PRIVATE OFFERING EXEMPTIONS FROM REGISTRATION: RULE 701

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PRIVATE OFFERING EXEMPTIONS FROM REGISTRATION: RULE 701

Exemptions from registration used in private offerings that are commonly used include:

What is the Rule 701 exemption used in private offerings?

Rule 701 under the Securities Act of 1933, as amended (the “Securities Act”) is an exemption from the registration requirements of the Securities and Exchange Commission (the “SEC”) for offers and sales of securities under certain compensatory benefit plans or written agreements relating to compensation.


What are the benefits and downsides of using a Rule 701 exemption in a private offering?

The benefits to using a Rule 701 exemption in a private offering are:

  • Limited disclosure requirements for awardees including providing a copy of the compensatory benefit plan (although 10b-5 under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), applies); and

  • No filing requirement with the SEC.

The downsides to using a Rule 701 exemption in a private offering are:

  • Not available to SEC reporting companies;

  • Only available to individuals who are employees, officers, directors, partners, trustees, and certain consultants and advisors of the issuer;

  • Aggregate sales price or amount of securities sold under Rule 701 exemption during any 12-month period cannot exceed:

  1. $1,000,000;

  2. 15% of the total assets of the issuer, measured at the issuer’s most recent balance sheet (no older than its last fiscal year-end); or

  3. 15% of the issuer’s total outstanding securities of the same class being offered in reliance on Rule 701, measured at the issuer’s most recent balance sheet (no older than its last fiscal year-end).

  • Increased disclosure requirements if aggregate sales price or amount of securities sold under Rule 701 during any 12-month period exceeds $10,000,000;

  • State exemptions is still required for private offering; and

  • The securities sold in the private offering will be restricted securities, which means they may not be resold, without registration with the SEC, for up to 12 months.

What types of consultants and advisors are eligible to receive securities in a private offering under Rule 701?

Consultants and advisors receiving securities in private offering under Rule 701 must be natural persons, providing bona fide services to the issuer or an issuer related entity and such services are not in connection with the offer or sale of securities in a capital-raising transaction and do not directly or indirectly promote or maintain a market for the issuer’s securities.


What type of information does the issuer have to provide to recipients of securities issued under Rule 701?

A reasonable time prior to the issuance of securities under Rule 701, the issuer must provide to each recipient a copy of the written compensatory plan. If the aggregate sales price of securities sold by the issuer on reliance on Rule 701 exceeds $10,000,000 in a 12-month period then the issuer must also provide to each recipient the following additional disclosures:

  • A summary of the material terms of the compensatory plan or compensatory contract;

  • A list of risk factors associated with investing in the issuer’s securities; and

  • Financial statements of the issuer(for the two most recently completed fiscal years) prepared in accordance with U.S. generally accepted accounting principles (GAAP) dated not more than 180 days before the sale.

The decision whether to commence a private offering, including the preparation of required disclosures and federal and state compliance, can be complicated and difficult. Business Legal Advisors, LLC has over seven years of experience assisting companies with private offerings, from preparing for the private offering to the completion of a successful offering.

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