Rule 701: What startups need to know

A lot of startups issue equity (like stock options or RSUs) to reward employees and advisors.

But by offering equity you’re ‘selling securities’, which usually means you need to register them with the Securities and Exchange Commission (SEC). That’s a time-consuming and expensive process.

That’s where Rule 701 comes in. It gives private companies a way to issue equity without going through a full SEC registration (as long as they stay within certain limits).

In this guide, we’ll break down what Rule 701 is, how it works, and what to watch out for as your company grows.

What is Rule 701?

Rule 701 of the Securities Act of 1933 is a solution that lets private companies give equity – like stock options or RSUs – to employees, advisors, and consultants without registering those shares with the SEC (as long as they stay under certain limits).

Here’s how it works.

• Over any 12-month period, you can issue up to the highest of these three amounts without needing extra disclosures:
• $1 million in total value of equity issued
• 15% of your total assets
• 15% of your total outstanding shares (of the class being offered)

In any case, if you go over $10 million in equity issued in that 12-month window, you’ll need to provide additional financial and risk disclosures to the people receiving it.

Why is Rule 701 important for startups?

For many startups, offering stock options (and other forms of equity) is essential for attracting and retaining talent.

Rule 701 makes it easier and cheaper for startups to give equity to their team by:

• Saving time and money: You don’t need to register with the SEC, which can be costly and time-consuming.
• Offering flexibility: You can choose how to calculate your 12-month limit, either using a fixed period or a rolling one. We’ll explain the difference below.
• Helping you hire great people: Equity gives employees a stake in your company, which is a big draw if you can’t offer big salaries.

That said, Rule 701 does have limits. If you’re not compliant, your company could face penalties.

How does the 12-month period work?

To stay within the limits of Rule 701, your company needs to track how much equity it’s issuing over a 12-month period.

But you get to choose how that 12-month window is calculated:

• Fixed period: A set window, like your fiscal or calendar year (for example, January 1st to December 31st).
• Rolling period: A moving window based on the 12 months before each new grant.

Let’s run through an example to show how these work.

​​Imagine a startup called Nexora – they want to issue stock options to their employees.

Say Nexora issue most of their employee stock options in two big rounds:

• $6 million in November 2025, and
• $5 million in February 2026.

Fixed period: If Nexora uses a fixed 12-month period, like January 1st to December 31st, then the November 2025 grant is counted in the 2025 12-month period.

The February 2026 grant is counted in the 2026 period. So even though they issued $11 million only a few months from one another, they never go above $10 million in a single year.

Rolling period: If Nexora uses a rolling 12-month window, each grant checks how much equity was issued in the 12 months before it.

So, when they issue the $5 million in February 2026, they must look back to February 2025. That period includes the $6 million issued in November 2025.

So, $6 million (November 2025) + $5 million (February 2026) = $11 million total in that 12-month rolling window.

As a result, they’ve gone over the $10 million limit, so they must provide detailed financials and risk disclosures to all employees receiving equity in that round.

How to stay compliant with Rule 701 (in five steps)

Follow this checklist to make sure you’re staying within the SEC’s rules.

• Make sure you’re eligible: Rule 701 only applies to private companies. Public companies can’t use this exemption.
• Monitor how much you’re issuing: Track your 12-month issuance total to avoid triggering extra disclosure requirements. For example, if your stock option pool is 10% and your company is valued below $100 million, you’re unlikely to hit the $10 million limit, so you can be confident you’re operating safely within the exemption.
• Choose your 12-month period method: Decide whether to use a fixed or rolling period and stick with it.
• Prepare required disclosures (if needed): If issuing more than $10 million in securities, you should reach out to a tax advisor to make sure the recipients get the proper disclosures they need.
• Keep detailed records: Maintain thorough records of all equity compensation grants, pricing, and board approvals. SeedLegals lets you easily view the equity promises you’ve made, all in one place. Just remember, it’s up to you to keep full records of things like pricing and board approvals.

Make sure you issue equity the right way

If you’re issuing stock options to your team, we can help you do it in a compliant and cost-effective way.

Book a call below or start your 7-day free trial today.