[Federal Register Volume 64, Number 44 (Monday, March 8, 1999)]
[Rules and Regulations]
[Pages 11103-11117]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-5297]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 228, 229, 230 and 239
[Release No. 33-7646, 34-41109; File No. S7-2-98]
RIN 3235-AG94
Registration of Securities on Form S-8
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
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SUMMARY: The Securities and Exchange Commission (``we'' or
``Commission'') is adopting amendments to Form S-8, related rules under
the Securities Act, and Regulations S-K and S-B. Some of the amendments
restrict the use of Form S-8 for the offer and sale of securities to
consultants and advisors. Other amendments allow the use of Form
S-8 for the exercise of stock options by family members of employee
optionees.
DATES: Effective Date: The amendments are effective April 7, 1999.
Compliance Date: Currently effective registration statements on Form S-
8 need not comply with amended Sec. 230.405 and amended General
Instruction A.1.(a)(1) to Form S-8 (referenced in Sec. 239.16b) until
May 10, 1999.
FOR FURTHER INFORMATION CONTACT: Anne M. Krauskopf, Special Counsel,
Office of Chief Counsel, Division of Corporation Finance, at (202) 942-
2900.
SUPPLEMENTARY INFORMATION: We are adopting amendments to Rules 401 \1\
and 405 \2\ under the Securities Act of 1933 (``Securities Act''),\3\
Item 402 \4\ of Regulations S-B and S-K, and Securities Act Forms S-3
\5\ and S-8.\6\
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\1\ 17 CFR 230.401.
\2\ 17 CFR 230.405.
\3\ 15 U.S.C. 77a et seq.
\4\ 17 CFR 228.402 and 17 CFR 229.402.
\5\ 17 CFR 239.13.
\6\ 17 CFR 239.16b.
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I. Executive Summary
Today we adopt rule amendments that address two separate concerns
involving the use of Form S-8 to register the offer and sale of
employee benefit plan securities.
First, we adopt amendments designed to restrict the
availability of streamlined registration on Form S-8 in order to deter
abuse of the form. In particular, the form has been misused to sell
securities to the general public through employees and nominal
``consultants and advisors,'' and to register securities issued to
stock promoters. We are adopting these amendments as part of our
comprehensive agenda to deter registration and trading abuses,
including microcap fraud.\7\
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\7\ See also Securities Act Release No. 7505 (Feb. 17, 1998) [63
FR 9632], adopting amendments to Regulation S [17 CFR 230.901 et
seq.]; Release No. 39670 (Feb. 17, 1998) [63 FR 9661] under the
Securities Exchange Act of 1934 (``Exchange Act'') [15 U.S.C. 78a et
seq.], proposing amendments to Exchange Act Rule 15c2-11 [17 CFR
240.15c2-11]; Securities Act Release No. 7541 (May 21, 1998) [63 FR
29168], proposing amendments to Rule 504 [17 CFR 230.504];
Securities Act Release No. 7644 (Feb. 25, 1999), adopting amendments
to Rule 504; and Exchange Act Release No. 41110 (Feb. 25, 1999),
reproposing amendments to Rule 15c2-11.
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Second, we are expanding Form S-8 to cover stock option
exercises by employees' family members, so that the rules governing use
of the form do not impede legitimate intra-family transfers of options
by employees. These amendments will facilitate transfers for estate
planning purposes and transfers under domestic relations orders.
Form S-8 is available to register the offer and sale of securities
to the issuer's employees \8\ in a compensatory or incentive context.
In 1990, we adopted substantial revisions to Form S-8,\9\ including
making the form effective immediately upon filing and abbreviating the
disclosure format. We permitted the delivery of regularly prepared
materials advising employees about benefit plans to satisfy Securities
Act prospectus delivery requirements, eliminating the need to file and
deliver a separate prospectus that duplicates this information. This
treatment reflected a distinction we traditionally have drawn between
offerings to employees primarily for compensatory and incentive
purposes and offerings for capital-raising purposes. The compensatory
purpose of the offering and employees' familiarity with the issuer's
business through the employment relationship justify the use of
abbreviated disclosure that would not be adequate in a capital-raising
transaction.\10\
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\8\ For this purpose, ``employees'' also includes the employees
of the issuer's subsidiaries or parents. See General Instruction
A.1(a) to Form S-8.
\9\ Securities Act Release No. 6867 (June 6, 1990) [55 FR
23909].
\10\ Form S-8 also permits incorporation by reference of the
registrant's Exchange Act reports without regard to the length of
the issuer's reporting history or the aggregate market value of its
securities held by the nonaffiliated public (the issuer's ``public
float''). Incorporation by reference from Exchange Act reports into
a Securities Act registration statement is not otherwise available
unless the issuer satisfies the eligibility requirements for Form S-
2 [17 CFR 239.12], Form S-3, Form F-2 [17 CFR 239.32] or Form F-3
[17 CFR 239.33].
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The 1990 revisions also made Form S-8 available for offers and
sales of securities to consultants and advisors. To be eligible, a
consultant must provide the issuer bona fide services not in connection
with the offer or sale of securities in a capital-raising transaction.
There did not appear to be a reason to distinguish between transactions
with regular employees and transactions with consultants or advisors,
as long as securities are issued for compensatory rather than capital-
raising purposes.
A. Abuses of Form S-8
Since the 1990 revisions, some issuers and promoters have misused
Form S-8 as a means to distribute securities to the public without the
protections of registration under Section 5 of the Securities Act. For
example, the issuer registers on Form S-8 securities nominally offered
and sold to employees or, more commonly, to so-called ``consultants.''
These persons then resell the securities in the public markets, at the
direction of the issuer or a promoter. In some cases, the consultants
or employees perform limited or no additional services for the issuer.
The consultants or employees then either remit to the issuer the
proceeds from these resales, or apply those proceeds to pay expenses of
the issuer that are not related to any service provided by the
consultants or employees.\11\
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\11\ See, e.g., In the Matter of Spectrum Information
Technologies, Inc. (``Spectrum''), Securities Act Release No. 7426,
Exchange Act Release No. 38774, Accounting and Auditing Enforcement
Release No. 930 (June 25, 1997); SEC v. Hollywood Trenz, Inc.
(``Hollywood Trenz''), Litigation Release No. 15730, Accounting and
Auditing Enforcement Release No. 1032 (May 4, 1998).
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Registration of the shares on Form S-8 does not accomplish Section
5 registration of these public sales. The
[[Page 11104]]
transaction that takes place (a capital-raising transaction with the
public) is a different transaction from the transaction registered on
Form S-8 (a compensatory transaction with employees, including
consultants). Although the issuer purports to sell securities to
employees, the securities instead are sold to the public. The
``employees'' act as conduits by selling the securities to the public
and distributing the proceeds (or their economic benefit) to the
issuer. This public sale of securities by the issuer has not been
registered, although the Securities Act requires registration. The
failure to register this sale of securities deprives public investors
of the protections afforded by the Securities Act.
Form S-8 also has been misused to register securities issued to
compensate ``consultants'' and ``advisors'' for promoting the issuer's
securities.\12\ This practice facilitates securities fraud by providing
compensation as incentive to persons who hype the issuer's stock, and
may result in these persons conditioning the market for resales of the
issuer's securities.
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\12\ See, e.g., SEC v. Softpoint, Litigation Release No. 14480,
Accounting and Auditing Release No. 666 (Apr. 27, 1995).
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Today we are adopting some of the amendments that we proposed in
February 1998 which are designed to prevent these abuses.\13\ The
amendments will:
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\13\ Securities Act Release No. 7506 (Feb. 17, 1998) [63 FR
9648] (``Proposing Release''). We received 17 comment letters on the
Proposing Release. These comment letters and a Comment Summary are
available for inspection and copying in the Commission's Public
Reference Room under file number S7-2-98. Comments that were
submitted electronically are available on the Commission's website
(http://www.sec.gov).
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Clarify that Form S-8 is not available for consultants and
advisors who directly or indirectly promote or maintain a market for
the issuer's securities; and
Provide that certain registration statements and post-
effective amendments that automatically become effective upon filing
will not be presumed filed on the proper form if the Commission does
not object to the form before the effective date.
We are not adopting today the 1998 proposal to require disclosure
in Part II of Form S-8 of the names of, number of securities to be
received by, and specific services to be provided by consultants and
advisors (the ``Part II disclosure proposal''), nor are we taking any
action on the other matters on which we solicited comment. Many
commenters viewed these means of addressing consultant abuses as overly
broad and burdensome to legitimate compensatory securities offerings.
Instead, in a companion release we have issued a new proposal that
is targeted to prevent abuse of Form S-8 by the types of issuers who
have shown the greatest inclination to abuse the form while, to the
extent possible, keeping the form available to register legitimate
compensatory transactions.\14\ In the companion release, we also have
extended the comment period on the Part II disclosure proposal and
various requests for comment that were included in the Proposing
Release (together, the ``remaining proposals'') \15\ for the duration
of the comment period on the new proposal.
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\14\ Securities Act Release No. 7647 (Feb. 25, 1999).
\15\ The remaining proposals are described in greater detail in
Section II.C, below.
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We may adopt any combination of the remaining proposals, the new
proposal and new solicitations of comment set forth in the companion
release. We no longer are considering our 1998 request for comment
whether each consulting or advisory agreement should be filed as an
exhibit to the Form S-8, and do not intend to adopt an amendment based
on this request for comment.
B. Option Exercises by Family Member Transferees; Executive
Compensation Disclosure
Currently, Form S-8 is available for the exercise of employee
benefit plan stock options only if the option is exercised by the
employee/optionee. If an issuer wants to permit an employee's family
member transferee to exercise an employee benefit plan option, it must
register the sale of the underlying securities upon exercise on a
separate, less streamlined registration statement.\16\
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\16\ See Use of Form S-3 for Transferred Options (Aug. 7, 1997),
which allows options transferred by gift from employees to their
immediate family members to be treated like ``transferable
warrants'' for purposes of registration on Securities Act Form S-3.
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An employee may obtain significant estate tax savings under current
tax law if the employee, during his or her lifetime, transfers a vested
option to a family member, who then exercises it. From a tax
standpoint, exercise of the option by the employee, with the underlying
security later passing to a family member through the employee's
taxable estate, is more costly. Our 1996 amendments to the rules under
Exchange Act Section 16 \17\ facilitated employees' transfers of
options and other derivative securities to their immediate family
members (and trusts and partnerships for their benefit) for estate
planning purposes.
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\17\ 15 U.S.C. 78p. The Section 16 amendments are discussed in
greater detail in Section III.A.1, below.
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In the Proposing Release, we proposed amendments that would make
Form S-8 available for registration of employee benefit plan stock
options exercised by an employee's family member. Today, we adopt
amendments that will:
Make Form S-8 available for the exercise of employee
benefit plan options by an employee's family member who has acquired
the options from the employee through a gift or domestic relations
order. For this purpose, ``family member'' will include nieces and
nephews, a former spouse, any person sharing the employee's household
(other than a tenant or employee), and specified family-related trusts,
foundations and other entities, as well as the relatives listed in the
definition as originally proposed;
Make Form S-8 available to former employees for the
exercise of transferable, as well as non-transferable, options; and
Revise executive compensation disclosure requirements to
clarify how options and stock appreciation rights (``SARs'') that have
been transferred should be reported.
