March 30, 1998

Comments RE: S-8 Proposals

Mr. Jonathan G. Katz
Secretary
U.S. Securities and Exchange Commission
Mail Stop 6-9
450 Fifth Street, N.W.
Washington, D.C. 20549

Dear Mr. Katz:

Please treat the comments on pages 3, 4 and 5 of the January-February 1998 issue of The Corporate Counsel, and on page 8 of the March-April 1998 issue of The Corporate Executive as my comments on the S-8 proposals.

	Sincerely,
	Jesse M. Brill Editor-Publisher

The S-8 Proposals

The S-8 proposals (see Release No. 33-7506, February 17, 1998) are split into two parts. The first set of proposals is designed to address the abuse of Form S-8 to register securities issued to consultants and advisors who either (a) act as statutory underwriters (by turning around and selling the securities to the public and then directly or indirectly conveying the sales proceeds to the issuer) or (b) directly or indirectly promote the issuer's securities. The second set of proposals will make Form S-8 available for exercises of transferable options by family members.

Consultants and Advisors

The 1990 streamlining revisions to Form S-8 (see our May-June 1990 issue at pg 1) also made Form S-8 available for the first time for securities issued to consultants and advisors, provided such services are not rendered "in connection with the offer or sale of securities in a capital-raising transaction." To put an end to the capital raising and stock promotion abuses that subsequently arose involving the S-8 (which is not reviewed by the Staff and becomes automatically effective upon filing), the Commission is now proposing several changes and also asking for comment on additional approaches to the problem.

Capital Raising

First, General Instruction A.1(a) to Form S-8 would be amended to add to the current `no capital raising' language that Form S-8 cannot be used for consultants and advisors who "directly or indirectly promote or maintain a market for the registrant's securities." In addition, the amended Instruction would codify the existing Staff position (see our September-October 1996 issue at pg 2) that the consultant or advisor be "a natural person who has contracted directly with the registrant." (However, in footnote 18 of the Release the Staff confirmed its position that, where a wholly-owned corporation is an alter ego for an individual, the S-8 would be available for issuances directly to the corporation.)

The Release goes on to explain that issuers could not, e.g., use Form S-8 to compensate "consultants who advise the company regarding a potential capital restructuring because this service is a predicate to capital raising and market maintenance." Financial consultants "who assist the company in structuring its compensation scheme, or attorneys who defend the company in litigation" could, in contrast, be compensated under the S-8. Presumably, this means that attorneys could not be compensated under the S-8 for corporate restructuring work or any other fees relating to an offering.

We would hope that the final version of the Instruction will contain specific examples of the kinds of activities that cannot be covered. (Just putting examples in a proposing or adopting release may not help down the road when you just refer to the actual Forms and Rules.) For example, would all services by a public relations firm be prohibited (e.g., financial P.R. and investor relations vs. product oriented or company image P.R.)?

Rule 701 vs. S-8 Consultants and Advisors

The Release acknowledges that, under current Staff interpretations, "consultants and advisors" are construed more broadly under Rule 701 than under Form S-8. The Staff specifically cites as fitting within Rule 701: independent sales representatives who distribute the company's products, franchisees, physicians who contract to provide medical services pursuant to various managed care arrangements, and golf pros who serve as independent agents for the distribution of golf products through their pro shops. The Release acknowledges that "In contrast, companies are not currently permitted to register on Form S-8 securities issued to compensate these persons, unless there is a de facto employment relationship between the person and the company. Such a relationship may exist where a person not employed by a company provides services to the company that traditionally are performed by an employee, and the compensation paid by the company for those services is the primary source of the person's earned income."

The Commission asks whether there is any need for the more restrictive S-8 position and whether, along those lines, the S-8 requirement (expressly set forth in Instruction A.1(a)) that insurance agents be "exclusive" (unlike Rule 701) should be dropped. Our take is that, first, there should be complete consistency between the 701 and S-8 interpretations and, secondly, there has to be clearer guidance in the S-8 Instructions as to what kinds of services can and cannot be covered. We are told that some issuers are paying for all kinds of services (and even goods!) with S-8 stock. Query, is it necessarily bad for, e.g., fledgling start up companies that are cash poor to pay for services by everyone from accountants and attorneys (if not capital-raising related) to the garbage collector, using S-8 stock?

