What is Rule 701?
Rule 701 is the SEC exemption that lets a private US company grant equity compensation to its team without registering those securities with the SEC, as long as the grants stay within set limits. It is what allows you to issue options, RSUs, and restricted stock to employees, consultants, and advisors as compensation. This article explains the exemption and the three limits Cake tracks for you.
Who Rule 701 covers
Rule 701 applies to equity granted as compensation to:
- Employees of the company
- Consultants and advisors providing genuine services
- International team members of a US issuer
It covers equity given as compensation. It does not cover equity sold to investors to raise capital, which runs under different exemptions.
The three tests
Rule 701 sets three limits, measured over any consecutive 12-month period. The three are independent, and a company can rely on the exemption by staying under any one of them. Cake measures your grants against all three and shows your position on each.
| Test | What it measures | Limit |
|---|---|---|
| Test 1 | Total dollar value of Rule 701 grants | $1,000,000 |
| Test 2 | Total shares issued under Rule 701 | 15% of outstanding shares |
| Test 3 | Total dollar value of Rule 701 grants | 15% of total assets |
Important: Cake tracks your Rule 701 position from the figures you enter, to help you stay on top of it. It is a tracking tool, not legal advice, so confirm your position and any obligations with your securities counsel.
The 12-month window
Rule 701 measures grants over any consecutive 12-month period. This can be a rolling window (the 12 months ending on each grant date) or a fixed window (aligned to a fiscal or calendar year). You set which method applies to your company in Cake.
What Happens Next
Once your grants are in Cake, the Rule 701 Tracker shows your position against each of the three limits and flags when you are getting close to one.
Important: If you are approaching the Rule 701 limits, or think you might exceed them, speak with your securities counsel about your disclosure obligations to the SEC before granting or exercising further. It is better to get advice early than to discover an obligation after the fact.
Related Articles
- How Cake calculates your Rule 701 position - how each limit is measured and which grants count
- What is the Rule 701 disclosure rule? - what happens when grants get large
- What is a 409A valuation? - the valuation Cake uses to value option and RSU grants