What is Rule 701?

Takeaway: Rule 701 is the SEC exemption that lets private companies grant equity to employees, directors, and consultants without going through the expensive, time-consuming process of registering the securities.

Whenever your startup issues stock options, restricted stock, or other equity awards, you are technically offering and selling securities. Without an exemption, those offers would need to be registered with the SEC—something only public companies do. Rule 701, under the Securities Act of 1933, is the safe harbor that makes virtually all private company equity compensation possible.

Rule 701 applies to securities granted under a written compensatory benefit plan to employees, directors, officers, consultants, or advisors. While it’s flexible, it comes with quantitative limits and important disclosure requirements.

Rule 701 limits

In any rolling 12-month period, the aggregate sales price or amount of securities you issue under Rule 701 cannot exceed the greatest of:

  • $1,000,000

  • 15% of your total assets (measured from your most recent balance sheet)

  • 15% of the outstanding shares of the class of securities being offered

For stock options, the “sales price” is based on the exercise price set when the options are granted (not the fair market value later). Early-stage companies usually bump up against the $1M limit first; later-stage companies may rely more on the asset or outstanding shares tests.

The $10 million disclosure trigger

If the total value of equity you grant in a rolling 12-month period exceeds $10 million, Rule 701 requires enhanced disclosures to all recipients in that period. These must include:

  • A copy of your equity incentive plan

  • A summary of material terms

  • A description of investment risks

  • Your most recent GAAP financial statements

Providing these disclosures is a heavier lift—especially the financials—so many companies manage grant timing to delay crossing this threshold.

Why it matters

Rule 701 is the backbone of startup equity programs. Without it, you couldn’t issue options or other equity grants without expensive SEC registration. But it’s not a “set it and forget it” rule—you need to track your grants carefully, especially as you grow and approach the $10M disclosure trigger.

If you want, I can also create a one-page founder-friendly Rule 701 compliance checklist that you can hand to your finance or legal team to track this.

Disclaimer: This post is for general informational purposes only and does not constitute legal, tax, or financial advice. Reading or relying on this content does not create an attorney–client relationship. Every startup’s situation is unique, and you should consult qualified legal or tax professionals before making decisions that may affect your business.