# Rule 701 for employee equity

> The exemption that lets a private company grant options: who qualifies, and the 12-month limits.

Source: https://lopifi.com/learn/securities-law-for-startup-fundraising/rule-701-employee-equity
Part of: Lopifi — US GAAP books on autopilot, checked by a CPA (https://lopifi.com)

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**What is Rule 701 and do I need it to grant stock options?** The exemption that lets a private company grant options: who qualifies, and the 12-month limits.

Options are securities too. A private company grants them under [Rule 701](https://lopifi.com/md/glossary/rule-701), which exempts sales under a written compensatory plan to employees, directors, officers and consultants who are natural persons. In any 12 months the amount sold under it can't exceed the greatest of $1,000,000, 15% of total assets or 15% of the class outstanding, and above $10 million the company must give the recipients specified disclosure.

> “The aggregate sales price or amount of securities sold in reliance on this section during any consecutive 12-month period”

— [17 CFR §230.701(d)(2)](https://www.law.cornell.edu/cfr/text/17/230.701), Rule 701: equity for employees, directors and consultants of a private company

**Northwind — The first grants.** Rule 701 counts options at their exercise price. Northwind's 65,000 options at $0.06 are $3,900 — far inside $1,000,000. The limit matters once grants are large and the 409A value is high.

## Where this page's rules come from

- [17 CFR §230.701(d)(2)](https://www.law.cornell.edu/cfr/text/17/230.701) — Rule 701: equity for employees, directors and consultants of a private company (sec)

- **Track:** [Cap tables & raising](https://lopifi.com/md/learn/equity)
- **Part of:** [Securities law for raising money](https://lopifi.com/md/learn/securities-law-for-startup-fundraising) — 3 min
- **Terms taught:** [Rule 701](https://lopifi.com/md/glossary/rule-701)
- **Previous:** [Regulation Crowdfunding](https://lopifi.com/md/learn/securities-law-for-startup-fundraising/regulation-crowdfunding)
- **Next:** [Equity on the books: stock, SAFEs, notes and stock comp, Cap table · Lesson 8](https://lopifi.com/md/learn/equity-accounting-journal-entries)
- **The course:** https://lopifi.com/md/learn