April 23, 1998

Securities and Exchange Commission

450 Fifth Street, N.W.

Washington, D.C. 20549

Attention: Mr. Jonathan G. Katz

Secretary

Re: Proposal to Amend Form S-8 and Related

Rules -- File No. S7-2-98

Ladies and Gentlemen:

This letter responds to the request of the Securities and Exchange Commission (the "Commission") in Release No. 33-7506 (February 17, 1998) (the "Release") for comments on proposals to amend Form S-8 and related rules under the Securities Act of 1933 and Regulations S-K and S-B to restrict the use of the form for the sale of securities to consultants, and to allow the use of the form for the exercise of stock options by family members of employee optionees.

These comments have been prepared by representatives of eight law firms in Silicon Valley, one Stanford Law School Professor and certain other individuals, several of whom are members of the Subcommittee on Employee Benefits, Executive Compensation and Section 16 of the Committee on Federal Regulation of Securities of the Section of Business Law of the American Bar Association (the "Subcommittee") that is submitting a separate comment letter addressing the Release. As indicated, we agree with the Subcommittee on many of the issues set forth in their comment letter.

I. Information about Consultants

The Release proposes a new requirement in Form S-8 pursuant to Part II, Item 8 thereof, that would require disclosure of the (1) name of each consultant receiving issuer securities, (2) the number of issuer securities to be issued to the consultant pursuant to the Form S-8, and (3) a specific description of the services that such consultant would provide to the registrant. The Release also indicates that, if the required information is not available at the time of filing of the Form S-8, the information would have to be included by post-effective amendment filed prior to the sale of stock to the consultant. Failure to provide the required information would be a disclosure violation.

We agree with the Subcommittee that the Commission’s proposals for addressing the elimination of perceived abuses of the use of Form S-8 to register offerings to consultants and advisors (hereinafter "consultants") who promote a registrant’s securities are more drastic than necessary to alleviate such abuses and run counter to the recent initiatives of the Commission to simplify the disclosure process. (See "Report of the Task Force on Disclosure Simplification", March 1996). We agree with their view that the primary reason for requiring this disclosure is not the protection of investors (in the case of sales under a Form S-8 registration statement to consultants, the investor is the consultant, who knows full well his or her own name, the number of shares that he or she is getting and the services that have been performed); rather, it is prompted by enforcement concerns regarding certain abuses of Form S-8. The Commission’s suggestions to address the enforcement issue unnecessarily increase the complexity, burden and cost of utilizing Form S-8 without providing any significant increase in investor protection.

We also agree with the Subcommittee’s views that public disclosure in a document filed with the SEC is not necessary to accomplish the enforcement objectives. Public disclosure of specific compensation information for a particular consultant is an unwarranted intrusion on such consultant’s right to privacy. In addition, such public disclosure could particularly injure high technology companies in Silicon Valley, where consultants are used extensively. It is our concern that competitors could obtain the names of particular consultants used by a company and hire such consultants away from that company. As we pointed out to the Subcommittee, this also would lead to the competitor seeking to use that information to gain strategic insight into the direction of the company's research and development efforts. Moreover, the required disclosure of the number of shares issued to each consultant would arm the company’s competitors with significant quantitative compensation information, thereby allowing them to use that knowledge to the detriment of the registrant in attempting to hire such consultant. Finally, we also are of the view that the frequency with which the disclosure is required is extremely burdensome, as the proposed requirement effectively requires the registrant to file a post-effective amendment to its registration statement on Form S-8 each time it grants an option to a consultant.

While we have no reason to doubt the Staff’s assertion that there have been abuses in the use of Form S-8 for consultants, we have not seen any such abuses by our respective clients, and we do not believe that this abuse is widespread. However, the need for technology companies to be able to utilize options and stock in compensating consultants for important contributions to their success is very widespread and quite compelling. For this reason, we recommend a solution that would minimize the burdens upon issuers, particularly those issuers wishing to comply with both the letter and spirit of the Form's requirements, while still providing the Commission with the information it requires for enforcement purposes to identify and remedy the isolated abuses.

