Flattery will get you everywhere...
[RELEASE NO. 33-7646, 34-41109; File No. S7-2-98]...
EFFECTIVE DATE: The amendments are effective April 7, 1999,...
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]
Registration of the shares on Form S-8 does not accomplish Section 5 registration of these public sales. The 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.
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:
* 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.
sec.gov;
to be read in conjunction with...
[Release No. 33-7645; File No. S7-5-98]...
EFFECTIVE DATE: April 7, 1999....
SUMMARY: The Securities and Exchange Commission ("we" or "Commission") is adopting amendments to Rule 701 under the Securities Act of 1933, which provides an exemption from registration for securities issued by non-reporting companies pursuant to compensatory arrangements....
(4) harmonize the definition of consultants and advisors permitted to use the exemption to the narrower definition of Form S-8; (Footnote 9)
Footnote 9 17 CFR 239.16b. Form S-8, a simplified form for registering sales to employees, is available only to public companies subject to the reporting requirements of the Securities .Exchange Act of 1934 [15 U.S.C. 78a et seq.] ("Exchange Act"). See also the release relating to revisions to Form S-8 we are adopting today, Release No. 33- 7646. ("S-8 Adopting Release").
sec.gov
I will not opine on "illegal," but it appears, IMO, that consultants, advisors and promoters can only be compensated with stock under a Section 5 Registration statement.
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