Question: Is a company that files Exchange Act reports on a voluntary basis, or in accordance with a contractual obligation, eligible to use Rule 701?

Answer: Yes. [Jan. 26, 2009]

Question: Are foreign private issuers that are not subject to the Exchange Act’s reporting requirements eligible to use Rule 701, whether or not they publish their non-U.S. disclosure documents in accordance with Exchange Act Rule 12g3-2(b)?

Answer: Yes. [Jan. 26, 2009]

Question: A company that is not subject to the reporting requirements of Exchange Act Section 13 or 15(d) issued options in reliance on Rule 701. This company is acquired by another company, which is subject to the reporting requirements of Exchange Act Section 13(a) or 15(d) and assumes the private company’s outstanding options so that they become exercisable for shares of the acquiring company. Does the acquiring company need to register the offer and sale of the shares issuable upon the exercise of the options?

Answer: No. Rule 701(b)(2) permits an issuer to rely on Rule 701 to sell securities offered prior to the issuer becoming a reporting company. Similarly, an acquirer that is subject to Exchange Act reporting requirements may rely on Rule 701 for the exercise of the assumed options. For purposes of compliance with any disclosure that may be required by Rule 701(e), the acquirer’s Exchange Act reports would satisfy any disclosure requirement under Rule 701(e). [October 19, 2016]

Question: Are securities analysts excluded from receiving securities issued under Rule 701 or registered on Form S-8 as “consultants” or “advisors” because their services, as securities industry professionals, are inherently capital-raising or promote or maintain a market for the issuer’s securities?

Answer: Yes. [Jan. 26, 2009]

Question: Must an issuer use a rolling period consisting of the 12 months immediately preceding the date of the transaction in question for determining whether it has exceeded the sales ceiling in Rule 701(d)(2) and whether it must comply with the additional disclosure requirements under Rule 701(e); or may the issuer elect a fixed 12-month period such as the calendar year or its fiscal year?

Answer: The issuer may choose to calculate its sales under Rule 701(d)(2) and 701(e) on the basis of either a fixed period or a rolling 12-month period but must continue using the chosen calculation method consistently. [Jan. 26, 2009]

Question: If an issuer sells shares in excess of the Rule 701(d) limits, does it lose the Rule 701 exemption for all shares sold in the applicable 12-month period or just for the excess shares? May the issuer rely on another available exemption from Securities Act registration for sales of excess shares for which Rule 701 is not available?

Answer: The Rule 701 exemption would not be available for sales of shares that exceed the Rule 701(d) limits. Rule 701(f) provides, however, that sales under Rule 701 are not subject to integration with other sales that are otherwise exempt from the registration requirements of the Securities Act. Therefore, an issuer may rely on an available alternative exemption such as a limited offering exemption under Rule 504 of Regulation D or a private placement exemption under Rule 506 of Regulation D or Section 4(2) for the sales in excess of the Rule 701(d) limits, and rely on Rule 701 for sales that do not exceed the Rule 701(d) limits. [Jan. 26, 2009]

Question: May an issuer sell $1,000,000 of securities under Rule 701(d)(2)(i) during any consecutive 12-month period, regardless of the calculations in Rules 701(d)(2)(ii) and (iii)?

Answer: Yes. Rule 701(d) limits the amount that may be sold to the “greatest” of $1,000,000, 15% of total assets, or 15% of the outstanding amount of the class of securities being offered. [Jan. 26, 2009]

Question: To calculate the 15% of assets and the 15% of securities tests under Rule 701(d)(2)(ii) and (iii), may an issuer use either its balance sheet as of the last day of its most recently ended fiscal year or a more recent balance sheet?

Answer: Yes, an issuer is permitted to choose either balance sheet. See the American Bar Association no-action letter (Dec. 7, 2000) issued by the Division. [Jan. 26, 2009]

Question: Within 12 months of an original option grant, the issuer reprices the option grant at a lower exercise price, which, in turn, lowers the aggregate sales price or amount of securities sold during the 12-month period. May the issuer exclude the original grant in determining the amount of securities that may be sold and whether it has an obligation under Rule 701 to deliver the additional disclosure called for when its issuance level exceeds $5 million?

Answer: Yes, but the issuer must count the repriced options as a new sale, and include them in determining its aggregate sales price or amount of securities sold within any consecutive 12-month period that includes the repricing date. [Jan. 26, 2009]

Question: May an issuer disregard options that are cancelled or forfeited when applying the Rule 701(d) and (e) limits?

