Rule 701
SEC rule exempting private company equity compensation plans from securities registration.
Definition
Rule 701 provides an exemption from SEC registration for securities issued under compensatory benefit plans (stock option plans, RSU plans) by private companies. This is why your startup can grant you stock options without registering them with the SEC. Rule 701 has limits based on the company's assets and outstanding securities. Once the company exceeds certain thresholds (currently $10M in securities sold under Rule 701 in 12 months), additional disclosure requirements kick in.
Why it matters
Rule 701 is what makes your stock option grant legal without the company filing with the SEC. If the company exceeds Rule 701 thresholds, it must provide you with additional disclosures including financial statements, which gives you more information about the company's health.
Example
A private company grants $8M in stock options over 12 months under Rule 701, staying below the $10M threshold that would trigger additional disclosure. When it exceeds $10M, all option holders must receive audited financial statements.