Rule 401(g)-Proper Form

Apparently, some issuers abusing the S-8 have attempted to hide behind Rule 401(g) which provides that any registration statement or amendment is deemed filed on the proper form unless the Commission objects to the form before the effective date. (That rule predated automatically effective registration statements.) The Commission will now amend Rule 401(g) to exclude from its scope all registration statements that become effective immediately upon filing, namely, Form S-8 (and S-3 for dividend reinvestment plans). We like this approach.

New S-8 Part II Filing Requirement For Consultants and Advisors

The third specific proposal to address consultant and advisor abuse would be to amend Part II of Form S-8 to require issuers to name any consultants or advisors to whom securities will be sold under the S-8, to specify the number of shares to be issued to each person, and to describe specifically the services each person will provide to the company. Where this information is not available at the time of filing, the issuer would be required to file a post-effective amendment before the securities could be sold to the consultants or advisors. The Release states that the failure to provide any part of this information in the Form S-8 would result in a "disclosure violation." (Presumably, this post-effective amendment requirement will apply to currently outstanding S-8s as well.)

The Release points out that this requirement not only will have a chilling effect on abusive practices, but it will also provide important information enabling the Staff to see what kinds of persons and services are being covered. We are big fans of the prophylactic effect of disclosure and would suggest that the Staff give this approach (which we expect to be controversial) a try. (However, we believe that the Commission's purposes could be achieved with lesser burdens and without naming names. More on crafting a compromise reporting requirement in the upcoming issue of The Corporate Executive.) In addition, we like the suggestion floated in the Release to require that a box on the S-8 cover page (and an EDGAR "tag") be checked to alert the Staff to facilitate monitoring when an S-8 covers consultants or advisors.

The Staff even asks whether consulting and advisory contracts should be required to be filed as exhibits to the S-8. In view of the confusion already out there over whether compensatory contracts and agreements are to be filed as 10-K or 10-Q exhibits (see our November-December 1995 issue at pg 5), we would urge the Staff to address this matter in the adopting release. (We also remind the Staff that it would be helpful, sooner rather than later, for the Commission to adopt a single repository for all exhibits of an issuer, to facilitate investor access via EDGAR-see our November-December 1995 issue at pg 5.)

Transferable Options

We were pleased to see the Staff responding to the need (see our May-June 1997 issue at pg 5) for amending the S-8 to cover exercises of transferable options by family member transferees.

The proposal would define family member the same as in the Rule 16a-1(e) definition of "immediate family," i.e., "any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, or sister-in-law, including adoptive relationships." In addition, the Release asks whether nieces and nephews should be added to the S-8 and 16a-1(e) definitions. We would think so.

Proposed new General Instruction A.5 would cover family members of any person who satisfies the S-8 definition of "employee," which includes consultants and advisors. It would also cover trusts for the exclusive benefit of family members and "any other entity owned solely by these persons" (e.g., family limited partnerships). And, as discussed at pg 30 of the Release, even subsequent transferees would be covered as long as they are "immediate family" of the original optionee. (Compare, however, the language of proposed Instruction A.5, which seems to limit the availability of the Form to direct transferees of the optionee.)

The proposal is limited to transfers via gift or a domestic relations order. Some tinkering is necessary here. For example, a transfer to a family limited partnership or corporation is not technically a gift, but rather a contribution of capital in exchange for units or shares. We suspect that there also may be situations where a "sale" to a family member may be in order, and that there could be divorce situations where a transfer not pursuant to a domestic relations order could take place. We also think it may be necessary to expand both the immediate family definition and the solely owned entity provision to include, for example, "significant others" where there is clearly the same estate planning intent (perhaps, adding "or any other persons or entities who receive shares for estate planning purposes").

Reload Options. The Release asks whether the S-8 should be extended to transferees' exercises of reload options granted directly to the transferee, rather than the employee. (See the November-December 1997 issue of The Corporate Executive at pg 3.) (Interestingly, the Release raises the question whether a gift is completed for tax purposes if the donor retains the right to the reload grants.)

Form S-3 to be Amended to Expressly Cover Options. Instruction I.B.4 of Form S-3 would be amended to provide that exercises of options (whether or not issued under employee plans) be treated the same as warrants. This is an expansion beyond the employee benefit context of the Staff's recent position in Ropes & Gray (see our July-August 1997 issue at pg 1). Thus, exercises of options not covered by an S-8 (e.g., options granted to non-qualifying consultants and advisors) could be registered on S-3, even by non-primary S-3 issuers.