We also adopt amendments to Form S-3 to make that form equally
available for the offer and sale of securities underlying both warrants
and options, in each case whether or not the securities are
transferable.
II. Abuses of Form S-8
A. Consultants and Advisors Eligible for Form S-8 Transactions
1. General
To prevent further abuse of Form S-8 as a vehicle to make
unregistered securities distributions to the general public and to
register securities issued to stock promoters, we are amending the
instructions to Form S-8 \18\ and the Securities Act definition of
``employee benefit plan.'' \19\ Currently, the instructions to Form S-8
allow the form to be used only to register the offer and sale of an
issuer's securities to the issuer's employees (or employees of its
parents or subsidiaries) under an employee benefit plan. The Form S-8
definition of ``employee'' and the Securities Act definition of
``employee benefit plan'' both permit participation by a consultant or
advisor who provides bona fide services to the issuer other than in
connection with the offer or sale of securities in a capital-raising
transaction. In response to telephone
[[Page 11105]]
inquiries, the staff has interpreted these standards to preclude the
issuance of securities on Form S-8 to consultants or advisors either:
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\18\ General Instruction A.1(a).
\19\ Securities Act Rule 405.
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As compensation for any service that directly or
indirectly promotes or maintains a market for the issuer's securities;
or
As conduits for distributing securities to the general
public.
The staff also has stated that a consultant or advisor must be a
natural person, the consulting contract must be between the issuer and
this natural person, and the issuer must issue the securities directly
to this natural person.\20\
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\20\ See Image Entertainment (Mar. 6, 1992). However, where the
consultant or advisor performs services for the issuer through a
wholly-owned corporate alter ego, the issuer may contract with, and
register securities on Form S-8 as compensation to, that corporate
entity. See Aaron Spelling Productions, Inc. (July 1, 1987).
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Despite these express limitations, some issuers improperly have
taken advantage of the abbreviated disclosure requirements and
automatic effectiveness of Form S-8 \21\ (and the related absence of
staff review) to register securities that are issued in capital-raising
transactions. In these cases, a company issues shares registered on
Form S-8 to purported employees or other nominees, designated as
``consultants'' or ``advisors,'' who often do not provide any services
to the company that properly may be compensated with securities
registered on Form S-8. By prearrangement, these nominees resell the
shares on an unregistered basis, remitting the proceeds to the company
or its affiliates, or using them to pay the company's expenses. These
unregistered resales deprive the real public purchasers of the
protections of Securities Act registration. Some companies have
repeated this process through a series of Forms S-8, distributing a
significant percentage--if not most--of the company's outstanding
shares in this manner.\22\
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\21\ Under Rule Securities Act 462(a) [17 CFR 230.462(a)], a
Form S-8 registration statement becomes effective as soon as it is
filed with the Commission. Under Rule 464(a) [17 CFR 230.464 (a)], a
post-effective amendment filed on Form S-8 also becomes effective
upon filing.
\22\ See, e.g., In the Matter of Sky Scientific, Inc. (``Sky
Scientific''), Securities Act Release No. 7372, Exchange Act Release
No. 38049, Accounting and Auditing Enforcement Release No. 863 (Dec.
16, 1996), in which the company conducted an unregistered
distribution to the public by misusing 106 registration statements
and post-effective amendments on Form S-8, distributing
approximately 30 million shares of common stock.
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In distributing securities to the public on the issuer's behalf,
these consultants or employees act as ``underwriters.'' \23\ The Form
S-8 registration statement registers only offers and sales of
securities to the company's employees and consultants or advisors. But
the securities issued to these people do not come to rest. Instead,
these people act as conduits for unregistered offers and sales of
securities to the public for which no exemption is available.\24\ In
these circumstances, we have charged both issuers and consultants
acting as nominees with violating Sections 5(a) and 5(c) of the
Securities Act.\25\ We also have charged violations of the antifraud
provisions of the Securities Act and the Exchange Act \26\ for
misrepresentations in the Form S-8 that the securities are issued as
compensation for consulting services rather than to raise capital for
the issuer.\27\
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\23\ ``Underwriter'' is defined in Section 2(a)(11) of the
Securities Act [15 U.S.C. 77b(a)(11)] to include ``any person who
has purchased from an issuer with a view to, or offers or sells for
an issuer in connection with, the distribution of any security, or
participates or has a direct or indirect participation in any such
undertaking, or participates or has a participation in the direct or
indirect underwriting of any such undertaking. . . .''
\24\ In particular, the ``resale'' exemption of Securities Act
Section 4(1) [15 U.S.C. 77d(1)] for ``any person other than an
issuer, underwriter or dealer'' is not available because these
nominees act as underwriters, as explained above.
\25\ See, e.g., Sky Scientific, cited at n. 22 above; Spectrum,
cited at n. 11 above; and Hollywood Trenz, cited at n. 11 above. See
also SEC v. Charles O. Huttoe, et al. (``Huttoe''), Litigation
Release No. 15153 (Nov. 7, 1996).
\26\ Section 17(a) of the Securities Act [15 U.S.C. 77q(a)],
Section 10(b) of the Exchange Act [15 U.S.C. 78j(b)] and Rule 10b-5
thereunder [17 CFR 240.10b-5].
\27\ See, e.g., SEC v. Softpoint, Inc., cited at n. 12 above;
and Hollywood Trenz, cited at n. 11 above.
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Issuers also have misused Form S-8 to register securities issued to
consultants and advisors as compensation for their services as stock
promoters. Public investors who purchase these securities in effect
compensate promoters for their services to the issuer, which sometimes
include the dissemination of material fraudulent information. These
transactions are outside the scope of transactions permitted to be
registered on Form S-8.
To deter these abuses of Form S-8, we proposed to include in the
Form S-8 instruction regarding consultant and advisor eligibility
further restrictions on compensable consulting services. We proposed to
require a consultant or advisor to provide the registrant bona fide
services that do not directly or indirectly promote or maintain a
market for the registrant's securities. This would be in addition to
the existing limitation that consultant services may not be in
connection with the offer and sale of securities in a capital-raising
transaction. To preclude the use of consultant entities as
underwriters, we also proposed to codify the requirement that a
consultant or advisor must be a natural person who contracts directly
with the registrant. We proposed parallel amendments to the Securities
Act definition of ``employee benefit plan,'' so that the standards for
consultant participation would be uniform. We are adopting these
proposals, modified slightly as described below.\28\
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\28\ Today we also adopt a similar amendment to Securities Act
Rule 701 [17 CFR 230.701], the Securities Act exemption for offers
and sales of securities by non-reporting companies as employee
compensation.
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While commenters agreed that these proposed amendments could help
deter the abusive use of Form S-8, they asked us to provide
interpretive guidance to assist issuers in determining what consultant
services properly may be compensated with securities registered on Form
S-8. Commenters were particularly concerned that a broad range of
legitimate financial consultants whose services do not involve
underwriting, market making or stock promotion would be precluded from
using Form S-8. In this release we provide interpretive guidance to
issuers, and also rewrite the current requirements to put them in plain
English.
We agree with commenters that it should not matter if the
consulting contract is with an entity or a natural person, as long as
the securities registered are issued to the natural persons working for
the consulting entity who provide bona fide services to the issuer.
Where the securities are issued to these persons, contracting with a
consulting entity would not abuse Form S-8. We have revised the
amendments to eliminate the proposed requirement that issuers contract
only with natural persons, while retaining the requirement that the
securities must be issued to natural persons.\29\
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\29\ However, in the limited circumstance where a consultant or
advisor performs services for the issuer through a wholly-owned
corporate alter ego, we will continue to permit issuers to register
on Form S-8 securities issued as compensation to that corporate
entity. See Aaron Spelling Productions, cited at n. 20 above.
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As adopted, the amended Form S-8 instruction and the parallel
amendment to the Rule 405 definition of ``employee benefit plan''
permit consultants and advisors to be treated like employees only if:
The consultants and advisors are natural persons;
[[Page 11106]]
The consultants and advisors provide bona fide services to
the registrant; and
The services provided by the consultants and advisors are
not in connection with the offer or sale of securities in a capital-
raising transaction, and do not directly or indirectly promote or
maintain a market for the registrant's securities.
2. Interpretive Guidance
Following adoption of these amendments, we will continue to take
the view that Form S-8 is not available to register offers and sales of
securities to either traditional employees or consultants and advisors
where:
By prearrangement or otherwise, the issuer or a promoter
controls or directs the resale of the securities in the public market;
\30\ or
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\30\ This test focuses on the issuer's power to make a resale
happen, or to make it happen at a particular time. This test is not
directed at, and is not intended to foreclose, an issuer's ability
to prevent resales from happening for a specified period of time,
such as through traditional restrictive legends.
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The issuer or its affiliates directly or indirectly
receive a percentage of the proceeds from such resales.\31\
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\31\ This test will be satisfied where the issuer or its
affiliates receive an economic benefit from the resale proceeds,
such as when the proceeds are used to pay the issuer's operating
expenses or are paid to the issuer's control persons.
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In other circumstances, Form S-8 will remain available to register
securities issued as compensation for the services of traditional
employees, without regard to the specific character of the service.
However, as to consultants and advisors, the character of the service
provided will determine whether Form S-8 is available, as described
below. Brokers, dealers and persons who find investors will be excluded
from receiving securities registered on Form S-8 because their
services, as securities industry professionals, are inherently capital-
raising. Consultants who provide investor relations or shareholder
communications services also will be excluded, because of the
promotional nature of their services.
We also will interpret the amendments to prohibit the issuance of
securities registered on Form S-8 to persons who arrange or effect
mergers that take private companies public. For example, a merger into
a thinly capitalized ``shell'' company with a class of securities
registered under the Exchange Act, or a subsidiary of such a company,
will fall into this category. These mergers commonly are used to
develop a market for the merged entity's securities, often as part of a
scheme to ``pump and dump'' those securities. Persons who arrange ``put
together'' mergers, in which the consolidation of numerous businesses
is conditioned on the combined entity's going public, also will be
precluded from being compensated with securities registered on Form S-
8.
The prohibition relating to services that directly or indirectly
promote or maintain a market for securities is aimed at services that
may reasonably be expected to raise (or sustain) the market price of
the registrant's securities. For example, persons who hype the issuer's
securities in an Internet newsletter, or otherwise publish or
disseminate information that reasonably may be expected to influence
the price of the issuer's securities, must not be compensated with Form
S-8 registered securities, whether or not receipt of compensation from
the issuer is disclosed.\32\
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\32\ Section 17(b) of the Securities Act [15 U.S.C. 77q(b)]
makes it unlawful to publish any communication describing a security
(whether or not the publication offers the security) where the
publishing party receives payment from the issuer, an underwriter or
dealer, without fully disclosing that such payment has been (or will
be) received and the amount paid.
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Consultants who publish legitimate scientific or medical research
in publications generally circulated only within the scientific or
medical community typically will not run afoul of this prohibition.
