Is the Gig Up? Equity Compensation for Platform Workers, Influencers, and Brand Ambassadors

Your company may pay someone who is not on your payroll to move the needle, such as a rideshare driver delivering your product, a social-media influencer wearing your brand, or a gig worker staffing your marketplace. You may even want to give that person a stake in the company’s success. But the federal securities rules that govern compensatory equity were written for a world where “worker” meant “employee,” and updating them has proved more difficult than expected.

On November 24, 2020, the SEC proposed temporary rules that would have expanded Rule 701 and Form S-8 to cover “platform workers.”[1] The proposal was never adopted. Six years later, companies are wondering whether granting equity to influencers and brand ambassadors is permissible, or whether to structure the grant arrangements into existing “consultant” or “advisor” categories. This article examines the unfinished regulatory framework, real-world practice, and the enforcement trap that catches the unwary.

Rules Written for an Outdated Workforce

Rule 701 under the Securities Act of 1933 exempts certain sales of securities made to compensate employees, consultants, and advisors of non-reporting companies. It is the principal vehicle by which private companies grant restricted stock, restricted stock units (RSUs), stock options, and other types of equity awards without a registration statement. Its public-company counterpart, Form S-8, serves the same function for reporting companies. For a deeper dive of different types of equity-based compensation, see Foley’s overview of equity-based compensation alternatives.

The problem is eligibility. Rule 701 and Form S-8 cover only employees, directors, general partners, and a narrow band of consultants and advisors — those who are natural persons, provide bona fide services to the issuer or qualifying related entities, and do not provide services in connection with a securities offering or the promotion or maintenance of a market for the issuer’s securities. A gig worker who delivers food through a company’s app, or an influencer who promotes a company on Instagram, may not fit neatly into any of those boxes.

The SEC’s Platform Worker Experiment

On November 24, 2020, the SEC voted three to two to propose temporary rules that would have amended Rule 701 and a parallel Form S-8 instruction to cover “platform workers.” Then-Chairman Jay Clayton explained: “Work relationships have evolved along with technology, and workers who participate in the gig economy have become increasingly important to the continued growth of the broader U.S. economy.”

The proposed rules would amend Rule 701 by adding a temporary rule provision that, for five years, would enable issuers to use Rule 701 to compensate certain platform workers, subject to the specified conditions. Under the amendments, an issuer could use the Rule 701 exemption to offer and sell its securities on a compensatory basis to platform workers who, pursuant to a written contract or agreement, provide bona fide services by means of an internet-based platform or other widespread, technology-based marketplace platform or system provided by the issuer if:

• No more than 15% of the value of compensation received by a participating worker from the issuer for services provided by means of the platform during a 12-month period, and no more than $75,000 of such compensation received from the issuer during a 36-month period;
• The amount and terms of any securities issued to a platform worker may not be subject to individual bargaining or the worker’s ability to elect between payment in securities or cash;
• The issuer must take reasonable steps to prohibit the transfer of the securities issued to a platform worker pursuant to this exemption, other than a transfer to the issuer or by operation of law;
• The issuance of securities to participating platform workers is pursuant to a compensatory arrangement, as evidenced by a written compensation plan, contract, or agreement, and is not for services that are in connection with the offer or sale of securities in a capital-raising transaction, or services that directly or indirectly promote or maintain a market for the issuer’s securities; and
• The issuer operates and controls the platform, as demonstrated by its ability to provide access to the platform, to establish the principal terms of service for using the platform and terms and conditions by which the platform worker receives payment for the services provided through the platform, and by its ability to accept and remove platform workers participating in the platform

The same conditions would apply to issuances to platform workers by reporting companies on Form S-8, except for the proposed transferability restriction. The comment period closed in February 2021, but the proposal was never finalized and cannot currently be relied upon. The SEC’s rule page for Release No. 33-10892 still carries a status of “Proposed,” and the five-year sunset was never triggered because the rule never took effect.