Of the various possible alternatives suggested by the Commission, we believe the following should be sufficient to address the perceived abuses while respecting the privacy, competitive and practical concerns discussed above:

• Quarterly Disclosure. Require registrants to disclose quarterly the information only to the extent specified by paragraph B below (in Part II of Form 10-Q for the issuer's first three fiscal quarters and in Part II of Form 10-K for the issuer's fourth fiscal quarter), unless the exemption set forth in such paragraph is satisfied.

• Disclosure of Aggregated Information. Require registrants to disclose in Part II of Form 10-Q and Form 10-K only the aggregate number of the issuer’s securities sold to consultants and the aggregate number of consultants to whom securities are issued, and to certify that all of the services rendered are of the permitted type. In addition, no disclosure should be required if any one of the following three conditions is met: (1) the total number of shares issued during the issuer’s prior fiscal quarter to consultants did not exceed 1% of the total number of outstanding shares as of the last day of the issuer’s prior fiscal quarter; (2) the registrant meets the "float" requirements set forth in General Instruction I.B.1 of Form S-3; or (3) the market capitalization of the registrant (i.e., the total number of outstanding shares multiplied by the market price of such shares) as of the last day of the issuer’s prior fiscal quarter exceeds $150,000,000. In no event should the identity of the consultants or a specific description of the services rendered be required to be disclosed in a publicly filed document.

• Undertaking to Furnish Information. Require a specific undertaking in Part II of Form S-8 for registrants to provide information to the Commission on a confidential basis with respect to the issuance of securities to consultants upon the request of the Commission, with such information to include the names of the consultants receiving such securities, a description of the services performed by each such consultant and the number of securities granted to each such consultant. This information would not be available to the public on EDGAR or through any other form of public request and would be treated in the same manner as any confidential business information.

Set forth below are our reasons for not recommending other alternative approaches:

A. Frequency of Disclosure. As noted above, Silicon Valley high technology companies typically utilize a large number of consultants in their business. However, a Form S-8 covering the securities issuable under broad-based equity incentive plans is often filed shortly after adoption and approval of the plan, which is well in advance of most option grants or stock issuances to such consultants under the plan. Consequently, required information regarding consultants will only be available after the Form S-8 is filed as the Board identifies consultants from time to time to receive awards under the Plan, thereby potentially requiring the filing of post-effective amendments on a frequent basis. Since securities are issued to consultants on a frequent basis following the filing of Form S-8 (in high technology companies, securities are often issued on a monthly or even weekly basis), this obligation to file post-effective amendments will be particularly burdensome to technology companies. We believe that the preferable method of disclosure would be in Quarterly Reports on Form 10-Q for the issuer's first three fiscal quarters and in the Annual Report on Form 10-K for the fourth fiscal quarter. Regular quarterly reporting of aggregate data of stock issuances to consultants will provide a uniform means of monitoring transactions that may be abusive, thereby enhancing prevention of the abuses the Commission has identified. We do not believe a post-effective amendment to Form S-8 should be required since the Form 10-Q is automatically incorporated by reference. Nor do we believe that these issuances are of sufficient market significance to require prompt reporting on Form 8-K. Quarterly reports would cover the actual sale of securities (i.e., the purchase or grant of stock, whether pursuant to exercise of an option or otherwise) during the fiscal quarter to consultants under a Form S-8. There is precedent for this type of requirement in the existing requirement to report sales of unregistered equity securities during the quarter, as set forth in Item 2(c) of Part II of Form 10-Q and Item 5 of Part II of Form 10-K. Both such items reference Item 701 of Regulation S-K. This approach also would be consistent with the revisions to the reporting requirements of Regulation S issuances recently adopted in Release 33-7505.