However, consultants who circulate this kind of research to a broader
audience in a manner reasonably expected to raise or sustain the market
price of the registrant's securities may not be compensated with Form
S-8 registered securities. Similarly, consultants who provide product
or corporate image advertising usually will be able to receive Form S-8
registered securities. However, whether activities that nominally
promote the issuer's products or image have the purpose or effect of
promoting or maintaining a market for the issuer's securities would
depend on the facts and circumstances. The more the services reflect
traditional advertising practices, the more likely they are to be
viewed as product-oriented.
The revised instruction will not prevent all financial consultants
from being compensated with securities registered on Form S-8. Instead,
eligibility will depend on the specific character of the services
provided. For example, business development consultants retained to
identify another company as a potential partner for technology
development may be compensated with securities registered on the form.
A consultant who advises the issuer on business strategy or
compensation policies also will be eligible. A consultant who arranges
a bank credit line for the issuer similarly will be eligible. In
contrast, a consultant who arranges a financing that involves any
securities issuance--whether equity or debt--will not be eligible.
Whether a consultant retained to perform management functions
traditionally performed by an employee, such as a consultant chief
financial officer, is eligible will not be determined based on the
person's title. Instead, eligibility will depend on the primary
character of the services provided. Where the services are primarily
capital-raising or promotional, Form S-8 will not be available to
register securities issued as compensation.
The independence requirements of generally accepted auditing
standards (``GAAS'') effectively prohibit accountants who audit the
issuer's financial statements from receiving the issuer's securities as
compensation for their services.\33\
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\33\ Rule 2-01 of Regulation S-X [17 CFR 210.2-01], and AICPA
Interpretation 101-1 of Statement of Auditing Standards No. 1.
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Attorneys \34\ who represent an issuer in matters that are not
related to its securities, such as litigation defense, securing U.S.
Food and Drug Administration approval of a drug, or obtaining a patent,
will be eligible. Attorneys who prepare the issuer's Exchange Act
reports and proxy statement will be eligible whether or not these
documents are incorporated into a Securities Act registration
statement. However, any consultant or advisor, including an attorney,
who prepares or circulates an Exchange Act report or proxy statement
that is part of a promotional scheme that violates federal securities
laws will not be eligible.
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\34\ The discussion of attorneys in this section refers to
attorneys in law firms engaged by the issuer, not to ``in-house
counsel,'' who would be employees of the issuer.
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Attorneys serving as counsel to the issuer, its underwriters or any
participating broker-dealer in a securities offering will not be
eligible. Attorneys and other consultants who assist an issuer in
identifying acquisition targets, or in structuring mergers or other
acquisitions in which securities are issued as consideration, will be
eligible, unless the acquisition takes a private company public, as
described above.
3. Harmonization With Rule 701
Consultants and advisors also may be issued securities under Rule
701, the Securities Act exemption for offers and
[[Page 11107]]
sales of securities by non-reporting companies as employee
compensation. In the Proposing Release, we stated that we were
considering interpreting ``consultants and advisors'' for Rule 701
purposes in the narrower manner we traditionally have interpreted these
terms for Form S-8 eligibility, and requested comment about
interpreting the terms consistently for both purposes. As stated in
today's release adopting amendments to Rule 701,\35\ we are concerned
that Rule 701 also may become subject to abuse once Form S-8 is
amended.\36\ Accordingly, the amended Form S-8 instructions and the
interpretations described above will apply equally for purposes of both
regulations.\37\ However, issuers may continue to use securities
registered on Form S-8, or issued under Rule 701, to compensate persons
who have a de facto employment relationship with them. Such a
relationship may exist where a person not employed by a company
provides the company with bona fide services \38\ that traditionally
are performed by an employee, and the compensation paid by the company
for those services is the primary source of the person's earned
income.\39\
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\35\ Securities Act Release No. 33-7645 (Feb. 25, 1999) (``Rule
701 Adopting Release'').
\36\ Securities issued under Rule 701 are ``restricted
securities,'' as defined in Securities Act Rule 144(a)(3) [17 CFR
230.144(a)(3)]. However, 90 days after a Rule 701 issuer becomes
subject to the reporting requirements of the Exchange Act, Rule
701(c)(3) lifts the Rule 144 current public information, holding
period, volume and notice restrictions for non-affiliates--and the
holding period restriction for affiliates--who wish to resell the
securities.
\37\See Section II.D of the Rule 701 Adopting Release.
\38\ These services must not be in connection with the offer or
sale of securities in a capital-raising transaction, and must not
directly or indirectly promote or maintain a market for the issuer's
securities.
\39\ See Foundation Health Corporation (Jul. 12, 1993), which
permitted registration on Form S-8 of stock underlying benefit plan
options granted to physicians employed by an affiliated professional
corporation to provide medical services at the registrant's HMO,
where the company had the right to require the physicians to provide
medical services exclusively at the HMO.
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4. Insurance Agents
We also asked in the Proposing Release if Form S-8 eligibility for
insurance agents should continue to be limited to exclusive agents, or
if non-exclusive insurance agents also should be permitted to use the
form. We are persuaded that any insurance agent who derives more than
50% of his or her annual income from the issuer should be permitted to
receive securities issued under Form S-8, whether or not the agency
relationship is exclusive.\40\ Agents who depend on the issuer for this
percentage of their income are likely to possess sufficient information
about the issuer whose insurance products they sell to justify reliance
on the abbreviated disclosure of Form S-8. We have amended Form S-8
accordingly.\41\
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\40\ Whether an insurance agent satisfies this income test can
be determined by reference to the agent's most recent income tax
return.
\41\ See General Instruction A.1(a)(2) to Form S-8, as revised.
We also have amended Rule 701 in the same manner.
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B. Requirement as to Proper Securities Act Form
Securities Act Rule 401(g) provides that any registration statement
or amendment is deemed filed on the proper form unless the Commission
objects to the use of the form before the effective date. The rule
requires the Commission and the registrant to resolve whether a filing
is on the appropriate form before effectiveness. Use of the proper form
is important because the disclosure requirements of different forms are
tailored for the particular transactions that we designed the forms to
register. In some cases, registration on a form other than the form
prescribed for the specific transaction may deprive public investors of
the disclosure benefits of Securities Act registration.
Because we have no opportunity to object in a timely manner to the
improper use of Form S-8 and other forms that become effective
immediately upon filing,\42\ we proposed to amend Rule 401(g) so that
all registration statements and post-effective amendments that become
effective automatically upon filing would be excluded from its
scope.\43\ Although significant abuses in this area appear to have been
limited to Form S-8, we did not limit the proposed amendment to Form S-
8, in order to deter abuse involving other automatically effective
forms.
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\42\ Securities Act Rule 462 [17 CFR 230.462] makes the
following registration statements effective immediately upon filing:
(a) Rule 462(a) covers Forms S-3 and F-3 for dividend and interest
reinvestment plans, and Form S-8; (b) Rule 462(b) covers
registration statements filed in specified limited circumstances to
increase by no more than 20% the number of shares of the same class
previously registered for the same offering, and post-effective
amendments to those registration statements; (c) Rule 462(c) covers
post-effective amendments filed in specified limited circumstances
to provide only price-related information omitted from the
registration statement in reliance on Rule 430A; and (d) Rule 462(d)
covers post-effective amendments filed solely to add exhibits. Where
the issuer continues to meet the requirements for filing on the
appropriate form, Rule 464 [17 CFR 230.464] makes effective upon
filing post-effective amendments on Form S-8; Forms S-3, F-2 and F-3
relating to dividend or interest reinvestment plans; and Form S-4
[17 CFR 239.25] (if filed in reliance on General Instruction G to
that form).
\43\ Securities Act Rules 485(b) [17 CFR 230.485(b)] and 486(b)
[17 CFR 230.486(b)] make investment company registration statements
and post effective amendments effective immediately upon filing.
These registration statements and post-effective amendments are not
affected by the amendment to Rule 401(g).
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We are adopting the amendment to Rule 401(g) as proposed. As a
result, issuers will bear the risk of assuring that automatically
effective registration statements are filed on the proper form. Where a
form that is available solely for a specified purpose is used for a
different type of transaction, the registration may not be valid. Where
a registration statement is filed on a form that is available only for
the offer and sale of securities to a class of persons other than the
persons to whom the securities are actually offered and/or sold, we
will, in appropriate cases, continue to assert that the securities are
offered and sold in violation of Section 5.\44\
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\44\ See, e.g., Sky Scientific, cited at n. 22 above; Spectrum,
cited at n. 11 above; Hollywood Trenz, cited at n. 11 above; and
Huttoe, cited at n. 25 above.
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C. Remaining Proposals and Requests for Comment
To prevent the use of consultants and advisors as conduits for
unregistered public offerings, we proposed to amend Part II of Form S-8
to require an issuer to name any consultants or advisors to whom
securities will be sold under the registration statement, specify the
number of securities to be issued to each of these persons, and
describe specifically the services that each of these persons will
provide to the issuer. As proposed, this information would need to be
filed by post-effective amendment before the securities are sold to the
consultants or advisors if the information was not available when the
Form S-8 originally was filed. This proposal was designed to discourage
the use of Form S-8 as a vehicle for making unregistered distributions
and to permit objective verification that the services are bona fide,
non-capital-raising and non-promotional services that legitimately may
be compensated with securities registered on Form S-8.
In addition to (or as alternatives to) this proposed Part II
disclosure, we requested comment:
Whether issuers should be required to disclose Form S-8
issuances of securities to consultants in their
[[Page 11108]]
Exchange Act reports--either in Forms 10-K and 10-Q, or on Form 8-K;
\45\ and
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\45\ 17 CFR 249.310, 17 CFR 249.308a, and 17 CFR 249.308,
respectively.
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Whether issuers should be required to file consulting and
advisory contracts as exhibits to Form S-8.
We also requested comment on whether the proposed Part II
disclosure would effectively combat the problem, and whether this
disclosure would be unduly burdensome.
Commenters divided in their assessment of the potential
effectiveness of the proposed Part II (and/or Exchange Act) disclosure
proposal. While some agreed that it would have a chilling effect on the
use of consultants as underwriters, others expressed skepticism that
violators who are not deterred by the existing requirements would be
deterred by the proposed disclosure requirements.
Most commenters suggested that the proposed disclosure could cause
potential competitive harm to legitimate registrants that would
outweigh the proposal's prospects for preventing abuse of Form S-8. In
particular, the proposals to disclose the identity of consultants and
the specific services they provide could require issuers to reveal to
competitors critical information concerning their business strategy.
Commenters also stated that the proposal to disclose the number of
securities issued could cause issuers competitive harm by permitting
competitors who seek the named consultants' services to design more
attractive incentive packages.\46\
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\46\ Commenters also objected that disclosure of the number of
securities issued would violate legitimate consultants' privacy.
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Further, commenters stated that the proposal would impose excessive
burdens and costs, particularly for issuers who conduct a significant
portion of their business through legitimate consultants and use
securities to pay for their services, because these issuers would
continually be filing post-effective amendments to make the required
disclosure. Commenters opposed a requirement to file consulting
contracts as exhibits because of confidentiality concerns, noting that
the Commission can obtain these contracts as supplemental information
upon request under Securities Act Rule 418.\47\
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\47\ 17 CFR 230.418.
