[Federal Register Volume 64, Number 44 (Monday, March 8, 1999)]
[Proposed Rules]
[Pages 11118-11124]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-5298]
Federal Register / Vol. 64, No. 44 / Monday, March 8, 1999 / Proposed
Rules
[[Page 11118]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 239
[Release No. 33-7647; File No. S7-2-98]
RIN 3235-AG94
Registration of Securities on
Form S-8
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule; Extension of comment period and further request
for comment.
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SUMMARY: In connection with the proposals issued on February 17, 1998,
Release No. 33-7506 [63 FR 9648] (the ``Proposing Release''), the
Securities and Exchange Commission (``we'' or ``Commission'') is
issuing a new proposal to amend Form S-8. The new proposal is targeted
to prevent the abuse of Form S-8 to register offerings to consultants
and advisors who act as statutory underwriters, or to register
securities issued as compensation to consultants or advisors who
promote the registrant's securities. In addition, we are extending the
comment period until May 7, 1999 for the proposals and requests for
comment in the Proposing Release that we continue to consider.
DATES: We must receive your comments on or before May 7, 1999.
ADDRESSES: Please submit three copies of your comments to Jonathan G.
Katz, Secretary, U.S. Securities and Exchange Commission, Mail Stop 6-
9, 450 Fifth Street, NW, Washington, DC 20549. You also may submit
comments electronically at the following e-mail address: comments@sec.gov. All comment letters should refer to File Number S7-2-
98; include this file number on the subject line if you use e-mail. You
may inspect and copy comment letters in the public reference room at
the same address. We will post electronically submitted comment letters
on the Commission's Internet Web site (http://www.sec.gov).
FOR FURTHER INFORMATION CONTACT: Anne M. Krauskopf, Special Counsel,
Office of Chief Counsel, Division of Corporation Finance, at (202) 942-
2900.
SUPPLEMENTARY INFORMATION: Today we propose further amendments to Form
S-8 \1\ under the Securities Act of 1933 (``Securities Act'').\2\
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\1\ 17 CFR 239.16b.
\2\ 15 U.S.C. 77a et seq.
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I. Executive Summary and Background
In 1998, as part of our comprehensive agenda to deter registration
and trading abuses, including microcap fraud,\3\ we proposed various
amendments to Form S-8.\4\ In particular, Form S-8 has been misused to
issue securities to nominal ``consultants and advisors'' who act as
statutory underwriters \5\ to sell the securities to the general
public, and to register securities issued to stock promoters.\6\
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\3\ See 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 Securities Act Rule 504 [17 CFR 230.504];
Securities Act Release No. 7644 (Feb. 25, 1999), adopting amendments
to Securities Act Rule 504; and Exchange Act Release No. 41110 (Feb.
25, 1999), reproposing amendments to Rule 15c2-11.
\4\ See Securities Act Release 7506 (Feb. 17, 1998) [63 FR 9648]
(the ``Proposing Release'').
\5\ An ``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 * * * .''
\6\ For a detailed discussion of Form S-8 abuses, see Securities
Act Release No. 7646 (Feb. 25, 1999) (the ``Adopting Release''), at
Sections I.A and II.
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Today, in a companion release we adopt some of the 1998 proposals
that were designed to deter further misuse of the form.\7\ We also
propose a different amendment (the ``new proposal'') that would amend
the instructions to Form S-8 to impose new qualification requirements
for companies using the form. The new proposal would require, before
filing a registration statement on Form S-8, that:
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\7\ See Adopting Release at Sections II.A and II.B. We also
adopt amendments that allow Form S-8 to be used for the exercise of
employee benefit plan stock options by the employee's family members
who receive the options from the employee by gift or through a
domestic relations order, and clarify executive compensation
disclosure requirements that apply to transferred options. See
Adopting Release at Section III.
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Any company be timely in its Exchange Act reports \8\
during the 12 calendar months and any portion of a month before the
Form S-8 is filed; and
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\8\ These reports are required by Sections 13(a) and 15(d) of
the Exchange Act [15 U.S.C. 78m(a) and 15 U.S.C. 78o(d)].
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A company formed by merger of a nonpublic company into an
Exchange Act reporting company with only nominal assets at the time of
the merger wait until it has filed an annual report on Form 10-K \9\ or
Form 10-KSB \10\ containing audited financial statements reflecting the
merger.
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\9\ 17 CFR 249.310.
\10\ 17 CFR 249.310b.
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In issuing the new proposal, our specific goal is to make Form S-8
less susceptible to abuse, without imposing undue burdens on companies
more likely to be operating legitimate employee benefit plans. We
believe that the new proposal may be better targeted toward deterring
potentially abusive situations.
We also solicit comment on whether other potential amendments, such
as Exchange Act disclosure of aggregate Form S-8 sales to both
consultants and employees, may prevent further abuse of Form S-8 (the
``new comment solicitations'').\11\
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\11\ See Section III, below.