B. Information about Consultants. The Release proposes a new requirement in Form S-8, pursuant to Part II, Item 8 thereof, that would require disclosure of (i) the name of the consultant, (ii) the number of shares to be issued to the consultant, and (iii) a specific description of the services that such consultant will provide to the registrant. We believe such level of disclosure is inappropriate and unnecessary to achieve the goals of the Staff. The required disclosure is much too specific and unfairly penalizes issuers that use the expertise of consultants rather than that of employees in many aspects of their business. Detailed disclosure of specific securities issuances is not required with respect to securities sold to employees under a Form S-8 registration statement. None should be required in the case of consultants.

(1) Disclosure of Consultant Names. The law firms whose representatives have signed this letter represent many of the leading high technology, telecommunications, software, life sciences, and media companies in Silicon Valley. While our clients in these fields produce a diverse mix of products and services, a critical element central to the tremendous productivity of this vital sector of the American economy is constant innovation. These companies routinely leverage their ability to invent and develop new technologies far beyond the capacity of their immediate employees by tapping the expertise of large numbers of consultants and advisors. The projects for which such individuals are engaged may involve research and development efforts for products that may be years away from being marketed and involve these companies’ most critical trade secrets. These consultants are uniformly subject to confidentiality agreements that prohibit them from disclosing any confidential information concerning their work. For reasons related to confidentiality, we do not believe that it is necessary or desirable to name consultants in Part II of Form S-8, Form 10-Q, Form 10-K, or any other public filing. We believe that the disclosure of the names of consultants would place these high technology companies at a disadvantage relative to their competitors. Such competitors would be eager to learn the names of consultants in order to gain insight into the activities of such companies. Many of the consultants may be leading authorities in their fields or may otherwise be easily identifiable by the registrant’s competitors with specific research focuses. Consequently, the Commission’s proposal to require an issuer to disclose the names of consultants and advisors to whom securities will be sold pursuant to the issuer’s Form S-8 registration statement in many cases would amount to a mandate to disclose the issuer’s most closely guarded trade secrets. Simply knowing whom a competitor has engaged as a consultant may be enough to reveal the direction of that company’s research and development efforts. More ominously, such disclosure would make it far easier for the unscrupulous to engage in improper solicitation of information or services, industrial espionage, extortion, sabotage or worse. Such information in the hands of a competitor could provide confidential information that would not otherwise be available through any SEC filings or other public documents.

Further, with the advent of EDGAR and easily searchable databases of issuer filings available to anyone over the Internet, individual consultants and advisors named by our clients also could be placed at a competitive disadvantage in negotiating their compensation for their next engagement, since future employers could readily determine whom they had worked for in the past and how much equity they had received. To require issuers to make specific requests to the Commission to ensure confidential treatment would be both time consuming and wasteful. Based on its historical bias in favor of resolving specific interpretive questions in favor of full disclosure, it is unlikely that the Commission would be receptive to the majority of such requests.

The Commission's rules generally reflect the view that the names of employees receiving securities is not material, except under Regulation S-K and Schedule 14A in the context of compensation of certain executive officers and directors. Furthermore, those issuers who are not now deterred from abusing the Form S-8 registration statement despite the express prohibition against its use in a capital-raising transaction are not likely to be stopped by the requirement of naming "consultants" to whom securities will be issued. The real chilling effect would be felt by high technology companies, who will have to choose between disclosing critical trade secrets to their competitors or ceasing to provide equity incentives to individuals who may be key contributors to the future of their enterprises. Simply put, we do not believe that the abuses sought to be prevented by the Commission through the naming of consultants justify the competitive harm to issuers who use consultants for legitimate business purposes.

(2) Description of Services Performed by Consultants. As noted above, many high technology companies employ significant numbers of consultants. While the number engaged varies, it would not be unusual for 10-20% of a high technology company’s service providers to consist of consultants. The obligation to list consultants and identify the functions performed could prove unduly burdensome in a company utilizing large numbers of consultants. For this reason, we do not believe that it is necessary or desirable to specify the services to be provided by consultants. More importantly, the Commission's proposal to "describe specifically the services that each of the persons will provide to the company" would place many high technology companies at a competitive disadvantage for the same reasons described in subparagraph B.1 above.

