Rule 701, Regulation D, and Rule 144 FAQ

What is Rule 701?

Rule 701 is the SEC exemption that lets a private company sell securities, such as stock options or RSUs, under a written compensatory benefit plan to employees, officers, directors, consultants, and advisors, without registering those securities. It applies only to compensation; it can't be used to raise capital from outside investors.

What is the Rule 701 limit?

During any rolling 12-month period, the aggregate sales price or value of securities a company sells under Rule 701 can't exceed the greatest of $1,000,000, 15% of the company's total assets (per its most recent balance sheet), or 15% of the outstanding amount of the class of securities being offered, valued at fair market value.

What is the Rule 701 $10 million disclosure threshold?

If the aggregate sales price or value of securities sold under Rule 701 in any 12-month period exceeds $10 million, the company must give recipients enhanced disclosure before the sale: a summary of the plan's material terms, risk factors, and financial statements. Below that threshold, the rule itself doesn't require this disclosure.

Who qualifies for the Rule 701 exemption?

Employees, officers, directors, general partners, consultants, and advisors of the company (or its parents and majority-owned subsidiaries), receiving securities under a written compensatory benefit plan. It does not cover sales to investors who are not providing services to the company, even if those sales happen alongside a compensatory grant.

What is Regulation D?

Regulation D ("Reg D") is the SEC exemption most private companies use to sell securities to investors to raise capital, covering priced equity rounds, SAFEs, and convertible notes. Its main variants for startups are Rule 506(b) and Rule 506(c); a smaller, less commonly used variant, Rule 504, exempts offerings up to $10 million in a 12-month period.

Rule 506(b) vs Rule 506(c): what's the difference?

Rule 506(b) allows sales to an unlimited number of accredited investors plus up to 35 non-accredited but sophisticated investors, with no general solicitation or advertising, and lets investors self-certify their accredited status. Rule 506(c) allows general solicitation and public advertising instead, but requires every purchaser to be accredited and requires the company to take reasonable steps to verify that status rather than accepting self-certification.

What is an accredited investor?

An individual qualifies by income (above $200,000, or $300,000 jointly with a spouse, in each of the two most recent years with an expectation of the same this year) or net worth (above $1 million excluding the primary residence), or by holding certain professional securities licenses. An entity qualifies by meeting an asset threshold or registered-entity status, such as a bank, a registered investment company, a sufficiently large family office, or an entity whose equity owners are all independently accredited.

How does 506(c) verify accredited status, if self-certification isn't enough?

By reviewing documentary evidence such as tax returns or W-2s, bank or brokerage statements, a credit report, or a written confirmation from a broker-dealer, SEC-registered investment adviser, licensed attorney, or CPA that reasonable steps were taken to verify the investor's accredited status.

What is Form D, and when must it be filed?

Form D is the notice filing a company submits electronically to the SEC for a Reg D offering, disclosing basic information about the issuer and the offering. It must be filed within 15 days of the first sale of securities in the offering.

What are Blue Sky filings?

Blue Sky filings are state-level securities notice filings (and associated fees) that most states still require for a Reg D offering, even though Reg D generally preempts state merit review of the offering's own terms.

What is Rule 144?

Rule 144 is the SEC exemption that allows a holder of restricted securities (bought in a private placement or acquired through a compensatory exercise, not in a registered offering) or control securities (held by an affiliate) to resell them, once specific holding-period and other conditions are satisfied.

What is the Rule 144 holding period?

Six months if the issuer is an SEC-reporting company, or one year if it isn't, which is the case for most private companies, before a restricted security becomes eligible for Rule 144 resale at all.

What is an affiliate under Rule 144?

A director, executive officer, or holder of more than 10% of a class of the company's securities. An affiliate (also called a control person) faces additional conditions beyond the holding period before reselling: current public information, a manner-of-sale requirement, a volume limit, and, above a certain size, a Form 144 filing.

What is the Rule 144 volume limit?

For an affiliate, the greater of 1% of the outstanding shares of that class, or the average weekly reported trading volume over the four weeks preceding the sale notice, in any three-month period.

When is Form 144 required?

When an affiliate's Rule 144 sale, combined with their other sales in the same class over the trailing three months, exceeds 5,000 shares or $50,000 in aggregate sale price, whichever threshold is hit first.

How do Rule 701, Regulation D, and Rule 144 fit together?

They cover a company's equity at different points in its life, off the same cap table: Rule 701 exempts compensatory grants to the team, Regulation D exempts raising capital from investors, and Rule 144 governs when and how the restricted securities issued under either of those exemptions can later be resold.

Is any of this legal advice?

No. This is general information about how these exemptions and rules work. Whether a specific issuance, offering, or resale actually qualifies for an exemption, and what disclosure or filing it requires, is a determination for qualified securities counsel.

How does Value8 support securities compliance?

Value8's Ledger product monitors Rule 701 exemption headroom, tracks Rule 144 restricted-security holding periods and resale eligibility, and tracks Regulation D offerings, accreditation records, and Form D / Blue Sky filing status, all against the company's live cap table. It's a monitoring tool, not a substitute for securities counsel's own determination. See how Value8 does securities compliance for how it works.