficiency, Competition, and Capital Formation

E. Reasonable Alternatives

V. Paperwork Reduction Act

A. Summary of the Collection of Information

B. Summary of the Proposed Amendments' Effects on the Collections of Information

C. Incremental and Aggregate Burden and Cost Estimates for the Proposed Amendments

D. Request for Comment

VI. Initial Regulatory Flexibility Act Analysis

A. Reasons for, and Objectives of, the Proposed Action

B. Legal Basis

C. Small Entities Subject to the Proposed Rules

D. Reporting, Recordkeeping, and Other Compliance Requirements

E. Duplicative, Overlapping, or Conflicting Federal Rules

F. Significant Alternatives

VII. Small Business Regulatory Enforcement Fairness Act

VIII. Statutory Authority

I. Introduction

A. Rule 701, Form S-8, and the Concept Release

Title 17, section 230.701 (“Rule 701”) provides an exemption from the registration requirements of Securities Act Section 5
3

for offers and sales of securities by non-reporting companies
4

to their employees, officers, directors, trustees, consultants, or advisors
5

under written compensatory benefit plans
6

or written agreements relating to compensation.
7

The rule reflects the Commission's long-standing position that offers and sales of securities for compensatory purposes raise different issues, and therefore should be treated differently, from offers and sales that raise capital for the issuer of the securities.
8

3
15 U.S.C. 77e.

4
Only issuers that are not subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act (15 U.S.C. 78m and 78o(d)) and are not investment companies registered or required to be registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1
et seq.
) are eligible to use Rule 701.
See
17 CFR 230.701(b).

5
When the Commission first proposed Rule 701, it initially limited the exemption to the issuer's employees, directors, trustees or officers (or those of its parents or subsidiaries).
See Regulation D Revisions; Exemption for Certain Employee Benefit Plans,
Release No. 33-6683 [52 FR 3015 (Jan. 30, 1987)] (“Rule 701 Proposing Release”). The Commission specifically excluded consultants and “independent agents” due to a concern that including them could lead to an exemption broader than the intended compensatory purpose.
See, e.g., Employee Benefit Plans and Compensation Contracts,
Release No. 33-6726 (July 24, 1987) [52 FR 29033 (Aug. 5, 1987)] (“Rule 701 Reproposing Release”). Eventually, however, when adopting Rule 701, the Commission included issuances to consultants and advisors within the rule's scope. The Commission noted comments pointing out that securities issuances to such persons could be for compensatory and non-capital-raising purposes and determined that there was no meaningful basis for distinguishing issuances to them and to employees.
See Compensatory Benefit Plans and Contracts,
Release No. 33-6768 [53 FR 12918-02 (Apr. 20, 1988)] (“Rule 701 Adopting Release”). In 1999, the Commission amended Rule 701, consistent with amendments to Form S-8, to prevent the misuse of that form for capital-raising transactions.
See Rule 701—Exempt Offerings Pursuant to Compensatory Arrangements,
Release No. 33-7645 (Feb. 25, 1999) [64 FR 11095 (Mar. 8, 1999)] (“1999 Rule 701 Adopting Release”). Specifically, the Commission modified the definition of consultants and advisors to require that they be natural persons, provide
bona fide
services, and the services not be in connection with the offer or sale of securities in a capital-raising transaction and not directly or indirectly promote or maintain a market for the issuer's securities.
See id.

6
17 CFR 230.701(c)(2) defines a “compensatory benefit plan” as “any purchase, savings, option, bonus, stock appreciation, profit sharing, thrift, incentive, deferred compensation, pension or similar plan.”

7

See
17 CFR 230.701(c). The exemption also extends to offers and sales of securities under written compensatory plans or contracts established by the issuer's parent or the issuer's or parent's majority-owned subsidiaries.
See id.
The Commission has also indicated that a person in a
de facto
employment relationship with the issuer, such as a nonemployee providing services that traditionally are performed by an employee, with compensation paid for those services being the primary source of the person's earned income, would qualify as an eligible person under the exemption.
See
1999 Rule 701 Adopting Release,
supra
note 5.

8

See
Rule 701 Reproposing Release,
supra
note 5, at 29033 (stating that “[t]he Commission historically has recognized that when transactions of this nature are primarily compensatory and incentive oriented, some accommodation should be made under the Securities Act”).

For example, when first proposing Rule 701, the Commission recognized that employee equity incentive arrangements are “a potentially important tool to attract, compensate and motivate employees.”
9

It further expressed the concern that private, smaller companies were forgoing this potentially valuable means of compensation because of the costs of complying with Securities Act registration requirements.
10

The Commission also has expressly addressed the role that equity compensation may play in the employment relationship by indicating that using equity as a component of compensation may align the incentives of employees with the success of the enterprise, facilitate recruitment and retention, and preserve cash for the issuer's operations.
11

9

See
Rule 701 Proposing Release,
supra
note 5, at 3020.

10

See id.; see also
1999 Rule 701 Adopting Release,
supra
note 5, at 11095 (stating that when adopting Rule 701, “we determined that it would be an unreasonable burden to require these private companies, many of which are small businesses, to incur the expenses and disclosure obligations of public companies when their only public securities sales were to employees,” and further noting that “these sales are for compensatory and incentive purposes, rather than for capital-raising”).

11

See Executive Compensation and Related Person Disclosure,
Release No. 33-8732A (Aug. 29, 2006) [71 FR 53158 (Sept. 6, 2006)] (“2006 Executive Compensation Adopting Release”) (stating that unlike salary and bonus compensation, stock option compensation does not require the payment of cash by the registrant, and therefore can be particularly attractive to registrants for which cash is a scarce resource; noting that stock option compensation may also provide an incentive for employees to work to increase the registrant's stock price; and additionally indicating that some registrants may be able to use stock option compensation to help retain employees, because an employee with unvested in-the-money options forfeits his potential value if he leaves the registrant's employ.).

Form S-8 is the simplified form for the registration of securities transactions involving an issuance to a registrant's employees in a compensatory or incentive context and for a non-capital-raising purpose.
12

For purposes of Form S-8, the term “employee” includes consultants and advisors as long as they are natural persons and provide
bona fide
services to the registrant not in connection with a capital-raising transaction or promoting or maintaining a market for the registrant's securities.
13

Form S-8 provides for an abbreviated disclosure format, allows for updating through forward incorporation by reference of Exchange Act reports, and is effective immediately upon filing.
14

It also requires the issuer to provide disclosure to employees and others receiving securities in the offering. In addition, the full spectrum of investor protections associated with registration under the Securities Act applies to the transaction.

12

See Registration of Securities on Form S-8,
Release No. 33-7646 (Feb. 25, 1999) [64 FR 11103 (Mar. 8, 1999)] (“1999 Form S-8 Adopting Release”).

13

See
Form S-8, General Instruction A.1.(a)(1).
See also
1999 Form S-8 Adopting Release (stating that issuers may continue to use securities registered on Form S-8 to compensate persons who have a de facto employment relationship with them. Such a relationship may exist where a person not employed by a registrant provides the registrant with
bona fide
services that traditionally are performed by an employee, and the compensation paid by the registrant for those services is the primary source of the person's earned income.).

14

See Registration and Reporting Requirements for Employee Benefit Plans,
Release No. 33-6867 (June 6, 1990) [55 FR 23909 (June 13, 1990)] (“1990 Form S-8 Adopting Release”).

In July 2018, the Commission published a concept release to solicit comment on whether and how best to modernize the exemption under Rule 701 and to update Form S-8.
15

In the release, the Commission requested comment on how to address, consistent with investor protection, the significant evolution that has taken place in the types of compensatory offerings issuers make and the composition of the workforce since the Commission last substantively amended this rule and form.
16

Regarding workforce changes, the Commission focused on the new types of work relationships between companies and individuals that have

emerged in the so-called “gig economy.”
17

15

See Concept Release on Compensatory Securities Offerings and Sales,
Release No. 33-10521 (July 18, 2018) [83 FR 34958 (July 24, 2018)] (“Concept Release”). Unless otherwise indicated, comments cited in this release are to the public comments on the Concept Release, which are available at
https://www.sec.gov/comments/s7-18-18/s71818.htm.

16

See id.
While the Commission amended Rule 701 in 2018 to implement the Congressional mandate to raise the Rule 701(e) disclosure threshold from $5 million to $10 million,
see
Release No. 33-10520 (Jul. 18, 2018)

[83 FR 34940 (Jul. 24, 2018)], the last substantive amendment of Rule 701 prior to then was in 1999.
See
1999 Rule 701 Adopting Release
supra
note 5. The Commission last substantively amended Form S-8 in 2005.
See
Release No. 33-8587 (Jul. 15, 2005) [70 FR 42234 (Jul. 21, 2005)].

17

See id.,
at Section I.B. Other names for the “gig economy” include the “on-demand economy” and the “sharing economy.”
See, e.g.,
Alex Kirven, “Comment:
Whose Gig Is It Anyway? Technological Change, Workplace Control and Supervision, and Workers' Rights in the Gig Economy,
89 U. Colo. L. Rev. 249, 253 (Winter 2018), available at
http://lawreview.colorado.edu/wp-content/uploads/2018/05/Kirven-Whose-Gig-Is-It-Anyway-Technological-Change-Workplace-Control-and-Supervision-and-Workers-Rights-in-the-Gig-Economy.pdf.

These new types of work relationships have arisen in large part due to the internet and reductions in the costs of communication and information processing. They typically involve an individual's use of an internet “platform” provided by a company (the “platform provider”) to find a particular type of work, or “gig” (
i.e.,
task or job). The work could involve the individual providing services to end users, such as ride-sharing, food delivery, household repairs, dog-sitting, or tech support, or using the platform to sell goods or lease property to third parties.
18

Other new work relationships may involve individuals using the platform to perform tasks or services for the platform provider itself.
19

18

See id.

19

See, e.g., Working the Crowd: Employment and Labor Law in the Crowdsourcing Industry,
32 Berkeley J. Emp. & Lab. L. 143 (2011) (providing examples of crowdsourcing, such as a platform provider's use of multiple workers to tag photographs according to their content, or to build the back-end of a platform provider's interactive website).

A significant characteristic of these new work relationships is that the individual worker may have greater flexibility in determining when and how much he or she works than in a traditional employment relationship where those determinations are typically made by the issuer. In addition, these new work relationships can be, and often are, on a short-term, part-time, or freelance basis. Another significant characteristic is that an individual who provides services or goods through these platforms may have similar relationships with multiple companies through which the individual may engage in the same or different business activities. Given the characteristics of these new work relationships, the individual workers might not be employees, consultants, advisors, or de-facto employees
20

eligible to receive securities in compensatory arrangements under Rule 701.

20

See supra
note 7.