As noted above, the particular services rendered by consultants are often highly confidential and may well be the subject of confidentiality agreements between such consultants and the issuer. The benefits to be gained by a more specific description of the consulting services would be outweighed by the disadvantages of describing such services. Even where the name of the consultant is not sufficient to reveal the direction of the company's research and development, a description of the services surely could. Describing the services provided would give unscrupulous competitors the ability to engage in activities designed to adversely affect the consultant’s service relationship, including the possibility that the competitor would attempt to hire the consultant for itself with the lure of higher equity incentives.

We believe that it is sufficient to require the issuer to certify that the services of the consultants are not in connection with the promotion of the registrant's securities or the offer or sale of securities. Even if some description of the services is warranted, it would seem that brief descriptive statements that make it clear that the consultant is in no way engaged in capital-raising or similar activities would be sufficient. Examples of adequate disclosure would be, "consultant providing recruiting services" or "consultant assisting with research and development." Where the consultant serves in a financial capacity that is legitimately not capital raising, such as an interim chief financial officer, it would seem that adequate disclosure could be accomplished with a statement of typical duties, such as "interim chief financial officer providing ongoing oversight of corporate financial function."

(3) Disclosure of Number of Securities Issued to Consultants. We do not believe that it is necessary or desirable to specify the amount of securities issued to each consultant. The relevant information could easily be provided by simply requiring the issuer to disclose the aggregate number of shares sold to consultants. The disclosure of the specific amount of securities issued to individual consultants would place many issuers at a competitive disadvantage by providing their competitors with significant quantitative compensation information. This would better place such competitors in a position to attempt to hire the consultant away. Disclosing the number of securities issued to individual consultants would disclose confidential information to an issuer’s competitors. It would also impact privacy concerns for the consultant, particularly if one issuer is successful and the equity compensation becomes relatively large. Moreover, we agree that there should be a threshold that must be met in order to trigger any disclosure requirement. However, unlike the Subcommittee, we believe that reporting should not be required if any one of the following three conditions is met: (1) the total number of shares issued during the issuer’s prior fiscal quarter to consultants did not exceed 1% of the total number of outstanding shares as of the last day of the issuer’s prior fiscal quarter; (2) the registrant meets the "float" requirements set forth in General Instruction I.B.1 of Form S-3; or (3) the market capitalization of the registrant (i.e., the total number of outstanding shares multiplied by the market price of such shares) as of the last day of the issuer’s prior fiscal quarter exceeds $150,000,000.

C. Overbroad Application of Consultant Limitations. The Release cites certain "consultant abuses," in which issuers and consultants enter into arrangements pursuant to which consultants become conduits for distributions of securities to the public in violation of Section 5 of the Securities Act of 1933. The Commission appropriately seeks to curb such abuses in making Form S-8 unavailable for such purpose. The Release proposes to make Form S-8 unavailable for the issuance of securities as compensation for services that directly or indirectly (emphasis supplied) promote or maintain a market for the registrant’s securities. The latter prohibition arguably encompasses a broad and undefined range of legitimate financial consulting services not involving underwriting, market making or stock promotion for which no abuse or other rationale to exclude from use of Form S-8 is cited. Such exclusion would impose undue burdens on technology companies, which typically rely on financial consultants in a variety of contexts, consistent with the growth of outsourcing and contingent work. These consultants generally are of three types:

1. Consultant CFOs. It has become increasingly commonplace, both within the technology sector and in the broader marketplace, for companies to have chief financial officers who serve on a consulting basis, either full-time or part-time, rather than as regular employees. The consultant-CFOs perform those functions typically performed by employee-CFOs including, participating in capital raising transactions from time to time on behalf of the company. Like the employee-CFO, the consultant-CFO serves as neither an underwriter, market maker nor finder. It is anomalous to distinguish as inappropriate for registration on Form S-8 equity compensation paid to a consultant-CFO from that paid to an employee-CFO performing virtually identical functions, the latter of which is acknowledged to be appropriate for registration on Form S-8.

