Introduction
This article provides an overview of Rule 701, as well as the options available in the Rule 701 Report. The Rule 701 Report consists of the Rule 701 Planner, the Existing Grants table, and the Disclosures Report. The Rule 701 Report is found in the Equity & Financing section on the Company Workspace.
See this article for more information on the automatic disclosures for Rule 701.
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Rule 701 information
Rule 701 of the Securities Act of 1933 allows private companies to issue securities to employees and officers as a portion of their compensation without having to comply with federal securities registration requirements.
If the value of the equity granted under Rule 701 exceeds $10M during any consecutive 12-month period, a company is subject to additional disclosure requirements.
To qualify for an exemption under Rule 701, and avoid the additional disclosures, a company must meet ONE of three requirements:
- The dollar value of shares relying on Rule 701 is less than $1,000,000.
- The quantity of Rule 701 shares must be less than 15% of the outstanding shares (15% of outstanding shares amount, excluding shares issued under Rule 701).
- The dollar value of Rule 701 shares is less than 15% of company assets.
Rule 701 Planner
Rule 701 Planner Overview
The Rule 701 Planner enables you to plan future grants while qualifying for Rule 701 exemption. This report leverages the platform's power to allow you to include outstanding promises and pending grants, as well as define an aggregate value for additional grants.
This report consists of the Planner settings, Rule 701 Status, Criteria calculations, and In-flight grants. To download this report, click on Excel Export.
Planner settings
The settings in the top-left of the Rule 701 Planner shows an overview of the settings that are being used to calculate the company’s status.
- As of date: The date used to calculate the 701 checks. This date is also used as the issue date for any in flight, promised, or additional grants.
- 12-month period type: Shows what 12-month period has been selected. Once set, the SEC does not allow for changes and this setting cannot be changed.
- Include/exclude: You can choose to include or exclude in-flight grants, outstanding promises, and/or add hypothetical additional future grants. For in-flight grants and outstanding promises, the platform pulls in all applicable information. Since the outstanding promises and additional grants haven’t happened yet, you will need to input the expected fair market value per share at the time of issuance.
- Estimated total company assets: One of the three criteria that a company can meet to qualify for Rule 701 is that the total value of granted equity is less than 15% of the company’s total assets. Until the company assets have been added, the 15% Total Assets calculation in the criteria section will be blank.
To change the settings, click on Edit Details.
Rule 701 Status
The status modal shows whether your company is qualified for the Rule 701 Exemption, and if any additional disclosures are required, based on the setting and information provided.
If qualified, the calculator shows how the total value of remaining equity that can be granted within the time period.
If you are nearing a threshold, the status will update to indicate if additional disclosures are required. In this example, the company is approaching the $10M threshold.
In this example, the $10M threshold has been met and additional disclosures are required.
This example shows that the company is not qualified for Rule 701
Criteria calculations
This section shows how the three criteria for Rule 701 are calculated based on the report settings.
In-flight grants
If selected in the report settings, additional grants, in-flight grants, and/or promised grants will be listed at the bottom of the report.
Existing Grants
This table shows all existing grants that are used in the Rule 701 calculations, excluding in-flight grants or promises. Here you can select to include or exclude grants from 701 calculations. This report can be downloaded by clicking the Excel Export button.
To include or exclude a grant from 701 calculations, click on the three-bar menu to the right, and select Include/Exclude from 701.
Disclosures Report
This report will list all stockholders that have received disclosure documents, either through the automatic disclosures feature, or through the bulk disclosures workflow. Documents downloaded by the recipient are watermarked with their name and access date. Recipient access to documents expires one year from the date sent. There is a search box to search for specific stockholders. This report can be downloaded by clicking the Export Report button.
Clicking on Options allows you to set the date range of the report, and whether or not to include disclosures sent outside of the platform.
Screenshots are for illustrative purposes only.
Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.
Fidelity Private Shares LLC provides cap table management and other administrative services to private companies and their equity compensation plans.
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