Rule 701 is the federal securities exemption private companies use to issue stock compensation without registering the grants with the SEC.

How it works

Eligible issuers — non-reporting companies — may grant equity under a written equity incentive plan to employees, directors, consultants, and advisors. Total issuances in 12 months must stay within the greater of $1M, 15% of balance sheet assets, or 15% of outstanding securities — with an absolute cap.

When issuances exceed $10M in 12 months, enhanced disclosure (risk factors, financials summary) must be delivered to recipients before they accept grants.

Rule 701 covers options, RSUs, and restricted stock. It does not replace 409A pricing rules or state blue-sky filings. Investors in financings ask for representations that grants complied.

Why it matters

• Founders: Track rolling 12-month issuance totals; involve counsel before large refreshes or secondary programs.
• Investors: Cap table diligence includes Rule 701 compliance — fixes are expensive if grants were defective.

Common mistake

Issuing advisor or contractor equity without a proper written plan or outside Rule 701 categories. Not all recipients qualify; misclassification can blow the exemption.

Related ideas

See also equity incentive plan, 409A valuation, restricted stock, and cap table.