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CapMx ® How to Run the Rule 701 Computation. CapMx How to Run the Rule 701 Computation Rule 701 - Background Pre-Computation Tasks Running the Computation/Test.

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Presentation on theme: "CapMx ® How to Run the Rule 701 Computation. CapMx How to Run the Rule 701 Computation Rule 701 - Background Pre-Computation Tasks Running the Computation/Test."— Presentation transcript:

1 CapMx ® How to Run the Rule 701 Computation

2 CapMx How to Run the Rule 701 Computation Rule Background Pre-Computation Tasks Running the Computation/Test Post-Computation Tasks 2

3 3 Rule 701 – Background The information below is not legal advice and you must consult securities laws’ counsel for assistance with questions regarding Rule 701, blue sky or other securities laws compliance. The issuance of securities in the U.S. is regulated at the federal and state levels. Rule 701 of the Securities Act of 1933 (the "Act") is a federal regulation that provides an exemption from the registration requirements of section 5 of the Act. Section 5 of the Act requires that if a security is offered or sold in the United States, the issuer of the security must register the security with the Securities and Exchange Commission unless either the security or offer and sale are exempt from registration. Rule 701 is not an automatic exemption. Instead, the securities must meet the computation requirements of the Rule. NOTE: Securities laws at the state level are commonly referred to as the "Blue Sky Laws“ and are not part of the Rule 701 computation.

4 4 Rule 701 – Resources It is strongly suggested that you review the complete text of Rule 701 found at 17 C.F.R. § This URL to the SEC Final Rules version of the rule is effective April 7, 1999: If you have any questions regarding Rule 701, you must consult the Company’s legal counsel.

5 5 Rule 701 – Background 1.The Rule 701 computation is based on three separate tests determined by the aggregate sales price or amount of securities sold (including options granted) in reliance on Rule 701 during any consecutive twelve-month period, and must not exceed the greatest of the following: a. $1,000,000; b. 15% of the outstanding amount of the class of securities being offered and sold in reliance on this section, measured at the issuer's most recent balance sheet date (if no older than its last fiscal year end); or c. 15% of the total assets of the issuer (or of the issuer's parent if the issuer is a wholly-owned subsidiary and the securities represent obligations that the parent fully and unconditionally guarantees), measured at the issuer's most recent balance sheet date (if no older than its last fiscal year end).

6 6 Rule Background NOTES: a. The securities must pass only one of the three computation tests in order to obtain the 701 exemption. b. For total sales over $5 million during a twelve-month period, companies must disclose additional information, including risk factors, copies of the plans under which the offerings are made, and certain financial statements. IMPORTANT: Once you get the 701 report, review the section at the bottom “Additional Disclosures Required”; if that reflects “Yes”, you must discuss this with your company’s counsel as the company will have to provide additional information to optionees as noted in the above paragraph.

7 7 Rule Background NOTES: a. Once an issuer exceeds 500 shareholders and $10 million in assets, it is generally required to become a “reporting company” under the Securities and Exchange Act. The issuer may, however, continue to rely on Rule 701 to sell any securities previously offered. Securities issued under Rule 701 are restricted securities and can only be resold through registration or compliance with an applicable exemption. Transactions exempt from registration under Rule 701 are not exempt from antifraud, civil liability, or other provisions of federal securities laws. Antifraud rules in particular may require substantial disclosure of information to securities purchasers.

8 8 Rule Background Why you need to run the 701 computation a. Running the computation is the quantifiable check that the shares granted qualify for the Rule 701 exemption. b. If you input “Import 701” in the “Federal Exemption” field, you make the assumption that the shares qualify for the Rule 701 exemption, but, without running the actual computation, you have no verifiable proof of that qualification.

9 9 Rule 701 – Pre-Computation Tasks 1.Start and maintain a “701” folder, for either or both: a. hard copies of the reports and the list of grants covered by the report and the Board of Directors’ meeting minutes or Written Consent wherein the grants were authorized/approved b. electronic copies of the items noted in 1a., above 2.Update the Company’s FMV for the date of the security issuance (while not required for 701 computation purposes, it is mandatory for the accurate calculation of the $100,000 ISO limit) 3.Input securities (i.e., option grants / restricted stock issuances) a. The “Rule 701 Compensatory” field must be “Yes”, and b. The “Federal Exemption” field must be left “blank” (see the screen shot on the next slide) NOTE: The assumption is that all grants under the Company’s option plan are issued pursuant to Rule 701; review the option plan and confirm this with counsel. The Company’s counsel must (i) inform you if the security grant is not covered by Rule 701, and (ii) if not covered by Rule 701, inform you as to the correct Federal Exemption to be assigned to the grant.

