Employee Compliance 101: Securities Laws, Plan Restrictions, and RSUs‍

Casey Fenton

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December 7, 2023

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You're sitting at your desk, scrolling through your emails, when you stumble upon a message that instantly piques your interest. It's a notification from your company's HR department, and it begins with two words that can make any employee's heart race with excitement: 'RSU Grant.' The promise of Restricted Stock Units is not just a pat on the back; it's a piece of the company's future in your hands. But as you bask in the glow of this recognition, you also realize there's a lot more to RSUs than meets the eye. 

That's where guidance comes in. In this comprehensive guide, we'll help you navigate the complex web of employee compliance when it comes to securities laws and plan restrictions on your RSUs.

Which Securities Law Clauses and Provisions Pertain to My RSUs?

When it comes to your RSUs, understanding the relevant securities laws is crucial. These laws are designed to protect investors and ensure transparency in financial markets. While your RSUs may not make you an investor in the traditional sense, they are considered securities, and several key securities laws and provisions apply:

1. The Securities Act of 1933

The Securities Act of 1933, often referred to as the "truth in securities" law, is a cornerstone of securities regulation in the United States. It primarily deals with the initial issuance of securities to the public. However, it also has relevance to your RSUs, even though they are not publicly traded.

Exemption for Private Offerings

RSUs granted to employees are typically considered "private offerings" and are exempt from the requirement of registration with the Securities and Exchange Commission (SEC). This exemption recognizes that RSUs are awarded as a form of employee compensation within a private company and are not intended for public trading.

While RSUs are exempt from the registration requirement, it's essential to understand the basis for this exemption and recognize that the company must still comply with certain regulations when issuing RSUs.

2. The Securities Exchange Act of 1934

While the Securities Act of 1933 primarily focuses on the initial issuance of securities, the Securities Exchange Act of 1934 comes into play once those securities are actively traded in the secondary market. While RSUs themselves may not be directly regulated by this act, it's important to be aware of it, especially if your company goes public or is already a publicly traded entity.

Reporting Requirements for Public Companies

If your company becomes publicly traded, it will be subject to various reporting requirements under the Securities Exchange Act of 1934. These requirements are designed to ensure transparency and provide investors with accurate and timely information about the company's financial health and performance.

As an RSU holder, you may indirectly be affected by these reporting requirements, as they can impact the company's stock price and, consequently, the value of your RSUs.

3. Rule 701

Rule 701 is a crucial provision under the Securities Act of 1933 that directly affects the issuance of RSUs and other equity compensation plans by private companies.

Exemption for Private Companies

Rule 701 provides an exemption that allows private companies to offer securities, including RSUs, to their employees without the need for SEC registration, provided certain conditions are met:

  • Dollar Limitation: The total value of the securities offered by the company in any 12-month period must not exceed $5 million, or $10 million for certain companies.

  • Disclosure Requirements: The company must provide specific information to employees receiving the securities, including risk factors associated with the investment.

  • Written Plan: RSUs must be offered pursuant to a written compensation plan that specifies the terms and conditions of the grants.

Understanding Rule 701 is essential because it directly governs the issuance of RSUs within private companies. Compliance with Rule 701 helps ensure that employees receive essential information and protection when they receive RSUs.

What are the Common Plan Restrictions on RSUs?

Restricted Stock Units (RSUs) often come with plan restrictions designed to serve both the interests of the company and the employee. Understanding these restrictions is vital for making informed decisions about your RSUs. Here are some of the common plan restrictions you may encounter:

1. Vesting Period

One of the central elements of RSU plans is the vesting period. The vesting period is the duration you must remain employed by the company to earn the right to receive the RSUs. This restriction is in place to incentivize employee retention and loyalty.

If your company has a four-year vesting period, it means that you will receive a portion of your RSUs on a predetermined schedule, typically every year, as long as you remain employed with the company. After the vesting period, you will have full ownership of all your RSUs.

Understanding your vesting schedule is crucial, as it dictates when your RSUs will become yours to sell or transfer. It's important to note that if you leave the company before your RSUs vest, you may forfeit them, depending on the plan's terms.