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Finally, we extend the comment period on one of the proposals and
some of the requests for comment that we issued in the 1998 proposal
(together, the ``remaining proposals'').\12\ We may adopt any
combination of the new proposal, the remaining proposals and the new
comment solicitations.
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\12\ See Section IV, below.
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II. Registrant Eligibility Proposal
Our investigation of the misuse of Form S-8 shows that the
companies involved frequently share one or more of the following
characteristics:
Failure to file Exchange Act reports, or failure to file
them on a timely basis;
``Going public'' by means of a merger into a public
``shell'' corporation with only nominal assets; and
Stopping Exchange Act reporting not long after using Form
S-8 to make an unregistered distribution to the general public, whether
or not the company is eligible to suspend or terminate its Exchange Act
reporting.
We believe that tightening the eligibility standards of Form S-8
may be needed in order to deter abuse. In cases involving companies
formed by merger of a non-reporting company into a public ``shell,'' a
Form S-8 instruction requiring post-merger public information would
have prevented misuse.\13\ In other cases, a Form S-8 instruction
requiring the issuer to have filed Exchange Act reports on a timely
basis would have prevented misuse.\14\
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\13\ 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); and SEC v. Hollywood Trenz, Inc., Litigation Release No.
15730, Accounting and Auditing Enforcement Release No. 1032 (May 4,
1998).
\14\ See, e.g., SEC v. Charles O Huttoe, et al., Litigation
Release No. 15153 (Nov. 7, 1996); and SEC v. Softpoint, Litigation
Release No. 14480, Accounting and Auditing Release No. 666 (Apr. 27,
1995).
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Form S-8 currently permits use of the form by any company that:
Immediately before the time of filing is subject to the
requirement to
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file reports under Section 13\15\ or 15(d) of the Exchange Act; and
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\15\ 15 U.S.C. 78m.
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Has filed all reports and other materials so required
during the preceding 12 months (or such shorter period as the
registrant was required to file under the Exchange Act).
Under the new proposal, more stringent eligibility standards would
apply to all companies. Any company filing a Form S-8 would be required
to have filed its most recent Exchange Act reports on a timely basis
(the ``proposed timeliness standard''), and companies formed by a
merger of a non-reporting company into a public ``shell'' no longer
would be able to file a Form S-8 immediately.
Under the proposed timeliness standard, in order to file a Form S-
8, any company would need to:
Be subject to the Exchange Act reporting requirements;
Have filed all Exchange Act Section 13(a) or 15(d) reports
and all other materials required to be filed during the immediately
preceding 12 months (or such shorter time as the company was subject to
the Exchange Act reporting requirements); and
Have timely filed all Exchange Act Section 13(a) or 15(d)
reports required to be filed during the 12 calendar months and any
portion of a month immediately preceding the Form S-8 filing (or such
shorter time as the company was subject to those requirements).
The first two requirements would be the same as the existing Form
S-8 eligibility standard.\16\ The third requirement would apply the
timeliness standards of Securities Act Forms S-2 \17\ and S-3 \18\ to
Form S-8. As with Forms S-2 and S-3, a company that uses Rule 12b-25
\19\ to extend the due date for all or part of an Exchange Act report
would be considered timely if the company actually filed the material
within the time prescribed by that rule. Because Form S-8, like Forms
S-2 and S-3, provides disclosure through incorporation by reference of
Exchange Act reports, requiring those reports to be filed on a timely
basis as a form eligibility condition would be appropriate.
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\16\ The proposed language would clarify that the existing
standard's reference to ``other materials required to be filed''
means the materials required by Exchange Act Sections 14(a) or 14(c)
[15 U.S.C. 78n(a) and 78n(c)].
\17\ See General Instruction I.C(2) to Form S-2 [17 CFR 239.12].
\18\ See General Instruction I.A.3(b) to Form S-3 [17 CFR
239.13].
\19\ 17 CFR 240.12b-25.
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The proposed timeliness standard would apply to certain post-
effective amendments as well as new filings. When a registration
statement is post-effectively amended to satisfy the updating standards
of Securities Act Section 10(a)(3),\20\ the form and contents of the
amendment must conform to the applicable rules and forms in effect on
the date it is filed.\21\ With Form S-8, like Form S-3, incorporation
by reference of the company's subsequently filed annual report on Form
10-K or Form 10-KSB is deemed to amend the registration statement for
Section 10(a)(3) updating purposes. Accordingly, for an effective Form
S-8, the proposed timeliness standard also would be triggered when an
Exchange Act annual report is due, for purposes of determining whether
the company may continue to use that Form S-8 to make compensatory
offers and sales of securities. If the company does not timely file its
Form 10-K or Form 10-KSB under the standards of the new proposal, that
Form S-8 no longer would be available for purposes of making subsequent
offers and sales of securities.
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\20\ 15 U.S.C. 77j(a)(3). This section states that if a
registration statement is used more than nine months following its
effective date, the information it contains may be no more than 16
months old.
\21\ Securities Act Rule 401(b) [17 CFR 230.401(b)].
