Tag Archives: Form S-8

Can a Pink Sheet Use S-8 Shares to Compensate Consultants Who Raise Capital?

Exchanging Services for Rule 144 Restricted Stock is Common

Among OTCMarkets public companies, it is commonplace for Issuers to pay for consulting services using restricted shares of common stock.   For non-reporting companies, such as Pink Sheets, the usual way is for the CEO and the consultant to enter into a Consulting Agreement which specifies a certain number of shares for a specific scope of work.

This restricted stock is then held for the standard 12 month holding period under Rule 144 before being sold on the market.  Many times, the type of work for which restricted stock is awarded does include activities associated with raising capital, but Rule 144 is the mechanism for clearing the stock, not S-8.

S-8 Can Only Be Used By SEC Reporting Companies

Most Pink Sheets are not SEC filers, but are instead under the OTCMarkets’ Alternative Reporting Standard.  (Due to a recent change in OTCMarkets’ policies governing its OTCQB market tier, many SEC filers saw their OTCQB status change to Pink Sheet when their share price dropped below a penny.)   Because of this distinction, consultants providing services in exchange for true Pink Sheet stock are awarded Rule 144 restricted stock with a 12 month holding period, not S-8 stock, which is free trading.

S-8 Cannot Be Used for Capital Raising Activities

Even if a Pink Sheet was allowed to use S-8, the capital raiser would still be out of luck because stock issued to consultants in exchange for work associated with capital raising cannot be cleared using S-8.  There are no exceptions for this.  In fact, there are 8 requirements for an SEC reporting company to be able to use S-8, and all of them must be met.

Are S-8 Shares Free Trading?

S-8 Shares Are Free Trading When Form S-8 Is Filed

One reason why employees and consultants of OTC Bulletin Board or OTC Markets OTCQB Issuers like to receive S-8 Shares is that  an S-8 is immediately effective upon filing. This means that S-8 stock is free trading upon filing Form S-8 for employees and consultants who are not Affiliates.   S-8 stock is still subject to the Rule 144 volume limitations if owned by officers, directors and other Issuer control persons.

SEC Reporting Company Requirements To Use S-8

In order to meet the requirements of S-8 Shares, the OTC Issuer doing an S-8 offering must meet every one of the SEC’s requirements for S-8 stock.  The Public Company Issuer MUST:

  1. be “fully reporting to the SEC,” subject to the reporting requirements under Section 13 or 15 (d) of the Exchange Act;
  2. have filed all SEC reports for the past year (or for whatever shorter period the Issuer was required to file SEC reports);
  3. show that the consultant provided “bona fide services” to the Issuer;
  4. show that the services provided by the consultant were not “in connection with the offer or sale of securities in a capital raising transaction”;
  5. show that the services provided by the consultant were not “in connection with directly or indirectly promoting or maintaining a market for the Issuer’s securities”;
  6. The consultant must be a natural person (an individual) since Form S-8 cannot be used to issue stock to a corporation or other entity;
  7. The consulting agreement must be between the Issuer and the natural person; and
  8. The Issuer must issue the stock directly to the natural person as opposed to a corporate entity.

All SEC reporting companies, including OTCBB and OTC Markets OTCQB issuers can discuss the process of creating and registering S-8 Shares for employees and consultants by contacting securities lawyer Matheau J. W. Stout at (410) 429-7076 or mstout@otclawyers.com.