A 701 disclosure is the package of written information a private company must hand to employees and other equity recipients once its grants under Rule 701 of the Securities Act cross $10 million in any rolling 12-month period. Below that line, the company still has to give recipients a copy of the compensation plan itself, but the heavier package — plan summary, risk factors, and financial statements — only kicks in at $10 million. The SEC raised that threshold from $5 million in 2018.
When the $10 Million Threshold Triggers Disclosure
The 12-month window is rolling, not tied to a calendar or fiscal year. Every new grant resets what the prior twelve months look like, so a company can sit well under the ceiling for a long stretch and then approach it quickly during a hiring push or a repricing.
The trigger is also forward-looking, and this is where companies get into trouble. If you expect grants to exceed $10 million during an upcoming 12-month stretch, the enhanced disclosure has to go to every participant in that period before any sales occur, not just to people who receive grants after the threshold is crossed.1U.S. Securities and Exchange Commission. Rule 701 – Exempt Offerings Pursuant to Compensatory Arrangements Waiting until you have already passed $10 million and then scrambling to send disclosures can cost you the Rule 701 exemption for the entire offering. For option grants, the sale is counted as of the grant date, not the exercise date, so the clock starts when the option is issued.2eCFR. 17 CFR 230.701 – Exemption for Offers and Sales of Securities Pursuant to Certain Compensatory Benefit Plans and Contracts Relating to Compensation
Disclosures must go out a reasonable time before the sale date. The rule does not define “reasonable time” as a specific number of days, but the point is that recipients have to receive the information early enough to actually consider it.
What Must Be in the Disclosure Package
Once you’re over the threshold, three components sit on top of the plan copy that was already required:
- A plan summary. If the compensation plan is subject to ERISA, provide the summary plan description that ERISA already requires. If not, provide a summary of the plan’s material terms.
- Risk factors describing the risks of investing in the company’s securities, covering the company’s business, financial condition, and industry.
- Financial statements meeting the standards required for Regulation A offerings under Form 1-A, dated no more than 180 days before the sale of the securities.2eCFR. 17 CFR 230.701 – Exemption for Offers and Sales of Securities Pursuant to Certain Compensatory Benefit Plans and Contracts Relating to Compensation
On the financials, the recurring question is whether they have to be audited. They don’t. Unaudited annual financial statements are acceptable unless the company already has audited statements prepared under U.S. GAAP or PCAOB standards on hand, in which case those audited statements should be provided instead. Foreign private issuers whose books aren’t kept under U.S. GAAP or IFRS have to include a reconciliation to U.S. GAAP.2eCFR. 17 CFR 230.701 – Exemption for Offers and Sales of Securities Pursuant to Certain Compensatory Benefit Plans and Contracts Relating to Compensation
How Acquisitions Change the Calculation
An acquirer must include securities the target sold under Rule 701 during the same rolling 12-month period when it runs its own threshold math. A company sitting comfortably under $10 million on its own can end up over the line the day a deal closes, which pulls every participant in that 12-month window into the enhanced disclosure obligation. Build this check into deal diligence rather than discovering it after signing.
What Happens If You Miss the Deadline
Failing to deliver required disclosures can cost you the Rule 701 exemption for the offering. Without the exemption, those securities were sold in violation of federal registration requirements, and recipients get rescission rights: the right to force the company to buy the securities back at what they paid. For a company that has issued millions in equity to a growing workforce, a rescission demand can be financially serious.
The SEC has also brought enforcement actions against private companies for Rule 701 violations. An enforcement action tends to complicate later fundraising and IPO planning. And because the anti-fraud provisions of federal securities law continue to apply to Rule 701 offerings, any material misstatement or omission in the disclosures you do provide can create separate liability on top of the registration problem.2eCFR. 17 CFR 230.701 – Exemption for Offers and Sales of Securities Pursuant to Certain Compensatory Benefit Plans and Contracts Relating to Compensation
A Few Boundaries Worth Naming
Rule 701 is available only to companies that are not filing periodic reports with the SEC under the Securities Exchange Act of 1934.3U.S. Securities and Exchange Commission. Employee Benefit Plans – Rule 701 Once a company is public, it can’t rely on 701 for new grants, and the 701 disclosure regime doesn’t apply to those grants either.
The plan-copy obligation is separate from the 701 disclosure. Even a company that never gets close to $10 million must give each recipient a copy of the compensation plan or contract itself.2eCFR. 17 CFR 230.701 – Exemption for Offers and Sales of Securities Pursuant to Certain Compensatory Benefit Plans and Contracts Relating to Compensation The $10 million line is only about when the plan summary, risk factors, and financial statements get added on top.
If your grants are trending toward the threshold, treat the disclosure deadline as fixed. Preparing a risk factors write-up and current unaudited financials is a modest project compared to a rescission offer or an SEC inquiry.