Numerous commenters on the Concept Release who addressed issues relating to “gig economy” workers supported including them within the scope of Rule 701 and Form S-8.
21

Several noted that they did not believe or were uncertain that “gig economy” workers would fall within Rule 701's current categories of employees, consultants, or advisors, and recommended adding a new category of worker to include them.
22

21

See
the letters from Airbnb, Inc. (Sept. 21, 2018) (“Airbnb”), the American Bar Association, Business Law Section (Nov. 28, 2018) (“ABA”), Center for Capital Markets Competitiveness, U.S. Chamber of Commerce (Sept. 24, 2018) (“Chamber”), Davis Polk & Wardwell, LLP (“Davis Polk”), Indigo Ag, Inc. (Jul. 8, 2019) (“Indigo”), Postmates (Oct. 17, 2018), Brian Sament (Oct. 14, 2018) (“Sament”), Sullivan & Cromwell LLP (Sept. 24, 2018) (“Sullivan''), and Uber Technologies, Inc. (Oct. 11, 2018) (“Uber”).

22

See, e.g.,
letters from ABA, Chamber, Indigo, and Postmates.

The new work relationships of the gig economy have become increasingly significant to the broader U.S. economy.
23

They also raise some of the same considerations that led the Commission to adopt Rule 701. For example, “gig economy” issuers may have the same compensatory and incentive motivations to offer equity compensation to individuals participating in the companies' platform-based businesses. Permitting gig economy issuers to utilize the Rule 701 exemption on a temporary basis would allow the Commission to assess the appropriateness of the exemption for these new work relationships and thus should help inform the Commission's ongoing efforts to modernize its rules in light of changing economic and market conditions.

23

See, e.g.,

The Rise and Nature of Alternative Work Arrangements in the United States, 1995-2015,
Lawrence F. Katz and Alan B.Krueger, National Bureau of Economic Research, available at
http://www.nber.org/papers/w22667
(finding a substantial rise in the incidence of alternative work arrangements for U.S. workers from 2005 to 2015, and defining alternative work arrangements as including temporary help agency workers, on-call workers, contract workers, and independent contractors or freelancers);
see also Contingent Workforce,
U.S. Government Accountability Office, GAO-15-168R (2015), available at
https://www.gao.gov/assets/670/669766.pdf
(finding that, while the size of the U.S. contingent workforce varies by definition and data source, using an expansive definition of alternative work arrangements, 40.4% of the U.S. employed labor force in 2010 was in an alternative work arrangement).

For the above reasons, we propose to include a new category of worker, the “platform worker,” within the scope of Rule 701 and Form S-8.
24

As we stated in the Concept Release, any such expansion of Rule 701 and Form S-8 must be consistent with the Commission's mandate to protect investors.
25

It should not facilitate offers and sales of unregistered securities under the guise of being compensatory when in fact they are undertaken for capital-raising purposes. Therefore, we are proposing to expand Rule 701 and the use of Form S-8 to facilitate compensatory transactions with platform workers while also proposing conditions designed to limit the possibility that the rule changes could result in offers and sales for capital-raising purposes.
26

24

See
proposed Rule 701(h) and proposed 17 CFR 239.16b(c). As explained below, the proposed expanded scope of Rule 701 and Form S-8 would be temporary while we examine whether to adopt the rules or similar rules on a more permanent basis.

25

See
Concept Release,
supra
note 15, at Section II.A.

26

See, e.g.,
proposed Rule 701(h)(3) and proposed 17 CFR 239.16b(c)(1).

We are also proposing these changes on a temporary basis
27

to allow us to assess whether unregistered issuances of securities to platform workers under expanded Rule 701, or issuances registered on expanded Form S-8, are being made for appropriate compensatory purposes and not for capital-raising purposes. Similarly, we intend to assess whether such issuances have the expected beneficial effects for issuers in the “gig economy,” their platform workers, and ultimately their investors and whether such issuances have resulted in any unintended consequences. This assessment, in turn, should help us determine whether to modify or expand the scope of Rule 701 and Form S-8 on a permanent basis.

27

See infra
Section II.G.

We welcome feedback and encourage interested parties to submit comments on any or all aspects of the proposed rule amendments. When commenting, it would be most helpful if you include the reasoning behind your position or recommendation.

B. Summary of the Proposed Amendments

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

• The issuer operates and controls the platform, as demonstrated by its ability to provide access to the platform, to establish the principal terms of service for using the platform and terms and

conditions by which the platform worker receives payment for the services provided through the platform, and to accept and remove platform workers participating in the platform;

• The issuance of securities to participating platform workers is pursuant to a compensatory arrangement, as evidenced by a written compensation plan, contract, or agreement, and is not for services that are in connection with the offer or sale of securities in a capital-raising transaction, or services that directly or indirectly promote or maintain a market for the issuer's securities;

• No more than 15 percent of the value of compensation received by a participating worker from the issuer for services provided by means of the platform during a 12-month period, and no more than $75,000 of such compensation received from the issuer during a 36-month period, shall consist of securities, with such value determined at the time the securities are granted;

• The amount and terms of any securities issued to a platform worker may not be subject to individual bargaining or the worker's ability to elect between payment in securities or cash; and

• The issuer must take reasonable steps to prohibit the transfer of the securities issued to a platform worker pursuant to this exemption, other than a transfer to the issuer or by operation of law.
28

28
An issuer using proposed Rule 701(h) would also be able to continue to use Rule 701 for transactions to persons eligible under 17 CFR 230.701(c).

The proposed amendments also would permit an Exchange Act reporting issuer to register the offer and sale of its securities to its platform workers using Form S-8. The same conditions proposed for Rule 701 issuances would apply to issuances to platform workers that are registered on Form S-8, except for the proposed transferability restriction. Like the proposed amendments to Rule 701, the proposed Form S-8 amendments would be temporary and would expire, absent further Commission action, on the same date as the Rule 701 amendments.

In order to help in our evaluation of the proposed expanded scope of Rule 701 and Form S-8, we are also proposing that any issuer that issues securities to platform workers would be required to furnish information to the Commission at six-month intervals (each, an “interval”), regarding:

1. The criteria used to determine eligibility for awards, whether those criteria are the same as for other compensatory transactions, and whether those criteria, including any revisions to the criteria, are communicated to platform workers in advance as an incentive;

2. The type and terms of securities issued and whether they are the same as for other compensatory transactions by the issuer during that interval;

3. If pursuant to Rule 701, the reasonable steps taken to prohibit the transfer of the securities sold pursuant to this temporary rule;

4. The percentage of overall outstanding securities that the amount issued cumulatively under this temporary rule represents;

5. During the interval, the number of platform workers, the number of non-platform workers, the number of platform workers who received securities pursuant to the temporary rule, and the number of non-platform workers who received securities pursuant to the issuer's Rule 701 or Form S-8 issuances;

6. Both in absolute amounts and as a percentage of the issuer's total Rule 701 or Form S-8 issuances during the interval:

a. The aggregate number of securities issued to platform workers; and

b. The aggregate dollar amount of securities issued to platform workers.

II. Description of the Proposed Amendments

A. Proposed Inclusion and Definition of “Platform Worker” Under Rule 701 and Form S-8

We propose to amend Rule 701 and Form S-8 to permit an issuer on a temporary basis to offer and sell securities to certain platform workers. Under the proposed definition of “platform worker,”
29

eligible workers would be those persons unaffiliated with the issuer who meet two conditions. First, the worker must provide
bona fide
services through or by means of the issuer's internet-based or other widespread, technology-based marketplace platform or system (“platform”). Workers providing services to third-party end-users would qualify, as long as the issuer benefits from such services (
e.g.,
by receiving a fee for the worker's use of the platform or a percentage of the compensation received from the end-user for the worker's services).
30

Consistent with the treatment of persons eligible for the current exemption under 17 CFR 230.701(c) (“Rule 701(c)”), platform workers providing services to the issuer, or the issuer's parents, subsidiaries,
31

or subsidiaries of the issuer's parent, would also qualify.
32

Second, the services must be provided pursuant to a written contract or agreement between the issuer and the platform worker
33

and must be provided through a platform-based marketplace (or other widespread, technology-based marketplace platform or system) that the issuer operates and controls.
34

29

See
proposed Rule 701(h)(1);
see also
proposed 17 CFR 239.16b(c) and proposed amended General Instruction A.1.(b)(1) to Form S-8, which reference the proposed definition of “platform worker” under proposed Rule 701(h)(1).

30

See
proposed new Rule 701(h)(2)(i) (the first prong of the proposed definition of platform worker);
see also
proposed 17 CFR 239.16b(c)(1) and proposed amended General Instruction A.1.(b)(1) to Form S-8. As explained below in Section II.B., the services may not be in connection with the offer or sale of securities in a capital-raising transaction.

31
In a companion rulemaking, we are proposing to expand the scope of coverage of the Rule 701 exemption, which currently includes compensatory issuances to employees of an issuer's or its parent's majority-owned subsidiaries, to include compensatory issuances to employees of all of an issuer's or its parent's subsidiaries.
See
Release No. 33-10891 (Nov. 24, 2020), at Section II.C.3 (proposing to amend Rule 701(c)). Our proposed inclusion of platform workers of an issuer's subsidiaries, without regard to whether they are majority-owned, would be consistent with the proposed amendment of Rule 701(c). Like this proposed amendment, the meaning of “subsidiary” under Rule 701(h) would be governed by the general definition of subsidiary for purposes of the Securities Act. Under that definition, a “subsidiary” of a specified person is an affiliate controlled by such person directly or indirectly through one or more intermediaries.
See
17 CFR 230.405.

32

See
proposed Rule 701(h)(2)(i).

33
For the purpose of Rule 701(h), the term “written contract or agreement” would include an electronic, internet-based contract or agreement. We believe that a similar interpretation applies to the term “written compensation contract” in Rule 701(c). Because the proposed Rule 701(h) definition of “platform worker” would also be used in Form S-8, the same meaning of “written contract or agreement” would apply in that context.
See
proposed General Instruction A.1.(b)(1) of Form S-8;
see also
proposed 17 CFR 239.16b(c)(1).

34

See
proposed Rule 701(h)(2)(ii).

Commenters who supported expanding the scope of Rule 701 and Form S-8 to include offers and sales of securities to platform workers stated that updating Rule 701 and Form S-8 to include such workers is necessary to keep pace with evolutions in the economy and the labor market.
35

One commenter indicated that such an update would be consistent with the goals of the Jumpstart Our Business Startups Act (“JOBS” Act) to spur entrepreneurship and support the business startups and private companies that are vital to the U.S. economy, and that increased alignment of incentives between gig economy companies and

participating platform workers would benefit both.
36

35

See, e.g.,
letter from Chamber;
see also
letter from Airbnb.

36

See
letter from Airbnb.

Some commenters emphasized the potential benefits to platform workers of expanding Rule 701. Commenters stated that expanding eligibility for Rule 701 issuances would help democratize share ownership and wealth by allowing the many ordinary Americans participating in the gig economy to make significant strides toward greater wealth and financial security.
37

37

See
letter from Sament;
see also
letter from Airbnb.

Other commenters noted the potential benefits to the platform providers of expanding Rule 701. One commenter indicated that enabling privately held companies to grant equity compensation to platform workers performing services would enable those platforms to attract and retain talent.
38

Another commenter stated that the ability to grant equity compensation to platform workers would significantly enhance the growth and expansion of new economy companies and help level the playing field between private companies and public companies participating in the new economy.
39

38

See
letter from Postmates.

39

See
letter from Indigo.

