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Rule 701

SEC registration exemption used for equity plans at privately held companies. Rule 701 is the federal securities registration exemption most commonly used by private companies to grant or sell compensatory stock awards to employees and service-providers. State corporate and securities law exemptions for private companies are often conditioned on meeting the requirements of SEC Rule 701, or are directly modeled after it.

Under Rule 701, during any consecutive 12-month period a private company can sell up to 15% of the outstanding securities of the class it is offering to employees for up to $10 million in securities (the percentage can be greater than 15% for amounts of securities valued at under $1 million). The company must give employees a copy of the written plan under which it will deliver securities for amounts up to $10 million. If that dollar amount is exceeded, the company must provide a summary of the material terms of the plan, information about the risks, and financial statements meeting the Regulation A requirements.

Alert: The threshold amount increased from $5 million to $10 million under SEC amendments to Rule 701(e) in July 2018.

For details about Rule 701, see a commentary from the law firm Goodwin Procter. For the application of Rule 701 to selling stock after an IPO, see an FAQ elsewhere on this website.

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