Rule 701 Exemption in a Nutshell

Rule 701 of the Securities Act of 1933, as amended (the “Act”), exempts offers and sales of securities pursuant to a written compensatory benefit plan or a written compensation contract established by an issuer for the participation of its employees, directors, general partners, trustees (where the issuer is a business trust), officers, or consultants and advisors, and their family members who acquire such securities from such persons through gifts or domestic relations orders. 

Rule 701 also exempts offers and sales to former employees, directors, officers, consultants and advisors but only if such persons were employed by or providing services to the issuer at the time the securities were offered.  

A “compensatory benefit plan” is any purchase, savings, option, bonus, stock appreciation, profit sharing, thrift, incentive, deferred compensation, pension or similar plan.  A stock-based plan established for employees is generally considered “compensatory” if it is not used as a capital raising device.

The issuer should be aware of the limitation on aggregate sales price of securities that may be sold in reliance on Rule 701 during any consecutive 12-month period.  That limit is the greatest of the following:

1. $1,000,000
2. 15 percent of the total assets of the issuer measured at the issuer’s most recent annual balance sheet date (if no older than its last fiscal year-end); or
3. 15 percent of the outstanding amount of the class of securities being offered and sold in reliance on Rule 701, measured at the issuer’s most recent annual balance sheet date (if no older than its last fiscal year-end).  For this purpose, different classes of stock of the employer may be aggregated in certain circumstances.

Amounts of securities sold in reliance on Rule 701 do not affect “aggregate offering prices” in other exemptions, and amounts of securities sold in reliance on other exemptions do not affect the amount that may be sold in reliance on Rule 701.

The issuer must deliver to investors a copy of the compensatory benefit plan or the contract, as applicable. In addition, if the aggregate sales price or amount of securities sold during any consecutive 12-month period exceeds $5 million, the issuer must deliver certain additional disclosure to investors a reasonable period of time before the date of sale, including certain financial statements of the issuer.

Offers and sales exempt under Rule 701 are deemed to be a part of a single, discrete offering and are not subject to integration with any other offers or sales, whether registered under the Act or otherwise exempt from the registration requirements of the Act.

Securities issued under Rule 701 are deemed to be “restricted securities” as defined in Rule 144 and resales of such securities must be in compliance with the registration requirements of the Act or an exemption from those requirements. Ninety days after the issuer becomes subject to the reporting requirements of section 13 or 15(d) of the Exchange Act, securities issued under Rule 701 may be resold by persons who are not affiliates in reliance on Rule 144, without compliance with paragraphs (c) and (d) of Rule 144, and by affiliates without compliance with paragraph (d) of Rule 144.