The U.S. Securities and Exchange Commission could make it easier for so-called “gig economy” firms to offer stock and stock options to contractors who use their platforms, under a proposal to update the commission’s rules governing compensatory securities offerings and sales.
The proposal comes as the SEC looks to make its first updates in nearly 20 years to Rule 701, which offers limited exemptions from registration requirements for securities offered as compensation, primarily to employees and consultants. This longstanding rule recognizes that companies’ securities transactions to compensate employees are fundamentally different from those that seek to raise capital.
However, as the commission notes in its concept release, there have been significant market changes since the rule was last updated in 1999:
Forms of equity compensation that were not typically used at that time, particularly restricted stock units (‘RSUs’), have become common, and new types of contractual relationships between companies and individuals involving alternative work arrangements have emerged in the so-called ‘gig economy.’
The issue for “gig economy” firms like transportation network companies and short-term-rental firms is that the kinds of short-term, part-time and freelance workers that partner with these platforms often do not meet traditional definitions of employees, leaving them ineligible for Rule 701 compensation.
In a 56-question survey, the SEC asks for input on what factors it should consider in seeking to modernize the rule to acknowledge these new kinds of contractual relationships, including whether eligibility should be tied to the company’s exercise of control over the individual who would receive the securities compensation and whether it should matter whether the individual is paid directly by the company or by an end-user of the platform.
The decision to modernize Rule 701 comes as part of a rulemaking process called for in the Economic Growth, Regulatory Relief and Consumer Protection Act, which President Donald Trump signed in May. That legislation, which made a number of changes and updates to the Dodd-Frank Act, raises the threshold of compensatory securities offerings and sales, from $5 million to $10 million, before an issuer is required to provide additional disclosures to investors.
It’s important to get the details right, so we would urge the commission to exercise due consideration of the many issues raised by this proposal. Its basic thrust is very much good news. Even if gig economy workers aren’t traditional employees, platforms that want to make use of Rule 701 to compensate their partners are operating with essentially the same incentives as traditional employers. This is especially true for startup firms that often have to rely on using grants of equity to attract good talent.
Among the thorny issues is Section 12(g) of the Exchange Act, which requires an issuer to register any class of securities for which there are more 2,000 shareholders of record. In a Sept. 21 letter to the SEC, Airbnb asked that securities issued under the amended Rule 701 be excluded from the definition of “holders of record.” The company expressed interest in the proposal both to align its hosts’ incentives with those of the company and to encourage more homeowners to become hosts.
Nonetheless, it warned that, in the absence of the exclusion from Section 12(g), “few, if any, sharing economy companies, including Airbnb, would find the proposed revisions to Rule 701 useful.”