2. Business Development Consultants. A second category of consultants consists of business development consultants retained by technology companies, typically small companies, to identify other, typically larger, technology companies as development partners for certain technologies. Common examples are drug development alliances between biotechnology companies and large pharmaceutical companies. These corporate partnerships or alliances generally provide the small entity with development funding in exchange for certain rights to the product being developed. Often, the larger entity purchases an equity interest in the small company, infusing additional capital. Although many technology companies employ in-house business development professionals who are responsible for facilitating these alliances, it is not unusual for a consultant to be hired to perform this function, particularly in the case of a small company without a business development executive on board. Although the purpose of the alliance is technology development, funding, which may be in the form of an equity investment, may be an integral part. Thus, the consultant, like his in-house counterpart, may be indirectly involved in capital-raising activities and within the literal exclusionary language used in the Release, without posing the danger of the abuses cited in the Release.

3. Strategic Communications Consultants. The third category is consultants who provide investor relations services and strategic business advice on a regular basis, during financings or both. Like the CFO consultants and business development consultants, these consultants may be involved in the capital-raising process on behalf of the Company but are not acting as underwriters, market makers, promoters, finders or conduits for distributions of securities. Even in the context of financings, their equity compensation is not tied to the size or success of the financing and is not significant in relation to the financing as a whole. Thus, we believe the likelihood of abuse is remote.

We believe that the Commission should refine the definition of the scope of those persons whose equity compensation is excluded from Form S-8 to eliminate from such exclusion those consultants not acting as underwriters, promoters, market makers or conduits for distributions of securities. We suggest that the Commission include the types of consultant referenced above as "financial consultants" who are deemed to render bona fide services other than in connection with the offer or sale of securities in a capital-raising transaction.

D. Percentage of Securities Registrable on Form S-8. The Release solicits comments as to whether any limit should be placed on the aggregate number of shares that may be sold to consultants pursuant to a registration statement on Form S-8 during a registrant's fiscal year, in order to prevent the abuse of Form S-8 to register securities issued in connection with a capital-raising transaction. We do not feel that any such limit would be appropriate, and it would be potentially harmful to registrants who rely on legitimate consultants to perform important tasks for them. The Staff should not be in the position of "second guessing" the board of directors of a public company with respect to the appropriate number of shares to be issued to consultants. Any limitation on the number of shares issuable to consultants should not be based on an arbitrary determination by a regulator, but rather on a determination by an informed board of directors taking into account the particular facts and circumstances, as well as the state law fiduciary duties of directors to approve an action, such as the issuance of securities to consultants, only when such action is in the best interest of the corporation and its shareholders. (See, e.g., California Corporations Code Section 309(a)).

Any limitation that might be chosen would of necessity be artificial and arbitrary, and would raise various practical problems in its application. Similarly, we do not believe it would be feasible or appropriate for the Commission to attempt to identify specific industries that may utilize Form S-8 for specific purposes. High technology industries, on average, tend to use more consultants than companies in most other industries. However, we do not feel that any limit on the number of shares issued to consultants that are registrable on a Form S-8 should be differentially applied to different types of registrants; the absolute limit should simply be set high enough to accommodate the registrants with the largest need for consultants. The Commission has asked for guidance regarding the appropriate magnitude of any such percentage limit. Whether a specific limitation (the Release suggests 10%) would leave an adequate pool of securities available to compensate consultants for legitimate purposes cannot be determined in a vacuum and will vary from company to company and from time to time within the same company. Because we do not feel that any arbitrary limit is appropriate, we do not suggest a specific number. However, if it is felt by the Commission that a limit must be imposed, it should be as high as possible (e.g., 50%) in order to allow an issuer’s board of directors to perform its duties and hire the necessary consultants in a competitive market without having to worry about how shares issuable to such consultants are to be registered or what exemption will cover the issuance.

