Uber Drivers Who Want Stock Should Protest at the SEC

(Bloomberg Opinion) -- Uber Technologies Inc. is going public Friday, and the drivers are up in arms. In San Francisco, some 300 people — drivers and other protesters — gathered Wednesday in front of Uber’s headquarters. In London, many drivers went on a daylong strike. Atlanta, Chicago, New York and Melbourne, Australia, are among the cities that saw some form of driver protest ahead of Uber’s long-awaited IPO.

And really, can you blame them? On Friday, when the company begins offering shares to the public, there will be dozens — maybe hundreds — of Uber’s white-collar employees who will become instant millionaires, the result of owning pre-IPO stock or stock options. That stock was part of their compensation — a lure to join the company in the first place, and then a reward for all their hard work in making Uber a success. This pot of gold at the end of the rainbow is an important reason people go to work for startups.

But the drivers? They got no pre-IPO stock or stock options. Instead, Uber — and Lyft Inc. as well — gave some of them cash bonuses that ranged from $100 to $10,000, depending on how many trips they’d driven over the past few years. Many people, myself included, thought it was a pretty paltry reward, given that many Uber drivers make less than the minimum wage. An Uber spokesperson recently told Wired magazine, “Drivers are at the heart of our service — we can’t succeed without them.” So don’t they deserve more?

Last month, shortly after I pointed out the disparity between what the drivers were getting versus the full-time employees, I found myself on the phone with an Uber spokesman. He told me that the company had very much wanted to offer stock to its drivers, but that government regulations had thwarted the effort. He forwarded me a letter Uber had sent last fall to the Securities and Exchange Commission asking the agency to allow it to grant stock to its drivers. Here’s the key paragraph:

As you may know, over the last few years we have had productive conversations with the staff in the Division of Corporation Finance of the Commission to explore ways in which we and other gig economy companies can allow our driver and delivery partners to receive equity from Uber and similar companies. We are very appreciative of the fact that the Commission is now considering whether and how it can make such distributions a possibility. As a company that has empowered millions of individuals around the world to take control of their lives through our technology platform, we believe that it is the proper role of public policy and key institutions as well as the private sector to explore avenues to give individuals greater economic security regardless of how they work.

According to Uber, the essential problem is that, under Rule 701 of the Securities Act, companies can give stock and stock options to employees without requiring registration — but not to independent contractors. As I discovered when I looked into it more closely, this is mostly true. But not entirely.

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Do you remember the story about the graffiti artist who got rich when Facebook Inc. went public? His name is David Choe, and in 2005, Sean Parker, who was then Facebook’s president, hired him to paint murals on the walls of the company’s headquarters. Choe decided to take his compensation in pre-IPO stock instead of cash. Seven years later, when Facebook went public, Choe was worth $200 million.

Choe was, without question, an independent contractor. There are law firms in Silicon Valley who do work for startups in return for pre-IPO stock. And accountants. And landlords. Lots of people in business relationships with startups are willing to take stock instead of cash, in the hopes of a payoff like Choe’s. So it’s clearly not the case that all independent contractors are legally prevented from getting stock or stock options.

So why not Uber and Lyft drivers?

Rule 701 is an exemption — a loosening of the regulation that says a company has to file a registration statement whenever it wants to issue stock. It allows stock to be issued to a number of different categories of people without going through the complexity of a registration statement. They include qualified investors (i.e. investors wealthy enough that they can afford to lose money on the investment), employees, and certain kinds of advisers and consultants. There is one other category as well: “de facto employees,” who aren’t on a payroll, but make their living working for one company.

For years, the cap on the Rule 701 exemption allowed a company to issue $5 million in securities in a year. Last July, the SEC raised it to $10 million, and sent out a request for comment about what other changes ought to be made to the rule. Uber’s letter to the SEC was in response to the agency’s request.

In its letter, Uber says that it believes that “individuals who get work through the entrepreneurial economy” — that is, the gig economy — “should be able to receive securities pursuant to an exempt offering under Rule 701.” Such a change in the regulations, it adds, “would reflect the modern and changing nature of work.”

Another facet of Rule 701 is that the person receiving shares “must provide bona fide services to the issuer.” But, the letter says, Uber’s drivers use its platform to provide services solely to their customers, rather than the company itself. So the SEC should eliminate that requirement.

In addition, Uber calls on the agency to stop insisting that a “de facto employee” make most of his or her income from a single company. Thus, a driver who offers rides for both Uber and Lyft ought to be eligible for stock — and so should someone who drives for Uber part-time. The letter says:

Workers are less likely to be able to point to one job as a primary source of income and many individuals participate as entrepreneurs gaining income through multiple sources of work. Requiring that a specific technology platform be the primary source of income for individuals would undermine the business model of an issuer and the reality of the modern economy. Further, from a broader public policy perspective, Uber believes it would also result in fewer participants in the modern economy being able to benefit from the wealth generation offered by digital marketplaces, even if the contribution of such participants to such wealth generation is comparable to the contributions of employees at traditional companies.

Given that the gig economy is a fact of life for millions of people, what Uber is asking the SEC to do makes a lot of sense. Thirty years ago, perhaps, the restrictions on who was eligible to get pre-IPO shares or options may have been reasonable. They’re not anymore.

But there is also something disingenuous about Uber’s letter. First off, the company seems to be saying that because it is a platform company, its drivers are not providing it a service — and therefore they aren’t eligible for options or shares. That’s a laughable claim.

Second, while there are plenty of Uber drivers who are clearly ineligible for shares under the current rules — part-timers, and those who drive for multiple companies — there are others who would seem to qualify as a “de facto employees.” These are drivers who work only for Uber, and for whom it is their primary means of employment.

Uber must know who they are, and if it doesn’t, it has the means to find out. So why didn’t it give these drivers stock? I suspect the reason is that after fighting in court to prevent drivers from being classified as employees — eligible for health care, better pay and other benefits — Uber didn’t want to do anything that might make it appear as if the drivers are employees after all. Better to wait for the SEC to change the rules so that drivers can get stock without having to be classified as even de facto employees.

There is no guarantee that the SEC will make this change. It takes Rule 701 very seriously, and has sometimes cracked down on companies that have gone over the $5 million cap without filing a registration statement. But it should expand the exemption. The increasing importance of stock to one’s net worth has played a role in rising income inequality. Uber drivers are protesting because this is so clearly apparent — with the drivers largely left behind as Uber’s full-time, white-collar, college-educated employees prepare to cash in.

It is a shame the drivers are being deprived of that opportunity. Let’s hope the next gig economy company to go public won’t have Rule 701 standing in the way.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Joe Nocera is a Bloomberg Opinion columnist covering business. He has written business columns for Esquire, GQ and the New York Times, and is the former editorial director of Fortune. He is co-author of “Indentured: The Inside Story of the Rebellion Against the NCAA.”

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