What to know about Rule 701?

Rule 701 is a federal securities law exemption that lets companies give stock options and other forms of equity compensation to their employees without registering the offer with the Securities and Exchange Commission (SEC). It’s a crucial regulation for new businesses, as it allows them to offer equity incentives to employees.

Recent data shows that equity compensation is increasingly used as a means of paying workers, especially in the tech sector. The National Center for Employee Ownership estimates that in 2020, roughly $6,500 companies in the United States provided equity compensation to their employees. The growing prevalence of equity compensation highlights the need for an in-depth familiarity with Rule 701.

Why is it important if you have stock options and what you should know about them?

Understanding the implications of Rule 701 is essential if you are an employee who has been granted stock options by your company. With the help of the SEC’s Rule 701, your company can issue stock options to you without having to go through the time-consuming and expensive process of registering the offering with the SEC. By qualifying for this exemption, your business can use stock options as a form of compensation without meeting the stringent legal requirements normally associated with registered offerings.

Rule 701 has some restrictions and requirements that must be met. The maximum aggregate value of securities that may be sold in reliance on this exemption under Rule 701 is the greater of $10 million or 15% of the company’s total assets as of the company’s most recent fiscal year-end, whichever is greater. In addition, as a recipient of stock options and an employee, you are entitled to receive certain disclosures from your company following Rule 701. These include financial statements, risk factors, and other information about the offering.

You, as an employee, should also be aware of the risks that are lurking behind stock options. Stock options’ value can fluctuate depending on several factors, such as the health of the company, the stock market, and the economy as a whole. Think about the tax implications, the exercise price, and the expiration date of your stock options before signing anything.

Why companies need to be aware of Rule 701?

Rule 701 is important for companies to know about to stay in compliance with securities laws when providing stock options or other forms of equity compensation to their employees. To avoid the time and expense of SEC registration, businesses can issue equity compensation under Rule 701, which provides an exemption from registration. However, some restrictions and conditions must be met by businesses to qualify for this exemption.

Rule 701 stipulates that businesses can only sell securities with a total value of up to $15 million or 15% of their total assets if they qualify for the exemption, whichever is greater. They must also provide employees with the financial statements and risk factors required by Rule 701.

Additionally, businesses need to comprehend the 12-month window requirement and the timing implications of Rule 701. According to Rule 701, a company can only rely on the exemption for offers and sales of securities that occur within a 12-month time frame. Businesses need to be aware of this period and make sure they don’t go overboard with activities during it.

What are companies required to disclose under Rule 701?

Employees who receive equity compensation, such as stock options, are entitled to receive certain disclosures from their employers per Rule 701. The purpose of these disclosures is to equip workers with the knowledge they need to make educated decisions about their equity compensation. Companies are required to provide the following information:

• Financial Statements: As part of Rule 701, businesses must submit financial statements that have been audited or reviewed by a certified public accountant. These financial statements must cover the most recent fiscal year and any interim periods that have occurred since the end of the most recent fiscal year and must be provided to employees within a reasonable time before the sale of securities.
• Risk Factors: Companies offering securities must warn potential investors about the risks of doing so. The financial health of the company, the success of its operations, the volatility of its stock price, and other factors are all potential sources of risk.
• Information about the Offering: Employees have a right to know what securities are being offered, how much they will cost, how the money will be used, and whether or not they will have any voting rights or restrictions.
• Other Information: Additional information that is material to an employee’s investment decision may be required to be disclosed by their employers. Management, business strategy, intellectual property, and pending legal or regulatory matters may all fall under this category.

To ensure that they are providing their employees with the information they need to make educated decisions about their equity compensation, companies should review and comply with the disclosure requirements of Rule 701.

How the 12-month window works with Rule 701?

To qualify for the exemption from registration under Rule 701, offers and sales of securities must occur within 12 months. As a result, the exemption can only be used for sales and offers of securities made during this period. The 12-month window starts on the date of the first offer or sale of securities based on Rule 701.

Businesses should be aware of the 12 months and take care not to go over their limits during this time. A company may lose its exemption from SEC registration requirements for an offering if it exceeds the limits of Rule 701 within 12 months.

Further offerings made by the company within the 12 months may also affect the continued applicability of the exemption, so caution is advised. If a company has already made sales of securities under Rule 701 within the 12 months and now wants to make additional offers or sales of securities, the total value of all such sales must not exceed the allowable limits of Rule 701.

For the exemption to remain available, companies must keep a close eye on their offerings and sales of securities within the 12-month window and ensure they conform to the restrictions of Rule 701.

How to use the Rule 701 report?

Businesses can use Rule 701 reports to keep tabs on the status of their Rule 701-compliant security offerings and sales. Maintaining an exemption from federal income tax is dependent on a company’s compliance with the restrictions and requirements of Rule 701.

Typical data found in a Rule 701 report includes the total amount of securities sold or offered during the reporting period, the number of employees who received equity compensation, the types of securities offered, and any disclosures made to those employees. It may also include financial statements, risk factors, and other data that is important to the viewer.

The Rule 701 report allows businesses to keep tabs on their offering and sale of securities, determine whether or not they are within the permitted limits, and confirm that all employee disclosures have been made. Independent public accountants can use this report as a guide while conducting audits and reviews to make sure that the financial statement requirements of Rule 701 are met.

How can Eqvista help with filing for Rule 701?

Companies can use equity management platforms like Eqvista, which offer tools for tracking and reporting equity compensation, to compile the information necessary to create a Rule 701 report. These systems simplify the monitoring and reporting of Rule 701 compliance by generating reports that centralize all the necessary data in one place.

Eqvista is a full-featured equity management system that can help businesses meet the requirements of Rule 701. Learn more about how Eqvista can enhance your company’s equity management by contacting us today.