Business FormationSecuritiesStartupsDoes My Company Need to Register with the SEC to issues Equity Compensation to Employees?

October 5, 2021by Gregory Byrnes0

The three main exceptions to SEC registration when issuing equity rewards (stock) are Rule 707 of the Securities Act, Rule 506(b) of the Securities Act, and Section 4(a)(2).

Rule 701

Rule 701 of the Securities Act exempts rewards for compensatory purposes made under a written compensatory benefit plan or compensation contract by a company that is not required to report or require to register as an investment company. A compensatory benefit plan is any purchase, savings, option, bonus, stock appreciation, profit sharing, thrift, incentive, deferred compensation, pension, or similar plan. Rule 701 provides caps on the number of securities Rules 701 awards a company may issue. Rule 701 only applies to natural persons and Ruel 701 transactions are not considered covered securities.

Rule 506(b)

Rule 506(b) of Regulation D exempts awards to accredited investors. Officers and directors are considered accredited investors for the purpose of securities insurances regardless of income or net worth. Rule 506(b) requires a Form D filing and pay the required filing fees. Rule 506(b) exempt transactions are considered covered securities.

Section 4(a)(2)

Section 4(a)(2) exempts awards for offers or sales that are not public offerings. An offering or sale is a not generally considered a public offering if it involves a limited number of investors, the investors are sophisticated, and the investors have access to detailed information about the company. The burden of proving an offering is not a public offering is on the company. Section 4(a)(2) awards are not covered securities.

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