If your company is private and grants equity compensation — stock options, RSUs, or anything similar — you're almost certainly relying on Rule 701 of the Securities Act. It's the exemption that lets private companies issue equity to employees, officers, directors, and certain consultants without registering those securities with the SEC.
Rule 701 works well, and most companies never think twice about it. Until they do a deal.
On March 6, 2026, the SEC released updated Compliance and Disclosure Interpretations — now called Corporation Finance Interpretations — that address how Rule 701 applies in the M&A context. The guidance is in revised Question 271.23, and it has real teeth.
The Rule 701 Refresher
Rule 701 exempts private companies from SEC registration for compensatory equity issuances. But it comes with a cap structure. If the aggregate sales price of securities sold under Rule 701 in any consecutive 12-month period exceeds $10 million, the company must provide enhanced disclosure to recipients — including GAAP financial statements, a copy of the plan, a summary of material terms, and risk factor information.
Fail to provide that enhanced disclosure when you're over the threshold, and you lose the exemption entirely for every equity award granted during that 12-month period. That's not a slap on the wrist — it means those issuances were unregistered securities offerings in violation of the Securities Act.
What Changed: The M&A Counting Rule
Here's what the SEC clarified in updated Question 271.23: after you close a merger or acquisition, the target company's Rule 701 issuances from the same 12-month period get added to yours when calculating whether you've crossed the $10 million disclosure threshold.
In other words, if you were at $7 million in Rule 701 sales for the year, and the company you just acquired had done $5 million of its own, you're now at $12 million — and you need to provide enhanced disclosure to all equity recipients for that period. Retroactively.
This is the counting trap. A company that was comfortably under the threshold on a standalone basis can get pushed over it by a single acquisition.
Why This Matters More Than You Think
This matters because the consequences of getting it wrong aren't just theoretical. The SEC brought its first enforcement action against a private company for Rule 701 violations back in 2018, resulting in a $160,000 fine. And that was for a standalone company — not even an M&A scenario.
The M&A counting issue is particularly tricky because most standard acquisition diligence checklists don't include a line item for "how much has the target issued under Rule 701 in the current 12-month period, and will that push us over $10 million?" But they should.
The SEC Went the Other Way from Its Own Proposal
If you were tracking this area closely, you might recall that back in November 2020, the SEC proposed amendments to Rule 701 that would have gone in the opposite direction. Fenwick's analysis of the proposed rules at the time noted that the SEC's proposal would have let the acquiring company exclude the target's Rule 701 sales from its own $10 million threshold calculation. That would have been the acquirer-friendly outcome — a clean break at closing.
The final CDI guidance doesn't do that. The SEC's position is that you must include the target's Rule 701 issuances in your count. That's a meaningfully more conservative position than what was proposed, and companies that were relying on the proposed rules' approach need to update their assumptions.
What You Should Do
If you're a private company that grants equity and you're considering an acquisition — or if you advise companies in that position — here are the practical takeaways.
First, add Rule 701 counting to your M&A diligence checklist. Before you close, find out exactly how much the target has sold under Rule 701 during the current consecutive 12-month period. Add that to your own number and see where you land relative to $10 million.
Second, if the combined number pushes you over $10 million, plan to deliver the enhanced disclosures to equity recipients within a reasonable period of time before the next exercise or grant date. That means having current financial statements ready, which takes lead time.
Third, if you're doing multiple acquisitions in a year, this issue compounds. Each target's Rule 701 issuances stack onto the total.
And fourth, if you're a target company being acquired, be prepared for the buyer to ask for detailed Rule 701 records as part of diligence. Having clean records of all equity grants, exercise prices, grant dates, and aggregate sales will make the process smoother.
The Bigger Picture
This is part of a broader pattern of the SEC providing more detailed guidance on Rule 701 — the same batch of CDIs also clarified how multiyear option grants, repriced options, and post-deregistration exercises factor into the $10 million threshold. If you're a late-stage private company with a complex cap table, the days of treating Rule 701 as a set-it-and-forget-it exemption are over.
This post is for general informational purposes and does not constitute legal advice. Consult a securities attorney for guidance specific to your situation.
