Under Rule 701(1) | #Rule 701 |, an eligible company can offer its employees securities as compensation, make the sale, and, within certain limits, not have to register this with the SEC.
Provide copies of the compensatory plan and enhanced disclosures
However, companies that rely on Rule 701 to sell more than $5 million in securities to employees in a 12-month period have traditionally had to provide all eligible recipients with certain enhanced disclosures in addition to copies of the compensatory plan.
The disclosures present a significant administrative burden
These enhanced disclosures have proven to be a significant administrative burden, including as they did a summary of the material terms that applied to the plan or contract; a list of relevant risk factors associated with investing in the securities, and financial statements of the issuer.
This threshold has now been doubled from $5 million to $10 million, reducing the burden of complying with the regulatory requirements. It will be possible for companies to apply the amended rule immediately, even if they have commenced an offering already.
New types of contractual relationships
Rule 701(c), which discusses eligible plan participants, recognizes that largely because of the internet there are new types of contractual relationships arising in the workplace. Many of these relationships have individuals setting their own work schedules, and relying on the organization they work with solely as an online platform to find business.
The SEC request comment
Because these generally freelance arrangements fall outside of the traditional employment relationship, the individuals who participate in them may not qualify as employees. Accordingly, the SEC is requesting comment regarding these “gig economy” workers and the degree to which they should or should not be eligible for exempt compensatory offerings.
Travel company Airbnb has already responded, asking the SEC to allow it to provide Airbnb hosts with equity under the same Rule 701 exemptions available for investors and employees.
Airbnb is an online platform on which private individuals can offer rooms in their homes, or even entire houses or other properties, like accommodations for travelers who stay as their guests. The guests pay the hosts through Airbnb, which collects a portion of the proceeds as a service fee for use of the platform.
The trustworthiness and reliability of individual hosts are an invaluable form of capital for Airbnb, and the company is requesting the SEC to allow it to offer particularly loyal hosts equity in the company by way of additional compensation.
Airbnb is a community-based company
Airbnb CEO Brian Chesky has stated that Airbnb is a community-based company, one which is dependent on its hosts and would like to make them shareholders, subject to favorable changes in the SEC’s Rule 701.
Rule 701 website | https://www.sec.gov/rules/concept/2018/33-10521.pdf |