The Department of Labor on TikTok's ESOP: "We have no mechanism to enforce this"

Amidst all the issues that TikTok faces, its employees participate in an ESOP unlike anything I've ever seen. I can't figure out how—or if—TikTok's ESOP plan is part of any regulated effort at all in the United States. Please comment if you can help me sort through this.

First, let me say that I understand stock plans. I've drafted dozens of employee plans, and as a lawyer and early-stage investor, it's one of my principal occupations. I also participate in TikTok's ESOP with two years of vesting. Despite my familiarity with ESOPs as a lawyer, a venture capitalist, and as a participant, I can't figure out what TikTok's stock plan is or who regulates it. Thousands of participants are burdened by tax problems and straddled by non-disparagement clauses that make addressing this difficult.

I welcome comments from my network to help figure this out. I'll provide more background below.

The definition of an ESOP

An employee stock ownership plan (ESOP) is an IRC section 401(a) qualified defined contribution plan that is a stock bonus plan or a stock bonus/money purchase plan. The IRS and the Department of Labor share jurisdiction over ESOPs.

There's no evidence of IRS review of TikTok's ESOP a and the Department of Labor has confirmed that TikTok's ESOP is not registered with their department. A representative from the Department of Labor told me on Friday that TikTok's plan is not an ESOP and they have no oversight over it.

"My supervisor has confirmed my suspicion that this is not an ERISA plan, it's not an ESOP or stock ownership plan. This falls outside of ERISA, it is just a private contractual plan between the employer and employees for the stock incentive plan. . . . It is not in our jurisdiction, we don't have any way to enforce this; we have no mechanism to enforce any rules on this."

The preceding statement from the Department of Labor leaves me confused. I understood that employee plans of this kind had to be registered with the IRS (see here) or the Department of Labor (see here). If not with these two agencies, then with state agencies like the California Department of Financial Protection and Innovation (DFPI) (see here). The Securities and Exchange Commission does not oversee ESOPs and directs enforcement actions involving them to the Department of Labor (see here).

TikTok's ESOP seems to have no recourse in any government agency. Has TikTok cracked the code on how to develop an employee stock offering that avoids regulatory oversight?

What recourse is possible?

The only recourse available in TikTok's documents is arbitration. Anyone could arbitrate claims on an individual basis at an arbitrator. The problem is that an arbitrator would only address the concerns on a one-off basis, missing thousands of participants who are aggrieved and either unfamiliar with arbitration or unwilling to engage in arbitration. After all, by the terms of TikTok's ESOP, challenging it's legality is, itself, grounds for forfeiture of shares. Class action is a theoretical possibility, but any class action would first need to survive the arbitration clause. Both of these actions require the participation of participants, and there's little will to do that on a concerted basis, especially given the clawback provisions in the ESOP that threaten employee's already-paid compensation.

As it stands today, the Department of Labor believes it has no grounds to enforce TikTok's ESOP, and the IRS doesn't register it as a plan it regulates. California's DFPI also doesn't register TikTok's ESOP, and it defers federal regulators for ESOPs of this size because the employees are in multiple states.

A penny for thoughts on strategy

I would be grateful for thoughts from my network on a theory of recourse with a government agency that is not arbitration or class action. Ideally, there can be a discussion openly via comments, but I know that many comments will come privately by DM, and that's fine, too. Thank you. ??