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We do not adopt today, but instead defer for further consideration,
the Part II disclosure proposal and the related comment request
regarding Exchange Act disclosure of Form S-8 issuances to consultants
and advisors. However, we have decided not to adopt a requirement to
file all consulting and advisory contracts as exhibits to Form S-8. In
announcing this decision, we remind issuers that, in the absence of an
exhibit requirement, issuers remain obligated to furnish these
agreements as supplemental information to the Commission staff promptly
upon request under Securities Act Rule 418.\48\
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\48\ See Proposing Release at n. 37. Companies also must
consider whether they are required to file these contracts as
``material contract'' exhibits to other filings, as required by Item
601(b)(10) of Regulations S-B and S-K. [17 CFR 228.601(b)(10) and
229.601(b)(10)].
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Other potential amendments that we did not propose, but requested
comment on, were:
Whether the aggregate percentage of securities that may be
sold to consultants and advisors on Form S-8 during the registrant's
fiscal year should be limited to a particular percentage of the number
of securities of the same class outstanding;
Whether the existing requirement that the registrant
certify ``that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-8'' should be expanded also to
require certification that any consultant or advisor who receives
securities registered on the form is not hired for capital-raising or
promotional activities; and
Whether the Form S-8 cover page should include a box that
the registrant would be required to check if any of the securities
registered will be offered and sold to consultants and advisors.
Commenters were divided in their assessment of these other
potential amendments. Commenters representing high technology companies
expressed particular concern that any ``cap'' on the amount of
securities that may be issued to consultants and advisors on Form S-8
would arbitrarily interfere with companies' ability to conduct their
business in the most economically efficient manner. While some
commenters endorsed an expanded certification as a means of reminding
issuers of their responsibility for compliance, others questioned
whether it would be more effective than the existing certification
requirement. Although most commenters did not object to checking a box,
some questioned its usefulness. They pointed out that many plans are
drafted broadly to permit issuances to consultants, but securities may
not actually be issued to consultants immediately, if at all.
In the companion release issued today, we have extended the comment
period on these items. We will continue to consider them while we
request comment on the new proposal and new solicitations of comment
set forth in the companion release. We may adopt any combination of the
Part II (and/or Exchange Act) disclosure proposal, the other potential
amendments described in the Proposing Release (other than a requirement
to file consulting and advisory contracts as an exhibit to Form S-8),
the new proposal and the new comment solicitations.
III. Transferable Options and Proxy Reporting
A. Form S-8 Availability for Family Member Transferees
1. General
We are adopting amendments to Form S-8 to make it available for the
exercise of employee benefit plan stock options by an employee's family
member who acquires the options from the employee through a gift or a
domestic relations order. The amendments reflect the view that
streamlined registration on Form S-8 should be available for these
transactions, as well as transactions with employees, because of their
compensatory character and access to information about the issuer
flowing from the employment relationship. The eligibility standard that
an issuer may use Form S-8 only if it is required to file Exchange Act
reports provides a further safeguard.
These amendments also are consistent with the 1996 amendments to
the rules under Section 16 of the Exchange Act.\49\ In particular, the
Section 16 amendments eliminated the requirement of former Rule 16b-3
that a derivative security issued under an employee benefit plan be
non-transferable.\50\ Another amendment simplified transfers of
securities to a former spouse in divorce proceedings.\51\ These changes
have made the issuance of transferable options more attractive and more
common.
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\49\ These amendments were adopted in Exchange Act Release No.
37260 (May 31, 1996) [61 FR 30376].
\50\ Former Exchange Act Rule 16b-3(a)(2) provided that the
exemption was not available for derivative securities that were
transferable, except for transfers (i) by will or the laws of
descent and distribution, or (ii) pursuant to a qualified domestic
relations order as defined by the Internal Revenue Code.
\51\ Exchange Act Rule 16a-12 [17 CFR 240.16a-12] makes the
acquisition or disposition of equity securities through a domestic
relations order exempt from both the reporting requirements of
Section 16(a) and the short-swing profit recovery requirements of
Section 16(b).
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For purposes of defining transferees eligible to exercise options
on Form S-8, we proposed to define ``family member'' the same way
as Exchange Act Rule 16a-1(e) \52\ defines ``immediate
[[Page 11109]]
family.'' \53\ This definition includes any child, stepchild,
grandchild, parent, stepparent, grandparent, spouse, sibling, mother-
in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or
sister-in-law, including adoptive relationships. In addition, the Form
S-8 definition of ``family member'' as proposed included trusts for
the exclusive benefit of these persons, and any other entity owned
solely by these persons.\54\
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\52\ 17 CFR 240.16a-1(e).
\53\ Rule 16a-1(a)(2)(ii)(A) [17 CFR 240.16a-1(a)(2)(ii)(A)]
provides that a Section 16 insider has an indirect pecuniary
interest in securities held by members of the insider's immediate
family (as defined in Rule 16a-1(e)) sharing the same household.
\54\ Rule 16a-1(e) does not include these entities. Instead,
whether an insider has a pecuniary interest in securities held by a
trust or other entity is determined by reference to Rules 16a-8(b)
[17 CFR 240.16a-8(b)] and 16a-1(a)(2), respectively.
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As described in greater detail below, we are adopting our proposal
with some modifications to expand Form S-8 availability to an
employee's family members for the exercise of transferable employee
benefit plan options.\55\ In doing so, however, we want to emphasize
that this rule change does not require any issuer to permit options to
be transferred in this manner. Any decision whether to permit option
transfers remains entirely at the discretion of each individual
issuer.\56\ We also have restated the amended instruction in plain
English, so that it is easier to understand.
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\55\ Because option exercises by an employee's family member
transferees will be permitted on Form S-8, these exercises also will
be allowed on a ``cashless exercise'' basis pursuant to Federal
Reserve System Regulation T. See 12 CFR 220.3(e)(4).
\56\ In making this decision, we believe that issuers will
consider, among other things, Rev. Rul. 98-21, which states that the
transfer of an unvested option is not a completed gift for gift tax
purposes until vesting has occurred. 1998-18 I.R.B. 7 (May 4, 1998).
Typically, this means that the gift will not be complete until the
employee has performed additional service for the issuer. Issuers
also may consider Rev. Proc. 98-34, which provides a safe harbor for
valuing options. 1998-18 I.R.B. 15 (May 4, 1998).
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2. Permissible Transferees
We asked commenters whether any other relatives, such as nieces and
nephews, should be added to the Form S-8 definition of ``family
member,'' particularly to facilitate estate planning transactions. If
so, we asked whether the same relatives should be added to the Rule
16a-1(e) ``immediate family'' definition. Amending Rule 16a-1(e) this
way would result in a Section 16 insider being deemed to have an
indirect pecuniary interest in securities held by these relatives if
the relatives share the insider's household.\57\
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\57\ Rule 16a-1(a)(2)(ii)(A).
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Commenters responded that nieces and nephews are frequent and
appropriate beneficiaries of testamentary bequests and other gifts for
whom Form S-8 should be available. In contrast, commenters divided as
to whether nieces and nephews should be included within ``immediate
family'' for Section 16 purposes.
We are persuaded that the family relationship to an employee and
the compensatory character of the transaction makes the abbreviated
disclosure format of Form S-8 suitable for option exercises by nieces
and nephews, as well as the other persons included in the proposed
definition of ``family member.'' Accordingly, we have included nieces
and nephews in the definition of ``family member'' as adopted. However,
we are not persuaded that the likelihood of abusive transactions in
which insiders realize indirect gains is sufficiently high to include
nieces and nephews within the Rule 16a-1(e) definition of ``immediate
family.'' As a result, we have not amended Rule 16a-1(e).
Commenters also expressed concern that former spouses should be
included within the ``family member'' definition, particularly because
a transfer under a domestic relations order typically is to a former
spouse, rather than to a current spouse. We have revised the definition
of ``family member'' as adopted to include former spouses. As a result,
Form S-8 will be available for exercises of options transferred to a
former spouse pursuant to a domestic relations order, or by gift.
Some commenters expressed other concerns that the proposed
definition of ``family member'' was too narrow because it would exclude
unrelated persons who are the object of the employee's generosity.
Specifically, some commenters argued that no family limitation is
necessary in the absence of consideration for the option's transfer.
Other commenters suggested that each issuer should be permitted to
craft its own definition of ``family members'' for whom Form S-8 would
be available to exercise options transferred by gift.
We are not persuaded that either of these formulations is
acceptable, given the history of Form S-8 abuse and the need for
objective definitions of permissible offerees to deter future abuse.
However, we believe that there is a legitimate need for increased
flexibility to facilitate donative transfers of options to persons who
are not ``family members'' as proposed. Option exercises by these
persons are consistent with the compensatory, non-capital raising
purposes of Form S-8. To this end, we have included ``any person
sharing the employee's household (other than a tenant or employee)'' in
the ``family member'' definition as adopted. Of course, it is up to the
issuer to determine whether it wishes to permit transfers to these
persons.
We believe that sharing the employee's household generally will
provide the transferee with access to information about the issuer that
flows from the employee/optionee's employment relationship. Moreover,
the shared household suggests a sufficiently close relationship between
the transferee and optionee to presume that the transfer is a bona fide
gift,\58\ and not effected as a ruse to evade the registration
requirements of the Securities Act.
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\58\ In addition, when the transferee exercises the option, the
employee/optionee will recognize taxable income equal to the excess
of the fair market value of the underlying stock over the exercise
price. Treas. Reg. 1.83-7(a). At that time, the employer will be
entitled to deduct the same amount. Treas. Reg. 1.83-6(a).
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As proposed, Form S-8 would be available to the ``family member''
of any person who satisfies the Form S-8 definition of ``employee,''
including consultants and advisors. We are persuaded that consultants
and advisors should be treated the same as traditional employees for
this purpose, as they are for other purposes under Form S-8. In
particular, the amendments directed at deterring consultant abuses that
we adopt and propose today should relieve concerns that equal treatment
for family members of consultants or advisors is not appropriate.
We requested comment whether trusts that are primarily--rather than
solely--for the benefit of family members, and entities that are
primarily--rather than solely--owned by family members should be
included within the Form S-8 ``family member'' definition. Commenters
responded that the wide range of possible estate planning structures
providing for remote or contingent interests requires a more flexible
standard than exclusive benefit or sole ownership.
We are persuaded that entities in which family members (or the
employee) own more than 50 percent of the voting interests and trusts
in which family members have a more than 50 percent beneficial interest
should be included within the ``family member'' definition. Where more
than 50 percent of an entity's voting interests are owned by family
members or the employee, the employee's family retains control over the
entity's assets. Where family members have a more than 50 percent
beneficial interest in a trust, the donative purpose of the trust is
[[Page 11110]]
primarily for the benefit of the employee's family. The theories of
compensatory purpose and access to information make Form S-8 equally
appropriate for option exercises by these entities and trusts.
Regarding the entity standard, we are not specifying any particular
type of entity, such as a general partnership, that must be used. Any
type of entity will qualify as long as it meets the more than 50
percent of the voting interests ownership test. This approach should
foster flexibility in estate planning. For example, this standard will
permit Form S-8 to be used by family-controlled partnerships,
corporations and limited liability corporations. Of course, sales by
these entities of the securities received upon exercising the options
must qualify for an exemption or be registered under the Securities
Act.\59\
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\59\ As discussed in Section II.A.1 above, the resale exemption
of Securities Act Section 4(1) is not available for any person who
acts as an underwriter by taking securities from the issuer with a
view to their distribution. You also will need to consider whether a
``family member'' is an ``affiliate,'' as defined in Securities Act
Rule 144(a)(1) [17 CFR 230.144(a)(1)].