2. Cliff Vesting vs. Gradual Vesting

Vesting schedules can vary, and they typically fall into two categories: cliff vesting and gradual vesting.

  1. Cliff Vesting: With cliff vesting, you do not receive any RSUs until a specific date, often after the first year of employment. After reaching this milestone, all your RSUs typically vest at once.

Example: If you have a one-year cliff vesting schedule, you won't receive any RSUs until you've completed one year of employment. After that year, you'll receive the entire RSU grant.

  1. Gradual Vesting: Gradual vesting involves distributing RSUs incrementally over time. This approach can provide employees with more frequent access to their RSUs.

Example: If you have a 4-year gradual vesting schedule, you might receive 25% of your RSUs each year for four years.

Understanding the type of vesting schedule your RSUs are subject to is essential for planning your financial future and ensuring you meet the requirements to receive your RSUs.

3. Forfeiture Provisions

Many RSU plans include forfeiture provisions that give the company the right to reclaim your RSUs under specific circumstances. These provisions are typically designed to protect the company's interests.

Common triggers for forfeiture may include voluntarily quitting the company, termination for cause, or engaging in competitive activities that could harm the company's business interests.

If you leave the company voluntarily before the vesting period is complete, you may forfeit any unvested RSUs. However, you would still retain the RSUs that have already vested.

Understanding the forfeiture provisions in your RSU plan is critical, as they can impact your financial planning and decision-making regarding your employment status.

Which RSU Regulations Do I Need to Comply With?

While receiving Restricted Stock Units (RSUs) is an exciting part of your compensation package, it's essential to be aware of the regulations that govern them. Compliance with these regulations ensures that you fulfill your legal obligations and make informed financial decisions. Here are the key RSU regulations you need to be mindful of:

1. Tax Implications

RSUs come with tax implications that can significantly affect your financial planning. It's crucial to understand the tax regulations associated with RSUs:

  1. Income Tax: The value of your RSUs at the time they vest is typically considered ordinary income and is subject to federal and state income tax. This means you'll owe taxes on the value of the RSUs as if they were regular income.

  1. Withholding: Your employer may withhold a portion of your RSUs to cover the tax liability associated with them. It's important to review your withholding to ensure it aligns with your tax situation.

  1. Capital Gains Tax: When you eventually sell or transfer your RSUs, you may incur capital gains tax. The tax rate depends on various factors, including your holding period and income level.

Consult with a tax professional or financial advisor to understand the specific tax implications of your RSUs and how to optimize your tax strategy.

2. Reporting Requirements

The IRS requires you to report RSU income on your annual tax return. You'll typically receive a Form W-2 or a similar document from your employer that outlines the income associated with your RSUs. Accurate reporting of RSU income is essential to avoid potential penalties or audits.

Keep detailed records of your RSU transactions, including vesting dates and any associated tax withholdings. These records will be invaluable when preparing your tax returns.

3. Documentation and Record-Keeping

Maintaining accurate records is crucial when it comes to RSUs. Keep a copy of your RSU grant agreement, which outlines the terms and conditions of your RSUs, including the vesting schedule and any restrictions.

Similarly, maintain a record of when your RSUs vest, as this will help you track your ownership and tax obligations. Also document any sales or transfers of your RSUs, including dates, prices, and any associated fees.

Having a well-organized record-keeping system ensures that you can easily track your RSU-related activities and fulfill your tax reporting obligations accurately.

4. Financial Planning

Compliance with RSU regulations goes hand in hand with your overall financial planning. Consider how the taxation of RSUs will affect your take-home pay and budget accordingly. You may need to adjust your spending and savings plans.

As your RSUs vest and become available for sale or transfer, think about diversifying your investment portfolio to manage risk effectively. RSUs can be a valuable asset for achieving long-term financial goals, such as retirement or homeownership. Incorporate them into your financial planning strategy.

By complying with these RSU regulations and integrating them into your financial planning, you can make the most of your RSU awards while minimizing potential tax liabilities and ensuring your financial security.

What Do I Need to Know About Insider Trading?