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A stricter standard would apply to a company formed by a merger
between an entity that was not subject to the Exchange Act reporting
requirements at the time of the merger and an entity subject to the
Exchange Act reporting requirements that had only nominal assets at the
time of the merger. This type of company would not be allowed to file
any registration statement on Form S-8 until it had filed an annual
report on Form 10-K or Form 10-KSB containing audited financial
statements reflecting the merger, even if its other Exchange Act
reports were timely filed.
Because a company that ``goes public'' through a ``shell'' merger
does not file a Form 10 or Form 10-SB,\22\ the merged entity does not
file audited financial statements until it files an Exchange Act annual
report. The period before the first Exchange Act annual report is filed
appears to be the most likely period for using Form S-8 to make an
improper public offering, because the discipline of an audit has not
yet been applied to the financial statements of the merged entity.\23\
Prohibiting ``shell'' companies from using Form S-8 until such an
annual report is filed will make Form
S-8 unavailable during this critical period. Once the Form 10-K or 10-
KSB is filed within 12 months after the formation/merger, the company
would be subject to the proposed timeliness standard.
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\22\ 17 CFR 249.210 and 249.210b. These are the long form
Exchange Act registration statements, which contain extensive
business and financial information.
\23\ In this regard, note that Item 3(a) of Form S-8 requires a
registrant to incorporate by reference into its Form S-8 the
registrant's latest annual report filed under Section 13(a) or 15(d)
of the Exchange Act, or either: (1) the latest prospectus filed
under Rule 424(b) [17 CFR 230.424(b)]; or (2) the registrant's
effective registration statement on Form 10, 10-SB, 20-F or 40-F [17
CFR 249.210, 249.220f and 249.240f]. One of these documents (or the
company's annual report under Exchange Act Rule 14a-3(b) [17 CFR
240.14a-3(b)]) also must be delivered to plan participants to
satisfy Form S-8 prospectus delivery materials requirements under
Rule 428(b)(2) [17 CFR 230.428(b)(2)]. These standards are designed
to require incorporation by reference and delivery of a document
containing audited financial statements for the registrant's latest
fiscal year. The new proposal would assure that a company that
``goes public'' through a ``shell'' merger satisfies these
requirements with respect to the merged entity, rather than the
premerger ``shell.''
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Commenters are requested to address whether the new proposal would
be an effective deterrent to Form S-8 abuse. In particular, would the
proposed timeliness standard deter misuse by the companies most likely
to abuse Form
S-8 without imposing undue burdens on companies that sponsor legitimate
employee benefit plans? Many companies that file Forms S-8 also file
(or are establishing eligibility to file) registration statements on
Forms S-2 and S-3.\24\ We do not believe that it will be difficult for
these companies to satisfy the same timeliness standards for purposes
of Form S-8. We also believe that imposing these timeliness standards
on other companies will make the form less susceptible to abuse.
However, we request your comment on whether the proposed timeliness
standard would be equally effective and less burdensome if it required
timely filing only of the company's annual report on Form 10-K or Form
10-KSB, rather than all Exchange Act reports.
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\24\ Although General Instruction I.B.1 requires the aggregate
market value of a company's voting and non-voting common equity held
by non-affiliates to be at least $75 million for Form S-3 to be
available for a primary offering, this condition need not be met in
order to use Form S-3 for any other transaction for which it is
available, such as secondary offerings.
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We also are considering whether the proposed timeliness standard
should apply only to some subset of public companies. Can this
requirement be tailored so that it does not apply to the companies
least likely to abuse Form
S-8? For example, should the standard apply only to companies that do
not have securities listed on a national securities exchange or
admitted to trading on the NASDAQ National
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Market System? \25\ Alternatively, should the standard apply only to
companies that do not have securities listed on the New York Stock
Exchange or the American Stock Exchange, or admitted to trading on the
NASDAQ National Market System? In either case, are there any particular
listing requirements that would form an appropriate basis for
distinguishing among different markets for this purpose?
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\25\ In this case, we anticipate that the proposed timeliness
standard would apply to companies with securities traded in or
quoted on markets such as the Pink Sheets, the OTC Bulletin Board,
and the Nasdaq Small Cap market, as well as companies whose
securities trade other than in an organized market, such as
securities that are traded exclusively on the internet.
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If we impose the proposed timeliness standard on a limited basis,
should its application be based on the company's size rather than the
market on which the company's securities are traded? If so, should a
size test be based on assets or revenues? For example, would it be
appropriate to apply the proposed timeliness standard only to companies
with annual revenues below $10 million? Should a revenue test be lower,
such as $5 million, or higher, such as $20 or $25 million? If instead
the test is based on assets, should the standard apply only to
companies with assets below $50 million? Would a lower limit, such as
$25 million, or a higher limit, such as $100 million, be more
appropriate? Should an asset test be based on total assets, or only net
tangible assets, whose value is more readily determinable and
realizable?
