SEC Rules...
D. Consultants and Advisors
Like regular employees, consultants and advisors are eligible to receive
securities under the Rule 701 exemption. Similarly, where the issuer is a
reporting company, consultants and advisors may receive securities in a
transaction registered on Form S-8.32 Currently, the staff interprets the
scope of eligible consultants and advisors differently for purposes of Rule
701 and Form S-8. The staff has interpreted Rule 701 to permit participation
by a broader range of consultants and advisors, even though the words are
identical in both Rule 701 and Form S-8.
At the same time we proposed changes to Rule 701, we proposed changes to
Form S-8 to limit further the scope of eligible consultants and advisors.33
In many cases, the Form has been misused by registering shares for issuance
to consultants and advisors who do not have sufficient connection and
familiarity with the company. In some cases, these persons are receiving the
securities for capital-raising, rather than compensatory, purposes and
engage in public distributions of the company's securities.34
In the Rule 701 Proposing Release, we asked how consultants and advisers
participate in compensatory arrangements and whether we should restrict
their participation. We also asked whether Rule 701 and Form S-8 should be
harmonized in their treatment of these persons. We are concerned that
persons who would misuse exemptions will develop new methods to abuse
deregulatory safe harbors, even as we are taking steps to close down other
avenues for abuse.
We have determined that the flexible definition of "consultants and
advisors," particularly in the context of registered offerings on Form S-8,
has led to abuse. We are concerned that Rule 701 could be similarly abused
if we make changes only to Form S-8, even though Rule 701 securities, unlike
Form S-8 securities, are restricted.35 We are therefore adopting a
definition of the term "consultants and advisors" in Rule 701 that will
harmonize with the new definition in Form S-8,36 and narrow the scope of
eligible consultants and advisors.
As revised, securities promoters clearly will be excluded from the scope of
persons eligible to participate under the exemption. Independent agents,37
franchisees and salespersons who do not have an employment relationship with
the issuer no longer will be within the scope of "consultant or advisor."38
A person in a de facto employment relationship with the issuer, such as a
non-employee providing services that traditionally are performed by an
employee,39 with compensation paid for those services being the primary
source of the person's earned income, would qualify as an eligible person
under the exemption.40 Other persons displaying significant characteristics
of "employment," such as the professional advisor providing bookkeeping
services, computer programming advice, or other valuable professional
services may qualify as eligible consultants or advisors, depending upon the
particular facts and circumstances.41 Our staff will continue to handle
questions about "consultant or advisor" status on a case-by-case basis
through its interpretive letter process, but the terms will be interpreted
in the same manner for both Rule 701 and Form S-8. |