II. Form S-8 Availability for Transferees

We welcome the Commission's willingness to extend the availability of Form S-8 to certain transferees of compensatory options, and urge the Commission to act expeditiously on these changes. We believe that a transferable option should be covered under the Form S-8 based on (i) the optionee’s donative intent in transferring the option, and (ii) the status of the transferee. This approach should both allow the optionee more flexibility in transferring his or her options and also prevent the reliance on Form S-8 for the transfer of options to qualified donees for capital-raising purposes.

We offer the following specific comments in response to the Commission's proposals and related questions dealing with the use of Form S-8 transferable options.

A. Family Members. The definition of family member should be expanded to cover not only those individuals listed in the Commission’s release, but also nieces and nephews and family partnerships designed for the exclusive benefit the optionee and his or her family members. Nieces and nephews should be included in the definition of family member, because an optionee may want to transfer his or her options to a family member, but may not have any living relatives other than a sibling’s child. However, we believe that options gifted to nieces and nephews should not be added to the definition of immediate family in Rule 16a-1(e) because of the different objectives served by such Rule.

B. Family Partnerships. Family partnerships should be specifically included in the definition of family member. In this regard, families may choose a partnership structure, instead of other arrangements, such as a trust, in which to place assets for the benefit of family members. Although we believe the phrase "any other entity" in the Commission’s proposed definition of family member should cover a family partnership, this is not clear. Accordingly, we believe that family partnership should be expressly included in the definition of family member and that the definition of "family partnership" should recognize that the entity need be only "primarily" owned by such family members.

C. Charitable Organization. Options gifted to charitable organizations that satisfy the requirements of section 501(c)(3) of the Internal Revenue Code should also be covered on the Form S-8. Such organizations would generally include entities that are organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes. A common scenario is an optionee who charitably wants to transfer options to his or her alma mater. Under the current and proposed requirements of Form S-8, the exercise of such options would not be eligible for registration on a Form S-8. Precluding the exercise of options that have been transferred to charitable organizations from coverage under Form S-8 only impedes an optionee’s ability to donate gifts to such organizations and does not serve any overall purpose of the Commission. Accordingly, we believe that options transferred to charitable organizations should be eligible for registration on Form S-8.

D. Domestic Relations Orders. Form S-8 should be available for transfers pursuant to domestic relations orders. We agree with the Subcommittee that the Commission should not be prejudging the circumstances in which transfers surrounding the termination of a marital relationship are appropriate.

Respectfully submitted,

Professor Joseph A. Grundfest

Stanford Law School

Palo Alto, California 94305

FENWICK & WEST LLP WILSON, SONSINI, GOODRICH &

ROSATI, PROFESSIONAL CORPORATION

By:______________________________ By:______________________________

Scott P. Spector Ann Yvonne Walker

Two Palo Alto Square 650 Page Mill Road

Palo Alto, CA 94306 Palo Alto, CA 94304

(650) 858-7251 (650) 493-9300

BROBECK, PHLEGER & HARRISON LLP COOLEY GODWARD LLP

By:______________________________ By:______________________________

Patricia G. Copeland Michael R. Jacobson

Two Embarcadero Place 5 Palo Alto Square

2200 Geng Road Suite 400

Palo Alto, CA 94303 Palo Alto, CA 94306

(650) 424-0160 (650) 843-5031

HELLER, EHRMAN, WHITE & McAULIFFE LLP GRAY CARY WARE & FREIDENRICH LLP

By:______________________________ By:______________________________

Richard A. Peers William H. Hoffman

525 University Avenue 400 Hamilton Avenue

Palo Alto, CA 94301 Palo Alto, CA 94301

(650) 324-7045 (650) 328-6561

GUNDERSON DETTMER STOUGH McCUTCHEN, DOYLE, BROWN & ENERSEN

VILLENEUVE FRANKLIN & HACHIGIAN

By:______________________________ By:______________________________

Shawn E. Lampron William J. Newell

155 Constitution Drive 3 Embarcadero Center

Menlo Park, CA 94025 San Francisco, CA 94111

(650) 321-2400 (415) 393-2000

ShareData

By:______________________________

Mark A. Borges

190 Sobrante Way, Suite 100

Sunnyvale, CA 94086

(408) 746-3666