Federal Securities Law: Exemptions for Employee Plans under Rule 701

Under Rule 701 of the Securities Act of 1933, companies can offer their own securities as part of written compensation agreements to employees, directors, general partners, trustees, officers, or certain consultants without having to comply with federal securities registration requirements.

Under Rule 701, if total sales (not offerings) of stock during a twelve-month period do not exceed the greater of:

  • $1 million,
  • 15% of the issuer's total assets, or
  • 15% of all the outstanding securities of that class,

then the offerings are exempt from registration requirements.

The offerings must be discrete (not included in any other offer). All optionees and shareholders must be provided with a copy of the benefit plan or contract under which the options or securities are granted. For total sales over $5 million during a twelve-month period to the specified class of people above, companies must disclose additional information, including risk factors, copies of the plans under which the offerings are made, and certain financial statements.

Rule 701 can be used even if the non-accredited investors number more than 35.