This is the fourth part of our Securities Law 101 series. Because capital raising is such a critical function for middle market companies, we designed this series to introduce their management teams to some of the fundamental concepts in securities law. We hope that this series will prevent some of the most common mistakes management teams make. We will periodically publish posts examining different aspects of securities law.
For startup companies, cash is almost always tight. Despite the cash crunch, startups need to be able to attract qualified employees to get their business off the ground. So, a question I get all the time from founders of startups is: Can’t I just give my employees some shares? The answer, of course, is “yes, as long as there is an exemption from registration.”
So, what is this “exemption from registration”?
Well, as a reminder every time you issue securities the securities must be registered with the SEC and each state’s securities commission unless there is an exemption from registration. When you are issuing securities to employees, the exemption that you would most likely rely on is “Rule 701.” To be able to rely on Rule 701, you need to meet the following conditions:
- The issuer can’t be a 1934 Act reporting company or registered under the Investment Company Act of 1940;
- The purpose of the offering cannot be to raise capital. It can only be used to reward employees;
- The securities must be offered under a written compensatory plan; Continue Reading Securities Law 101 (Part IV): Paying employees with stock – Don’t get tripped up!