Insider trading occurs when individuals trade a company's securities, including stocks or RSUs, based on non-public, material information about the company. Material information is information that could significantly impact the stock's value if disclosed publicly. These can include upcoming financial results, mergers and acquisitions, major product developments, regulatory decisions, or other significant events that could affect the company's stock price.

Insider trading encompasses a range of activities that are strictly prohibited:

  1. Buying or Selling: It is illegal for insiders, which often include company executives, employees, and directors, to buy or sell company securities based on material non-public information.

  1. Tipping: Even if you don't directly trade securities, sharing insider information with others who then trade on it (referred to as "tipping") is also illegal. This includes sharing information with family members, friends, or anyone else who might benefit from the non-public information.

  1.  "Misappropriation" Theory: Insider trading can also occur when individuals outside the company, such as consultants or lawyers, improperly obtain non-public information and use it for trading purposes.

Trading Windows

Many companies establish "trading windows" during which employees can buy or sell company stock, including RSUs. These windows are designed to prevent insider trading and are typically aligned with the release of public financial statements. Be aware of your company's specific trading windows and ensure that you do not engage in stock transactions outside of these designated periods.

Blackout Periods

In addition to trading windows, companies may impose "blackout periods" during specific times when employees are prohibited from trading company stock. Blackout periods often coincide with the lead-up to the release of quarterly earnings reports or other significant events.

Compliance with blackout periods is essential to avoid the appearance of impropriety and to prevent unintentional violations of insider trading laws.

Consequences of Insider Trading

The consequences of insider trading can be severe, both for individuals and for the company:

  1. Legal Penalties: Individuals found guilty of insider trading can face significant fines, civil penalties, and even imprisonment.

  1. Reputation Damage: Insider trading allegations can tarnish an individual's reputation and have lasting negative effects on their career.

  1. Company Repercussions: Companies can also face legal actions, fines, and damage to their reputation if employees engage in insider trading.

Laws on Sale and Transfer of My RSUs

Finally, let's explore the laws governing the sale and transfer of your RSUs. Once your RSUs have vested, you have the option to sell or transfer them. Here's what you need to know:

1. Sale on Public Markets

If your company is publicly traded, you can generally sell your vested RSUs on public stock exchanges like the NYSE or NASDAQ. When selling, be mindful of potential capital gains taxes, as these apply to any profits you make.

2. Transfer Restrictions

Your RSU grant agreement may contain specific restrictions on transferring your RSUs to others. These restrictions can include limits on who you can transfer to and under what conditions. Always review your grant agreement to understand these restrictions.

3. Gifts and Charitable Donations

In some cases, you may be allowed to gift your RSUs to family members or donate them to charitable organizations. However, such transactions may have tax implications, so consult with a tax advisor before proceeding.

4. Tax Considerations

When you sell or transfer RSUs, you may incur capital gains taxes. The tax rate depends on various factors, including the holding period and your income level. It's crucial to understand the tax consequences of your actions and plan accordingly.

More than Just Legal Obligations

As an RSU recipient, you've embarked on a path that impacts your financial future with the legal framework that governs equity compensation. By understanding securities laws, plan restrictions, RSU regulations, insider trading, and the laws governing the sale and transfer of your RSUs, you empower yourself to make informed decisions, protect your interests, and uphold the integrity of financial markets

Compliance with RSU regulations is not only about fulfilling your legal obligations but also about securing your financial well-being. Whether you're new to RSUs or a seasoned recipient, this knowledge equips you to seize the full potential of this valuable form of compensation while safeguarding your financial future.

Want more info on how you can comply and still maximize your returns? Feel free to browse Upstock’s blog here.

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ABOUT THE AUTHOR

Casey Fenton

Founder, Upstock & Couchsurfing, AI and Equity Innovator

Casey Fenton, the founder of Upstock & Couchsurfing and an AI and equity innovator, has revolutionized how we perceive and implement equity in the workplace. His foresight in creating platforms that not only connect people but also align their interests towards communal and corporate prosperity has established him as a pivotal figure in technology and community building. Casey speaks worldwide on topics including ownership mindset, worker equity, With Upstock and Couchsurfing, he has demonstrated an unparalleled expertise in harnessing technology for the betterment of community interaction and organizational benefits.

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