Some commenters, however, opposed the expansion of the scope of Rule 701 and Form S-8 to include offers and sales of securities to platform workers because of their belief that the Commission lacks the expertise to assess accurately changes in the labor market, and due to their concern that such regulatory changes to Rule 701 and Form S-8 would encourage companies to misclassify employees and undermine American workers.
40

40

See
letter from Sen. Sherrod Brown (Mar. 7, 2019);
see also
letter from National Employment Law Project (Mar. 4, 2019) (“NELP”) (“Expanding the rule has the potential to further muddy the waters on `gig' workers' employment status and even legitimize their independent contractor status at a time when this issue is being examined by legislatures, courts, and agencies with expertise on employment status.”); and letter from Chairwoman Maxine Waters (Apr. 1, 2020) (opposing “weakening Rule 701 of the Securities Act of 1933 to allow companies to compensate certain non-traditional employees with equity compensation in lieu of a traditional paycheck and without important investor protections”).
But see, e.g., infra
Section II.B for a discussion of certain investor protection conditions; and letter from Rep. Patrick McHenry (Mar. 30, 2020) (requesting that any recipient of funds under the Coronavirus, Aid, Relief, and Economic Security (CARES) Act be encouraged to provide equity compensation to its entire workforce, including non-traditional workers).

We agree with commenters that expanding the scope of Rule 701 and Form S-8 to include offers and sales of securities to platform workers participating in an issuer's platform-based marketplace could benefit the issuer and its investors, including those platform workers that are new equity holders. We are mindful, however, that the gig economy is evolving. We are therefore making the rule amendments temporary so that we can reassess their impact as these markets develop.
41

41
The proposed amendments provide, however, that, following the expiration of temporary Rule 701(h), an issuer may continue to rely on the Rule 701(h) exemption for the sale of securities underlying options, warrants, or rights previously issued in an exempt transaction pursuant to Rule 701(h).
See
proposed Rule 701(h)(1)(ii) and
infra
Section II.G. We believe this provision is necessary in order to remove a potential disincentive to the use of the proposed exemption to issue options to platform workers. The Commission has taken a similar approach regarding securities sold by an issuer after it has become public that were initially offered pursuant to Rule 701.
See
17 CFR 230.701(b)(2).

Although we understand that the development of the gig economy raises a number of issues under labor, tax, and other regulatory regimes, our proposed amendments to Rule 701 and Form S-8 to include these workers solely reflect considerations relevant to the U.S. Federal securities laws. The proposed amendments are not meant, and should not be construed, to address issues raised under any other regulatory regimes. We express no opinion on whether or not these “gig economy” or platform workers would be considered “employees” for purposes of other laws or regulations.

The proposed amendments would require an eligible platform worker to be a natural person or an entity meeting specified conditions. We recognize that the “gig economy” is a fluid, developing market in which participating workers may be organized in various ways. In this regard, we note that some commenters recommended that platform workers should not be subject to a natural person requirement to participate in Rule 701 offerings.
42

We recognize that some platform workers may form limited liability companies or similar legal entities for a variety of reasons, such as tax planning and personal liability protection. In order to accommodate such workers and provide additional flexibility for an evolving market, the proposed rules provide that a platform worker may be an entity as long as substantially all of its activities involve the performance of
bona fide
services that meet the requirements of proposed Rule 701(h), and the ownership interest of the entity is wholly and directly held by the natural person performing the services pursuant to the proposed rule. This proposed approach would be similar to the Commission's recognition of personal services businesses as corporate alter egos of natural persons with respect to the ability to participate in Form S-8 offerings under existing employee, consultant, and advisor categories, where such businesses are wholly-owned by (or jointly owned with the spouse of) the natural person who provides services to the issuer.
43

42

See
letters from Chamber and Davis Polk. In the companion rulemaking, we are proposing to eliminate the “natural person” requirement in connection with Rule 701 eligibility for consultants and advisors by extending such eligibility to service-providing entities meeting specified conditions (
e.g.,
limits on the number of persons owning an entity and requiring a certain percentage of those persons to provide services).
See
Release No. 33-10891 at Section II.C.1. We are also proposing a similar change regarding consultant and advisor eligibility under Form S-8.
See
Release No. 33-10891 at Section II.C.2.

43

See
1999 Form S-8 Adopting Release at Section II.A.1 (“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.”);
see also
letter from Davis Polk.

We also recognize that the “gig economy” is a multi-faceted economic phenomenon and that, in some cases, participants may sell goods or conduct other activities—beyond providing services—by means of platforms. Some commenters recommended expanding the Rule 701 exemption to include any activity where there is an issuer providing a technology-based marketplace platform as long as the activity does not include capital-raising of the type currently prohibited by Rule 701.
44

Nevertheless, we are limiting this initial expansion of Rule 701 and Form S-8 eligibility to participants who provide
bona fide
services not in connection with capital-raising or with promoting or maintaining a market for the issuer's securities. The proposed expansion would not cover the use of a platform for the sale or transfer of permanent ownership of discrete, tangible goods.
45

We view the expansion of Rule 701 and Form S-8 to include platform workers who provide services, subject to the above limitations, as an incremental

evolutionary step that is consistent with the compensatory function of Rule 701 and Form S-8 while limiting the potential for abuse. Depending on the results of the initial expanded use of Rule 701 and Form S-8, if adopted, the Commission could consider expanding eligibility to other activities, such as selling goods or other non-service-providing activities in the future.

44

See, e.g.,
letter from ABA;
see also
letter from Sullivan (stating that to encompass the new types of alternative work arrangements, Rule 701 (and Form S-8) should encompass those individuals providing services to or on behalf of an issuer or making or distributing the products sold or provided to the issuer's consumers).

45

See
proposed Rule 701(h)(2)(i). For example, a platform that provided for the permanent transfer of real estate in fee simple, as opposed to the temporary rental of real estate, would not constitute bona fide services within the meaning of the rule.

The proposed definition of platform worker would also include the condition that the issuer operates the platform for the provision of services pursuant to a written contract or agreement
46

between the issuer and the platform worker under which the issuer controls the use of the internet platform. We believe that this “issuer control” condition would help maintain an appropriate compensatory nexus between the issuer and participating platform workers.
47

46
The Commission has similarly included a “written contract or agreement” requirement as a condition of using the Rule 701 exemption to help ensure that an issuance of securities is being undertaken for a compensatory purpose.
See
the Rule 701 Adopting Release,
supra
note 5, at 12919 (justifying the inclusion of issuances to consultants or advisors under Rule 701 in part because of the condition requiring a written plan or contract).

47
Although one commenter stated that “it is not necessary for a revised Rule 701 to micromanage the level of control” over a worker,
see
letter from Chamber, we agree with another commenter that indicated that some level of control by an issuer over the use of its platform would help ensure that the issuance of securities to workers participating in its marketplace platform under an expanded Rule 701 is compensatory only.
See
letter from Airbnb.

The appropriate nexus would be demonstrated by meeting three express requirements. First, the issuer must be able to provide access to the platform and establish the principal terms of service for using the platform. Second, the issuer must be able to establish terms and conditions by which the platform worker receives payment for the services provided through the platform. This could include an ability to establish the amount of the fees charged for using the platform. Such fees may include any fee charged to the participating worker for the use of the platform as well as any fee or percentage of payment charged to an end-user for the services provided by the worker. If there are no end-users, and multiple workers provide services directly to the issuer via the platform, the issuer must be able to determine the amount and method of payment for such services. Third, the issuer must have the authority to accept and remove the platform workers providing services through the platform.

We believe that these three requirements are necessary and appropriate to demonstrate the requisite nexus for purposes of an expanded Rule 701 and Form S-8. A written contract or agreement providing the issuer with control over the platform's terms of use, including payment terms, would evidence that the issuance of securities to the worker is for compensatory and incentive purposes relating to the services being provided. In addition, requiring that the issuer control who may provide services through its platform would help prevent participating workers from using the platform primarily for non-compensatory purposes. The proposed conditions would not, however, limit what services an issuer could facilitate through its platform or how participating workers could provide the services.

Rule 701 currently exempts offers and sales of securities to former employees, directors, general partners, trustees, officers, consultants, and advisors only if such persons were employed by or providing services to the issuer at the time the securities were offered.
48

The proposed amendment to Rule 701 would similarly exempt offers and sales to former platform workers if such workers met the conditions of § 230.701(h) at the time the securities were offered.
49

48

See
Rule 701(c).

49

See
proposed Rule 701(h)(1)(i).

In a companion rulemaking, at the suggestion of commenters, we are proposing to expand the eligibility of former employees under Rule 701 to include post-resignation or termination offers and sales to:

• Persons who were employed by or providing services to an issuer during a performance period ending within 12 months preceding resignation or termination of their employment or service for which the securities were issued; and

• Former employees of an acquired entity, as long as the securities are being issued in substitution or exchange for securities that were issued to the former employees of the acquired entity on a compensatory basis while such persons were employed by or providing services to the acquired entity.
50

50

See
Release No. 33-10891 at Section II.C.2.

In the interest of providing consistent treatment, we are similarly proposing to include under Rule 701 offers and sales to former platform workers who met the conditions of § 230.701(h) during a period of service ending within 12 months preceding the termination of service for which the securities were issued.
51

We believe that exempting post-termination grants of securities to former platform workers that are made in respect of prior service during the specified 12-month period would benefit both issuers and platform workers by facilitating compensatory transactions. Moreover, because we believe that expanding the use of Form S-8 to former platform workers would be consistent with the compensatory purposes of Form S-8, we are similarly proposing to amend Form S-8 to include securities issued to former platform workers, including post-termination grants made in respect of prior service during the 12 months preceding the cessation of service.
52

51

See
proposed Rule 701(h)(1)(i).

52

See
proposed General Instruction A.1.(b)(4)(i) of Form S-8.

For similar reasons, we also are proposing to include in the exemption under Rule 701(h), and to allow the registration on Form S-8 of, securities issued to former platform workers of an acquired entity in substitution or exchange for securities that were issued to the former platform workers of the acquired entity on a compensatory basis while such workers were providing
bona fide
services to the acquired entity.
53

Those persons would be able to participate in the acquiring issuer's plan with respect to equity awards granted in connection with the acquisition to replace awards issued by the acquired entity while such workers provided services to the acquired entity.
54

53

See
proposed Rule 701(h)(1)(i);
see also
proposed General Instruction A.1.(b)(4)(ii) of Form S-8. Such treatment would be consistent with the expanded scope of Form S-8 proposed in the companion rulemaking.
See
Release No. 33-10891 at Section III.D.1.

54
The companion release includes other proposed amendments pertaining to business combinations that could be applicable to issuances to platform workers if adopted. For example, we are proposing to amend Rule 701(e) to address the disclosure delivery obligations regarding acquired entity derivative securities that the acquiring issuer assumes in a business combination transaction. Another proposed amendment would clarify that, in determining whether the amount of securities the acquiring issuer sold during any consecutive 12-month period exceeds $10 million under Rule 701(e) [17 CFR 230.701(e)], the acquiring issuer would consider only the securities that it sold in reliance on Rule 701 during that period, and would not be required to include any securities sold by the acquired entity pursuant to the rule during the same 12-month period.
See
Release No. 33-10891 at Section II.A.6.

