Rule is a federal securities law exemption that allows you to grant your employees or independent contractors compensatory equity.
Table of contents
- SEC Brings Rule 701 Enforcement Action for Failure to Provide Required Disclosure
- Exemption from Securities Registration Under Rule 701
- Related Professionals
- What is Rule and Why is it Important if You Have Stock Options?
To begin, they said it was critical that the rules not be overly complicated or difficult to comply with. Specifically, they recommended:.
SEC Brings Rule 701 Enforcement Action for Failure to Provide Required Disclosure
Remove the requirement that consultants and advisors be natural persons. The presenters noted most consultants provide their services through an entity for liability or tax purposes.
Under the current rules, companies must jump through various hoops to compensate these consultants with equity. Eliminate the Hard Cap Limit. The presenters said that compliance with this limitation requires ongoing analysis with no clear benefit. Increase the Soft Cap. The presenters contended this requires companies to guess as to whether the limit will be exceeded and begin providing disclosures before the threshold is exceeded to ensure compliance.
Exemption from Securities Registration Under Rule 701
They called this impractical and said there was no clear rationale for the structure. It was recommended a rule be adopted that clarifies that material amendments to any security previously issued under Rule does not result in a new grant or sale for purposes of the rule. The presenters pointed out that Rule has no rules specifically addressing RSUs, which private companies generally did not grant when the rule was adopted. They recommended clarifying that RSUs are considered sales on the date of grant, similar to options.
It was also suggested that it be clarified that RSUs should be valued for the purposes of any Rule limits based on the value of the underlying shares on the date of grant. Other recommendations included simplifying the financial disclosure requirement by de-coupling it from Regulation A and requiring instead a current balance sheet and income statement; requiring a financial disclosure be provided just once a year unless there is a material change to the value of the company or the value of the securities; and conforming the consequences for violating the Soft Cap loss of Rule exemption for all securities sold in the month period with the consequence for violating the Hard Cap Limit only securities sold in excess of the limit.
Related Professionals
Your email address will not be published. Save my name, email, and website in this browser for the next time I comment. Forgot your password? Lost your password?
Your email address will not be published. Post Comment. This site uses Akismet to reduce spam. Learn how your comment data is processed.
October 29, Category : Securities Law. Without listing all of the nuances of Rule , there are a few key requirements that should be mentioned: Rule requires an issuer to provide a copy of the relevant compensatory plan to all eligible recipients in a reasonable time before issuing the securities.
Rule permits issuances to employees, officers, and directors, provided that the securities are granted or issued pursuant to a written compensatory benefit plan, which can include an employment agreement. Although it also permits grants to consultants, there are a number of additional restrictions in that case. Employers seeking to issue compensatory equity must also comply with state laws regulating the offer and sale of securities. Some but not all states have exemptions similar to Rule , so the laws of the state or states where the employees are located must be reviewed to ensure full compliance.
What is Rule and Why is it Important if You Have Stock Options?
Issuances of equity under Rule are always subject to the antifraud provisions of the securities law even though a formal registration is not required. This means that to reduce the likelihood of future claims in the event that the securities end up with little or no value, it is vital for the company to work with legal counsel to prepare comprehensive disclosure about the company and its management, operations, competitive landscape, and other relevant aspects. Carl Johnston 31 posts. He has more than thirty years of legal and professional experience.