Qualification Criteria for Rule 701 Exemption
Rule 701 allows companies to issue equity compensation without registering the securities under the Securities Act.
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After selecting the securities, the aggregate sales price or amount of securities sold within a continuous 12-month period must meet one of the qualification criteria for generating the report.
1. The aggregate sales price sold under Rule 701 is less than $1 million. Let’s consider an example that shows in detail how the criterion “Pass” and “Fail”.
| Amount of Securities | 1000 |
|---|---|
| Price per Share | $0.05 |
| Sales Price (Amount of Securities * Price per Share) | $50 |
| Aggregate Sales Price | $225 |
| Aggregate Sales Price < $1 million | $225 < $1,000,000 Pass |
The system calculates the value of all 3 qualification criteria, finds the highest case, and applies that as the “Greatest Value to Compare”.
| Amount of Securities | 250,000 |
|---|---|
| Price per Share | $4 |
| Sales Price (Amount of Securities * Price per Share) | $1,000,000 |
| Aggregate Sales Price | $1,000,225 |
| Aggregate Sales Price < $1 million | $1,000,225 > $1,000,000 Fail |
When it “Fails” in this particular criterion, we still need to continue checking the other two criteria.
2. The aggregate securities sold under Rule 701 are less than 15% of outstanding shares.
Here is an example that shows in detail how the criterion “Pass” and “Fail”.
| Aggregate Securities | 154,000 |
|---|---|
| Outstanding Shares | 1,045,000 |
| 15% of Outstanding Shares (0.15 * Outstanding Shares) | 156,750 |
| Aggregate Securities < 15% of Outstanding Shares | 154,000 < 156,750 Pass |
The system calculates the value of all 3 qualification criteria, finds the highest case, and applies that as the “Greatest Value to Compare”.
| Aggregate Securities | 154,000 |
|---|---|
| Outstanding Shares | 550,000 |
| 15% of Outstanding Shares (0.15 * Outstanding Shares) | 82,500 |
| Aggregate Securities < 15% of Outstanding Shares | 154,000 > 82,500 Fail |
When it “Fails” in this particular criterion, we still need to continue checking the other criteria.
3. The aggregate sales price sold under Rule 701 is less than 15% of Total Assets.
An example that shows in detail how the criterion “Pass” and “Fail”.
| Aggregate Sales Price | $1,000,225 |
|---|---|
| Total Assets | $10,000,000 |
| 15% of Total Assets (0.15 * Outstanding Shares) | $1,500,000 |
| Aggregate Securities < 15% of Total Assets | $1,000,225 < $1,500,000 Pass |
The system calculates the value of all 3 qualification criteria, finds the highest case, and applies that as the “Greatest Value to Compare”.
| Aggregate Sales Price | $1,000,225 |
|---|---|
| Total Assets | $1,000,000 |
| 15% of Total Assets (0.15 * Outstanding Shares) | $150,000 |
| Aggregate Securities < 15% of Total Assets | $1,000,225 > $150,000 Fail |
When it passes one of the criteria, the status shows the company is “Qualified” for Rule 701 exemption.
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