Confirmation of the Staff's Position that an S-8 Need Not be in Effect at Grant. We were pleased to see the Staff repeat in the Release its position that "registration of shares underlying employee benefit plan options would continue to be permitted at any time before the option is exercised, without regard to when the option becomes exercisable." (See our May-June 1997 issue at pg 6.) Guidance on Proxy Statement Disclosure of Transferred Options

We were also pleased to see that the Staff even devoted space in the Release on how to report transferable and transferred options in the Summary Compensation Table, the Option/SAR Grants Table and the Option/SAR Exercises and Year-End Values Table.

Summary Compensation Table. The Staff proposes to amend S-K Item 402(b)(2)(iv)(B) to confirm that the number of securities underlying stock options reported in the option grants column of the Summary Compensation Table should include options that subsequently have been transferred by the NEO. This certainly makes sense, because even the exercise of options would not affect the three-year grant history in the Summary Compensation Table.

Option Grants Table. Item 402(c)(1) would also be amended to make clear that the Option Grants Table should include options that subsequently were transferred. The Release also sets forth the Staff's view that transferability should be included in the footnote disclosure of material terms of the options. (It would seem appropriate to add transferability to the list of material terms in Instruction 3 to Item 402(c), to codify this position.)

Option Exercises and Year-End Values Table. Probably the most significant disclosure proposal regarding transferable options is whether options exercised during the year, or held at year end, by family member transferees should be included or at least footnoted in the Option Exercises and Year-End Values Table. To be consistent with the other disclosures, we think so. (See the November-December 1997 issue of The Corporate Executive at pg 4.) (Also, keep in mind that under the §13(d) beneficial ownership principles, options transferred to family members may in many instances be included in the transferor's beneficial ownership.)

Comment Period and Timetable

The comment period on the S-8 proposals expires April 27. We are hopeful that the Staff will keep these proposals on a fast track and look forward to adoption by early summer.

The S-8 Consultant and Advisor Proposal-A Compromise Solution

As many of our readers already know, last month the SEC proposed changes to Form S-8 to (a) expand the availability of the S-8 to cover exercises by family member transferees, and (b) address abuse of the Form by consultants and advisors receiving stock options in connection with capital raising or stock promotion. (See the January-February 1998 issue of The Corporate Counsel at pg 1.)

Perhaps the most controversial aspect of the proposals is the requirement to file a post-effective amendment prior to any sale to (i.e., exercise by) any consultant or advisor, naming each person, the number of shares, and the specific services provided. We are strong believers in the prophylactic effect of disclosure. However, we believe that a compromise approach can be implemented which would limit the reporting requirement to the potential abusers and not catch in the net, for example, high-tech companies that routinely use options to compensate consultants and advisors for technological and other services which clearly are not related to capital raising. (Not only do the individuals have a right to privacy (and the company a desire to keep this information confidential from competitors), but heretofore this type of disclosure has only been required for NEOs.) Periodic Reporting

Our solution would be (1) to have all issuers that make grants to consultants or advisors include a disclosure in their 10-K of the total number of grants to consultants or advisors during the year, and the year-end outstanding grants, and (2) to require 10-Q disclosure of grants to (and/or exercises by), e.g., lawyers, accountants, investment bankers, broker-dealers, finders, public relations consultants, (other specific categories which could relate to capital raising, public relations, or stock promotion), and anyone else performing services in the nature of the foregoing. (Alternatively, instead of a 10-Q requirement, the information might be submitted supplementally to the Staff (i.e., confidentially, non-EDGAR).) Because the Staff takes the position (in the proposing release) that grants to accountants and lawyers as compensation for restructurings and other pre-capital raising transactions are not registerable on Form S-8 and because there can be gray areas when compensating financial and business PR firms, we would require that all grants to such persons (as well as any grants to non-natural persons) be disclosed (in the 10-Q or supplementally).

We would also build into the final rule a one-year review by the Staff to assess and fine tune the process.

Hopefully, this approach will address the abuses without imposing unnecessary and intrusive disclosure requirements on innocent companies and their consultants.