The SEC's 2018 Rule 701 change raised a number, not an exemption

The record

Rule 701 exempts compensatory stock issued by a non-reporting company to employees, officers, directors, consultants and advisors from Securities Act registration. In its own adopting release, Release No. 33-10520, dated 18 July 2018 and effective 23 July 2018, the SEC states it is amending Rule 701(e) as mandated by Section 507 of the Economic Growth, Regulatory Relief, and Consumer Protection Act, which directed the Commission, within 60 days of enactment, to raise the disclosure threshold from 5 million dollars to 10 million dollars in aggregate sales price or securities sold in any consecutive 12-month period.

What the sources establish

The release states the amendment does no more than conform the rule to the statute, involves no exercise of agency discretion, and finds good cause to skip the ordinary notice-and-comment process for that reason; it also states that issuers already offering securities in the current 12-month period could apply the new 10 million dollar threshold immediately upon the amendment's effectiveness. A second source, the current rule text at 17 CFR 230.701, confirms the 10 million dollar figure is now the codified trigger and specifies that once it is exceeded, the issuer must deliver the compensatory benefit plan or agreement, plan-related risk factors, and financial statements comparable to a Regulation A offering circular, a reasonable time before the date of sale.

Scope and revision

The release is explicit that Rule 701(e) otherwise continues to operate exactly as it did before: the amendment changed only the dollar figure that triggers additional disclosure, not the exemption itself, and not the disclosures required once the threshold is crossed. An issuer selling under 10 million dollars in a 12-month period still relies on the underlying exemption without the added disclosure; an issuer above that figure still owes investors the plan document, risk factors and financial statements the rule always required above its threshold, now set at a higher dollar level. Nothing in the release eliminates the disclosure obligation for issuers that exceed the new figure.

The decision in front of you

This is editorial: an employee receiving compensatory equity from a private company should treat the 10 million dollar threshold as the point at which the company is legally obligated to hand over specified financial and risk disclosures, not as a limit on how much equity a company may grant. A company approaching that figure in a 12-month period should confirm which disclosures the current rule text requires before the threshold is crossed, not after.

• Has the issuer's aggregate sales price or securities sold under Rule 701 in the trailing 12 months crossed 10 million dollars?
• If so, has the issuer delivered the plan document, risk factors and Regulation A-comparable financial statements the rule requires?
• Does a given description of the 2018 amendment describe it as raising a disclosure threshold, or incorrectly as removing disclosure entirely?

A single number changed in 2018, from 5 million to 10 million dollars; the obligation the number triggers, and the exemption it sits inside, did not.