In addition to former employees, Form S-8 currently includes under its scope 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.

55

We are proposing a similar provision under Rule 701 and Form S-8 for the estates of deceased platform workers and the representatives of incompetent former platform workers.
56

Although the proposed changes to Rule 701 to include platform workers would be temporary rules, we believe that this proposed provision could prove useful to the administration of the estate of a deceased platform worker or the representation of an incompetent former platform worker, particularly because, under the proposed rules, sales of securities underlying options issued pursuant to the temporary rules may occur following the rules' expiration.

55

See
General Instruction A.1.(a)(3) of Form S-8. In the companion release, we are proposing to

amend Rule 701 to include a similar provision for the executors, administrators, or beneficiaries of the estates of deceased employees who may receive securities underlying options previously issued to former employees pursuant to Rule 701.
See
Release No. 33-10891 at Section II.C.2.

56

See
proposed General Instruction A.1.(b)(4)(iii) to Form S-8 and proposed Rule 701(h)(1)(i).

Request for Comment

1. Should we expand the scope of Rule 701 and Form S-8 to include offers and sales of securities to platform workers unaffiliated with the issuer who provide
bona fide
services to an issuer by means of the issuer's internet-based platform, or through other widespread technology-based marketplace platforms, as proposed? Should the expansion of Rule 701 and Form S-8 also include services provided by such workers to the issuer's parents, majority-owned subsidiaries, or majority-owned subsidiaries of the issuer's parent, as proposed?

2. Is there a basis for treating platform workers differently than any other non-employees not covered under the current exemption? Does the use of an internet-based platform establish a sufficient basis for treating those workers differently than non-employees in a different context?

3. Should we also expand the scope of Rule 701 and Form S-8 to include offers and sales of securities to platform workers unaffiliated with the issuer who provide
bona fide
services to third-party end-users by means of the issuer's internet-based marketplace platform, or through other widespread technology-based marketplace platforms or systems, and from which the issuer benefits, as proposed?

4. Should we define or provide examples of a “widespread, technology-based marketplace platform or system” (other than an internet-based marketplace platform) that would fall within the scope of the proposed amendments? If so, how should we define that term, or what examples should we include?

5. Is the term “services” sufficiently clear? Should we define it differently? If so, what should the definition be? Should we provide additional specific guidance concerning what activities constitute “services” for purposes of the proposed expansion of Rule 701 and Form S-8?

6. Should we limit issuances under Rule 701(h) or an expanded Form S-8 to platform workers who are unaffiliated with the issuer, as proposed? If so, should we provide a definition of or additional guidance concerning the meaning of “unaffiliated with the issuer”? For example, should we define “unaffiliated” as a person who is not an “affiliate” as defined by 17 CFR 230.405? Should we instead specify the types of persons that would satisfy the “unaffiliated” provision? For example, should “unaffiliated” mean persons who are not an issuer's employees, officers, directors, advisors, or consultants, or certain family members of such persons? If so, which family members would be treated as affiliates of the issuer and therefore be ineligible to receive securities under the proposed amendments to Rule 701 and Form S-8?

7. Should we limit the use of the expanded Rule 701 and Form S-8 only to workers who provide
bona fide
services through an issuer's marketplace platform, as proposed? Or should we consider other alternatives? For example:

a. Should we permit an issuer to offer or sell securities to workers who engage in other platform-based activities, such as selling goods? If so, should we limit the types of goods? For example, should we only permit an issuer to offer or sell securities to workers who engage in selling of unique or value-added goods and not workers who merely use a platform to resell goods?

b. If we were to permit an issuer to offer or sell securities to workers who engage in other platform-based activities, such as selling goods, what characteristics or factors would help ensure that the nexus between the issuer and worker is compensatory and the issuance of securities is not in connection with capital-raising or for speculative purposes? For example, should we require that the worker meets minimum annual or aggregate sales thresholds or that the worker has been engaged in performing platform-based activities for the issuer for a minimum period of time before she is eligible to receive shares under expanded Rule 701 and Form S-8. Should we only permit securities that do not have capital-raising features, such as restricted stock units, to be issued to platform workers for platform-based activities that involve the sale of goods?

c. Should we include offers and sales of securities to workers having other types of new work relationships? If so, which types of new work relationships should we include, and what characteristics or factors would help ensure that the nexus between the issuer and worker is compensatory and the issuance of securities is not in connection with capital-raising? Are there new work relationships that are not provided through an internet-based or other widespread, technology-based marketplace platform or system that we should include in the exemption?

8. Should we require that a platform worker be a natural person or an entity meeting specified criteria to be able to receive securities pursuant to an expanded Rule 701 or Form S-8, as proposed? Should we instead require a platform worker to be a natural person? Do a significant number of platform workers currently operate through a business entity? If so, would a natural person requirement impact the extent to which they would continue to perform as platform workers or continue to do so through a business entity? Should we limit the types of business entities through which a platform worker would be able to operate? Should we permit an entity to be a platform worker, as proposed, if substantially all of its activities involve the performance of
bona fide
services that meet the requirements of proposed Rule 701(h), and the ownership interest of the entity is wholly and directly held by the natural person performing the services pursuant to the proposed rule? Are there different or additional eligibility conditions that we should adopt to allow platform workers to perform services as entities pursuant to the temporary rules? For example, should we permit more than one natural person to own the entity through which the services are being performed by the platform worker? If so, should we limit the number of natural persons that may own the entity or require that a co-owner be the spouse or other family member? Should we condition allowing more than one natural person to own the entity by requiring each owner to perform the services of a platform worker?

9. Should we require that an issuer operating a platform control the platform as a condition to using the Rule 701 exemption and Form S-8 registration for issuances of securities to workers providing services through the platform, as proposed? Should we

permit the use of the exemption for issuances to such workers if an issuer's affiliate controls the platform?

10. Should we require that services be provided pursuant to a written contract or agreement, as proposed? If so, should we include an express provision that the term “written contract or agreement” includes an electronic, internet-based contract or agreement? Should we provide the same provision for the term “written compensation contract” in Rule 701(c)?

11. Are the proposed conditions demonstrating control of the platform appropriate? Should we require that an issuer satisfy all of the specified conditions? Should we only require that an issuer have the ability to determine terms of use, including payment terms? Should we instead only require that an issuer have the ability to accept and remove the workers providing services through its platform?

12. Are there other conditions, in addition to or in lieu of the proposed conditions, that we should adopt?

13. Instead of, or in addition to, an issuer control requirement, are there other issuer eligibility conditions that we should adopt to help ensure that the issuance of securities to platform workers is for a compensatory purpose? For example, when the issuer's platform is used to provide services to end-users, should we require that an issuer earn a substantial amount of its annual revenues from fees or other payments resulting from platform workers using the issuer's platform? Would such a condition make it less likely that the issuance of securities to those workers would be for a capital-raising purpose?

14. Should we expand the scope of Rule 701 and Form S-8 to include offers and sales of securities to former platform workers, including former platform workers of an entity acquired by an issuer, as proposed? Should such expansion include securities issued to former platform workers, including post-termination grants made in respect of prior service during the 12 months following the cessation of service, as proposed? Should we include under Form S-8 issuances to executors, administrators, or beneficiaries of the estates of deceased platform workers, or other persons similar to those included for deceased or incompetent former employees, as proposed? Should we amend Rule 701 to include a similar provision for the estates of deceased employees or deceased platform workers and representatives of incompetent former employees or incompetent former platform workers, as proposed?

15. Would state blue-sky laws affect the operation of the proposed temporary platform worker exemption? If so, how? Are there changes we should consider to address state law issues? For example, should we provide for the preemption of state securities law registration requirements for offers made pursuant to Rule 701(h)? Are there other state law implications that would be relevant to consider in connection with the proposed amendments? For example, would the proposed temporary platform worker exemption have any implications regarding the enforceability of state laws pertaining to non-competition arrangements? Would the proposed exemption result in an increase in the use of non-compete provisions regarding issuers' arrangements with platform workers? Would the proposed exemption affect the ability of issuers under state law to provide additional benefits to platform workers, such as minimum wage guarantees, healthcare stipends, and occupational auto insurance?

B. Additional Requirements for Issuances to Platform Workers Under Rule 701 and Form S-8

We are proposing four additional requirements with which an issuer must comply in order to use the exemption for issuances to platform workers under Rule 701.
57

In addition, we are proposing that the first three of these conditions would also apply to issuances to platform workers registered on Form S-8.
58

57

See
proposed Rule 701(h)(3).

58

See
proposed 17 CFR 239.16b(c)(1) and proposed General Instruction A.1(b)(2)(i) through (iii) to Form S-8.

Because of certain structural differences between platform-based work relationships and traditional employer-employee relationships, we are mindful that compensatory offerings in this context may be more susceptible to misuse. For example, a traditional employer-employee work relationship will involve some degree of interpersonal interactions between the issuer and the employee by which the former supervises and monitors the work and conduct of the latter. In contrast, there may be no or very few interpersonal interactions in the issuer-platform worker relationship. In addition, platform workers frequently work for multiple companies and may have exclusive control over their work schedules, including how often and for how long they will work. These short-term and/or intermittent work relationships across multiple issuers may increase the likelihood that workers would establish a work relationship with a platform as a means of realizing an investment opportunity with the issuer or that issuers would use the proposed provisions to engage in capital-raising activities. The additional requirements we are proposing are designed to work together to help ensure that issuances made to platform workers pursuant to revised Rule 701 are for compensatory purposes while reducing any opportunity for a platform worker to use her relationship with the issuer to engage in speculative activity.
59

59
One commenter specifically recommended imposing additional restrictions regarding the issuance of securities to platform workers beyond those typically applicable to equity issuances under Rule 701 because of the third-party, contractual relationship between the issuer and platform worker.
See
letter from Airbnb.

The first condition is that the issuance must be pursuant to a compensatory arrangement that is evidenced by a written compensation plan, contract, or agreement between the issuer and the platform worker.
60

The compensatory arrangement may not be for services in connection with the offer or sale of securities in a capital-raising transaction or services that directly or indirectly promote or maintain a market for the issuer's securities. Thus, an issuer may not rely on the exemption to issue securities to a platform worker for compensation for performing services analogous to those of an underwriter or promoter or otherwise made in connection with a capital-raising transaction. An issuer also may not rely on the exemption to issue securities to a platform worker as part of a plan or scheme to evade the compensatory purpose of Rule 701 or otherwise evade the registration requirements of the Securities Act.
61

This condition is based on the requirements under Rule 701 and Form S-8 currently applicable to consultants and advisors,
62

which were designed to prevent abuse of the rules as conduits for unregistered securities distributions to the general public and for securities issuances to stock promoters.
63

60

See
proposed Rule 701(h)(3)(i).

61

See
Preliminary Note 5 to Rule 701, which would remain applicable to issuances under proposed Rule 701(h).We are also proposing to add a similar note in proposed General Instruction A.1(b)(2) to Form S-8.

62

See
Rule 701(c)(1)(ii) and (iii) [17 CFR 230.701(c)(1)(ii) and (iii)], and General Instruction A.1(a)(1)(ii) and (iii) to Form S-8.

