Options and Blue Sky Securities Laws

Since we first began representing startups with their securities issuances and other mergers & acquisitions needs in 2011, there has been a marked increase in our startup clients knowing that they must be cognizant of securities laws’ requirements – most clients come to us with the expectation that navigating both federal and blue sky securities regimes will be a major component of any capital raise the company effectuates.  What still comes as a surprise to most of our startup clients, however, is the fact that option grants to employees are themselves securities issuances, and must therefor also comply with the state and federal securities laws.

At the federal level, rule 701 covers most options issuances, and is not difficult to comply with as long as the issuer takes the requirements into consideration before making its first options grants, and then revisits the rule when new grants are made.  However, most issuers (and some practitioners), even if wary that they need to respect federal securities issuances, seem to forget that they must also comply with the blue sky laws for the states in which their grantees reside.

A few further twists:  first, the securities requirements attach whether the options are incentive stock options (ISO’s) or non-qualified stock options (NQSO’s).  Second, because many issuances are done under 506(b) of Regulation D of the Securities Act, the National Securities Markets Improvement Act of 1996 (NSMIA) usually exempts the offering from state registration and review.  However, because options issuances are often done under Rule 701 of the Securities Act and not 506, option issuances are not preempted by the NSMIA, and the blue sky requirements for such offerings are therefor different than those for 506.

Comments are closed.