SUMMARY
Securities Act Release No. 33-7646, dated February 26, 1999, Regarding
Registration of Securities on Form S-8
Purpose: To clarify that S-8 is not available to consultants and advisors
who directly or indirectly promote or maintain a market in the
issuer's securities, declaring that these persons take from an
issuer with a view of distribution and are therefore "statutory
underwriters" (who presumably would not have an exemption for the
resale of securities issued in these types of transactions
[Section 4(l) of the Securities Act of 1933, as amended (the
"Act"), the exemption relied upon for secondary sales of
securities, is not available to "issuers, underwriters or dealers"
in securities]).
Background:
Effective April 7, 1999, the availability of S-8's streamlined
registration process will be restricted to deter the abuse of the
Form to make sales to the general public through so-called
"consultants" and "advisors," and to eliminate registration on the
Form to "stock promoters."
S-8 eliminated a need to file a prospectus that duplicated
information usually available to plan participants who were being
compensated by the issuance of securities rather than cash, and it
reflected the Commission's distinction between offerings made to
employees for compensatory reasons and offerings made for capital
raising. The Commission reasoned that the relationship of the
employee to the issuer provided the employee with a familiarity of
the issuer's business sufficient to justify the abbreviated
disclosure, which would not be adequate in a capital raising,
transaction.
The 1990 amendment included "consultants," whom the Commission
found no reason to distinguish with regular employees, for bona
fide non-capital raising services rendered.
Abuses: Since 1990, the Form has been used to distribute securities to the
public without the protections to investors of registration under
Section 5 of the Act. Securities are often issued to so-called
"consultants" for nominal services, with pre- arrangements for
exercise and distribution to the public in underlying markets.
Often the options granted are exercised to provide funds to the
issuer or the proceeds of the sales are for the payment of debts
of the issuer that are not related to any of the services provided
by the consultants.
The initial registration of the shares underlying these options
did not register the public "capital raising" transaction which
actually takes place in the secondary sales. In these instances,
the employee or consultant acts as a conduit to the public, and
the shares are not actually issued as compensation for services,
for which the Form is solely intended.
Securities have also been issued to consultants whose services are
to promote the issuer's securities. This practice invites fraud by
providing inexpensive compensation to persons who hype the
securities of the issuer and expand the issuer's market through
resales by these and other persons.
Through its recent amendments to Form S-8, the Commission has
sought to curb these practices, while maintaining, to the extent
possible, the initial intent of the Form, i.e., the registration
of compensatory transactions between the issuer and consultants
and advisors who render bona fide services outside "capital
raising," circumstances, as well as to traditional employees.
Amendments:
The Form's availability is for employees or employees of
subsidiaries, pursuant to any employee benefit plan. An "employee"
is defined to include a consultant or advisor who provides bona
fide services to the issuer other than in capital raising
transactions. Like the traditional employee, the consultant or
advisor must be a natural person, and there must be a contract
between the issuer and the consultant or advisor. The Commission
has determined that "capital raising" includes (i) compensation
for any service that directly or indirectly promotes or maintains
a market for the issuer's securities, or (ii) where the securities
are issued to persons who act as conduits for a distribution to
the general public.
Securities issued to persons who promote the issuer's securities
are outside of the Form. Securities cannot be issued to any one
who directly or indirectly promotes or maintains a market in the
issuer's securities.
Issuers cannot use the Form for the issuance of securities to
consultants and advisors whose services relate to potential
capital restructuring because this service is a predicate to
"capital raising" and market maintenance; however, services
rendered in structuring the compensation scheme would be included
under the Form.
Public relations services are also prohibited as the Commission
believes these services enhance and expand the market of the
issuer and its securities.
Rule 701 Amendments:
Effective April 7, 1999, the Commission amended Rule 701 to
harmonize the definition of "consultants and advisors" permitted
to use the Rule to the narrower definition of Form S-8. As
revised, securities promoters will clearly be excluded from the
scope of persons eligible to use Rule 701.