Equity compensation is a form of employee compensation representing an ownership interest in the employer. It can take many forms depending on the needs and objectives of the company. Companies use equity compensation as both:

Companies granting any form of equity compensation must bear in mind various securities law requirements and restrictions. Generally, a company must either register equity securities to be issued as employee compensation with the SEC or determine that the issuance would qualify for an exemption from registration. While a company is private and is not required to file reports under the Exchange Act, Rule 701 of the Securities Act provides a safe harbor exemption from registration for issuances of equity securities as employee compensation. For reporting issuers, equity securities to be issued as employee compensation can be registered on Form S-8. Form S-8 is used by an issuer to register securities to be issued under employee benefit plans, such as equity incentive or employee stock purchase plans.

Practical Law has resources that can assist counsel with securities laws considerations in issuing equity compensation.

Practical Law provides a brief overview of the different types of equity compensation available to employers and a more detailed discussion of stock options granted by company employers to employees, specifically addressing tax, regulatory and other legal considerations.

Rule 701 is the principal exemption relied on by non-reporting issuers when offering securities under equity compensation plans to their employees. Rule 701 permits securities to be offered and granted to employees under written compensatory benefit plans if the aggregate sales price or amount of securities sold in reliance on Rule 701 during any consecutive 12-month period does not exceed the greatest of:

If the limits under Rule 701 have been reached or Rule 701 is not otherwise available or desirable, issuers may consider the exemptions under Section 4(a)(2) and Regulation D. Section 4(a)(2) exempts from the registration requirements of the Securities Act offers and sales of securities made "in transactions by an issuer not involving any public offering." Because the limits of the Section 4(a)(2) exemption are not well defined, the SEC introduced Regulation D to provide issuers with a "safe harbor" for the purposes of Section 4(a)(2).

Practical Law's Practice Notes, Employee Incentive Compensation and the Role of Rule 701 and Section 4(a)(2) and Regulation D Private Placements can give counsel a greater understanding of these two key registration exemptions.

A reporting issuer uses Form S-8 to register securities to be issued under employee benefit plans, such as equity incentive or employee stock purchase plans. Securities Act registration for these securities can be completed by filing a short form registration statement on Form S-8. This form permits an unlimited number of securities to be registered, allowing a company to incorporate by reference its current and future Exchange Act reports. It does not require the company to file a prospectus with the SEC. The company must instead provide employees with a prospectus containing specified information.

Practical Law's Practice Note, Registration Statement: Form S-8 can help counsel to understand:

Practical Law's Practice Note, Form S-8 Considerations: Prospectus Disclosure and Annual Reports also identifies issues relating to the requirements of an issuer to:

Practical Law's Practice Note, Filing Documents with the SEC details the standard procedures an entity must comply with when filing registration statements with the SEC. This Note contains information on issues such as:

Practical Law has several resources that set out resolutions for:

For this information, see the following Standard Clauses: