Rule 701 Overview

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.

Previously, the only visibility into Rule 701 compliance was in the Grant Shares or Options workflow's Check Constraints step, where the workflow conducts two of the three Rule 701 exemption checks for clients issuing new grants.

What does the Rule 701 Report do

The Rule 701 Planner enables clients to plan future grants while qualifying for Rule 701 exemption. The planner leverages the platform's power to allow clients to include outstanding promises and pending grants, as well as define an aggregate value for additional grants. The Rule 701 Report consists of the Rule 701 Planner and Existing Grants Table.

The Existing Grants Table

The Existing Grants Table serves two purposes:

It gives a full list of existing grants that could count towards the Rule 701 exemption so clients can manually add up the grant totals to confirm our calculations, and
It provides a way for clients to change the federal exemption used if it’s not Rule 701. Currently, the platform assumes all grants being issued are using the Rule 701 exemption; however, there are other situations where other exemptions can be used that would not contribute to the Rule 701 calculations. The Update Exemption action should open a window to select one of the federal exemptions.

This table shows all existing grants that are used in the Rule 701 calculations (not in-flight grants or promises). It provides a place for users to include/exclude grants from 701 calculations. The user can use the three-line menu to the right of the applicable grant to exclude it from Rule 701 calculations (by default, the platform will include each grant in Rule 701 calculations). The details from this table can be downloaded to an Excel spreadsheet as well.

How the Rule 701 Planner Works

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The details section 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: Since Rule 701 status depends on the value of equity granted within a 12-month window, the timing of a grant can be very important.
12-Month Period Type: Once a company selects their period-type, the SEC does not allow them to change it. This value cannot be edited.
Include/Exclude: The user 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, the user will need to input the expected Fair Market Value per Share at the time when they think the grant will be made.
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. The user can add their company assets in the Edit Details modal to see if their company qualifies under this rule. Until the user adds the value, the 15% Assets calculator in the criteria section will be blank.

The status modal shows whether (based on the information provided) the company is qualified for the Rule 701 Exemption.

If the user is qualified, the calculator shows how the total value of remaining equity they can grant within this period (based on the most permissive criteria for them)

If the user does NOT qualify, the calculator shows the amount of grant value that is in excess.

The information in the Rule 701 status summary at the top of the Planner can be downloaded to an Excel spreadsheet as well.

Screenshots are for illustrative purposes only.

Fidelity provides cap table management and other administrative services to private companies and their equity compensation plans.

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