What does a 701 disclosure mean?

What does a 701 disclosure mean?

Most startups rely on Rule 701 to issue employee equity. It’s a federal exemption that allows private companies to issue up to $10M in equity to employees, without extensive disclosures. Rule 701 is friendly to startups and small companies who want to issue equity but can’t afford expensive accountants or lawyers.

Who can use Rule 701?

Rule 701 may be used only by an issuer that is not subject to the reporting requirements of Section 13 or Section 15(d) of the Exchange Act, and is not an investment company registered or required to be registered under the Investment Company Act of 1940.

What qualifies as an accredited investor?

The SEC defines an accredited investor as either: an individual with gross income exceeding $200,000 in each of the two most recent years or joint income with a spouse or partner exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.

Do stock options need to be registered?

To issue any equity, a company needs to either (a) register with the SEC as a public company, or (b) issue the equity under an “exemption” from the registration requirement. Registration is expensive. Exemptions are cheap, but have some quirks and limitations.

What is the accredited investor exemption?

The SEC allows companies to sell securities to accredited investors without providing them with more information because it considers accredited investors wealthy enough to “bear the risk of a loss.” In its August 2020 rulemaking, the SEC expanded the criteria for accredited investors to include not only wealth, but …

What is exempt from the disclosure requirements of the Securities Act?

This section exempts offers and sales to former employees, directors, general partners, trustees, officers, consultants and advisors only if such persons were employed by or providing services to the issuer at the time the securities were offered.

What makes a security exempt?

An exempt transaction is a type of securities transaction where a business does not need to file registrations with any regulatory bodies, provided the number of securities involved is relatively minor compared to the scope of the issuer’s operations and that no new securities are being issued.

Can I lie about being an accredited investor?

In a Rule 506(b) offering, investors can “self-certify”, so this is where the opportunity for an investor to falsify their qualifications comes in. In a Rule 506(c) offering, investors must provide “reasonable assurance” to the Syndicator that they are accredited, which must be dated within 90 days of the investment.

Can I invest without being an accredited investor?

How to invest without being an accredited investor requires only that the investor has a net worth of less than $1 million. This includes the net worth of his or her spouse. The investor must also have earned $200,000 or more annually for the last two years.

Is a stock option considered a security?

Certain derivatives on securities (e.g., options on equity securities) are also considered securities for the purposes of the securities laws. Security futures products are considered to be both securities and futures products. Futures contracts on broad-based securities indexes are not considered securities.

How can I invest without being accredited?