Where Influencers Fit — And Where They Do Not

Even if it was effective, the platform worker proposal does not squarely address influencers and brand ambassadors, and that gap is not accidental. The eligibility threshold that matters is the requirement that services be provided through a platform operated and controlled by the issuer. An influencer promoting a company on Instagram, TikTok, YouTube, or any other social media platform is providing services through a third-party platform the company does not operate or control. A classic brand-ambassador arrangement would therefore likely fall outside the proposed definition. By contrast, a creator who provides services on a company’s own marketplace or content platform (e.g., a seller on a company-operated social commerce app) could more plausibly satisfy the definition. The distinction turns on platform control, not on the nature of the services. Other conditions in the proposal are a poor fit for typical influencer deals. Influencer agreements are almost always individually negotiated, conflicting with the “no individual bargaining” requirement, and the 15%-of-compensation and $75,000 caps would constrain high-value arrangements.

Despite the regulatory ambiguity, companies are granting equity-like instruments to influencers and brand ambassadors. Most companies that take this approach classify influencers as “consultants or advisors” under Rule 701 or Form S-8 or satisfy other securities law exemptions, (2) review state “blue sky” filing requirements, (3) document the relationship in a formal consulting or ambassador agreement, (4) report all compensation (including stock compensation) on a Form 1099, and (5) structure the grants to be compliant with or exempt from Code Section 409A.

Companies looking into these types of grants also need to monitor other requirements and limitations that are outside the scope of this article, including the potential application of Section 17(b) anti-touting rules, broker-dealer limitations, and/or Federal Trade Commission (FTC) disclosure obligations.

Practical Takeaways for Employers

For companies considering equity grants to non-traditional workers, the regulatory landscape remains unsettled, but several practical steps can reduce risk:

• Map eligibility carefully. Determine whether the recipient can qualify as a “consultant” or “advisor” under existing Rule 701 or Form S-8 guidance. If the arrangement does not fit, a registered offering or another exemption may be required to move forward.
• Address tax and benefits classification upfront. Non-employee recipients generally receive Form 1099 reporting. Stock options must be nonqualified (incentive stock options are not available to non-employees), priced at fair market value, and structured to comply with Code Section 409A.
• Assess the company’s industry for sector-specific rules. Securities and tax analysis is only part of the picture; the company’s own industry may impose separate advertising, promotional, or endorsement requirements on whoever is being paid to speak about the business. For example, if the company is engaging the influencer to promote a healthcare-related business, a regulated medical product, or a wellness product, additional regulatory regimes may apply.
• Confirm the recipient understands the tax consequences of the grant. Separate from the company’s own reporting and Code Section 409A compliance obligations, non-employee influencers and advisors are frequently unrepresented and may not understand the various tax consequences associated with equity awards, especially with respect to certain types of awards (e.g., restricted stock). The company should encourage the recipient to consult their own tax advisor and confirm in the grant documents that the company is not providing tax advice.
• Build in protections if the relationship goes south. An influencer or brand ambassador is the public face of the company, and the arrangement may end badly through underperformance, a reputational controversy, a move to a competitor, or disparagement of the company. The equity plan and the individual award agreement should protect the company in the event the relationship between the company and influencer deteriorates, such as performance- or deliverable-based vesting instead of pure time vesting; forfeiture of unvested awards on termination of the engagement; and a repurchase or call right on vested shares. The documents could also include clawback or cancellation triggers tied to breach of the underlying services agreement, reputational harm, or morals-clause conduct.
• Structure the agreement to emphasize compensatory purpose. Use a written consulting agreement, ambassador agreement or licensing agreements. Avoid features that look more like a capital-raising transaction than a compensatory one.
• If applicable, build Section 17(b) compliance into the grant and check applicable broker-dealer and FTC rules. If the recipient will engage in promotions that could trigger Section 17(b), broker-dealer rules or FTC disclosure, then carefully structure around these requirements and monitor compliance.
• Watch the regulatory horizon. The 2020 platform worker proposal may be revived, modified or superseded.

Foley’s Employee Benefits & Executive Compensation attorneys regularly advise companies on structuring equity grants, navigating securities law exemptions, and managing the tax and disclosure considerations that accompany these arrangements. For more information, visit the Employee Benefits & Executive Compensation practice page or contact a member of the team.

[1] https://www.sec.gov/rules-regulations/2020/11/temporary-rules-include-certain-platform-workers-compensatory-offerings-under-rule-701-form-s-8 and https://www.sec.gov/newsroom/press-releases/2020-293