What is Rule 701?

Rule 701 of the Securities Act of 1933 allows private companies to issue securities to employees and officers as a portion of their compensation without having to comply with federal securities registration requirements.

There are special disclosure requirements that are triggered once the value of the equity awards under Rule 701 exceeds $10M during any consecutive 12-month period. Click here to learn how to distribute Rule 701 disclosures on Carta.

The Economic Growth, Regulatory Relief, and Consumer Protection Act mandated that the SEC revise Rule 701(e) to increase the aggregate sales or offering price of securities sold during a consecutive 12-month period from $5M to $10M (among other items). This revised threshold means fewer companies will be subject to the additional disclosure requirements, thus saving time and money. This update took effect on July 23, 2018.

To pass Rule 701, your company must meet one of the following requirements:

The dollar value of your Rule 701 shares is less than $1,000,000.
The quantity of your Rule 701 shares is less than 15% of the outstanding amount of the class of securities being offered and sold (excluding shares issued under Rule 701).
The dollar value of your Rule 701 shares is less than 15% of your company assets.

The 12 month period can be defined in two ways:

The company can select a fixed 12-month period, but must be consistent with using that set time frame, or
The company can adopt any rolling 12-month period.

Once the company chooses which 12-month period type they want to use, they cannot switch between the two. Refer to question 271.06 for more information.

How to export the Rule 701 Analysis report