Whether you are a private company on the road to IPO preparing a stock offering or a business that has already gone public and is looking to offer equity incentives to employees, you will face an admin burden, with the onus on you to ensure that your filings to the Securities and Exchange Commission (SEC) are complete and accurate.
Among the most significant documents United States-based companies can expect to grapple with are Form S-1 and Form S-8, with the former required of companies preparing a stock offering in connection with an IPO and the latter associated with post-IPO awards linked to employee stock plans.
Here, we will look at the key details associated with both.
SEC Form S-1
Companies file Form S-1 – also known as a registration statement – with the SEC in advance of formally going public and must do so before their shares can be listed on a national stock exchange.
In this document, companies are required to provide information on several topics, such as their existing business model, their main competition, how they intend to use the proceeds, details on management and the financial state of the company, as well as information on the planned stock offering itself, such as the process behind settling on the offer price, who the underwriters are, and what percentage of company stock is being sold by individual stockholders.
Form S-1 has two parts. Part I is called the prospectus. In this section, the company provides all information that is legally required by the SEC, as set out just above. Part II includes details not legally required in the prospectus (i.e., doesn’t have to be shown to prospective investors), such as whatever recent transactions involving unregistered securities may have taken place and the company’s financial statement schedules.
Part of the logic behind the S-1 requirements is that providing this information will enable investors to do due diligence on the offering prior to its being issued and guide them towards a decision on whether to invest in the company’s stock.
Given that an IPO can be an involved process with twists and turns along the way, the SEC understands that certain facts and declarations may change and need to be updated between the point that the S-1 is submitted and the actual flotation. In those circumstances, updates to previously submitted information can be provided in Form S-1/A. In theory, multiple S-1/As might be filed by a company in the run-up to the first day of their shares being traded openly on a public stock exchange.
The key point for companies to be aware of is that when the facts provided in the initial registration statement change, the SEC must be formally notified through an S-1/A. It is not enough to merely submit an S-1 with a snapshot of information at a given moment in time. If any of those details subsequently change, for whatever reasons – whether due to material changes or a delay in the offering – you must file an update. In the event of a submission omitting key information or making material misrepresentations, the SEC has the power to respond in a number of ways, any of which might prove detrimental to a company deemed not to have met its obligations. Typically, the process of completing Form S-1 is time-consuming and demanding. It is a fact-driven form and completing it in the depth required will require extensive information gathering. The final document can run to more than one hundred pages and will include multiple chapters.
The form itself is submitted online using the SEC’s EDGAR filing system.
SEC Form S-8
Compared to Form S-1, Form S-8 is relatively straight-forward and therefore far less time-consuming. That does not mean it is not an important document in its own right, merely that it should be easier for companies to complete and file with the SEC.
Whereas S-1 goes into great depth and detail, Form S-8 is perhaps best thought of as a short-form registration statement. In it, companies must provide the required details on plans to allocate or offer equity to personnel internally as part of an employee stock plan. So, if individuals are to receive, for example, shares or stock options as part of their compensation package, an S-8 registering these grants will need to be filed by the company before that award can be completed.
An S-8 filing is also required when companies want to grant employee bonuses and involve personnel in profit-sharing initiatives.
Little by way of disclosure is required with S-8 filings. This is because the starting assumption in the process is that the disclosure-related heavy lifting will have already taken place in earlier submissions of other documents, such as annual and quarterly reports, with that data automatically included in the S-8. The idea is that when companies are up to date with their SEC filings, Form S-8 allows them to register shares quickly and smoothly.
Against that backdrop, it should come as no surprise to read that the typical completed Form S-8 will require only a modest amount of documentation (relative to Form S-1), rarely exceeding twenty pages and usually closer to ten pages.
Another key difference between the two forms is that while the contents of an S-1 will be fully reviewed by the SEC, an S-8 is not automatically subjected to the same level of scrutiny. Again, this is at least in part due to the fact that much of the relevant background information will have already been submitted in other documentation. In practical terms, because an S-8 is not subject to review, once filed it becomes effective immediately.
The next step after filing is to then send a prospectus to employees containing all relevant information and inviting participation in whatever plan is being proposed.
The SEC has specific rules in place on S-8 eligibility. Basically, all employees are covered by the terms, as well as other individuals such as advisors and consultants. However, the SEC is very clear on where it draws the line – it does not permit a company to file an S-8 when gifting shares to individuals involved in the marketing of that same company’s shares.
This rule was introduced in 1999 to clamp down on a practice whereby some companies were granting large amounts of shares to individuals who engaged in marketing efforts designed to boost the price of that stock. In certain instances, those individuals would then immediately sell their gifted shares on the stock market, with the proceeds of that sale making their way back to the issuer of the stock, i.e., the company. Subsequent to that, in 2005, the SEC further updated its rules to restrict companies who have undertaken reverse mergers with shell companies from making Form S-8 filings. These rules state that eligible companies must a) not be a shell company or b) must have ceased being a shell company at least 60 days prior to any filing and filed documents with the SEC proving that to be the case. The main reason cited by the SEC at the time for introducing this restriction was that since shell companies do not operate active businesses and tend not have employees, it was difficult to see a legitimate basis for such entities to use Form S-8.
As with Form S-1, an S-8 is submitted online using the SEC’s EDGAR filing system.
Form S-1 and Form S-8 are merely two of the forms that company need to file with the SEC, with many of these documents needing to be submitted at regular intervals on an ongoing basis. Negotiating the various deadlines and reporting requirements can be challenging, which is why if you do not already use high-quality reporting software you should consider doing so. Global Shares can assist you in that process, with our experienced personnel and state-of-the-art software solution on-hand to help you navigate your way what can at times be a confusing maze of obligations.
Contact us now for more information.