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11 11 Rule 701 – Pre-Computation Tasks (cont’d) 4.For this example, three options (totaling 70,000 shares) were input into CapMx with a grant date of 5/31/2011 as follows: a. John Glengary, 10,000 shares b. Alonzo Harris, 10,000 shares c. Melvin Udall, 50,000 shares 5.Run the excel version of the Options and SPRs Granted report for the date of the grants that will undergo the Rule 701 computation. 6.At the report generation screen, input the following: a. “From Date” and “To Date” = grant date b. “Option Filter Criteria” – the “Status” field = “Pending” 7.If you are maintaining a hard-copy 701 file, print-out the report so that you can staple it to the back of 701 computation and the Board of Directors’ meeting minutes/Written Consent. 8.If you are maintaining an electronic 701 file, save the report to that file.

12 12 Rule 701 – Pre-Computation Tasks (cont’d) 9.In order to accurately compute the prong of the 701 Test that is based on the Total Assets of the Company, you must have the Company’s most recent balance sheet; the balance sheet cannot be older than the Company’s last fiscal year end. 10.The “Total Assets” test is one of the three tests calculated in the 701 computation, and the securities only has to pass one of the three tests in order to obtain the 701 exemption. Accordingly, if you do not have access to the Company’s balance sheet, input a “Total Assets” value of $100 so that this prong will fail. Even if you don’t have the balance sheet, you must obtain from the Company its balance sheet date because the “outstanding stock test” is calculated based on that date. The securities could still obtain the 701 exemption by passing one of the other two remaining tests, i.e., either the $1,000,000 test or the 15% of outstanding stock test. NOTE: Never, never, never “Pass” the “Total Assets” test if you do not have the actual “Total Assets” number from the Company’s balance sheet.

13 13 Run the “Options & SPRs Granted” report for the 701 “Calculation Date” (i.e., the grant date of the securities); you will attach this report to the Rule 701 Report as back- up:

14 14 Options & SPRs Granted Report

15 15 Rule 701 – Running the Computation 1.At the Transaction Menu bar, select: Security  Rule 701 Computation 2.The Rule 701 Test screen will open reflecting the values input for the last 701 Test run in CapMx

16 16 Rule 701 – Running the Computation/Test Input the values for the 701 Test to be run for the new grants: 1.Calculation Date The grant date of the securities that will undergo the 701 Test. 2.Balance Sheet Date Can be either the date of the company's most recent balance sheet or the balance sheet for its last fiscal year end. Please consult your legal advisor for more information. NOTE: Even if you do not have the Company’s balance sheet in order to obtain the “Total Assets”, you must still obtain either (a) the date of the Company’s most recent balance sheet, or (b) the date of the balance sheet for it its last fiscal year, as that date will impact the “15% of Outstanding Stock” calculation. 3.Total Assets Measured at the company's most recent balance sheet date (if no older than its last fiscal year end). Please consult your legal advisor for more information.

17 17 Rule 701 – Running the Computation (cont’d) Input the values for the 701 Test to be run for the new grants: 4.Test Type Select “Update Federal Exemption” in order for CapMx to automatically complete the “Federal Exemption” field on the grant screen with “701” if the test results in a “Pass”. If you select “Read Only”, CapMx will generate a report, but it will not update the “Federal Exemption” field on the grant screen. 5.Include New Securities Select "Yes“ in order for the new securities granted/issued on the Calculation Date to be included in the computation. 6.Calculation Date of Last Run This field is pre-filled by the system based on the last Calculation Date (it will be blank if 701 Test is being run for the first time).

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20 20 Rule 701 – Post-Computation Tasks 1.Print the 701 Report for your records. 2.If you are maintaining a hard-copy file, staple the Options and SPRs Granted Report to the back of the 701 Report along with the Board of Directors’ meeting minutes/Written Consent (this will serve as the “check” on the securities included in the 701 Test). 3.If you are maintaining an electronic file, save the 701 Report to your desktop in the same folder that the Options and SPRs Granted Report was saved. Click the printer icon and select “Adobe PDF” (you must have the Adobe® Acrobat Writer program installed on your computer). Your system will create a PDF file that you can then save to your desktop. 4.If the 701 Test failed all three prongs, send a copy of the 701 Report to and discuss with the Company’s counsel the next steps to be taken regarding the appropriate federal exemption to be assigned to the grants.

21 21 Rule 701 – Post-Computation Tasks (cont’d) 5.As a final check, run the Options and SPRs Granted Report using the same parameters and “Pending” filter criteria.

22 22 Questions? Contact your CapMx Account Representative or the CapMx Support Team at:

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