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We have provided a separate test for foundations, which usually are
organized either as corporations or trusts, because anomalous
attributes of foundations make the general tests for trusts and other
entities not suitable. Because the corporate form generally used by
foundations involves a ``membership'' structure rather than a stock
structure, the entity test will not be available. Foundations organized
as trusts typically will not satisfy the trust test because the
beneficial interest will be primarily charitable. Nevertheless, family
control of the assets held by foundations, whether formed as trusts or
corporations, justifies making Form S-8 equally available for option
exercises by these entities. Accordingly, we have included in the
definition of ``family member'' a foundation in which family members
(or the employee) control the management of assets.\60\
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\60\ We presume that persons who control the foundation's assets
would decide whether and when an option is exercised.
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In contrast, theories relying on primary family ownership, control
or benefit do not support expanding Form S-8 availability for option
exercises by other entities, such as Section 501(c)(3) \61\ charities.
Some commenters requested that Form S-8 be made available for exercises
of employee benefit plan options transferred by gift to charities.
These commenters believed that facilitating transfers to charities
would be consistent with the purposes of Form S-8 because option
exercises by charities would not raise concerns about use of the form
for capital-raising.
---------------------------------------------------------------------------
\61\ 26 U.S.C. 501(c)(3).
---------------------------------------------------------------------------
We are not persuaded by this argument. Although an option exercise
by a Section 501(c)(3) charity, for example, may not abuse Form S-8 for
capital-raising purposes, the charity is not likely to have a pre-
existing relationship with the issuer that would justify use of the
abbreviated Form S-8 disclosure. While we seek to facilitate employees'
estate planning through the amendments we adopt today, we must keep in
mind that investor protection is our primary objective. To permit
entities that are not controlled by, or for the primary benefit of, an
employee's family members to exercise options on Form S-8 would suggest
that the abbreviated Form S-8 disclosure is adequate for the offer and
sale of securities to non-employees generally. As discussed above,\62\
we remain firmly persuaded of the contrary view.
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\62\ See Section II.A.1, above.
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3. Permissible Transfers
As proposed, Form S-8 would be available only if the option is
transferred by gift or under a domestic relations order. We believe it
is not consistent with the purpose of Form S-8 to allow the form to be
used for option exercises when the option is sold by the employee to
another party. Accordingly, we have provided that Form S-8 will not be
available for the exercise of employee benefit options transferred for
value.
We have modified the amendment as adopted to clarify that:
Form S-8 is not available for the exercise of options
transferred for value;
A transfer under a domestic relations order in settlement
of marital property rights is not a prohibited transfer for value; and
A transfer to an entity more than fifty percent owned by
the optionee's family members in exchange for an interest (such as a
limited partnership interest) in that entity is not a prohibited
transfer for value.
As proposed, a family member transferee would not be required to
receive the option directly from the employee for Form S-8 to be
available. Instead, a subsequent transferee who is a ``family member''
would be able to exercise the option on Form S-8, if he or she received
the option by gift or through a domestic relations order from another
``family member'' of the employee.
Commenters responded favorably to this proposal, noting that it
would facilitate estate planning by the direct transferee family
member, as well as the employee/optionee. Commenters also stated that
issuers should be able to decide for themselves whether the
recordkeeping requirements that would flow from permitting subsequent
transfers are too burdensome.
We believe that Form S-8 should be equally available to indirect
family member transferees, as long as each transfer of the option is
from another family member of the employee/optionee, and either by gift
or pursuant to a domestic relations order. Whether the transfer is a
direct one from the employee/optionee, or indirect through another
``family member,'' the family member transferee will have a sufficient
preexisting relationship with the issuer to justify reliance on the
abbreviated Form S-8 disclosure. Of course, by making Form S-8
available to these indirect transferees, we are not in any way
requiring issuers to permit indirect option transfers. This decision,
like the decision to permit any option transfers, remains entirely at
the discretion of each issuer.
We requested comment whether Form S-8 should be available for
``reload'' options \63\ issued directly to family members, following
their exercise of transferred employee benefit plan options. Commenters
stated that although option plans typically permit the award of options
only to employees, consultants and advisors, situations may arise where
an issuer decides to authorize the issuance of reload options directly
to transferees. Commenters supported Form S-8 availability to family
member transferees for reload options issued directly to the
transferees.
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\63\ ``Reload'' options generally are replacement options
granted upon the exercise of an earlier-granted option.
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We believe that the preexisting relationship with the issuer, by
virtue of the transferee's membership in the employee/optionee's
family, that justifies the adequacy of abbreviated Form S-8 disclosure
for the transferee's exercise of the original option applies equally to
a reload option. As a result, the amendment will permit the use of Form
S-8 for the exercise by family member transferees of reload options
that the issuer issues directly to those transferees.
4. Permitted Transactions by Transferees
Under the amendment, family member transferees will be treated like
employees for all purposes under Form S-8. We have expanded General
Instruction A.1(a)(5) to specify resale of the securities underlying
transferred
[[Page 11111]]
options as a transaction for which Form S-8 will be available to an
employee's ``family member.'' This revision clarifies our intent that
under General Instruction C to Form S-8, the Form S-3 resale
prospectus \64\ will be available for:
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\64\ As part of the Securities Act Reform Release (Securities
Act Release No. 7606A (Nov. 13, 1998) [63 FR 67174]), we have
proposed a new approach to the registration of resale transactions
that would eliminate Form S-3 resale prospectuses entirely,
including the Form S-3 resale prospectus provided by General
Instruction C to Form S-8. However, the Securities Act Reform
Release requests comment whether there are compelling reasons to
retain a different resale treatment for employee benefit plan
securities that would not apply in other resale contexts. That
release does not propose to rescind Form S-8. See Securities Act
Reform Release at Section V.A.2.h.
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The resale by a ``family member'' who is an affiliate of
the issuer of securities that were registered on the Form S-8; and
The resale by a ``family member'' of restricted securities
acquired upon the exercise of transferred employee benefit plan options
before the Form S-8 was filed.
Similarly, if the employee/optionee leaves the company before or
after the option transfer, Form S-8 will remain available to the
``family member'' for option exercises to the same extent as the form
is available to a former employee, including a former consultant.
Consistent with current staff interpretive positions, registration
of shares underlying employee benefit plan options will continue to be
permitted at any time before the option is exercised, without regard to
when the option becomes exercisable.\65\ This position is a departure
from the general requirement that a registration statement must be
filed before an option becomes exercisable--the time at which an offer
of the underlying security is deemed made--if the exercise will be
registered. We have historically based this exception from the general
requirement on a policy determination that transactions registered on
Form S-8 should be allowed more flexibility because of the unique
character of the employee/employer relationship and the compensatory
purpose involved.
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\65\ See Division of Corporation Finance Manual of Publicly
Available Telephone Interpretations (July 1997), at Section G
(Securities Act Forms), Interpretation No. 61.
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5. Prospectus Delivery and Disclosure of Tax Effects
The Proposing Release did not address prospectus delivery standards
that should apply to option exercises by employees' family members, or
whether the Form S-8 prospectus materials should disclose material
estate and gift tax consequences of option transfers. However,
commenters requested that we provide guidance on these issues. We agree
that the applicable requirements should be made clear.
As to prospectus \66\ delivery generally, we want to clarify that:
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\66\ Instead of disseminating a customary prospectus included in
a registration statement, Form S-8 issuers fulfill prospectus
delivery obligations by providing plan participants: (1) document(s)
containing the plan information required by the form (updated as
necessary); and (2) a written statement listing the documents
incorporated by reference and advising participants of their
availability upon request. Under Securities Act Rule 428(a)(1) [17
CFR 230.428(a)(1)], the delivered documents and the documents
incorporated by reference constitute a prospectus meeting the
requirements of Securities Act Section 10(a) [15 U.S.C. 77j(a)].
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An employee transferor will not be required to provide a
prospectus to the family member transferee in connection with a
transfer by gift or pursuant to a domestic relations order; but
Existing prospectus delivery requirements that apply to
employee optionees will apply equally to family member transferees.
Accordingly, the issuer will be required to deliver a prospectus,
updated to reflect material changes, to the family member transferee at
or before the transferee's exercise of the option.
Commenters also requested guidance as to on-going requirements to
deliver updated prospectus materials to transferees. The same standards
would apply as for an employee/optionee:
The information delivered as a Form S-8 prospectus must be
updated in writing in a timely manner to reflect any material changes
during any period in which offers or sales are being made.\67\
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\67\ Rule 428(b)(1)(i). Company information is updated through
incorporation by reference to the company's Exchange Act reports and
other documents, which the company must make available without
charge. See Part I, Item 2 of Form S-8.
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For plan participants, including option transferees, who
already received a prospectus from the issuer, the issuer needs to
furnish only the updating material.
However, the issuer must deliver the basic prospectus as
well as all updates to new plan participants, including option
transferees. For option transferees, the issuer will provide the basic
prospectus at the time of the update rather than the time the employee
transfers the option.
Regarding shareholder communications, an issuer must furnish to all
employees participating in a stock option plan (and their transferees)
who do not otherwise receive this information all shareholder
communications and other reports furnished to shareholders on a
continuing basis.\68\
---------------------------------------------------------------------------
\68\ Rule 428(b)(5).
---------------------------------------------------------------------------
As to the tax consequences of an option transfer, the Form S-8
prospectus materials must describe ``the tax effects that may accrue to
employees as a result of plan participation.'' \69\ If the Form S-8
registers options issued under an employee benefit plan \70\ that
permits the options to be transferred, this discussion should address
the material estate and gift tax consequences to an employee/optionee
of an option transfer.
---------------------------------------------------------------------------
\69\ Part I, Item 1(f) of Form S-8.
\70\ As defined in Securities Act Rule 405, ``employee benefit
plan'' includes written compensation contracts in addition to
traditional plans.
---------------------------------------------------------------------------
B. Technical Change to Form S-8 to Allow Registration of Shares
Underlying Transferable Options
To permit family member transferees to exercise employee benefit
plan options, Form S-8 must be available for the registration of shares
to be issued upon exercise of transferable options. Current General
Instruction A.1(a) to Form S-8 makes the form available to former
employees, and guardians and executors of both current and former
employees (collectively, ``former employees''),\71\ for the exercise of
non-transferable employee benefit plan stock options and the subsequent
sale of the underlying securities, if these exercises and sales are not
prohibited under the plan.\72\
---------------------------------------------------------------------------
\71\ Instruction A.1(a) also makes Form S-8 available to former
employees for the acquisition of registrant securities through
intra-plan transfers among plan funds, to the extent permitted by
the specific plan.
\72\ By its terms, this non-transferability restriction applies
only to the exercise of options by former employees. However,
issuers often apply it to all Form S-8 optionees, particularly
because of the practical difficulties of replacing options when
current employees become former employees.
---------------------------------------------------------------------------
We proposed to eliminate this non-transferability restriction in
its entirety, but requested comment whether the restriction should be
lifted only for options that may be transferred to ``family members''
by gift or through a domestic relations order.
