Rule 701

Simplify your Rule 701 compliance with Eqvista. Ensure eligibility and effortlessly generate accurate Rule 701 reports.

What is Rule 701?

Rule 701 is a crucial federal exception based on the Securities Act of 1933. Under this provision, private companies can issue securities as part of specified compensation programs that include performance incentives and stock options.

This can be particularly helpful when not all of your service providers or employees qualify as accredited investors for other securities exemptions, such as Regulation D. The exception does not apply to publicly traded corporations.

Requirements/Conditions for Rule 701

When a company offers shares, they need to register with the SEC, which can be time-consuming and costly. Rule 701 allows companies to bypass this registration, as long as they follow certain limits.

There’s a cap on how much stock a company can offer under this rule. The total value of the shares sold in a 12-month period must not exceed the greater of:

  • A $1,000,000 total offering price
  • 15% of the company’s total assets, or
  • 15% of the total shares outstanding.

You’ll have additional disclosure requirements if your securities issuance in a given 12-month period is more than $10 million. Securities issued under Rule 701 are referred to as “restricted securities”, which means unless they are registered or the holders meet an exemption, they can’t be traded freely.

Note: The 12-month term is not limited to either the company’s fiscal year or the calendar year; it can start on any day in the current year. But once you decide on a date, you have to stay with it for all subsequent analyses.

Benefits of Rule 701

Companies that want to incentivize their employees and service suppliers without dealing with the hassles of SEC registration should consider Rule 701. It offers the following benefits.

  • Flexibility – Startups can choose their own 12 month periods for securities issuance under Rule 701 which gives operational flexibility and matches their business cycles and peak issuance needs. There are strategic advantages to this especially when scaling.
  • Cost-effective – Under Rule 701, companies are allowed to issue equity as compensation without registering with the SEC. It saves money and thereby becomes a great incentive to keep valuable employees. Rather than depleting financial resources or undertaking complex registration processes, companies can reward staff with equity in place of cash.
  • Employee retention – Under Rule 701, equity issuance ensures that employees’ interests are aligned with companies’ performance. Since employees also become owners of equities, they are naturally attracted to the company as well. Thus, it is a very effective retention strategy. Providing the staff with equity in the future of the company can create a more dedicated and motivating staff.

Eqvista’s Rule 701 Services

Eqvista’s Rule 701 solution helps you manage your equity compensation process effectively. Our expert team provides solutions to understand SEC requirements and compliance.

Rule 701 Eligibility Check

You can instantly check your 701 eligibility by logging in to your Eqvista account. Our system will require you to input a few pieces of information:

  • The check period end date
  • Total outstanding shares
  • Total assets
  • Balance sheet date

Eqvista analyzes your sales during the 12 month window to see which equity types are eligible for issuance.

Our system will then calculate and apply the highest qualifying criteria for Rule 701 exemption. It will also check if your company qualifies under the SEC’s Rule 701 exemption.

Rule 701 Report Generation

After you confirm your eligibility, Eqvista will generate a full Rule 701 report showing the securities issued (common shares, preferred shares, options and warrants) and their values.

Our report, downloadable in Excel format, will include the following:

  • Overview of shares, options, and warrants selected for exemption
  • Qualifying criteria analysis
  • Breakdowns by security type (Common Equities, Preferred Equities, Options, Warrants)
  • Per-security details including shareholder information, grant specifics, and pricing

Here’s a sample of how your 701 report will look:

Rule 701

For in-depth guidance on Rule 701 compliance and Eqvista’s features, go through our Rule 701 support articles.

Get Started with Rule 701 Compliance

Firms must understand the specifics of Rule 701 to use stock incentives wisely and comply with federal rules. This includes its offering caps, required disclosures, and recent revisions.

That being said, legal framework management requires expert guidance. At Eqvista, our reports provide the data for internal records and regulatory review. We employ a straightforward process to analyze your company’s 701 eligibility and generate accurate reports.

Our insights from the report will also prepare you to handle potential audits and record-keeping. Only our Premium and Enterprise account holders can access the Rule 701 feature. If you’re a freemium user, please upgrade your account to use this feature and get access to unlimited shareholders, waterfall analysis, one-time cap table set-up, and more. Reach out to set up your first consultation call!

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