63

See
1999 Rule 701 Adopting Release,
supra
note 5, at Section II.D., and 1999 Form S-8 Adopting Release (” at Sections I.A. and II.A. A number of commenters that addressed expanding our rules to encompass “gig economy” workers generally supported such a condition.
See, e.g.,
letters from ABA, Airbnb, Chamber, and Uber.

Second, as proposed, no more than 15 percent of the value of compensation received by a platform worker from the issuer for services provided during a consecutive 12-month period, and no more than $75,000 of such compensation received from the issuer during a consecutive 36-month period, may consist of securities issued pursuant to Rule 701 or a registration statement on Form S-8.
64

The issuer would be required to determine the value of such securities as of the time the securities are granted.
65

For the purpose of assessing compliance with these limits, an issuer would be able to use any reasonable, recognized valuation methodology
66

as long as the methodology is consistently applied during the same 12-month or 36-month period.
67

64
For example, if a platform worker received $1,000 in total compensation during a 12-month period from Issuer X for services provided to or for the benefit of Issuer X, no more than $150 of that compensation could consist of securities. These proposed annual limits on the amount of securities a platform worker could receive as compensation from an issuer are in addition to the limits on the aggregate sales price or amount of securities that an issuer can sell in reliance on Rule 701 during any consecutive 12-month period.
See
17 CFR 230.701(d). As discussed below, the Rule 701(d) limits would continue to apply, and an issuer would be required to aggregate issuances to platform workers with all other issuances under Rule 701 during a 12-month period for the purpose of complying with Rule 701(d).
See infra
Section II.C.

65

See
proposed Rule 701(h)(3)(ii).

66
We expect that issuers would use the same valuation methods that they currently use to make valuations for compensatory issuances under Rule 701(c).

67
In this regard, an issuer's use of multiple, different valuation methodologies during the same period could raise concerns that the issuer was doing so as part of a plan or scheme to evade the compensatory purpose of Rule 701.

This proposed cap on the amount of compensation that a platform worker may receive as securities from the issuer is designed to limit an issuer's incentive and ability to use the new exemptive rule as a conduit for a public distribution of its securities, contrary to the compensatory purpose of Rule 701 and Form S-8.
68

In addition, we believe the proposed cap would reduce any incentive for platform workers to use the exemption primarily for realizing speculative investment opportunities and would limit the risk that issuances would be for capital-raising or other non-compensatory purposes.
69

68
Some commenters supported imposing a limitation on the amount of equity compensation a “gig economy” worker could receive to prevent abuses under an expanded Rule 701 and Form S-8.
See
letters from ABA and Airbnb.

69
The Commission has historically expressed concern about the potential for abuse in the area of issuances of securities for compensation.
See, e.g.,
1999 Rule 701 Adopting Release, 64 FR at 11098;
see also
Rule 701 Reproposing Release, 52 FR at 29034.

Third, we are proposing that the amount and terms of any securities issued to a platform worker may not be subject to individual bargaining. Similarly, as proposed, platform workers would not be permitted to elect between payment in securities or cash.
70

We believe this proposed requirement would also reduce any incentive for platform workers to use the exemption as a means of realizing speculative investment opportunities rather than receiving the securities as a compensatory grant.
71

70

See
proposed Rule 701(h)(3)(iii).

71
One commenter recommended the adoption of this type of condition in order to prevent abuses from occurring under any expanded rules.
See
letter from Airbnb. This proposed condition is also consistent with the “no sale” position taken by the staff that, where securities are awarded to employees at no direct cost through broad-based bonus plans, there has been no sale, and therefore no public distribution of the securities, since employees do not individually bargain to contribute cash or other tangible or definable consideration to such plans.
See Changes to Exchange Act Registration Requirements to Implement Title V and Title VI of the JOBS Act,
Release No. 33-10075 (May 3, 2016) [81 FR 28689 (May 10, 2016)].

The preceding three conditions would apply equally to securities issuances to platform workers under both Rule 701 and Form S-8.
72

For purposes of Rule 701, however, we are proposing a fourth condition that would require the issuer to take reasonable steps to prohibit the transferability of securities issued to platform workers pursuant to the exemption except for transfers to the issuer or by operation of law.
73

Such reasonable steps could include the placement of special legends on the securities to be issued to platform workers or appropriate instructions to transfer agents that would provide adequate notice of the transfer prohibition to platform workers. The purpose of this provision is to help ensure that the shares are obtained for compensatory and not speculative purposes. Specifically, it would prevent the development of a market in such securities until after the issuer becomes subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, which would in turn greatly reduce, if not eliminate, any incentive for a worker to seek out securities issued pursuant to Rule 701 for speculative purposes.

72

See
proposed 17 CFR 239.16b(c)(1) and proposed General Instruction A.1.(a)(3) to Form S-8.

73

See
proposed Rule 701(h)(3)(iv).

Currently, all securities issued pursuant to Rule 701 are “restricted securities,” and any resales must comply with Securities Act registration requirements or qualify for an exemption therefrom.
74

As proposed, the additional transferability prohibition on Rule 701 securities issued to platform workers would preclude any transfers, except transfers back to the issuer or by operation of law.
75

Transfers by operation of law would include, for example, transfers pursuant to the laws of descent and distribution and domestic relations orders in divorces. One commenter recommended the adoption of enhanced transfer restrictions for securities issued to gig economy workers beyond those applicable to equity currently issuable pursuant to Rule 701 because of the third-party contractual relationship between gig economy participants and gig economy companies.
76

As noted earlier, we agree that applying enhanced transfer restrictions is appropriate in light of the more remote contractual relationship between an issuer and its platform workers, compared to the relationship with its employees.
77

As with other securities issued pursuant to Rule 701, however, ninety days after the issuer becomes subject to Exchange Act reporting requirements, securities issued to platform workers would become available for resale under 17 CFR 230.701(g)(3).
78

74

See
17 CFR 230.701(g)(1) and (2).

75

See
proposed Rule 701(h)(3)(iv).

76
Letter from Airbnb.

77

See supra
note 59 and accompanying text.

78

See
proposed Rule 701(h)(3)(iv). Following that 90-day period, persons who are not affiliates may resell Rule 701 securities in reliance on 17 CFR 230.144 without compliance with the current public information requirements under 17 CFR 230.144(c) and holding period requirements under 17 CFR 230.144(d), and affiliates may resell such securities without compliance with the holding period requirements.

We are not proposing similar transfer restrictions for securities issued to platform workers pursuant to a Form S-8 registration statement. Securities Act and Exchange Act protections for such securities would already exist, making the use of the issued securities for speculative purposes by a platform worker less likely.
79

79
For example, to be eligible to use Form S-8, the issuer must be a reporting issuer and must have filed all reports and other materials required to be filed during the preceding 12 months (or for such shorter period that the registrant was required to file such reports and materials).

Request for Comment

16. Would the proposed conditions for issuances to platform workers under Rule 701 or Form S-8 help ensure that the issuances are for a compensatory purpose? Should we adopt only some of the conditions? If so, which ones? For example, should we require only that the issuance be pursuant to a compensatory arrangement for services

not in connection with the offer or sale of securities in a capital-raising transaction?

17. Should we impose a cap on the amount of compensation that a platform worker may receive as securities from the issuer on an annual basis under Rule 701 and Form S-8 to limit the potential that the issuance to platform workers would be used for capital-raising or speculative purposes, as proposed? If so, should we require that no more than 15 percent of the value of compensation received by a platform worker from the issuer for services provided during a 12-month period be in securities, as proposed? Should the annual cap be less than or greater than 15 percent of the compensation received by the platform worker during a 12-month period? Should the annual cap apply only to issuances under Rule 701 rather than both Rule 701 and Form S-8? Should the annual cap apply only to issuances under Form S-8?

18. Should we impose a cap on the amount of compensation that a platform worker may receive as securities from the issuer during a 36-month period (under Rule 701 and registered on Form S-8) to limit the potential that the issuance to platform workers would be used for capital-raising or speculative purposes, as proposed? Should we require that no more than $75,000 of such compensation received from the issuer during a 36-month period may consist of securities, as proposed? Should this cap be less than or greater than $75,000, and/or apply to a shorter or longer period than 36 months? For example, should we limit the amount of securities a platform worker may receive as compensation from an issuer to no more than $50,000 for a consecutive 24-month period? Instead of, or in addition to, the 36-month cap, should there be an aggregate limit on the dollar amount of securities that a platform worker may ever receive from an issuer? If so, what should that cap be? Should the $75,000 cap apply only to issuances under Rule 701? Should the $75,000 limitation apply only for as long as the issuer is not subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act? Should the $75,000 cap apply only to issuances registered on Form S-8?

19. Should we impose only the proposed 12-month cap or only the proposed 36-month cap, but not both? Should we not impose any cap on the amount of compensation that a platform worker may receive as securities in light of other proposed conditions? Should either cap apply to limit the total amount of compensation issued as securities to platform workers by an issuer as well as an issuer's affiliates, or should either cap apply individually to each issuer or issuer's affiliate?

20. For purposes of the 12- and 36-month caps on the amount of compensation that a platform worker may receive as securities from the issuer, should the value of compensation be measured at the time the securities are granted, as proposed? For the same purposes, should an issuer be able to use any reasonable, recognized valuation methodology for purposes of determining the fair market value of the securities issued to platform workers under Rule 701? Should an issuer be able to change the valuation methodology used for purposes of the proposed caps as long as the change is motivated by bona fide reasons unrelated to the proposed exemption for platform workers?

21. Should we specify in Rule 701 and Form S-8 that the issuer must use the same valuation method that it currently uses to make valuations for compensatory issuances under Rule 701(c), if applicable, and apply the methodology consistently during the same period?

22. Should we require that the amount and terms of any securities issued to a platform worker may not be subject to individual bargaining or the worker's ability to elect between payment in securities or cash, as proposed? If a platform worker is unable to negotiate the amount and terms of securities to be issued as compensation, should that worker be able to elect to receive payment only in cash?

23. For issuances pursuant to the Rule 701 exemption, should we require the issuer to take reasonable steps to prohibit the transfer of securities issued to platform workers, other than to the issuer or by operation of law, as proposed? Should we limit the prohibition on transferability to a specific period,
e.g.,
for two or three years? Should we mandate the specific steps that an issuer must take to prohibit the transfer of such securities? If so, what should those steps be? For example, should we require that issuers put special legends on the securities issued to platform workers, or should we require that issuers provide appropriate instructions to transfer agents concerning the transfer prohibition on shares issued to platform workers? Are there other reasonable steps that we should require an issuer to take in connection with the proposed prohibition on transferability to help ensure that the shares issued to platform workers are for compensatory and not speculative purposes?

24. Instead of requiring an issuer to take reasonable steps to prohibit the transfer of securities issued to platform workers, should we instead allow platform workers to resell their securities using an applicable exemption or safe harbor? For example, should platform workers be allowed to resell their securities pursuant to Rule 144? Alternatively, in Rule 701(h), should we require a different holding period than is in Rule 144, such as a two-year holding period, or is any holding period insufficient to mitigate concerns about misuse of the temporary exemption? Are there other transfer restrictions that would be more appropriate in this context?

