What is a 701 Violation?

Rule 701 is the federal exemption which grants a private company exemption from registration for options, and other equity-derivative type grants.
This rule places specific mathematical limits on the amount of grants issued in a given year. Those specific limits are based on an annual period, and totals cannot exceed the following in any given year:

  • $1,000,000 (for options, this number is calculated by multiplying the option strike price by the number of options granted).
  • 15% of the total assets of the private company, as measured at the company’s most recent balance sheet date.
  • 15% of all outstanding securities of the applicable class.

So what does this actually mean? Before each round of option grants, you’ll need to ensure that you adhere to these constraints. Violations of these limits can lead to serious consequences from the SEC. Also, if within a 12 month period you grant more than $10MM in equity awards, you must disclose additional information.

You can check your 701 compliance in Shareworks Startup under Compliance > Rule 701 Reporting:

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