SEC Staff Updates Guidance on Rule 701 Offering Exemption, Ineligible Issuer Status, and Smaller Reporting Company Status

On March 6, 2026, the staff of the SEC’s Division of Corporation Finance issued new and revised Compliance & Disclosure Interpretations (C&DIs) primarily addressing (i) exemptions for offers and sales of securities pursuant to certain compensatory benefit plans under Rule 701 under the Securities Act of 1933, as amended (the Securities Act), (ii) the impact of foreign court convictions on ineligible issuer status under Securities Act Rule 405, and (iii) the connection between smaller reporting company (SRC) status and the SRC status checkboxes on Securities Act registration forms and reporting forms under the Securities Exchange Act of 1934, as amended (the Exchange Act).

Securities Act Rules C&DIs - Rule 701 – Compensation Benefit Plan Exemption

Securities Act Rule 701 provides an exemption from the registration requirements of the Securities Act that allows private (nonreporting) companies to issue equity and equity awards under written compensatory benefit plans or compensation agreements. The exemption is subject to limits on the amount of securities that can be sold in any 12-month period and a requirement (under Rule 701(e)) that an issuer whose sales exceed $10 million in any consecutive 12-month period must deliver enhanced disclosure (including risk factors and financial statements) to investors a reasonable period before the sale.

The new and revised Rule 701 C&DIs largely focus on how to apply the $10 million threshold that triggers Rule 701(e) disclosure, how option repricings should be counted, and how Rule 701 operates in the context of multiyear grants, post-Exchange Act deregistration exercises, and mergers and acquisitions (M&A).

Revised Question 271.10 (Repricing of Options)

The staff clarified that when an issuer reprices an option downward within 12 months of the original grant, the issuer may treat the repricing as effectively replacing the original grant for purposes of calculating whether the issuer has crossed the Rule 701 limit as to aggregate sales price or amount of securities sold during a 12-month period; the repriced options must be treated as a new sale and counted in the 12-month period that includes the repricing date.

Revised Question 271.12 (Rule 701(e) Disclosure; Consequences of Noncompliance)

The staff reinforced that an issuer should provide the Rule 701(e) disclosure to all participants in the Rule 701 offering during any 12-month period it expects sales/grants would exceed the $10 million threshold, not only those who participate after the threshold is crossed. The staff also reiterated that failure to provide the disclosure to all participants can result in the issuer losing the exemption for the entire offering once sales exceed the threshold.

This guidance underscores the importance of forward-looking forecasting (not just backward-looking measurement) when deciding when to begin delivering the Rule 701(e) disclosures.

Revised Question 271.14 (Foreign Issuers and the 180-Day Financial Statement Requirement)

The staff clarified that foreign issuers relying on Rule 701 and exceeding the $10 million threshold must comply with the requirement to deliver financial statements dated within 180 days, and cannot alternatively deliver financial statements on the semi-annual cadence applicable to foreign issuers that are Exchange Act reporting companies. The staff noted this effectively requires financial statements to be available on at least a quarterly basis in most cases.

Revised Question 271.16 (Post-Deregistration Exercises; Clean Slate for Future Grants)

For companies whose Exchange Act reporting obligations have been suspended or terminated and who have outstanding employee options with underlying shares previously registered under a Form S-8 registration statement (and later deregistered), the staff confirmed that Rule 701 can be available for option exercises after deregistration. The staff also clarified two key points:

• If the aggregate exercise price of the outstanding options exceeds $10 million, the issuer must deliver the Rule 701(e) disclosure a reasonable period before exercise to rely on Rule 701 for the sale of the underlying shares on exercise; and
• For future grants after deregistration, the issuer begins with a clean slate for Rule 701 calculations—shares underlying previously outstanding options are not included in measuring compliance with Rule 701(d) and (e) for new grants after Exchange Act reporting is suspended/terminated.

Companies suspending or terminating Exchange Act reporting should treat Rule 701 readiness as part of the broader post-reporting life cycle, especially where equity compensation remains an important retention tool.

Revised Question 271.23 (M&A: Counting a Target’s Rule 701 Sales for Rule 701(e) Threshold)

In the merger context, the staff clarified that for purposes of determining whether the acquirer has crossed the Rule 701(e) disclosure threshold in a consecutive 12-month period, the acquirer must include securities sold by the target company in that same period.

Revised Question 271.24 (RSUs: When Disclosure Must Be Delivered)

For RSUs that settle upon satisfaction of service/performance conditions (with no additional consideration paid at settlement), the staff confirmed that—if the issuer crosses the Rule 701(e) $10 million threshold—the Rule 701(e) disclosure must be provided a reasonable time before the RSU grant date, as the “sale” date for an RSU for Rule 701 reliance purposes is the grant date (not the later settlement date).

New Questions 271.26 and 271.27 (Multiperiod Grants; Scope of “Offering” Affected by a Disclosure Failure)

The new guidance addresses a three-12-month period options grant fact pattern, where only one rolling 12-month period exceeds the $10 million disclosure threshold trigger. The staff’s key clarifications are:

• The disclosure obligation turns on the value of options granted (based on exercise price) during the relevant 12-month period (and other Rule 701 sales in that period), rather than on vesting or exercise amounts exceeding $10 million;
• For the options, the required disclosure must be delivered a reasonable period before the exercise date; and
• If only one 12-month period exceeds the threshold, then the Rule 701(e) disclosure obligation—and the consequences of a failure to deliver it (i.e., loss of the Rule 701 exemption)—are confined to that period’s offering and would not taint grants from other 12-month periods.

Rule 405 — “Ineligible Issuer” Status

Revised Question 203.03 (Foreign Court Convictions and “Ineligible Issuer” Status)

The staff revised its position to provide that a conviction by a foreign court relating to conduct described in Exchange Act Section 15(b)(4)(B)(i)–(iv) does not trigger “ineligible issuer” status under Securities Act Rule 405. The staff noted that this approach is consistent with how it treats similar disqualification provisions in Regulation A and Regulation D. The staff’s prior position was that such foreign convictions would trigger “ineligible issuer” status.

Ineligible issuer status can affect the availability of certain communications and offering-related flexibilities. For example, to qualify as a well-known seasoned issuer—which allows use of an automatic shelf registration statement—an issuer must not be an ineligible issuer. Also, rules that permit certain free writing prospectuses and other post-filing communications are generally available only if the issuer is not an ineligible issuer.  

Regulation S-K C&DIs

New Question 102.06 (SRC Checkbox)

The staff clarified that a registrant’s failure to check the smaller reporting company (SRC) status box on a Securities Act registration or Exchange Act reporting form does not itself cause the registrant to lose SRC status or the ability to use SRC accommodations, assuming the registrant otherwise qualifies as an SRC.