In the interest of providing issuers flexibility and simplifying
option plan administration, we are adopting this amendment as proposed.
As a result, employee benefit plan options that are transferable to
anyone may be registered on Form S-8, but may be exercised on Form S-8
only by employees and their
[[Page 11112]]
family members, as defined in the form.\73\
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\73\ Issuers no longer will need to rely on the staff's
interpretive position in Merrill Lynch & Co., Inc. (May 16, 1996),
which permitted former employees to exercise on Form S-8 options
transferable only to children, step-children, grandchildren or
trusts established for their exclusive benefit, if such options had
not been transferred by the original grantees.
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C. Registration on Form S-3 of Shares Underlying Transferable Warrants
or Options
General Instruction I.B.4 to Form S-3 allows issuers to register on
Form S-3 the offer and sale of securities to be received upon the
exercise of outstanding transferable warrants issued by the same
issuer.\74\ As a condition to Form S-3 availability, the Instruction
requires that the issuer have sent, within the twelve calendar months
before the Form S-3 is filed, specified annual report information to
all record holders of the transferable warrants.\75\
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\74\ Instruction I.B.4 also makes Form S-3 available to register
securities offered upon exercise of outstanding rights granted by
the same issuer, under dividend or interest reinvestment plans, or
upon the conversion of outstanding convertible securities. In each
case, these securities may be registered on Form S-3 whether or not
the issuer satisfies the $75 million public float test applicable to
primary offerings under Instruction I.B.1 to Form S-3.
\75\ The Instruction refers to the information required by
Exchange Act Rule 14a-3(b) and Regulation S-K Items 401 (Directors,
Executive Officers, Promoters and Control Persons), 402 (Executive
Compensation) and 403 (Security Ownership of Certain Beneficial
Owners and Management).
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By interpretation, the staff of the Division of Corporation Finance
expressed the view that employee benefit plan options transferred by
gift from employees to their immediate family members would be
considered ``transferable warrants'' for purposes of Instruction
I.B.4.\76\ Upon effectiveness of the amendments adopted today to permit
employees' family members to exercise employee benefit plan options on
Form S-8, there will be no further need to rely on this
interpretation.\77\
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\76\ Use of Form S-3 for Transferred Options (Aug. 7, 1997).
This interpretation applied the definition of ``immediate family''
set forth in Exchange Act Rule 16a-1(e).
\77\ However, registrants may continue to rely on a related
letter, Ropes & Gray (Oct. 30, 1997), which distinguishes procedures
for fee transfers in other circumstances. This letter provides
generally that a post-effective amendment to the original
registration statement (other than a Form S-8) is not necessary to
deregister the unsold shares for which the transferred fee
originally was paid.
---------------------------------------------------------------------------
However, upon considering this interpretation, we proposed to treat
options (including options not issued under employee benefit plans) the
same as warrants for purposes of Form S-3 availability, in each case
without regard to transferability. Commenters were asked to address
whether transferability, or differences between an issuer's
relationships with option holders and warrant holders, would justify
different treatment of the underlying securities for purposes of Form
S-3 availability. This issue generated virtually no comment.
Securities offered pursuant to options, like securities offered
pursuant to rights, convertible securities and warrants, are all
offered to existing security holders of the issuer, who are presumed to
``follow'' the issuer through corporate communications and Exchange Act
filings.\78\ This presumption appears to apply equally to options as
well as warrants, in each case without regard to transferability.
Accordingly, we are adopting the amendment in the form proposed.
---------------------------------------------------------------------------
\78\ See Securities Act Release No. 6331 (Aug. 6, 1981). See
also the proposed treatment of offerings to existing security
holders, including option holders, in Section V.A.2.c of the
Securities Act Reform Release.
---------------------------------------------------------------------------
D. Executive Compensation Disclosure of Transferred Options
The Proposing Release proposed amendments to (and solicited comment
on other potential amendments to) the executive compensation disclosure
requirements of Item 402 of Regulations S-K and S-B \79\ to address the
reporting treatment of transferred (or transferable) employee benefit
plan stock options. These issues arose under the summary compensation
table,\80\ the option/SAR grants table,\81\ and the aggregated option/
SAR exercises and fiscal year-end option/SAR value table.\82\ The
amendments adopted today reflect the staff's view that the transfer of
an option by an executive does not negate the option's status as
compensation that should be reported.
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\79\ An issuer must include, or incorporate by reference, this
disclosure in Securities Act registration statements filed on Forms
S-1 [17 CFR 239.11], S-2, S-3, S-4, S-8, S-11 [17 CFR 239.18] and
SB-2 [17 CFR 239.10]. An issuer also must include this disclosure in
its Exchange Act registration statement on Form 10 or Form 10-SB
[together, 17 CFR 249.210], and its proxy or information statement
(if action is to be taken as to the election of directors or the
approval of specified director or executive compensation, as
provided in Item 8 of Schedule 14A [17 CFR 240.14a-101]). Finally,
an issuer must include, or incorporate by reference from its
definitive proxy or information statement, this disclosure in its
annual report on Form 10-K [17 CFR 249.310] or Form 10-KSB [17 CFR
249.310b].
\80\ Item 402(b) of Regulations S-B and S-K.
\81\ Item 402(c) of Regulations S-B and S-K.
\82\ Item 402(d) of Regulations S-B and S-K.
---------------------------------------------------------------------------
1. Summary Compensation Table
The summary compensation table prescribed by Item 402(b) requires a
three-year reporting history of compensation, including the number of
securities for which options were granted, for each person serving as
the issuer's chief executive officer (the ``CEO'') during the last
fiscal year and the four other most highly compensated executive
officers serving at the end of that year (together with the CEO, the
``named executive officers''). We proposed to amend this item so that
the sum of the number of securities underlying stock options granted
required to be reported in column (g) of the table would include
options that subsequently were transferred by the named executive
officer.
Commenters considered this proposal appropriate, noting that the
compensatory character of the securities reported is not changed if the
named executive officer subsequently transfers them. We are adopting
this amendment without modification.\83\
---------------------------------------------------------------------------
\83\ Revised Item 402(b)(2)(iv)(B).
---------------------------------------------------------------------------
Consistent with the theory that an option retains its compensatory
character following transfer, the staff of the Division of Corporation
Finance is of the view that reload options issued directly to
transferees also should be reported in Item 402 disclosure as new
grants, both in the summary compensation table and the option/SAR
grants table.
2. Option/SAR Grants Table
Among other things, this table must show the number of options
granted during the most recent fiscal year to the named executive
officers. The table also must provide footnote disclosure of the
material terms of those options. We proposed to amend this item so that
the information required by the table would apply to all options and
SARs granted during the year, including options and SARs that
subsequently were transferred.
Consistent with their reaction to the parallel amendment to the
summary compensation table, commenters also considered this amendment
appropriate. We are adopting this amendment in the form proposed.\84\
---------------------------------------------------------------------------
\84\ Revised Item 402(c)(1).
---------------------------------------------------------------------------
In the Proposing Release, we expressed our view that
transferability is an option term that should be disclosed in a
footnote to this table. While we did not propose a specific amendment
to codify this position, we solicited comment whether the item should
be amended to include transferability among the material terms
requiring footnote disclosure.\85\ Commenters generally did not agree
that
[[Page 11113]]
transferability is a material option term that should require footnote
disclosure in the option/SAR grant table. In particular, commenters
expressed the view that, over time, transferability may become a
standard feature of options granted to executives.
---------------------------------------------------------------------------
\85\ Instruction 3 to Item 402(c) lists the material terms
requiring footnote disclosure.
---------------------------------------------------------------------------
We believe that transferability should continue to be disclosed in
a footnote to this table, since it is not currently a feature of most
options, and may be viewed as a special benefit to the employee
receiving the option. We are not, however, amending this item to codify
a requirement to disclose option transferability in a footnote, since
in the future transferability may become a standard option feature.
We also requested comment whether footnote disclosure should be
required to specify the date of any transfer of an option or SAR that
has occurred. While some commenters supported this disclosure (and
parallel footnote disclosure in the summary compensation table), they
did not believe that naming the transferee would provide material
information to investors. While some commenters favored disclosing the
transferee's status, such as ``immediate family member'' or
``unaffiliated charity,'' others objected to this disclosure, noting
that named executive officers are not required to disclose transfers of
other elements of their compensation, such as cash or stock.
We have concluded that the summary compensation table and option/
SAR grants table should not be amended to require footnote disclosure
of subsequent transfers, although such disclosure may be included on a
voluntary basis. The purpose of these tables is to disclose the
compensation awarded to the named executive officers. While
clarification that an award must be reported even if subsequently
transferred furthers this purpose, disclosure of an award's subsequent
transfer does not. This is because the gain on the exercise of the
transferred options, as discussed below, continues to be imputed to the
named executive officer for Item 402 disclosure purposes.
3. Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Value
Table
This table must present, among other things, both the option
exercises by the named executive officers during the last fiscal year
and the value of options held by them at fiscal year end. This value is
computed based on the difference between the exercise price of the
options and the year-end fair market value of the covered shares.
Without proposing a specific amendment, we solicited comment
whether it is necessary to amend this table so that it includes all
option and SAR compensation from which the named executive officer's
family members continue to derive benefits. We wanted to know whether
such an amendment is needed to ensure that investors continue to
receive meaningful disclosure of all option and SAR compensation
awarded by the issuer, especially if option and SAR transfers to family
members become more common following adoption of our amendments to Form
S-8.
We do not adopt any amendment to this table today. We intend to
conduct a general review of the Item 402 disclosure scheme for purposes
of evaluating the need for further amendments, and will consider
further the comments responsive to the Proposing Release concerning
this table in connection with that review.
In the meantime, the staff of the Division of Corporation Finance
continues to answer interpretive questions concerning this table. In
the staff's view, a named executive officer is presumed to continue to
have a compensatory interest in an option or SAR following its
transfer. As a result, an issuer should continue to report in this
table options and SARs held or exercised by transferees of named
executive officers. Issuers may, but are not required to, include a
footnote indicating that the option or SAR is held or was exercised by
a transferee.
IV. Transition
The amendments adopted today become effective April 7, 1999 (the
``effective date''), except that currently effective registration
statements will be required to comply with certain amendments as of May
10, 1999, as discussed below.
The amendment to Rule 401(g) will apply to all Forms S-8 and other
automatically effective registration statements filed on or after the
effective date, and all post-effective amendments to those registration
statements (including Securities Act Section 10(a)(3) \86\ updates
accomplished through incorporation by reference of the registrant's
Form 10-K) filed on or after the effective date.\87\
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\86\ 15 U.S.C. 77j(a)(3).
\87\ Securities Act Rule 401(b) [17 CFR 230.401(b)] generally
requires an amendment filed for purposes of satisfying Section
10(a)(3) to conform to the applicable rules and forms in effect on
the amendment's filing date.
---------------------------------------------------------------------------
The amendments to Form S-8 and Rule 405 restricting permissible
consultants will apply to Forms S-8 filed initially on or after the
effective date. However, currently effective registration statements on
Form S-8 will be required to comply with these amendments as of May 10,
1999. As a result, any securities issuance on or after May 10, 1999
under any currently effective Form S-8 must comply with these
amendments.
