On March 6, 2026, the Division of Corporation Finance at the Securities and Exchange Commission (SEC) issued new and updated Compliance and Disclosure Interpretations (CDIs) for private and foreign companies issuing equity compensation in reliance on Rule 701 to their employees, officers, directors, and certain consultants and advisers.
Backdrop: Covered Equity Plans & Disclosure Triggers
Rule 701 provides an exemption from registration under the Securities Act of 1933, as amended, for securities issued under a written compensatory benefit plan or compensation contract for companies not required to file periodic reports with the SEC under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Private companies, as well as foreign issuers, often rely upon Rule 701 to make awards to employees (as well as officers and directors) under equity incentive plans or to offer employee stock purchase plans.
If the aggregate sales price or amount of securities sold by a company in reliance on Rule 701 during any consecutive 12-month period exceeds $10 million, before the date of sale the company must provide employees with “enhanced disclosure,” including: (i) a copy of the plan, (ii) a summary of material plan terms or, if required by ERISA, a summary plan description, (iii) information regarding the risks of investment in the company’s securities, and (iv) specified financial statements prepared in accordance with U.S. GAAP or IFRS (or reconciled to U.S. GAAP).
Enhanced Disclosure and Other Updates
The new CDIs (271.26 and 271.27) clarify when enhanced disclosure must be provided and the consequence of not doing so. Other previously issued CDIs (271.10, 271.12, 271.14, 271.16, 271.23 and 271.24) have been updated solely to reflect the relevant $10 million threshold for providing enhanced disclosure (which was updated from $5 million in 2018). These CDIs are summarized below for reference.
Delivery of Enhanced Disclosure
A company must provide the enhanced disclosure noted above only to those employees who purchase or receive grants or awards of equity during the consecutive 12-month period in which the aggregate sales price of such equity sales, grants and/or awards exceeds $10 million. A company is not required to provide enhanced disclosure in consecutive 12-month periods during which the $10 million threshold is not met, even if those periods fall before or after a period during which the $10 million threshold is exceeded. The consequence of not providing enhanced disclosure when required is the loss of the exemption for all equity sold, granted, or awarded during “the entire offering period that took place” in the 12-month period during which the $10 million threshold was exceeded.
Anticipating Required Enhanced Disclosure
A company must carefully calculate anticipated sales, grants, and/or awards because a company must provide enhanced disclosure to all recipients in the coming 12-month period if the company believes that sales will exceed the $10 million threshold in such period, not only to those recipients who purchase or receive grants or awards after the $10 million threshold is exceeded.
Stock Options
For stock options, the relevant value for purposes of calculating the $10 million threshold is the exercise price of the stock options at the date of grant; amounts of stock options vested or exercised are not counted for this purpose. If a company reprices an option grant within 12 months of the grant date by lowering the exercise price, the company may exclude the original grant, but must count the repriced option as a new sale, in determining whether the $10 million threshold is exceeded in any consecutive 12-month period. If required, the delivery of enhanced disclosure to employees holding stock options must be made a reasonable period of time before the exercise date of such options.
Restricted Stock Units
When a company awards a restricted stock unit (”RSU”) to employees (including RSUs that settle upon satisfaction of conditions based on length of service and/or company performance) and exceeds the $10 million threshold during the consecutive 12-month period during which the RSU is awarded, the company must deliver enhanced disclosure to the RSU recipient a reasonable time before the date the RSU award is granted.
Financial Statements for Foreign Companies
If a foreign company intends to conduct an offering to employees in reliance on Rule 701 that exceeds the $10 million threshold in a consecutive 12-month period, it must provide financial statements that cover a period ending no more than 180 days earlier. This means that the foreign company must make financial statements available on at least a quarterly basis to satisfy the enhanced disclosure requirement. It is important to note that foreign issuers with securities listed on foreign stock exchanges may not publish quarterly financial statements under their home country rules; thus, this requirement may limit their ability to grant equity incentive compensation to periods during which current financial statements will be available for distribution to employees.
Including Target Company Equity Incentives in Calculation of $10 Million Threshold
Following a merger transaction, the acquiring company must include equity sold, granted, or awarded by the target company in reliance on Rule 701 in determining whether the acquiring company has exceeded the $10 million threshold in any consecutive 12-month period for purposes of Rule 701.
Clean Slate for Companies Suspending/Terminating Reporting Requirements
Upon suspension or termination of a company’s Exchange Act reporting obligations, a company can rely upon Rule 701 for the exercise of outstanding stock options, the underlying shares of which were removed from registration. For purposes of determining whether the $10 million threshold is exceeded, the company must calculate the aggregate exercise price of such outstanding stock options in the relevant 12-month period; however, any future grants of stock options or other equity incentives by the company post-suspension/termination will be calculated separately, and the shares underlying the outstanding stock options will not be included for purposes of determining whether the $10 million threshold is exceeded in any consecutive 12-month period.
The Bottom Line
Given the significance of Rule 701 as a compensation strategy, employers should stay abreast of the rules attendant to this safe harbor or count on someone who can navigate the new and changing guidance for you. As always, we are here to help.