25. Should we apply the proposed conditions only to securities that have capital-raising features (
e.g.,
stock options) and not to securities that do not have such features (
e.g.,
restricted stock units)? If so, which of the proposed conditions should not apply to such securities?

26. Should we limit the type of securities that can be issued to platform workers under Rule 701 or on Form S-8? For example, should we limit issuances to equity securities and securities convertible into or exchangeable for equity securities?

27. Are there other conditions in addition to, or instead of, the proposed conditions that we should adopt to help ensure that issuances to platform workers under Rule 701 or registered on Form S-8 are undertaken for compensatory and not capital-raising or speculative purposes? For example, should we require that a platform worker provide services through an issuer's platform (or other widespread, technology-based marketplace platform or system) for a certain period of time before the worker is eligible to receive securities from the issuer? If so, should the minimum period be six months, one year, or some other period? Should we require that the platform worker provide services for a continuous period of time? Should we require that the securities issued to a platform worker not vest until after a particular period of time? If so, should the vesting period be six months, one year, or some other period after the grant of securities?

28. Do the additional conditions for issuances to platform workers provide adequate investor protections for platform workers who receive shares pursuant to Rule 701 or registered on Form S-8? If not, what additional conditions or measures would be appropriate to provide an acceptable level of investor protection?

C. Integration of Proposed Rule 701(h) With the Existing Rule 701 Exemption

Title 17, section 230.701(d) (“Rule 701(d)”) imposes limits on the aggregate sales price or amount of securities that an issuer can sell in reliance on the rule during any consecutive 12-month period.
80

In addition, 17 CFR 230.701(e) (“Rule 701(e)”) provides that if the aggregate sales price or amount of securities sold during any consecutive 12-month period exceeds $10 million, the issuer must deliver certain disclosure to investors a reasonable period of time before the date of sale.
81

80

See
17 CFR 230.701(d)(2), which imposes alternative caps on the aggregate sales price or amount of securities sold under the rule during a consecutive 12-month period. In the companion Rule 701/Form S-8 release, we are proposing to raise: The cap under 17 CFR 230.701(d)(2)(i) permitting issuance from $1 million to $2 million, to reflect inflation; and the cap under 17 CFR 230.701(d)(2)(ii) from 15% to 25% of the issuer's total assets, to reflect that start-up companies may be more dependent upon human capital than fixed assets.
See
Release No. 33-10891 at Section II.B.

81
In the companion release, we are proposing to require that Rule 701(e) enhanced disclosure be provided only for those sales that exceed the rule's $10 million threshold.
See
Release No. 33-10891 at Section II.A.1. If adopted, this provision would be applicable to all Rule 701-exempt issuances, including those granted to platform workers.

Proposed Rule 701(h) would not create a separate and independent ceiling on the amount of securities that could be offered or sold under Rule 701. Rather, platform workers would be an additional class of persons temporarily eligible under Rule 701(c) to participate in the issuer's Rule 701 offers and sales, and would be subject to the same Rule 701(d) limitations on the total amount of securities that an issuer may sell. In this regard, the securities sold to platform workers would be aggregated with all other securities sold by the issuer to persons meeting existing Rule 701(c) eligibility conditions for purposes of applying the Rule 701(d) ceiling.

We believe that it is appropriate to apply the same ceiling to all Rule 701 exempt offerings rather than to provide a separate ceiling for offers to persons eligible to receive securities under the temporary provision. If we were to provide separate ceilings, issuers with technology-based marketplace platforms would be able to sell securities in excess of the amount they are permitted to sell to traditional workers, while issuers that rely only on traditional employment would be limited to the ceiling imposed under Rule 701(d). We believe it is better to propose an approach that treats all issuers equally, rather than one that favors issuers conducting their businesses through platforms as defined by the proposed rule.

Similarly, an issuer that offered and sold securities to platform workers pursuant to proposed Rule 701(h) would be subject to the same Rule 701(e) disclosure requirements. Those securities would be aggregated with all other securities offered and sold by the issuer to persons meeting existing Rule 701(c) eligibility conditions for purposes of applying the $10 million disclosure threshold in Rule 701(e).
82

82
In the companion release, we are proposing amendments to the disclosure requirements under Rule 701(e) that, if adopted, would be applicable to issuances to platform workers under proposed Rule 701(h). For example, we are proposing to conform the age of financial statement requirement in Rule 701(e) to the corresponding requirement in Part F/S of Form 1-A.
See
Release No. 33-10891 at Section II.A.2. In addition, we are proposing to allow issuers to provide alternative valuation information, similar to that required under Internal Revenue Code Section 409A, in lieu of financial statements, for purposes of Rule 701(e) disclosure.
See id.
at Section II.A.4.

Request for Comment

29. Should we require that the securities sold to platform workers be aggregated with all other securities sold by the issuer to persons meeting existing Rule 701(c) eligibility conditions for purposes of applying the Rule 701(d) ceiling, as proposed? Should we instead impose a separate and independent ceiling on the amount of securities that an issuer could sell to platform workers during any consecutive 12-month period? If so, what should the ceiling be?

30. Should we require that the securities issued to platform workers be aggregated with all other securities sold by the issuer to persons meeting existing Rule 701(c) eligibility conditions for purposes of applying the Rule 701(e) disclosure threshold, as proposed? Should we instead impose a separate disclosure threshold for issuances to platform workers? If so, what should that threshold be?

D. Integration With Exchange Act Rule 12g5-1

For purposes of determining whether an issuer is required to register a class of equity securities with the Commission pursuant to Section 12(g)(1) of the Exchange Act,
83

17 CFR 240.12g5-1 (“Rule 12g5-1”) permits the exclusion of certain securities.
84

Specifically, 17 CFR 240.12g5-1(a)(8)(i)(A) permits the exclusion of securities held by persons who received the securities pursuant to an employee compensation plan in transactions exempt from, or not subject to, the registration requirements of Securities Act Section 5. Title 17, section 240.12g5-1(a)(8)(i)(B) permits the exclusion of securities held by persons who received the securities in a transaction exempt from, or not subject to, the registration requirements of Securities Act Section 5 from the issuer, a predecessor of the issuer or an acquired company in substitution or exchange for securities received pursuant to a compensatory plan in transactions exempt from, or not subject to, the registration requirements of Securities Act Section 5, as long as the persons were eligible to receive securities pursuant to Rule 701(c) at the time the excludable securities were originally issued to them. In addition, Rule 12g5-1 provides a non-exclusive safe harbor by which an issuer may deem a person to have received the securities pursuant to an employee compensation plan if such plan and the person who received the securities pursuant to the plan met the plan and participant conditions of Rule 701(c).
85

83
15 U.S.C. 78l(g)(1). Section 12(g)(1) requires, among other things, that an issuer with assets exceeding $10,000,000 and a class of equity securities held of record by either 2,000 persons, or 500 persons who are not accredited investors, register such class of securities with the Commission.

84

See
17 CFR 240.12g5-1(a)(8). The Commission adopted this provision of Rule 12g5-1 pursuant to Section 503 of the JOBS Act, which instructed the Commission to amend the definition of “held of record” to exclude securities held by persons who received them pursuant to an “employee compensation plan” in transactions exempted from the registration requirements of Section 5 of the Securities Act. Section 503 also instructed the Commission to adopt a safe harbor that issuers can use when determining whether holders of their securities received them pursuant to an employee compensation plan in transactions exempted from the registration requirements of Section 5 of the Securities Act. The Commission adopted the term “employee compensation plan” and left it undefined so that “issuers will have appropriate flexibility to make a principles based determination about securities received as employee compensation when determining their holders of record under Section 12(g)(5).”
See
Release No. 33-10075.

85

See
17 CFR 240.12g5-1(a)(8)(ii)(A).

We are proposing similar treatment for issuances to platform workers under proposed Rule 701(h).
86

We believe that these proposed amendments to Rule 12g5-1 are appropriate because they would remove a potential disincentive to an issuer's offer and sale of securities as compensation to platform workers and would avoid favoring companies that do not have platform workers over companies that have them. Specifically, the proposed revisions would eliminate the requirement for an issuer to count platform workers who receive shares pursuant to a compensation plan

87

under Rule 701(h) as record holders for the purpose of determining its Section 12(g) registration obligations.
88

In addition, similar to the existing exclusion in 17 CFR 240.12g5-1(a)(8)(i)(B), the proposed amendment would exclude securities received in a transaction exempt from, or not subject to, the registration requirements of Securities Act Section 5 in substitution or exchange for securities received pursuant to Rule 701, as long as the persons were eligible to receive the securities when they were originally issued to them.
89

Finally, the proposed amendments would extend the safe harbor in 17 CFR 240.12g5-1(a)(8)(ii), for securities received in a Rule 701(c) offering, to compensatory issuances to platform workers pursuant to Rule 701(h).
90

86
Two commenters supported excluding platform workers from the definition of record holder under Rule 12g5-1.
See
letters from Airbnb and Davis Polk.

87
Similar to the current Rule 12g5-1 exclusion for securities issued pursuant to an employee

compensation plan, we propose to use and leave undefined the term “compensation plan” to provide issuers with the appropriate flexibility to make a principles based determination about securities issued as compensation to their platform workers when determining their holders of record under Section 12(g)(5). Not defining a “compensation plan” for platform workers would also avoid unnecessary complexity and potential conflict with existing terms, such as “compensatory benefit plan.”
See
Release No. 33-10075, 81 FR at 28694.

88

See
proposed Exchange Act Rule 12g5-1(a)(8)(i)(A).

89

See
proposed Exchange Act Rule 12g5-1(a)(8)(i)(B).

90

See
proposed Exchange Act Rule 12g5-1(a)(8)(ii)(A)(
2
). The Rule 12g5-1 safe harbor would continue to provide that an issuer may, solely for the purposes of Exchange Act Section 12(g), deem the securities to have been issued in a transaction exempt from, or not subject to, the registration requirements of Securities Act Section 5 if the issuer had a reasonable belief at the time of the issuance that the securities were issued in such a transaction.
See
17 CFR 240.12g5-1(a)(8)(ii)(B).

The proposed amendments to Rule 12g5-1 would also include a note to remind issuers of the temporary nature of Rule 701(h).
91

Upon expiration of Rule 701(h), without further Commission action, an issuer would no longer be able to issue additional Rule 701-exempt securities to its platform workers. Importantly, however, we are not proposing the Rule 12g5-1 exclusion and safe harbor for securities issued to platform workers on a temporary basis. Therefore, an issuer could continue to rely on the exclusion and safe harbor subsequent to Rule 701(h)'s expiration date.

91

See
proposed Note 1 to paragraph (a)(8)(ii) of Rule 12g5-1.

Request for Comment

31. Should we permit an issuer to exclude platform workers to which it has issued securities under Rule 701(h) from the definition of “holders of record” for the purpose of determining its registration obligations under Section 12(g), as proposed?

32. Should we extend the Rule 12g5-1 safe harbor to cover issuances to platform workers under Rule 701(h) pursuant to a compensation plan, as proposed?

33. Should we leave “compensation plan” for platform workers undefined, as proposed? If not, how should we define a “compensation plan” for platform workers?