Should a size test be based instead on the aggregate market value
of the voting and non-voting common equity held by non-affiliates (the
``public float''), as reported in the company's most recently filed
Form 10-K or Form 10-KSB? If so, should the proposed timeliness
standard apply only to companies with a public float less than $75
million?
Would the new proposal be more effective if it required newly
reporting companies, as well as companies formed by ``shell'' mergers,
to postpone filing a Form S-8 for a specified period of time after
becoming subject to the Exchange Act in order to establish a reporting
history? For example, should we reinstate a 90-day waiting period
before a newly reporting company is allowed to file a Form S-8? \26\
Would a different waiting period be appropriate, either shorter (30 or
60 days or some other number) or longer (120 or 180 days or some other
number)?
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\26\ Previously, the Form S-8 instructions required the
registrant to have been subject to the Exchange Act reporting
requirements for 90 days before filing a Form S-8. This requirement
was eliminated in the 1990 revisions to Form S-8. See Securities Act
Release No. 6867 (Jun. 6, 1990) [55 FR 23909]. In proposing this
change, the Commission noted that ``[r]etention of the requirement
that Form S-8 registrants be subject to Exchange Act reporting
obligations would provide for current public information.
Information in an effective Securities Act or Exchange Act
registration statement would be available to the marketplace and the
registrant would be subject to the continuous reporting system under
the Exchange Act. As a result, the business and financial
information regarding the registrant would be available to
employees.'' Securities Act Release No. 6836 (Jun. 12, 1989) [54 FR
25936].
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With respect to companies formed by ``shell'' mergers, should the
new proposal instead prohibit them from using Form S-8 for a longer
period of time, such as 18 months, two years, or three years? Does the
``nominal assets'' standard provide sufficient guidance? If not, should
an objective benchmark be provided? What level of assets would be
appropriate for this purpose? For example, should assets of $200,000 or
less be considered ``nominal''? Should the ``nominal'' character of the
public shell's assets be measured on an absolute basis (such as
$100,000, $200,000, $500,000 or some other number), or by reference to
the assets of the private company that is acquired (such as five, ten,
or 25 percent of the combined assets, or some other percentage)?
Should all assets be considered for purposes of this test, or only
net tangible assets? In addition--or as an alternative--should the test
address whether the public shell has had continuous operations for a
specified period of time? For example, Exchange Act Rule 3a51-1 \27\
excludes from the definition of ``penny stock'' a security of an issuer
having net tangible assets in excess of $2 million, if the issuer has
been in continuous operation for at least 3 years, or $5 million, if
the issuer has been in continuous operation for less than three years.
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\27\ 17 CFR 240.3a51-1.
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Should the eligibility test for companies formed through ``shell''
mergers be measured by reference to the ``shell's'' assets at all, or
only with respect to whether the ``shell'' has a business plan other
than to merge with the private company? For example, Securities Act
Rule 419 \28\ defines a ``blank check company,'' in part, as a
development stage company that either has no specific business plan or
purpose, or has indicated that its business plan is to merge with an
unidentified company or companies.\29\ Should the same test apply for
Form
S-8 eligibility purposes, whether or not a merger candidate is
identified? If we use this test, should we eliminate the ``development
stage'' provision?
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\28\ 17 CFR 230.419.
\29\ Securities Act Rule 251(a)(3) [17 CFR 230.251(a)(3)] makes
the Regulation A [17 CFR 230.251 et seq.] exemption from Securities
Act registration unavailable to these companies. Similarly, Rule
504(a)(3) [17 CFR 230.504(a)(3)] makes the Rule 504 [17 CFR 230.504]
exemption of Regulation D [17 CFR 230.501 et seq.] unavailable to
these companies.
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The standards of the new proposal would apply to a company whether
or not the company is a ``small business issuer.'' \30\ However, we
request comment on whether the new proposal would have a
disproportionate adverse effect on small business issuers. Would the
new proposal discourage these issuers from going public, so that they
could continue to issue securities to employees under Securities Act
Rule 701? \31\
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\30\ This term currently is defined as a company that: (i) has
revenues of less than $25,000,000; (ii) is a U.S. or Canadian
issuer; (iii) is not an investment company; (iv) if a majority owned
subsidiary, the parent corporation is also a small business issuer;
and (v) the public float (aggregate market value of outstanding
voting and non-voting common stock held by non-affiliates) does not
exceed $25,000,000. See Item 10 of Regulation
S-B [17 CFR 228.10] and Securities Act Rule 405 [17 CFR 230.405]. In
the Securities Act Reform Release (Securities Act Release No. 7606A
(Nov. 13, 1998) [63 FR 67171]), we proposed to amend the definition
of ``small business issuer'' to raise the revenue threshold to
$50,000,000, and to eliminate the public float test. See Securities
Act Reform Release at Section V.E.2.
\31\ 17 CFR 230.701. The Commission adopted amendments to Rule
701 in Securities Act Release No. 7645 (Feb. 25, 1999).
