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What Is Rule 701 Related to Stock Options? Why Companies Should Know About It?

by Saniya Zeenat Writer
If you run a private company and often grant stock options or other equity compensations to employees, you should be aware of Rule 701 to issue equity without extensive disclosures. It is quite friendly for even startups and small companies who wish to issue equity but cannot afford high-priced accountants.

Most non-public venture backed companies raise funds based on an exemption from registration. But they don’t realize that the same set of rules applies to stock options when issued by the company for employees. Rule 701 stock options is a safer exemption designed by Securities and Exchange Commission (SEC) that sanctions firms to issue options without the time and expense of registration under the Securities Act.
                              
What is Rule 701?

Rule 701 is only applicable to private companies. In order to qualify the course of exemption, the firm needs to issue the securities in accordance with a written compensatory benefit plan like stock option plan only to directors, employees, consultants and advisors. Under this rule, the total sales price or amount of securities sold/options granted in pursuant to the rule in the course of a consecutive 12-month period cannot exceed the greater of the following terms:

•    $1,000,000 (in a situation of stock options, it is measured by multiplying the option exercise price with the number of options granted.
•    15% of aggregate assets of the issuer, calculated with the issuers’ recent annual balance sheet date or its last fiscal year-end.
•    15% of the remaining amount of securities which is being provided and sold in pursuant to the rule

Every time when options are granted, you need to ensure that you are following these mathematical terms. Also, if you have granted over $5M in equity shares during any 12-month period, you will experience particular disclosure debts.

Why Private Venture-Backed Companies Need to Know About Rule 701?

As startup companies run privately for quite long and focus on growing, they should know the criteria of Rule 701 to monitor their equity shares carefully. In addition, officers and directors of private firms should pay complete attention to this rule otherwise they may trigger issues with the Securities and Exchange Commission (SEC).

It is better to approach equity management firm to figure out the effective way to structure your grants under Rule 701 stock options. If your firm is closer to the $10M threshold, it is crucial to plan equity issuance property to avoid problems with extra disclosures.

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About Saniya Zeenat Innovator   Writer

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Joined APSense since, November 4th, 2019, From Noida, India.

Created on Dec 30th 2019 23:28. Viewed 291 times.

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