E. Considerations Specific to Form S-8

Form S-8 provides a number of accommodations to registrants that seek to register the offer and sale of securities to their employees, consultants, and advisors.
92

For example, to satisfy the Securities Act prospectus delivery requirements set forth in Rule 428, the form requires only abbreviated disclosure and permits the delivery of regularly prepared materials advising employees and other eligible persons about employee benefit plans, together with a statement of availability of documents containing registrant information.
93

Form S-8 also permits the incorporation by reference of a 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 non-affiliated public (its “public float”).
94

The Commission has justified this differing treatment for Form S-8 offerings because of their compensatory, incentivizing, and non-capital-raising purpose.
95

92

See
1999 Form S-8 Adopting Release,
supra
note 12, at 11103;
see also
1990 Form S-8 Adopting Release,
supra
n. 14.

93

See
Form S-8, Part I, Item 2.

94

See
Form S-8, Part II, Item 3.

95

See, e.g.,
1999 Form S-8 Adopting Release,
supra
note 12, at 11103. The Commission has also justified the abbreviated disclosure format of Form S-8 because of “employees' familiarity with the issuer's business through the employment relationship.”
Id.

We propose to amend Form S-8 so that the accommodations available to registrants currently offering securities on that form to employees and other covered persons would generally be available to registrants offering securities to platform workers. We also propose to amend Rule 428 so that its prospectus content, delivery, updating, and related procedural requirements are applicable to offerings to platform workers pursuant to a written compensation plan, contract, or agreement. Thus, a registrant registering an offering of securities to platform workers on Form S-8 would be able to deliver a Section 10(a) prospectus consisting of plan or compensation contract information, a statement of availability of registrant information, and other documents required of current Form S-8 registrants, and follow the same Form S-8 procedural requirements.
96

We believe that the proposed conditions designed to help ensure that an offering to such workers is for a compensatory purpose justify extending the same treatment to issuers seeking to register an offering of securities to platform workers on Form S-8.

96

See
proposed Rule 428(d).

Many of the substantive plan disclosure requirements for Form S-8 pertain to tax qualified defined contribution plans. We believe, however, that issuers that elect to register an offering of securities on Form S-8 for issuance to platform workers would do so to incentivize those workers in the short-term by offering options and restricted stock units, rather than pursuant to a defined contribution plan for the purpose of retirement savings. Accordingly, we are not proposing amendments to those items of Form S-8 that pertain to defined contribution plans to include platform workers.

Request for Comment

34. Platform workers may not be as familiar with the registrant's operations as employees and other persons currently eligible to receive securities under Form S-8 may be. As such, should registrants offering securities to platform workers be subject to different information content, prospectus delivery, or other procedural requirements than those applicable to current Form S-8 registrants? If so, what additional requirements under Form S-8 or Rule 428 or what different or additional disclosure requirements should apply to offerings to platform workers?

35. Are there circumstances in which registrants would issue securities to platform workers pursuant to defined contribution plans? If so, should we amend those items of Form S-8 that pertain to defined contribution plans to include platform workers?

F. Requirement To Furnish Certain Information

As explained in detail below, the proposed expansion of Rule 701 and Form S-8 to include securities issuances to platform workers would be temporary.
97

Related to this, we are also proposing a requirement that an issuer furnish certain information to the Commission. If the proposed amendments are adopted, we plan to use this information to assist us in evaluating the expanded use of Rule 701

and Form S-8, in order to help determine whether to permit such use on a permanent basis and under the same or different conditions. The information should provide insight into how, and to what extent, the exemptions are being used, as well as the extent and type of benefits provided to issuers, platform workers, and other investors. This would enable us to assess the utility of the issuances of securities to platform workers under Rule 701 or Form S-8 and to assess whether the proposed conditions have achieved their purpose of helping to prevent non-compensatory issuances. Although the proposed rule would require issuers to furnish certain information, furnishing the identified information would not be a condition to rely on Rule 701 or Form S-8. Thus, a failure to furnish the information would not result in the loss of the proposed exemption in Rule 701 or Form S-8 eligibility for issuances to platform employees. The information would, however, be important for determining whether the exemptions should expire, be extended, or be made permanent.

97

See infra
Section II.G.

The required information would be furnished, rather than filed, and therefore would not be subject to potential liability under Section 18 of the Exchange Act.
98

The information would be intended only for the Commission's use and would be non-public. It would not be furnished through the Commission's Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system. Rather, it would be furnished in a non-public manner designated by the Division of Corporation Finance for this purpose, for example, electronically by email or by some other means of electronic communication.

98
15 U.S.C. 78r.

As proposed, the issuer would be required to provide the following information concerning its issuances to platform workers to the Commission at six-month intervals commencing six months after the first such issuance:

1. The criteria used to determine eligibility for securities awards to platform workers, whether they are the same as for other compensatory transactions, and whether those criteria, including any revisions to such criteria, are communicated to workers in advance as an incentive;

2. The type and terms of securities issued to platform workers during the prior six months, and whether they are the same as for other securities issued in compensatory transactions by the issuer during that interval;

3. If issuing securities pursuant to Rule 701(h), the steps taken to ensure that the securities sold are non-transferable;

4. The percentage of overall outstanding securities that the amount issued to platform workers cumulatively under Rule 701(h) or pursuant to a registration statement on Form S-8 (pursuant to § 239.16b(c)), as applicable, represents;

5. During the interval, the number of platform workers, the number of non-platform workers, the number of platform workers receiving securities pursuant to the temporary rule, and the number of non-platform workers who received securities pursuant to the issuer's Rule 701 or Form S-8 sales; and

6. The number and dollar amount of securities issued to platform workers under Rule 701 or pursuant to a registration statement on Form S-8, both in absolute amounts and as a percentage of the issuer's total sales under Rule 701 or total sales pursuant to a registration statement on Form S-8, as applicable during the interval.
99

99

See
proposed Rule 701(h)(4) and proposed 17 CFR 239.16b(c)(3). The amounts calculated as a percentage should compare the amount of securities issued to platform workers under Rule 701 or Form S-8 with the total amount of securities issued to all workers (both platform and non-platform) and other covered persons under Rule 701 or on Form S-8.

We recognize that some non-reporting issuers may view certain information concerning compensation practices for platform workers as privileged or confidential. For that reason, the proposed rules would provide that to the extent that the issuer treats such information as privileged or confidential, it may submit a confidential treatment request pursuant to 17 CFR 200.83
100

for the furnished information.
101

100
Under Rule 83, an issuer can request that the non-public information not be disclosed pursuant to a request under the Freedom of Information Act (“FOIA”). Written requests for confidential treatment under Rule 83 relating to the furnished materials may be submitted either in paper format or electronically. If there are no FOIA requests, the information will remain non-public for 10 years. After 10 years, the confidential treatment request will expire unless an issuer requests and is granted an extension. In the event of a FOIA request, the Commission may require the issuer to provide substantiation of its confidential treatment request.

101

See
proposed Rule 701(h)(5) and proposed 17 CFR 239.16b(c)(4).

Request for Comment

36. Should the temporary rules require an issuer to furnish certain information to the Commission if it seeks to register issuances to platform workers on Form S-8, as proposed? If so, should an issuer be required to furnish the information at six-month intervals, as proposed? Should the issuer be required to furnish the information annually or on another periodic basis? If so, which periodic basis would be appropriate?

37. Should the same reporting interval apply to issuances of securities both under Rule 701 and pursuant to a registration statement on Form S-8?

38. Is the proposed information appropriate for the purpose for which it is being sought? Should issuers be required to furnish less information or other information in addition to, or instead of, the proposed information?

39. What method should the Commission require issuers to use to furnish the information required? For example, should the information be furnished electronically via email for this purpose? Should the Commission provide a form for this purpose?

Are there other steps that the Commission should take to facilitate the reporting requirement?

40. Should we require that an issuer notify the Commission that it intends to make offers or sales to platform workers pursuant to the exemption in proposed Rule 701(h)? If so, when and how should issuers be required to provide such notice?

G. Expiration of the Temporary Rules Authorizing Issuances to Platform Workers Under Rule 701 and Form S-8

With limited exceptions, we propose to make this exemptive rule temporary in order to have an opportunity to evaluate the appropriateness of extending the Rule 701 exemption to issuances to workers in this relatively new type of work arrangement, including whether such issuances are being made for compensatory, incentive, and non-capital-raising purposes.
102

Moreover, given the rapid pace of technological change, particularly in the area of the internet and platform software, and the evolving nature of the platform worker labor market, making the expanded Rule 701 exemption temporary would also provide us with the opportunity, subject to public notice and comment, to implement amendments to this area of the

exemptive framework in light of such technological and labor market changes.

102
As previously discussed, the exemption would continue to be available to issuers for the post-expiration issuance of securities underlying options previously issued in an exempt transaction pursuant to Rule 701(h).
See supra
note 41 and accompanying text. In addition, as previously noted, an issuer could continue to rely on the Rule 12g5-1 exclusion and safe harbor for securities issued to its platform workers prior to the expiration of Rule 701(h) and continue to exclude those workers as record holders subsequent to Rule 701(h)'s expiration date.
See supra
Section II.D.

As proposed, Rule 701(h) would apply only to offers and sales of securities occurring within five years following the date of the rule's effectiveness. On that date, Rule 701(h) would expire and no longer be effective.
103

Prior to the expiration date, the Commission may decide to let the exemption expire, extend the temporary exemption, or adopt the exemption on a permanent basis. If the Commission extends the exemption or adopts it on a permanent basis, it may also consider whether any revisions to the rule are appropriate. We believe that five years is an appropriate period for the temporary exemption. On the one hand, it would provide issuers with sufficient time to develop and conduct successful securities offerings to platform workers, the demand for which initially may not be readily apparent. On the other hand, the limited period would allow the Commission to evaluate the temporary exemption and make necessary adjustments in response to technological, labor market, or other changes.

103
In the event that the Commission determines to let the exemption expire, we anticipate addressing any transition or related issues at that time.

The rule authorizing the temporary use of Form S-8 for issuances to platform workers (17 CFR 239.16b(c)) would also expire five years from the date of that rule's effectiveness, which we expect would be the same date as the expiration date for Rule 701(h). Rule 428(d), the temporary rule authorizing the application of the same streamlined disclosure, prospectus delivery, and related procedural requirements to issuances to platform workers as those currently applicable to other Form S-8 issuances, would expire on the same date as 17 CFR 239.16b(c).

Request for Comment

41. Should we adopt each of proposed Rule 701(h), the proposed amendment to Form S-8 (17 CFR 239.16b(c)), and proposed Rule 428(d) as temporary rules, as proposed? If we do, should the rules expire five years from the date of their effectiveness, as proposed? Should the rules expire on a different date (
e.g.,
one, two, three, or four years from the date of effectiveness)?

42. Should we permit an issuer, following expiration of Rule 701(h), to issue securities underlying options, warrants, or rights that were previously issued to platform workers in an exempt transaction pursuant to Rule 701(h), as proposed?

43. Should we make the expiration date for the temporary Form S-8 provisions different from the expiration date for issuances under Rule 701(h)? If so, should the effective period of the Form S-8 provisions be longer or shorter than the effective period of Rule 701(h)?