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Finally, would the new proposal be more effective and less
burdensome than any of the remaining proposals? \32\ In particular,
would the new proposal be more effective and impose fewer burdens on
legitimate employee benefit plans than the proposed Form S-8 Part II
disclosure of the number of securities issued to consultants, their
names and the services they provide (or disclosure of the same
information in the company's Exchange Act reports)? Is the new proposal
better targeted at the specific problem than a limitation on the
percentage of a class of securities outstanding that may be sold to
consultants and advisors during the company's fiscal year?
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\32\ The remaining proposals are described in Section IV, below.
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III. Other Potential Amendments
Although we do not propose any other specific amendment today, we
ask commenters to address whether any approaches other than the new
proposal and the remaining proposals would help to deter Form S-8
abuse. For example, should we consider other forms of certification? As
described below, one of the remaining proposals is to expand the
existing Form S-8 certification to
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require the company to certify that any consultant or advisor who
receives securities registered on the form is not hired for capital-
raising or promotional activities.
Instead, each time a company issues securities to consultants,
should it be required to post-effectively amend its Form S-8 to certify
that the consultants receiving the securities will not engage in these
activities? Alternatively, should we require consultants and advisors
who receive securities registered on Form S-8 to provide the company
with certifications that they have not and will not engage in capital-
raising, promotional or market maintenance activities? If this
requirement is imposed, companies would be required to retain the
certification for a period of time and provide it to the Commission or
the staff upon request.\33\ Would a three- or five-year retention
period \34\ be appropriate for this purpose? If not, for what period of
time should this information be retained?
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\33\ Securities Act Rule 418 [17 CFR 230.418] requires companies
to furnish information supplementally to the Commission or the staff
upon request.
\34\ Securities Act Rule 428(a)(2) [17 CFR 230.428(a)(2)]
requires a company to keep documents that are used as part of the
Form S-8 Section 10(a) prospectus (other than documents incorporated
by reference) for five years after they are last used as part of
that prospectus.
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Instead of certification, another possibility would be to require
companies to make a statement in Part II of the Form S-8 registration
statement that the securities will be issued for compensatory, not
capital-raising, purposes. Would this approach be an effective
deterrent to abuse?
In some cases, companies have improperly filed a series of Forms S-
8 to make unregistered offerings of securities to the public,
distributing a significant percentage--if not most--of the company's
securities in this manner.\35\ One of the remaining proposals would
require companies to disclose, in their Exchange Act reports, Form S-8
sales of securities to consultants and advisors.
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\35\ See, e.g., Sky Scientific, cited at n. 13 above, 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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Instead, should we require companies to provide disclosure in their
quarterly and annual Exchange Act reports when aggregate issuances on
Form S-8 (to both consultants and traditional employees) during the
preceding 12 month period have exceeded a specified percentage of the
number of securities of the same class outstanding? In particular,
would Exchange Act disclosure of aggregate issuances to traditional
employees, as well as consultants, be necessary to identify companies
misusing Form S-8 to make public offerings?
If so, would ten, 15, 20 percent, or some other percentage, of
outstanding securities of the same class be an appropriate threshold
for requiring this disclosure? In particular, would the 15 percent of
outstanding securities of the class or 15 percent of the issuer's total
assets test used in Rule 701 be an appropriate threshold? Should this
disclosure identify both the aggregate number of securities and options
issued, and the aggregate number of employees and consultants who
received them? Should issuances to employees be segregated from
issuances to consultants for this purpose? If we require Exchange Act
disclosure only of aggregate issuances to consultants, would one
percent of the outstanding securities of the class during the preceding
12 month period be an appropriate disclosure threshold?
If an aggregate disclosure requirement is adopted, should companies
be required to identify individual issuances if they exceed a
particular threshold, such as one percent of the outstanding securities
of the class? Should information identifying the recipients of the
securities be required? Finally, do the companies that abuse Form S-8
continue to file Exchange Act reports long enough for this kind of
disclosure to be meaningful?
IV. Continuing Request for Comment
During the comment period, we are extending our request for comment
on the remaining proposals.\36\ These are:
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\36\ We have not republished in this release the text of the
rules previously published in the Proposing Release. Please refer to
Sections II.C and II.D of the Proposing Release for a full
discussion of the remaining proposals. See Section II.C of the
Adopting Release for a brief discussion of the comments we have
received to date on the remaining proposals. A Comment Summary with
respect to the Proposing Release also is 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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Proposal: Disclosure in Part II of Form S-8 of the names of any
consultants or advisors who will receive securities under the
registration statement, the number of securities to be issued to each
of them, and the specific services that each will provide the company.
Requests for comment:
Whether companies should be required to disclose Form S-8
sales of securities to consultants or advisors in their Exchange Act
reports--either in Form 10-K and Form 10-Q,\37\ or on Form 8-K; \38\
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\37\ 17 CFR 249.308a.
\38\ 17 CFR 249.308.
