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From Securities Regulation Daily, March 1, 2019

Lyft’s much-anticipated IPO filing includes novel plan to involve drivers in the initial sale

By John M. Jascob, J.D., LL.M.

The company’s directed share program signals a new approach under Rule 701 by the SEC for "gig economy" workers.

In its eagerly-awaited initial public offering, on-demand ridesharing company Lyft, Inc., will offer its drivers an opportunity to obtain an equity stake by giving them cash to purchase shares in the IPO. In its Form S-1 registration statement filed publicly on March 1, Lyft will provide certain veteran drivers with a one-time cash bonus to purchase stock through a directed share program. Lyft’s co-founders, however, will potentially retain control of the firm through a controversial dual-class share structure that is not subject to a sunset provision.

Cash for drivers. Under the directed share program, Lyft will pay $10,000 to drivers in good standing who have completed at least 20,000 rides on its platform as of February 25, 2019. Drivers who have completed between 10,000 rides and 20,000 rides as of that date will receive $1,000, as will drivers who have participated in Lyft’s Driver Advisory Program. Drivers may choose to use their bonus to purchase shares in the IPO through the directed share program, but have no obligation to do so.

The inclusion of the directed share program for drivers in Lyft’s registration statement provides the first evidence that the SEC may expand the compensatory benefit plan exemption under Securities Act Rule 701 to include stock issuances to workers in the new "gig economy." The Commission had signaled that it was open to this kind of arrangement with its concept release on Rule 701 in July 2018. In that release, the SEC asked for public comment on ways to modernize compensatory securities offerings and sales under the rule, which has not been updated in 30 years. Specifically, the Commission sought input on whether Rule 701’s scope should be extended to cover alternative work arrangements involving issuers like Lyft who use Internet platforms to provide individuals the opportunity to sell goods and services.

Dual class share structure. Lyft's registration statement also calls for the company to adopt an unequal voting structure that would appear to keep voting control in the hands of Lyft’s co-founders, John Zimmer and Logan Green. Under this dual class structure, Zimmer and Green would hold at the closing all of Lyft’s Class B common stock, which will have 20 votes per share. The Class A common stock offered in the IPO, however, will have only one vote per share. The co-founders would thus potentially wield majority voting control after the IPO despite reportedly owning less than 10 percent of Lyft’s equity.

The Council of Institutional Investors (CII) had criticized a dual share structure of this nature, stating that it would create a substantial misalignment between those with control and those exposed to the economic consequences of that control. Accordingly, CII had asked Lyft’s board to adopt a sunset provision automatically converting any such dual class capital structure to one class of common stock with one vote per share within seven years. Lyft’s registration statement, however, references no such provision.

Companies: Lyft, Inc.

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