44. Should the proposed extension of Rule 701 and Form S-8 to platform workers expire absent further Commission action, as proposed? Are there any transition or related issues (
e.g.,
related to transfer restrictions) that we should address in connection with the proposed expiration of the temporary rules?

45. Rather than making the rules temporary,
104

should we adopt any of the proposed rules on a permanent basis? If so, which ones?

104

But see supra
note 102.

III. General Request for Comments

We request and encourage any interested person to submit comments on any aspect of the proposed amendments, other matters that might have an impact on the proposed amendments, and any suggestions for additional changes. With respect to any comments, we note that they are of greatest assistance to our rulemaking initiative if accompanied by supporting data and analysis of the issues addressed in those comments and by alternatives to our proposals where appropriate.

IV. Economic Analysis

The Commission is proposing amendments to Rule 701 to establish a temporary provision that, on a trial basis, would expand the scope of the rule to include a new category of worker, the platform worker, to whom an issuer would offer and sell securities, under certain conditions, without registration under the Securities Act. Similarly, the Commission is proposing amendments to permit an Exchange Act reporting issuer to register offers and sales to platform workers on Form S-8.
105

The Commission is proposing these amendments on a temporary basis for a five-year period. Permitting gig economy issuers to utilize the Rule 701 exemption on a temporary basis would allow the Commission to assess the appropriateness of the exemption for these new work relationships and thus should help inform the Commission's ongoing efforts to modernize its rules in light of changing economic and market conditions. In connection with the proposed amendments, issuers that offer and sell securities to platform workers would be required to furnish certain information to the Commission at six-month intervals to assist in evaluating the proposed expanded scope of Rule 701 and Form S-8. The Commission also is proposing to amend Rule 12g5-1 under the Exchange Act to extend the exclusion from the definition of “held of record” and corresponding safe harbor, for securities issued to platform workers.

105
Unlike the proposed amendment to Rule 701, the proposed amendment to Form S-8 does not include a transfer prohibition. We discuss the anticipated economic effects of this difference below.

We are mindful of the costs imposed by and the benefits obtained from our rules and amendments.
106

The discussion below summarizes information about the gig economy in general, various attributes of platform workers and specific information about the online platform economy. We then discuss the potential economic effects of the proposed amendments. These include the likely benefits and costs, effects on efficiency, competition, and capital formation, and reasonable alternatives. We attempt to quantify these economic effects whenever possible; however, due to data limitations, we are not able to quantify many of the economic effects.

106
Section 2(b) of the Securities Act [15 U.S.C. 77b(b)] and Section 3(f) of the Exchange Act [15 U.S.C. 78c(f)] requires the Commission, when engaging in rulemaking where it is required to consider or determine whether an action is necessary or appropriate in the public interest, to consider, in addition to the protection of investors, whether the action will promote efficiency, competition and capital formation. Further, Section 23(a)(2) of the Exchange Act [15 U.S.C. 78w(a)(2)] requires the Commission, when making rules under the Exchange Act, to consider the impact that the rules would have on competition, and prohibits the Commission from adopting any rule that would impose a burden on competition not necessary or appropriate in furtherance of the Exchange Act.

A. Economic Baseline

The baseline for the economic analysis consists of the current regulatory requirements applicable to issuers issuing securities to their employees as part of their compensation arrangements. Non-reporting issuers are able to rely on Rule 701 to offer compensatory securities to their employees. Registrants are able to register the offer and sale of compensatory securities to their employees on Form S-8. As discussed above, these provisions currently are not available for platform workers because of their non-traditional employment status. Thus, the affected parties for the proposed amendments would consist of online platform-based businesses wishing to offer securities as compensation, their platform workers,

and any companies with which these businesses compete in the labor market.

1. Overview of the Gig Economy

Numerous recent studies document an evolution and expansion of the gig economy over time. These studies examine various aspects of the nature of non-traditional (or alternative) work arrangements and corresponding trends in this area. The findings across these studies may vary for multiple reasons. For example, there is no general consensus on the definition/scope of the gig economy, or its various constituents.
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Consequently, the results of these studies may vary because they use different definitions of the gig economy. Moreover, various sources of data are utilized to study the field. The three main sources of data used in these studies are government surveys such as the Current Population Survey,
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administrative data such as IRS filings, and private sector data. Due to the differing nature of the data analyzed, different types of errors or biases in the data may affect the findings of these studies.
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We discuss some of the main findings of this literature below and then focus on data and statistics from studies using definitions of gig economy that are more likely to be relevant to the scope of the proposed amendments to Rule 701 and Form S-8.

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Katherine Abraham, John Haltiwanger, Kristin Sandusky, and James Spletzer,
The Rise of the Gig Economy: Fact or Fiction,
109 AEA PAPERS & PROCEEDINGS 357 (2019) (the “2019 Abraham Study”).

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The Current Population Survey (CPS) is conducted on a monthly basis by the United States Census Bureau on behalf of the Bureau of Labor and Statistics. The CPS may include supplementary questions/topics on a non-periodic basis. In 2005 and again in 2017 the supplementary questions focused on contingent workers.
See, e.g.,
U.S. Bureau of Labor Statistics, Electronically mediated work: New questions in the Contingent Worker Supplement, MONTHLY LAB. REV. (Sept. 2018) (the “2017 Contingent Worker Supplement”),
https://www.bls.gov/opub/mlr/2018/article/electronically-mediated-work-new-questions-in-the-contingent-worker-supplement.htm.

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See, e.g.,
Katherine Abraham, John Haltiwagner, Kristin Sandusky, and James Spletzer,
Measuring the gig economy: Current Knowledge and Open Issues
(Nat'l Bureau of Econ. Research Working Paper 24950, 2018) (the “2018 Abraham Study”). The 2018 Abraham Study finds that there has been a growing discrepancy between the level of self-employment as measured in core household surveys versus the level of self-employment as measured in administrative data. The study concludes that examining integrated data sets that combine survey, administrative, and private data are likely to improve the measurement of self-employment activity.

A 2019 study,
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using a broad definition of alternative work arrangements,
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finds a significant increase in alternative work arrangements over the 2005-2015 period. It estimates that about 15.8 percent of survey participants engaged in some form of alternative work arrangement in 2015 as compared to 10.7 percent in 2005.
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It also finds that workers providing services through an online intermediary accounted for 0.5 percent of all workers in 2015.
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Lawrence Katz & Alan Krueger,
The Rise and Nature Of Alternative Work Arrangements in the United States, 1995-2015,
72 ILR REV. 382 (2019) (the “Katz Study”).

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The definition of alternative work arrangements used in the Katz Study includes temporary help agency workers, on-call workers, contract workers, and independent contractors or freelancers.

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The 2005 results in the Katz Study were based on data from the 2005 Contingent Worker Supplement and the 2015 results in the Katz Study were based on a survey conducted by RAND-Princeton as part of the RAND American Life Panel (the “Rand-Princeton Survey”).

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The Katz Study does not discuss 2005 online platform participation rates.

The 2019 Abraham Study reports self-employment rates increasing from 13 percent in 2004 to 15 percent in 2016, based on published Census Bureau statistics on non-employer businesses.
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The largest increase in non-employers between 2010 and 2016 took place in the Ground Passenger Transportation sector,
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which grew by almost 300 percent (651,000 drivers) during the period.
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The study also finds positive growth in non-employers for the following sectors: NAICS 488 (Support Activities for Transportation), NAICS 611 (Educational Services), NAICS 448 (Clothing and Clothing Accessories Stores), and NAICS 446 (Health and Personal Care Stores), although to a much less extent as compared to the growth observed in the Ground Passenger Transportation sector.

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A non-employer business is defined by the Census Bureau as one that has no paid employees, has annual business receipts of $1,000 or more ($1 or more in the construction industries), and is subject to federal income taxes. Most non-employers are self-employed individuals operating very small, unincorporated businesses, which may or may not be the owner's principal source of income.
https://www.census.gov/quickfacts/fact/note/US/NES010217.

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This sector corresponds to North American Industry Classification System (NAICS) code 485.

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See also
Jonathan Hall & Alan Krueger,
An Analysis of the Labor Market for Uber's Driver-Partners in the United States,
71 ILR Review 705 (2018) (the “Hall Study”). The Hall Study finds that the number of Uber drivers increased from a base of zero in 2012 to 460,000 active drivers by the end of 2015.

The 2017 Contingent Worker Supplement estimated that there were about 1.6 million electronically mediated workers in the United States,
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accounting for one percent of total employment.

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The 2017 Contingent Worker Supplement defines electronically mediated work as an employment arrangement where workers: (1) Use a platform provider's website or mobile app to connect to clients or customers and obtain short jobs, projects, or tasks; (2) are paid by or through the platform provider that owns the website or mobile app, (3) choose when and whether to work, (4) may do these short jobs, projects, or tasks in person or online.

The Federal Reserve 2018 Survey of Household Economics and Decision Making (the “2018 SHED Survey”)
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finds that 30 percent of adults engaged in gig economy related work, including both the provision of services and the sale of goods, and using both online and offline methods, in 2018. The survey also finds that three percent of adults surveyed participated in gig economy work enabled by the internet or a mobile app to connect to customers.

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The Federal Reserve has conducted the Survey of Household Economics and Decision Making on an annual basis starting in 2013.

Another study uses private data to examine various characteristics and trends of a subsection of the gig economy, namely the online platform economy and its participants.
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It analyzed a sample comprised of 39 million unique checking accounts over the October 2012-March 2018 period
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and found a significant increase in the number of families receiving income from providing goods and services using online platforms.
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For example, in 2013, less than 0.5 percent of the sample checking accounts received income from work performed through an online platform, whereas that number increased to 1.6 percent in 2018.
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The study further breaks down income sources from online platform utilization into four categories: (1) Transportation, (2) non-transport work (includes services such as dog walking and home repair), (3) selling of goods, and (4) leasing.
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As of March 2018, online

platform workers in categories (1) and (2) constituted approximately 65 percent of the workers in all four categories. Over the 2013-2018 period, the transportation services category has shown the most significant growth, increasing from less than 10 percent of online platform workers in 2013 to approximately 60 percent of online platform workers in 2018.

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Diana Farrell, Fiona Greig & Amar Hamoudi,
The Online Platform Economy in 2018: Drivers, Workers, Sellers, and Lessors,
JPMorgan Chase Institute, (2018) (the “Farrell Study”).

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The study applies multiple filters to select the accounts in the final sample. These filters are described in the Appendix of the study.

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In order for an online platform to be included in the Farrell Study, it had to meet the following criteria: (1) The platform connects independent suppliers to customers, (2) the platform mediates the flow of payment from customer to supplier, (3) the platform empowers participants to enter and leave the market whenever they want. The study identified 128 online platforms based on the three criteria above. We believe the definition of gig economy applied in this study most closely resembles the definition of online platform workers used in the proposed amendments to Rule 701 and Form S-8.

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The Farrell Study also notes that as of March 2018, about 4.5% of accounts examined received income from an online platform at some point over the prior year.

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Companies identified in categories (1) and (2) in the Farrell Study are likely to have a significant overlap with the companies that are likely to be included in the proposed expansion of Rule 701 and Form S-8, given the overlap between the provided definition of these categories and the

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2020-26374. Public record. Not legal advice.