Now in English please.
Exemption from Securities Registration Under Rule 701
Under Rule 701 of the Securities Act of 1933, companies can offer their own securities as part of written compensation agreements to employees, directors, general partners, trustees, officers, or certain consultants without having to comply with federal securities registration requirements. Under Rule 701, if total sales (not offerings) of stock during a twelve-month period do not exceed the greater of:
$1 million,
15% of the issuer's total assets, or
15% of all the outstanding securities of that class,
then the offerings are exempt from registration requirements. The offerings must be discrete (not included in any other offer). All optionees and shareholders must be provided with a copy of the benefit plan or contract under which the options or securities are granted. For total sales over $5 million during a twelve-month period to the specified class of people above, companies must disclose additional information, including risk factors, copies of the plans under which the offerings are made, and certain financial statements.
While these are the general outlines of the rule, there are a number of specific wrinkles, as outlined below.
Measuring Sales
The limit is based on actual sales, not just offers. In measuring sales, all options granted during the period are considered part of the aggregate sales, with the option price defined as of the date of grant. Repriced options are treated as new grants. For restricted stock or compensatory stock purchases, calculations are made as of the date of sale. For deferred compensation equity plans, measurements are based on the date on an irrevocable election to defer compensation. In calculating outstanding securities for the 15% rules, all currently exercisable or convertible options, warrants, rights, and other securities are treated as outstanding.
The rule also requires that if stock is provided in exchange for employee or consultant services, the value for the purposes of the exemption calculations is the price of the stock provided, not the amount of compensation foregone.