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A rule under the Securities Act that provides a safe harbor from registration under the Securities Act for grants of equity securities by a non-reporting company to its employees and certain other persons under the terms of a written compensatory benefit plan or written compensation contract.
Rule 701 is a safe harbor exemption created by the Securities and Exchange Commission (SEC) that allows companies to issue stock options without the time and expense of registration of the stock under the Securities Act. Rule 701 only applies to private companies.
Rule 701 is a federal exemption under the Securities Act of 1933 that allows private companies to issue securities to employees and other service providers. This is especially useful when not all of your employees or service providers are accredited investors eligible for other securities exemptions like Regulation D.
Rule 701 is an exemption for the offer and sale of unregistered securities by the issuer company. The exemption that applies to sales of unregistered stock by the shareholder is Rule 144. Rule 144 is an entirely different discussion.
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 must be less than 15% of the outstanding shares (15% of outstanding shares amount, excluding shares issued under Rule 701).
Stock options are only for people Finally, Rule 701 generally provides that only natural persons can be granted options under a stock option plan. This issue often arises when a consultant provides services to the company and asks to have their options titled in the name of their LLC.