The amendments that allow Form S-8 to be used by employees' family
members for the exercise of employee benefit plan options transferred
by gift or pursuant to a domestic relations order will apply
automatically, as of the effective date, to any Form S-8 registering
shares underlying employee benefit plan options, even if the Form S-8
became effective before the effective date. It will not be necessary to
post-effectively amend these forms for this amendment to apply.
The amendments to Form S-3 apply to registration statements filed
initially on or after the effective date, and to pre-effective
amendments filed on or after that date.
The amendments to Item 402 of Regulations S-K and S-B apply to all
Securities Act and Exchange Act documents that include this disclosure
filed initially on or after the effective date. Amendments to documents
that initially were filed before the effective date need not include
the new required disclosure. For example, if preliminary proxy material
containing Item 402 disclosure was filed before the effective date,
definitive material filed after the effective date need not comply.
V. Cost-Benefit Analysis
As an aid to evaluate the costs and benefits of our proposals, we
requested the views of the public and other supporting information. We
received no comments in response to these requests. We have concluded
that the amendments will not result in an increase in costs or prices
for consumers or individual industries, or significant adverse effects
on competition, employment, investment, productivity, innovation or
small business.
Some of the amendments are designed to deter the use of Form S-8 to
register transactions in which consultants or employees act as conduits
to distribute securities to the public, or transactions in which
consultants are compensated for other capital-raising or promotional
services. This will discourage filers from misusing the form to
register transactions for which it is not available. We believe that
the elimination of this misuse will benefit investors and enhance their
confidence in the integrity of the securities markets.
[[Page 11114]]
Other forms remain available to register securities for these purposes.
The forms most likely to be used are Forms S-1, SB-2, S-2 and S-3. The
estimated burden hours for using Form S-8 are 12 hours.\88\ The
estimated burden hours \89\ for the other forms are:
\88\ The burden hour estimates discussed in this section were
developed for purposes of the Paperwork Reduction Act.
\89\ The estimated burden hours for Form S-8 and Form SB-2
assume that only 25% of the total hours spent to prepare the form
will be spent by company employees. These estimates assume that the
remaining 75% of the total hours will be spent by hired
professionals, such as attorneys or accountants. These estimates
therefore do not include within the burden hours the remaining 75%
of total hours, but instead account for that time as costs. The
estimated burden hours for Form S-2 and S-3 do not follow this
convention, but instead account for all estimated hours as burden
hours.
---------------------------------------------------------------------------
Form SB-2--138
Form S-3--398
Form S-2--470
Form S-1--1290
Because none of these forms becomes effective automatically upon
filing, unlike Form S-8, additional costs may be incurred due to the
resultant delay. However, we believe that any additional costs of using
these other forms are justified in order to provide adequate
information to investors.
Our records indicate that approximately 5600 Forms S-8 were filed
during the fiscal year ending September 30, 1998.\90\ We do not have
data to determine how many of these filings would have been precluded
if the amendments had been in effect. Therefore, we cannot quantify the
impact. However, we believe that the rule change will only impact
transactions that were not intended to be registered on the form.
---------------------------------------------------------------------------
\90\ During the same period, 745 post-effective amendments were
filed on Form S-8.
---------------------------------------------------------------------------
The amendment to make Form S-8 available for employee benefit plan
option exercises and the subsequent resale of the underlying securities
by an employee's family members will reduce costs by eliminating the
need to file a different, less streamlined registration form for these
transactions. By reducing these costs for issuers, option
transferability may become more widespread, allowing families to incur
estate tax savings as a result. Because information on intrafamily
transfers is not reported and option transferability is a relatively
new and limited practice, we do not have data upon which to quantify
costs that will be saved by the amendments.
The amendment to make Form S-3 available for the exercise of
options to the same extent as it is available for the exercise of
warrants also will reduce costs by making this streamlined registration
form available for a broader group of transactions. However, we do not
have data for quantifying this effect. The amendments to Item 402 of
Regulation S-B and S-K also will not increase costs because they will
not require the reporting of any compensatory transactions that are not
already required to be reported.
VI. Summary of Final Regulatory Flexibility Analysis
In accordance with 5 U.S.C. 604, we have prepared a final
Regulatory Flexibility Analysis (``FRFA'') regarding the proposed
amendments.
The analysis notes that the amendments to Form S-8 and Rules 401
and 405 are designed to deter abusive practices in which Form S-8 is
used to make capital-raising distributions of securities to the general
public, or to compensate consultants and advisors for promotional and
other capital-raising activities. These uses are contrary to the
express purposes of the form. Other amendments to Form S-8 and to Item
402 of Regulations S-B and S-K result from concerns expressed by
representatives of industry that the current limited scope of persons
permitted to exercise options under Form S-8 has a chilling effect on
intra-family transfers for estate planning and other purposes. The
amendments to Form S-3 result from the staff's view that shares
underlying options should be treated the same as shares underlying
warrants for purposes of form availability. We believe that the
amendments will not result in any impairment of protection for the
investing public, and should result in improved protection by assuring
that capital-raising offerings are registered on the forms prescribed
for those offerings.
As the FRFA describes, the staff is aware of approximately 815
Exchange Act reporting companies that currently satisfy the definition
of ``small business'' under Rule 157 of the Securities Act.\91\
Overall, 13,577 companies are Exchange Act reporting companies. Based
on a random sample of the Forms S-8 filed during fiscal 1998, the
Commission estimates that approximately 380 of the 5600 Forms S-8
filed during 1998 were filed by small business issuers, and that
consultants or advisors were the sole recipients of securities
registered on approximately 185 of the Forms S-8.
---------------------------------------------------------------------------
\91\ 17 CFR 230.157.
---------------------------------------------------------------------------
The amendments will not impose any new reporting, recordkeeping or
compliance burdens. The amendments designed to deter the abuse of Form
S-8 may require some small businesses to use less streamlined forms
to register securities offerings that otherwise would have been
registered on Form S-8. In most cases, however, these will be
offerings for which Form S-8 was not in fact previously available.
The amendment to make Form S-8 available for employee benefit plan
option exercises and the subsequent resale of the underlying securities
by an employee's family members should reduce recordkeeping and
compliance burdens for smaller businesses by eliminating the need to
file a different, less streamlined registration form for these
transactions. While we cannot quantify the number of small businesses
that would be affected, the average reporting and recordkeeping burden
that will be avoided by eliminating the need to file a different form
could be substantially reduced.\92\
---------------------------------------------------------------------------
\92\ See the Paperwork Reduction Act Analysis at Section VII,
below.
---------------------------------------------------------------------------
The amendment to make Form S-3 available for the exercise of
options to the same extent as it is available for the exercise of
warrants will further reduce recordkeeping and compliance burdens by
making this streamlined registration form available for a broader group
of transactions.
The amendments to Item 402 of Regulation S-B should not increase
recordkeeping and compliance burdens because they will not require
reporting of compensatory transactions that are not already required to
be reported. Regulation S-K generally does not apply to small issuers.
As discussed more fully in the FRFA, we considered several possible
significant alternatives to the amendments, to minimize effects on
small entities. These included: (a) the establishment of different
compliance or reporting timetables that take into account the resources
available to small entities; (b) the clarification, consolidation, or
simplification of compliance and reporting requirements under the rules
and forms for small entities; (c) the use of performance rather than
design standards; and (d) a partial or complete exemption from coverage
of the rules and forms for small entities.
We invited written comments on any aspect of the Initial Regulatory
Flexibility Analysis, but received no specific comments in response to
our request. In particular, we sought comment on: (1) the number of
small entities that would be affected by the proposed rule amendments;
and (2) the determination that the proposed rule
[[Page 11115]]
amendments would reduce reporting, recordkeeping and other compliance
requirements for small entities. We received no comments in response to
these requests. A copy of the Final Regulatory Flexibility Act Analysis
may be obtained from Anne M. Krauskopf, Office of Chief Counsel,
Division of Corporation Finance, Securities and Exchange Commission,
450 Fifth Street, NW, Washington, DC 20549.
VII. Paperwork Reduction Act Analysis
Our staff consulted with the Office of Management and Budget
(``OMB'') and submitted the amendments as proposed for review in
accordance with the Paperwork Reduction Act of 1995 (``PRA'').\93\ The
title to the affected information collection is: ``Form S-8.'' An
agency may not conduct or sponsor, and a person is not required to
respond to, a collection of information unless it displays a currently
valid control number. This collection of information has been assigned
OMB Control No. 3235-0066.
---------------------------------------------------------------------------
\93\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------
The amendments designed to deter the abuse of Form S-8 may require
some companies to use less streamlined forms to register securities
offerings that otherwise would have been registered on Form S-8. In
most cases, however, these will be offerings for which Form S-8 was not
in fact previously available. We estimate that this may reduce the
number of registration statements filed on Form S-8 by approximately
one percent.
The amendments to Form S-8 will permit the form to be used for the
exercise of employee benefit plan options and the resale of the
underlying securities by family members of employee optionees. By
eliminating the need to file different, less streamlined registration
statements for these transactions, the amendments may encourage
registrants to permit intra-family transfers of employee benefit plan
stock options. We believe that, to the extent registrants have filed
separate registration statements for option exercises by family member
transferees, the form most often used was Form S-3. The Commission
is unable to estimate with certainty the number of Forms S-3 that
have been filed for this purpose, but believes it to be a negligible
percentage of the 3827 Forms S-3 filed during the fiscal year ending
September 30, 1998. Because option transferability is a relatively new
and limited practice, it is difficult to quantify burden hours that
will be saved by the proposed amendments. However, by permitting family
members' option exercises to be registered on the least burdensome
registration form, the amendments should make transferability
substantially more attractive. We estimate that this will reduce the
number of registration statements filed on Form S-3 by a minimal
percentage, but that this reduction will be offset by an increased
number of filings on Form S-3 resulting from the amendment to General
Instruction I.B.4 to Form S-3.
This amendment will make Form S-3 available for the
registration of shares underlying options as well as warrants, in each
case without regard to transferability. This will allow the
registration of additional transactions on Form S-3, a relatively
streamlined registration form. While we do not know the number of Forms
S-3 filed during fiscal 1998 that were filed in reliance on this
instruction, we estimate that it also was a relatively small percentage
of the 3827 Forms S-3 filed.
The OMB received no comments in response to our request for comment
regarding the information collection obligation.
VIII. Statutory Basis and Text of Amendments
The amendments to Securities Act Forms S-8 and S-3 and Rules 401(g)
and 405 are adopted pursuant to the authority set forth in Sections 6,
7, 8, 10 and 19 of the Securities Act. The amendments to Item 402 of
Regulations S-B and S-K also are adopted pursuant to Exchange Act
Sections 12, 13, 14, 15 and 23.
List of Subjects in 17 CFR Parts 228, 229, 230 and 239
Reporting and recordkeeping requirements, Securities.
Text of the Amendments
In accordance with the foregoing, Title 17, Chapter II of the Code
of Federal Regulations is amended as follows:
PART 228--INTEGRATED DISCLOSURE SYSTEM FOR SMALL BUSINESS ISSUERS
1. The authority citation for part 228 continues to read as
follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2,
77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77jjj, 77nnn, 77sss,
78l, 78m, 78n, 78o 78u-5, 78w, 78ll, 80a-8, 80a-29, 80a-30, 80a-37,
80b-11, unless otherwise noted.