Answer: Yes. Once options are forfeited or cancelled, those options need not be counted for purposes of the Rule 701(d) and (e) limits. [Jan. 26, 2009]

Question: Rule 701(e) prescribes additional disclosure that must be delivered a reasonable time before sale if the aggregate sales price or amount of securities sold during any consecutive 12-month period exceeds $5 million. Must this disclosure be provided to all investors in the Rule 701 offering, or only to those investors who purchase securities after the issuer exceeds the $5 million threshold? What are the consequences of non-compliance?

Answer: The Rule 701(e) disclosure must be provided to all investors in the Rule 701 offering if the issuer believes that sales will exceed the $5 million threshold in the coming 12-month period, not only to those who purchase securities after the issuer exceeds the $5 million threshold. As stated in Securities Act Release No. 7645 (Feb. 25, 1999):

Question: A private issuer has a broad-based employee stock purchase plan that relies on the Rule 701 exemption. Employees sign up for payroll deductions at the start of a year, and the payroll deductions accumulated over the course of the year are applied to purchase shares on a single purchase date at the end of the year. Employees have the right to withdraw from the plan and have their payroll deductions refunded at any time during the year until shortly before the single purchase date. May the private issuer provide the Rule 701(e) disclosure shortly before the single purchase date?

Answer: Yes. [Jan. 26, 2009]

Question: A foreign issuer intends to conduct a Rule 701 offering exceeding the $5 million threshold in Rule 701(e). Is the issuer required under Rule 701(e)(4) to deliver to investors financial statements that are no more than 180 days old, or can the issuer deliver its annual and interim financial statements only at the frequency required of foreign issuers that are Exchange Act reporting companies?

Answer: The issuer must follow the 180-day requirement, regardless of whether it furnishes financial statements reconciled to U.S. GAAP or prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, both of which are allowed under Rule 701(e)(4). The 180-day requirement effectively means that the financial statements must be available on at least a quarterly basis unless sales of securities are limited to particular times of the year. [Jan. 26, 2009]

Question: May an issuer of securities provide the disclosure required by Rule 701(e) by means of electronic delivery, such as an email with attachments?

Answer: Yes. Rule 701(e) requires only that the disclosures be “provided” and “delivered.” It contains no requirement that the disclosures be provided or delivered using a particular medium. In general, the federal securities laws do not prescribe the medium to be used for providing information to investors by or on behalf of issuers of securities. For guidance on using electronic delivery to provide disclosure under the federal securities laws, see Securities Act Release No. 7856 (Apr. 28, 2000). [Jan. 26, 2009]

Question: A company is no longer required to file reports under Exchange Act Sections 13(a) or 15(d). With respect to employee stock options that are outstanding upon the suspension or termination of the company's Exchange Act reporting obligations and for which underlying shares previously registered on Form S-8 have been removed from registration by post-effective amendment (the "Outstanding Stock Options"), is the Rule 701 exemption available to the company for the exercise of the Outstanding Stock Options? Is the Rule 701 exemption available for the exercise of stock options that the company grants in the future?

Answer: Rule 701 is available to a company upon suspension or termination of its Exchange Act reporting obligations. With respect to the Outstanding Stock Options, if the aggregate exercise price of those options exceeds $5 million, the company must deliver the disclosure required by Rule 701(e) in a reasonable period of time before the options are exercised in order to rely on the Rule 701 exemption for the sale of the underlying shares upon exercise of the options. With respect to future grants, the company is considered to start with a clean slate under Rule 701 upon suspending or terminating its Exchange Act reporting obligations. Shares underlying the Outstanding Stock Options are not included for purposes of determining compliance with the 12-month sales limitation requirements in Rule 701(d) and the disclosure requirements in Rule 701(e). [June 4, 2010]

Question: In a merger transaction in which the acquirer assumes derivative securities of a target company and such derivative securities thereafter become derivative securities of the acquirer, does the acquirer need an exemption from registration for such assumption?

Answer: No. In a merger transaction, where derivative securities of the target company are assumed by the acquirer and by their terms become derivative securities for an economically equivalent amount of acquirer securities, the acquirer would not need an exemption for the assumption of such derivative securities, provided that at the time of grant by the target the compensatory benefit plan under which they were issued permitted this assumption without the consent of the holders of the derivative securities. [June 23, 2016]

Question: Is the exercise or conversion of the derivative securities that the acquirer has assumed in Question 271.17 eligible for exemption under Rule 701?

Answer: Under Rule 701, an issuer must be eligible for, and comply with, the exemption at the time that any sales are made pursuant to it. For these purposes, when an eligible issuer grants derivative securities pursuant to Rule 701, the securities underlying the derivative securities are considered to have been sold on the date of the grant of the derivative securities (without regard to when the derivative securities become exercisable or convertible). So long as the target company complied with Rule 701 at the time the derivative securities assumed in the merger transaction were originally granted, the exercise or conversion of the derivative securities would be exempt, subject to compliance, where applicable, with Rule 701(e). See Questions 271.22 and 23 below. [June 23, 2016]

Question: After the completion of a merger transaction, is an acquirer required to include securities previously sold by the target company pursuant to Rule 701 in its calculations for purposes of determining the amount of securities it may sell pursuant to Rule 701(d) on a going forward basis?