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Whether the aggregate percentage of securities that may be
sold to consultants and advisors on Form S-8 during the company's
fiscal year should be limited to a specified percentage of the number
of securities of the same class outstanding;
Whether the existing requirement that the company 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 the company to certify that any consultant or advisor who
receives securities registered on the form does not, and will not,
engage in capital-raising or promotional activities; and
Whether the Form S-8 cover page should include a box that
the company would be required to check if any securities registered on
the form are offered and sold to consultants and advisors.
In particular, we are considering carefully whether, to what extent
and in what form, there should be additional disclosure requirements
about consultants and advisors. We solicit your comment on this issue.
With respect to limiting the aggregate percentage of securities
that may be sold to consultants and advisors on Form S-8 during the
company's fiscal year, we previously solicited comment whether annual
percentage limitations of five, ten or 15 percent of the number of
securities of the same class outstanding, computed based on the
company's most recent balance sheet, would be appropriate.\39\ Would a
higher percentage, such as 30 percent, be appropriate for this purpose?
Would the 15 percent of the issuer's total assets test used in Rule 701
be an appropriate cap? Instead, should a higher percentage, such as 30,
40 or 50 percent, be applied to limit annual aggregate Form S-8 sales
to employees, as well as to consultants and advisors?
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\39\ See Section II.D of the Proposing Release.
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We may adopt any combination of the new proposal, the remaining
proposals and the new comment solicitations.
V. General Request for Comment
We request your written comment on all aspects of the new proposal,
the new comment solicitations and the remaining proposals. You should
address whether the new proposal, as drafted, is easy to understand and
implement. In particular, would the new proposal and the new comment
solicitations be less burdensome and
[[Page 11122]]
more effective in deterring Form S-8 abuse than the remaining
proposals?
VI. Cost-Benefit Analysis
The new proposal is intended to eliminate misuse of Form S-8 and
thus enhance investor protection. The costs and benefits of the new
proposal are discussed below.\40\ We request your written comment on
this analysis as an aid to further evaluate the costs and benefits of
the new proposal. Please provide empirical data and other factual
support for your views to the extent possible.
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\40\ For a discussion of the costs and benefits of the remaining
proposals, see Section V of the Proposing Release. We invite
additional comments on that cost-benefits analysis also.
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The new proposal is 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. We believe that this will benefit investors by permitting
registration and sale of securities only when current information is
available, which should inhibit fraudulent promotional schemes and will
enhance investor confidence in the integrity of the securities markets.
Other forms remain available to register securities for capital-raising
purposes. The additional costs of using these other forms are justified
in order to provide adequate information to non-employee investors.
Our records indicate that approximately 5600 Forms S-8 were filed
during the fiscal year ending September 30, 1998.\41\ 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 impact primarily
transactions that were not intended to use the form.
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\41\ During the same period, 745 post-effective amendments were
filed on Form S-8.
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The new proposal will require:
Any company using Form S-8 to be timely in its Exchange
Act reports during the 12 calendar months and any portion of a month
before the Form S-8 is filed; and
A company formed by merger of a nonpublic company into an
Exchange Act reporting company with only nominal assets at the time of
the merger to wait until it has filed an annual report on Form 10-K or
Form 10-KSB containing audited financial statements reflecting the
merger before filing a registration statement on Form S-8.
Some companies may face increased costs as a result of the rule
change because, for limited periods of time, Form S-8 may not be
available to them to register compensatory employee benefit plan
securities offerings. This could reduce the flexibility of these
companies' compensation arrangements. Commenters should consider
whether the new proposal would make an affected company more likely to
use cash for compensation purposes. If so, would this result in cash
flow concerns or constrain reinvestment in the company's business?
For all companies, the proposed timeliness standard would condition
Form S-8 availability on the company's timely satisfaction of its
Exchange Act reporting requirements. Form S-8 would be available if the
company does no more than what it otherwise is required to do.
Accordingly, the proposed timeliness standard will not require a
company to incur additional costs. The proposed timeliness standard
will provide investor protection benefits by giving companies an
additional incentive to file their Exchange Act reports on a timely
basis.
For a company formed by a ``shell'' merger, the proposed standard
will make Form S-8 unavailable until the company has filed a Form 10-K
or Form 10-KSB that includes audited financial statements for the
merged entity. This will provide investor protection benefits by
ensuring that the audited financial statements of the merged entity,
rather than merely the ``shell,'' are incorporated by reference into
the Form S-8. However, during the limited period that the proposed
standard will apply, such a company would be required to use a less
streamlined registration statement to register securities offered under
a compensatory employee benefit plan. The most likely registration
statement forms to be used for this purpose are Forms S-1, SB-2, S-2
and S-3. The estimated burden hours for purposes of the Paperwork
Reduction Act for using Form S-8 are 12 hours. The estimated burden
hours \42\ for the other forms are:
\42\ 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.