2. In Sec. 228.402 paragraph (b)(2)(iv) introductory text is
republished and paragraphs (b)(2)(iv)(B) and (c)(1) introductory text
are revised to read as follows:
Sec. 228.402 (Item 402) Executive compensation.
* * * * *
(b) * * *
(2) * * *
(iv) Long-term compensation (columns (f), (g) and (h)), including:
(A) * * *
(B) The sum of the number of securities underlying stock options
granted (including options that subsequently have been transferred),
with or without tandem SARs, and the number of freestanding SARs
(column (g)); and
* * * * *
(c) Option/SAR grants table. (1) The information specified in
paragraph (c)(2) of this item, concerning individual grants of stock
options (whether or not in tandem with SARs) and freestanding SARs
(including options and SARs that subsequently have been transferred)
made during the last completed fiscal year to each of the named
executive officers shall be provided in the tabular format specified as
follows:
* * * * *
PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES
ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND
CONSERVATION ACT OF 1975--REGULATION S-K
3. The authority citation for part 229 continues to read in part as
follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2,
77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 77nnn,
77sss, 78c, 78i, 78j, 78l, 78m, 78n, 78o, 78u-5, 78w, 78ll(d), 79e,
79n, 79t, 80a-8, 80a-29, 80a-30, 80a-37, 80b-11, unless otherwise
noted.
* * * * *
4. In Sec. 229.402 paragraph (b)(2)(iv) introductory text is
republished and paragraphs (b)(2)(iv)(B) and (c)(1) introductory text
are revised to read as follows:
Sec. 229.402 (Item 402) Executive compensation.
* * * * *
(b) * * *
(2) * * *
(iv) Long-term compensation (columns (f), (g) and (h)), including:
(A) * * *
(B) The sum of the number of securities underlying stock options
granted (including options that subsequently have been transferred),
with or without tandem SARs, and the number of freestanding SARs
(column (g)); and
* * * * *
[[Page 11116]]
(c) Option/SAR Grants Table. (1) The information specified in
paragraph (c)(2) of this item, concerning individual grants of stock
options (whether or not in tandem with SARs) and freestanding SARs
(including options and SARs that subsequently have been transferred)
made during the last completed fiscal year to each of the named
executive officers shall be provided in the tabular format specified as
follows:
* * * * *
PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933
5. The authority citation for part 230 continues to read in part as
follows:
Authority: 15 U.S.C. 77b, 77f, 77g, 77h, 77j, 77r, 77s, 77sss,
78c, 78d, 78l, 78m, 78n, 78o, 78w, 78ll(d), 79t, 80a-8, 80a-24, 80a-
28, 80a-29, 80a-30, and 80a-37, unless otherwise noted.
* * * * *
6. By amending Sec. 230.401 to revise paragraph (g) to read as
follows:
Sec. 230.401 Requirements as to proper form.
* * * * *
(g) Except for registration statements and post-effective
amendments that become effective automatically pursuant to
Secs. 230.462 and 230.464, a registration statement or any amendment
thereto is deemed filed on the proper form unless the Commission
objects to the form before the effective date.
7. By amending Sec. 230.405 to revise the definition of ``Employee
benefit plan'' to read as follows:
Sec. 230.405 Definitions of terms.
* * * * *
Employee benefit plan. The term employee benefit plan means any
written purchase, savings, option, bonus, appreciation, profit sharing,
thrift, incentive, pension or similar plan or written compensation
contract solely for employees, directors, general partners, trustees
(where the registrant is a business trust), officers, or consultants or
advisors. However, consultants or advisors may participate in an
employee benefit plan only if:
(1) They are natural persons;
(2) They provide bona fide services to the registrant; and
(3) The services are not in connection with the offer or sale of
securities in a capital-raising transaction, and do not directly or
indirectly promote or maintain a market for the registrant's
securities.
* * * * *
PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933
8. The authority citation for part 239 continues to read in part as
follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77sss, 78c,
78l, 78m, 78n, 78o(d), 78u-5, 78w(a), 78ll(d), 79e, 79f, 79g, 79j,
79l, 79m, 79n, 79q, 79t, 80a-8, 80a-24, 80a-29, 80a-30 and 80a-37,
unless otherwise noted.
* * * * *
9. By amending Sec. 239.13 to revise paragraph (b)(4) to read as
follows:
Sec. 239.13 Form S-3, for registration under the Securities Act of
1933 of securities of certain issuers offered pursuant to certain types
of transactions.
* * * * *
(b) Transaction requirements. * * *
(4) Rights offerings, dividend or interest reinvestment plans, and
conversions, warrants and options. (i) Securities to be offered:
(A) Upon the exercise of outstanding rights granted by the issuer
of the securities to be offered, if such rights are granted on a pro
rata basis to all existing security holders of the class of securities
to which the rights attach;
(B) Under a dividend or interest reinvestment plan; or
(C) Upon the conversion of outstanding convertible securities or
the exercise of outstanding warrants or options issued by the issuer of
the securities to be offered, or an affiliate of that issuer.
(ii) However, Form S-3 is available for registering these
securities only if the issuer has sent, within the twelve calendar
months immediately before the registration statement is filed, material
containing the information required by Sec. 240.14a-3(b) of this
chapter under the Exchange Act to:
(A) All record holders of the rights;
(B) All participants in the plans; or
(C) All record holders of the convertible securities, warrants or
options, respectively.
(iii) The issuer also must have provided, within the twelve
calendar months immediately before the Form S-3 registration
statement is filed, the information required by Items 401, 402 and 403
of Regulation S-K (Secs. 229.401 through 229.403 of this chapter) to:
(A) Holders of rights exercisable for common stock;
(B) Holders of securities convertible into common stock; and
(C) Participants in plans that may invest in common stock,
securities convertible into common stock, or warrants or options
exercisable for common stock, respectively.
* * * * *
10. By amending Form S-3 (referenced in Sec. 239.13) by revising
paragraph B.4 of General Instruction I to read as follows:
Note--The text of Form S-3 does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form S-3 Registration Statement under the Securities Act of 1933
* * * * *
General Instructions
* * * * *
I. Eligibility Requirements for Use of Form S-3
* * * * *
B. Transaction Requirements. * * *
4. Rights Offerings, Dividend or Interest Reinvestment Plans, and
Conversions, Warrants and Options.
(a) Securities to be offered (1) upon the exercise of outstanding
rights granted by the issuer of the securities to be offered, if such
rights are granted on a pro rata basis to all existing security holders
of the class of securities to which the rights attach, (2) under a
dividend or interest reinvestment plan, or (3) upon the conversion of
outstanding convertible securities or the exercise of outstanding
warrants or options issued by the issuer of the securities to be
offered, or an affiliate of that issuer.
(b) However, Form S-3 is available for registering these securities
only if the issuer has sent, within the twelve calendar months
immediately before the registration statement is filed, material
containing the information required by Rule 14a-3(b) (Sec. 240.14a-3(b)
of this chapter) under the Exchange Act to:
(1) All record holders of the rights,
(2) All participants in the plans, or
(3) All record holders of the convertible securities, warrants or
options, respectively.
(c) The issuer also must have provided, within the twelve calendar
months immediately before the Form S-3 registration statement is
filed, the information required by Items 401, 402 and 403 of Regulation
S-K (Secs. 229.401-229.403 of this chapter) to:
(1) Holders of rights exercisable for common stock,
(2) Holders of securities convertible into common stock, and
(3) Participants in plans that may invest in common stock,
securities convertible into common stock, or warrants or options
exercisable for common stock, respectively.
* * * * *
11. By amending Sec. 239.16b to revise paragraph (a)(1) to read as
follows:
[[Page 11117]]
Sec. 239.16b Form S-8, for registration under the Securities Act of
1933 of securities to be offered to employees pursuant to employee
benefit plans.
* * * * *
(a) * * *
(1) Securities of the registrant to be offered to its employees or
employees of its subsidiaries or parents under any employee benefit
plan. The form also is available for the exercise of employee benefit
plan options by an employee's family member (as defined in General
Instruction A.1(a)(5) to Form S-8) who has acquired the options from
the employee through a gift or a domestic relations order.
* * * * *
12. By amending Form S-8 (referenced in Sec. 239.16b) by revising
paragraph 1.(a) of General Instruction A to read as follows:
Note--The text of Form S-8 does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form S-8 Registration Statement Under the Securities Act of 1933
* * * * *
General Instructions
A. Rule as to Use of Form S-8.
1. * * *
(a) Securities of the registrant to be offered under any employee
benefit plan to its employees or employees of its subsidiaries or
parents. For purposes of this form, the term ``employee benefit plan''
is defined in Rule 405 of Regulation C (para.230.405).
(1) For purposes of this form, the term ``employee'' is defined as
any employee, director, general partner, trustee (where the registrant
is a business trust), officer, or consultant or advisor. Form S-8 is
available for the issuance of securities to consultants or advisors
only if:
(i) They are natural persons;
(ii) They provide bona fide services to the registrant; and
(iii) The services are not in connection with the offer or sale of
securities in a capital-raising transaction, and do not directly or
indirectly promote or maintain a market for the registrant's
securities.
(2) In addition, the term ``employee'' includes insurance agents
who are exclusive agents of the registrant, its subsidiaries or
parents, or derive more than 50% of their annual income from those
entities.
(3) The term employees also includes former employees as well as
executors, administrators or beneficiaries of the estates of deceased
employees, guardians or members of a committee for incompetent former
employees, or similar persons duly authorized by law to administer the
estate or assets of former employees. The inclusion of all individuals
described in the preceding sentence in the term ``employee'' is only to
permit registration on Form S-8 of:
(i) The exercise of employee benefit plan stock options and the
subsequent sale of the securities, if these exercises and sales are
permitted under the terms of the plan; and
(ii) The acquisition of registrant securities pursuant to intra-
plan transfers among plan funds, if these transfers are permitted under
the terms of the plan.
(4) The term registrant as used in this Form means the company
whose securities are to be offered pursuant to the plan, and also may
mean the plan itself.
(5) The form also is available for the exercise of employee benefit
plan options and the subsequent resale of the underlying securities by
an employee's family member who has acquired the options from the
employee through a gift or a domestic relations order. For purposes of
this form, ``family member'' includes any child, stepchild, grandchild,
parent, stepparent, grandparent, spouse, former spouse, sibling, niece,
nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law,
brother-in-law, or sister-in-law, including adoptive relationships, any
person sharing the employee's household (other than a tenant or
employee), a trust in which these persons have more than fifty percent
of the beneficial interest, a foundation in which these persons (or the
employee) control the management of assets, and any other entity in
which these persons (or the employee) own more than fifty percent of
the voting interests. Form S-8 is not available for the exercise of
options transferred for value. The following transactions are not
prohibited transfers for value:
(i) A transfer under a domestic relations order in settlement of
marital property rights; and
(ii) A transfer to an entity in which more than fifty percent of
the voting interests are owned by family members (or the employee) in
exchange for an interest in that entity.
* * * * *
Dated: February 25, 1999.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-5297 Filed 3-5-99; 8:45 am]
BILLING CODE 8010-01-P