Answer: Yes. Post-merger, for purposes of determining the amount of securities that the acquirer may sell pursuant to Rule 701(d), the acquirer would be required to include the aggregate sales price and amount of securities for which the target company claimed the Rule 701 exemption during the same 12-month period for which the acquirer is making the determination. [June 23, 2016]

Question: After the completion of a merger transaction, to calculate compliance with Rule 701(d)(2) on a going forward basis, could an acquirer use a pro forma balance sheet as of its most recent balance sheet date that reflects the merger transaction as if it had occurred on that date?

Answer: Yes. Alternatively, the acquirer also could use a balance sheet date after the merger transaction that will reflect the total assets and outstanding securities of the combined entity. [June 23, 2016]

Question: Where an obligation to provide disclosure pursuant Rule 701(e) is triggered, Rule 701(e)(4) requires an issuer to provide investors with the financial statements required to be furnished by Part F/S of Form 1-A a reasonable time before the date of sale. In these circumstances, is an issuer required to follow the financial statement requirements of Part F/S as they relate to Tier 1 or Tier 2 Regulation A offerings?

Answer: An issuer could elect to provide financial statements that follow the requirements of either Tier 1 or Tier 2 Regulation A offerings, without regard to whether the amount of sales that occurred pursuant to Rule 701 during the time period contemplated in Rule 701(e) would have required the issuer to follow the Tier 2 financial statement requirements in a Regulation A offering of the same amount. [June 23, 2016]

Question: After the completion of a merger transaction, for assumed derivative securities for which the target company was required to provide disclosure pursuant to Rule 701(e), does the acquirer assume that obligation? How does the acquirer satisfy the obligation?

Answer: For assumed derivative securities for which the target company was required to provide disclosure pursuant to Rule 701(e) that are exercised or converted post-merger, the acquirer would satisfy that obligation by providing information meeting the requirements of Rule 701(e) consistent with the timing requirements of Rule 701(e)(6). [June 23, 2016]

Question: After the completion of the merger transaction, how does the acquirer treat securities previously sold by the target company pursuant to Rule 701 in its calculations for purposes of determining whether it has triggered a disclosure obligation pursuant to Rule 701(e)?

Answer: For purposes of Rule 701(e), following the merger transaction, in determining whether the amount of securities the acquirer sold during any consecutive 12-month period exceeds $5 million, the acquirer must include any securities that the target company sold during the same period. [June 23, 2016]

Question: An issuer is relying on Rule 701 to exempt the offer and sale of a restricted stock unit (RSU) award it is making to one of its employees. The RSU award will settle upon the satisfaction of conditions based on length of service and/or company performance. No additional consideration is paid by the employee at the time of settlement. If the issuer sells an aggregate amount of securities (including the RSUs) during the consecutive 12-month period that exceeds $5 million, thus triggering the requirement to deliver the additional information specified in paragraphs (1) through (4) of Rule 701(e), when is the issuer required to provide the additional information?

Answer: Under Rule 701(e), the issuer must deliver the information specified in paragraphs (1) through (4) to investors “a reasonable period of time before the date of the sale.” For the sale of an RSU award that relies on Rule 701 for exemption, the date of sale is the date it is granted. As such, the issuer must provide the required information a reasonable time before the date the RSU award is granted. Although RSUs are derivative securities (as their value is derived from value of the underlying common stock), they are not “exercised or converted,” and thus Rule 701(e)(6) relating to the exercise or conversion of derivative securities does not apply. [October 19, 2016]

Question: To protect against the unauthorized disclosure of Rule 701(e) information, may companies that are using electronic delivery to satisfy Rule 701(e) disclosure requirements implement safeguards with respect to electronic access to Rule 701(e) information?

Answer: We understand that some companies satisfying their Rule 701(e) delivery obligations electronically have concerns about the potential disclosure of sensitive company information. Standard electronic safeguards, such as user-specific login requirements and related measures, are permissible. The use of a particular electronic disclosure medium either alone or in combination with other safeguards, such as the use of dedicated physical disclosure rooms that house the medium used to convey the information required to be disclosed, should not be so burdensome that intended recipients cannot effectively access the required disclosures. For example, we would expect that physical disclosure rooms would be accessible during ordinary business hours upon reasonable notice. Once access to the required information has been granted, however, the medium used to communicate the required disclosure should provide the opportunity to retain the information or have ongoing access substantially equivalent to personal retention. [November 6, 2017]