Here’s something you might be concerned about if you run a “sharing economy” business like Airbnb or Uber: payments to people who earn income from those services are on the decline. (According to a JP Morgan Chase study, the monthly earnings of drivers for ride-sharing companies dropped 53 percent between 2013 and 2017.)
Here’s something you might be concerned about if you run the SEC: companies just aren’t going public like they used to anymore, leaving regular Joes unable to get a piece of the pie.
Now, here’s something that might address both of these concerns: what if you allowed sharing economy businesses, like Airbnb and Uber, to compensate their hosts and drivers with equity?
That’s precisely the plan that Airbnb is proposing to the SEC. In a September 21 letter, the hospitality unicorn has asked the SEC to update “Rule 701” to allow it to introduce a stock-sharing plan for its hosts. Currently, such a plan would not pass muster under 701, which limits the universe of people to which private companies like Airbnb can give equity only to investors and employees. Airbnb is also asking for a workaround to another regulatory hurdle, section 12(g) of the Securities and Exchange Act. Under that provision, any company with more than 2,000 shareholders (or 500 who are not U.S. accredited investors) has to meet public reporting requirements. Airbnb of course wants to avoid that fate – having the reporting requirements of a public company with few of the benefits is seemingly a poor tradeoff.
These are not small accommodations that Airbnb is requesting – and in fact, others have tried and failed to get them before. Uber itself met with the SEC about giving its drivers equity last year. And ride-hailing upstart Juno had to scrap a plan to do the same.
But there’s reason to believe the SEC, and its chairman Jay Clayton, could be receptive to the idea now. Clayton has made an interesting pivot of late. He has consistently championed public listings as a way for Main Street investors to participate in the economic growth of expanding companies – and, accordingly, has lamented the decline in IPOs. But as we have observed, Clayton may have thrown up his hands at the idea of coaxing any more companies into going public, and turned his focus, instead, to getting stock into the hands of the little guys by any means necessary. His gestures towards letting Main Street investors buy equity in private companies is one dramatic example.
The Airbnb plan is a baby step in that direction. Clayton and the SEC could embrace it as a limited end run around the IPO process. Of course, there would be plenty of details to work out, including the tax treatment of the kind of stock transfer that Airbnb is contemplating.
Oh, and don’t look now, but both Uber and Lyft are planning to go public in 2018. Should the SEC hold out and require Airbnb to take that step before it hands out stock to its hosts? Or has getting stock into the hands of everyday investors completely overtaken the goal of promoting IPOs? The SEC’s action on Rule 701 may give us the answers.