People who are considering joining a start-up company sometimes ask our Irvine business lawyer about stock options as part of their compensation package. The SEC requires companies to register securities whenever they issue them. However, Rule 701 of the Securities Act does not require private companies to register their securities when offered as a part of a compensation package. Generally, this exemption impacts the following individuals:

• Partners
• Officers
• Trustees
• Directors
• Employees
• Consultants and
• Advisors.

Understanding Rule 701

In order to meet the criteria of Rule 701, the business needs to adhere to the following:

• The purpose of the stocks cannot be to raise funds.
• The compensation plan must be in writing with the securities listed.
• The maximum total sales of stocks must fall within the maximum allowed limits.
• All investors must receive a copy of the compensation plan in writing.

If the sales exceed $5 million in a one-year period, the company needs to release further information, such as risk factors, financial statements and copies of the plans. However, the business does not need to file with the SEC although they still must adhere to all legal and civil laws.

Calculations Under Rule 701

Federal regulations include strict requirements regarding calculating sales, offers and total options. The company must calculate exact dates in order to determine if the sales fall within the required time frames. However, apart from a copy of the benefit plan, the company does not need to disclose additional information under Rule 701 for sales that fall within the listed parameters.

Reach Out to Our Irvine Business Lawyer

If you need further clarification on compensating employees with stocks, contact Daily Aljian LLP, our Irvine business lawyer.