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Form SB-2--138
Form S-3--398
Form S-2--470
Form S-1--1290
Because none of these alternative forms becomes automatically
effective upon filing, there may be additional costs due to potential
delay in implementing the employee benefit plan. However, once the
company files the required Form 10-K or Form 10-KSB, the company would
be able to post-effectively amend the less streamlined registration
statement to convert it to a Form S-8,\43\ assuming the proposed
general timeliness standard also is satisfied, thereby regaining the
benefits of the abbreviated form.
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\43\ See Securities Act Rule 401(e) [17 CFR 230.401(e)].
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For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996 (``SBREFA''),\44\ we request data and analysis on whether
the new proposal would result in a major increase in costs or prices
for consumers or individual industries, or significant adverse effects
on competition, employment, investment, productivity, innovation or
small business. Would the new proposal be likely to have a $100 million
or greater annual effect on the economy? Commenters are requested to
provide empirical data to support their views.
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\44\ Pub. L. No. 104-121, 110 Stat. 857 (1996) (codified in
various sections of 5 U.S.C., 15 U.S.C., and as a note to 5 U.S.C.
601).
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VII. Summary of Initial Regulatory Flexibility Analysis
The Commission has prepared an Initial Regulatory Flexibility
Analysis (``IRFA'') in accordance with 5 U.S.C. 603 regarding the new
proposal.
As noted in the analysis, the new proposal is 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. We believe that the new proposal 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 IRFA 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.\45\
Overall, 13,577 companies are Exchange Act reporting companies. Based
on a random sample
[[Page 11123]]
of the Forms S-8 filed during fiscal 1998, the Commission estimates
that approximately 380 of those Forms S-8 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.
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\45\ 17 CFR 230.157.
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The new proposal will not impose any new reporting, recordkeeping
or compliance burdens for most small issuers. However, the new proposal
may require some small businesses to use less streamlined forms to
register securities offerings that otherwise would have been registered
on Form S-8. We believe that in many cases, however, these will be
offerings for which Form S-8 was not in fact previously available. This
may reduce the flexibility of the compensation arrangements for some
small businesses that merge with ``shells.'' We do not have the data to
estimate this effect, but note that the effect would be only for the
limited time until the combined entity files a Form 10-KSB with audited
financial statements that reflect the merger.
We invite your written comments on any aspect of the IRFA. In
particular, we seek your comment on: (1) the number of small entities
that would be affected by the proposed rule amendments; and (2) the
determination that the proposed rule amendments would not significantly
increase reporting, recordkeeping and other compliance requirements for
small entities. Commenters should address whether the proposed
amendments to Form S-8 will affect the number of registration
statements filed on this form, affect the dollar amount of securities
sales on this form, or affect the form's availability to small
entities.
Any commenter who believes that the new proposal will significantly
impact a substantial number of small entities should describe the
nature of the impact and estimate the extent of the impact. For
purposes of making determinations required by SBREFA, we also request
data regarding the potential impact of the proposed amendments on the
economy on an annual basis. All comments will be considered in the
preparation of the Final Regulatory Flexibility Analysis if the new
proposal is adopted. Please refer to the Proposing Release for a
summary of the separate Initial Regulatory Flexibility Analysis with
respect to the remaining proposals.\46\ A copy of either Initial
Regulatory Flexibility 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.
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\46\ Section VI of the Proposing Release.
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VIII. Paperwork Reduction Act Analysis
Parts of the new proposal contain ``collection of information''
requirements within the meaning of the Paperwork Reduction Act of 1995
(``PRA'').\47\ Our staff has submitted the new proposal for review by
the Office of Management and Budget (``OMB'') in accordance with the
PRA. 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.
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\47\ 44 U.S.C. 3501 et seq.
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The new proposal may require some companies to use less streamlined
forms to register securities offerings that otherwise would have been
registered on Form S-8. We estimate that this may reduce the number of
registration statements filed on Form S-8 by approximately not more
than five percent, and may increase the number of registration
statements filed on different forms by a corresponding amount. In many
cases, however, these will be offerings for which Form S-8 was not in
fact previously available. We believe that this will provide a
substantial investor protection benefit that justifies any additional
costs to filers.
In accordance with 44 U.S.C. 3506(c)(2)(B), we solicit comment on
the following:
Whether the proposed changes in the collection of
information are necessary to the agency's function, including practical
utility;
The accuracy of the estimated burden of the proposed
changes to the collection of information;
Whether there are ways to enhance the quality, utility and
clarity of the information to be collected; and
Whether the burden of collection of information on those
who are to respond, including through the use of automated collection
techniques or other forms of information technology, may be minimized.
Persons who wish to submit comments on the collection of
information requirement should direct them to the Office of Management
and Budget, Attention: Desk Officer for the Securities and Exchange
Commission, Office of Information and Regulatory Affairs, Washington,
DC, with reference to File No. S7-2-98. Because the OMB is required to
make a decision concerning the collection of information between 30 and
60 days after publication, your comment is best assured of having its
full effect if OMB receives it within 30 days of publication.
Please refer to the Proposing Release for a separate Paperwork
Reduction Act Analysis of the remaining proposals.\48\
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\48\ Section VII of the Proposing Release.
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IX. Statutory Basis and Text of Proposed Amendments
The new amendment to Securities Act Form S-8 is proposed under the
authority set forth in Sections 6, 7, 8, 10 and 19 of the Securities
Act of 1933.
List of Subjects in 17 CFR Part 239
Reporting and recordkeeping requirements, Securities.
Text of the Proposed Amendments
In accordance with the foregoing, Title 17, Chapter II of the Code
of Federal Regulations is proposed to be amended as follows:
PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933
1. 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.
* * * * *
2. By amending Sec. 239.16b to redesignate paragraph (b) as
paragraph (c); redesignate paragraphs (a)(1) and (a)(2) as new
paragraphs (b)(1) and (b)(2); revise paragraph (a); and add new
paragraph (b) introductory text to read as follows:
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) A registrant may use this form for registration under the
Securities Act of 1933 (``the Act'') of the securities listed in
paragraph (b) of this section if the registrant satisfies the
requirements of paragraph (a)(1) and (a)(2) of this section:
(1) A registrant may not file a registration statement on this form
unless, immediately before filing the registration statement, the
registrant:
(i) Is subject to the reporting requirements of sections 13(a) or
15(d) of the Securities Exchange Act of 1934 (the ``Exchange Act'') (15
U.S.C. 78m(a) or 78o(d));
(ii) Has filed all reports required by Section 13(a) or 15(d) of
the Exchange
[[Page 11124]]
Act and all materials required by section 14(a) or 14(c) of the
Exchange Act (15 U.S.C. 78n(a) or 78n(c)) required to be filed during
the 12 months immediately before filing a registration statement on
this form (or for such shorter period that the registrant was required
to file such reports and materials); and
(iii) Has filed on a timely basis all reports required by section
13(a) or 15(d) of the Exchange Act during the 12 calendar months and
any portion of a month immediately preceding the filing of the
registration statement (or for such shorter period that the registrant
was required to file such reports). If during that time the registrant
has used Sec. 240.12b-25 of this chapter with respect to a report or a
part of a report, that material must have been filed within the time
prescribed by that section.
(2) If the registrant is an entity formed by the merger between:
(i) An entity subject to the Exchange Act reporting requirements
that had only nominal assets at the time of the merger; and
(ii) An entity that was not subject to the Exchange Act reporting
requirements at the time of the merger, the registrant may not file a
registration statement on this form until it has filed an annual report
on Form 10-K or Form 10-KSB (Sec. 249.310 or Sec. 249.310b of this
chapter) containing audited financial statements for a fiscal year
ending after consummation of the merger.
(b) A registrant may use this form for registration under the Act
of the following securities:
* * * * *
3. By amending Form S-8 (referenced in Sec. 239.16b) in General
Instruction A to redesignate paragraphs 1.(a) and 1.(b) as paragraphs
1.(d) and 1.(e); revise the introductory text of paragraph 1.; and add
new paragraphs 1.(a) and 1.(b) 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 registrant may use this form for registration under the
Securities Act of 1933 of the securities listed in paragraph 1.(d) and
1.(e) of this section if the registrant satisfies the requirements of
paragraph 1.(a) and 1.(b) of this section:
(a) A registrant may not file a registration statement on this form
unless, immediately before filing the registration statement, the
registrant:
(i) Is subject to the reporting requirements of Sections 13(a) or
15(d) of the Securities Exchange Act of 1934 (the ``Exchange Act'') (15
U.S.C. 78m(a) or 78o(d));
(ii) Has filed all reports required by Section 13(a) or 15(d) of
the Exchange Act and all materials required by Section 14(a) or 14(c)
of the Exchange Act (15 U.S.C. 78n(a) or 78n(c)) required to be filed
during the 12 months immediately before filing a registration statement
on this form (or for such shorter period that the registrant was
required to file such reports and materials); and
(iii) Has filed on a timely basis all reports required by Section
13(a) or 15(d) of the Exchange Act during the 12 calendar months and
any portion of a month immediately preceding the filing of the
registration statement (or for such shorter period that the registrant
was required to file such reports). If during that time the registrant
has used Rule 12b-25 (Sec. 240.12b-25 of this chapter) under the
Exchange Act with respect to a report or a part of a report, that
material must have been filed within the time prescribed by that rule.
(b) If the registrant is an entity formed by the merger between:
(i) An entity subject to the Exchange Act reporting requirements
that had only nominal assets at the time of the merger; and
(ii) An entity that was not subject to the Exchange Act reporting
requirements at the time of the merger, the registrant may not file a
registration statement on this form until it has filed an annual report
on Form 10-K or Form 10-KSB (Sec. 249.310 or Sec. 249.310b of this
chapter) containing audited financial statements for a fiscal year
ending after consummation of the merger.
* * * * *
Dated: February 25, 1999.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-5298 Filed 3-5-99; 8:45 am]
BILLING CODE 8010-01-P
