RSU Legal and Regulatory Considerations: Ensuring Compliance and Reporting Obligations‍

RSU Legal and Regulatory Considerations: Ensuring Compliance and Reporting Obligations‍

August 30, 2023

RSU Legal and Regulatory Considerations: Ensuring Compliance and Reporting Obligations‍

Remember Zenefits? This once-promising startup met its reckoning in 2017 when it faced a $450,000 fine from the SEC. The penalty wasn't for financial malfeasance or product issues; it was for failing to comply with securities laws around issuing Restricted Stock Units (RSUs) to their employees. What seemed like a straightforward way to incentivize their team became a legal quagmire that marred the company’s reputation and exacted a hefty financial toll."

As Zenefits discovered the hard way, handling RSUs is not as simple as doling out shares and reaping the rewards. It’s a complex process governed by a maze of legal and regulatory guidelines that demand your unwavering attention. Hence, this article will guide you through the multifaceted world of RSU compliance—from understanding the securities laws to navigating accounting standards and tax implications. This is your comprehensive road map to issuing RSUs without stumbling into legal pitfalls.

Compliance with Securities Laws for RSUs

Issuing RSUs isn't merely an internal matter; it's a transaction regulated by securities laws. Some of those are as follows:

1. Federal Compliance

In the United States, the issuance of RSUs is governed by federal securities laws. A key component to familiarize yourself with is Rule 701, issued under the Securities Act of 1933. This exemption allows private companies to issue securities as a part of compensatory benefit plans, like RSUs, without registering them with the SEC. However, to qualify, you must adhere to certain conditions, including limits on the value of securities that can be sold in any 12-month period. Failure to adhere to Rule 701 could mean stringent sanctions, so do your homework and consult with experts.

2. State Blue Sky Laws

Don't overlook the state securities laws—commonly referred to as "Blue Sky Laws." These are additional regulations that apply on a state-by-state basis in the United States. While federal laws create a regulatory framework, each state can impose its own requirements and restrictions. Keep tabs on these as they can sometimes be more restrictive or entail additional reporting requirements compared to federal laws.

3. Anti-Fraud Provisions and Disclosures

Even when you’re exempt from registering RSUs with the SEC, you're not exempt from anti-fraud provisions under federal law. Make sure that all materials and communications related to RSUs, whether it's the plan document, email announcements, or executive summaries, are transparent and free from misleading statements.

4. Insider Trading Concerns

For publicly traded companies, insider trading policies also come into play. Employees with RSUs have a unique insight into the company's health, which could pose a risk of insider trading. Ensure that your RSU plan is structured in a manner compliant with insider trading laws and that employees are educated on these limitations. Regularly review transactions involving company insiders to ensure they are being executed in accordance with these rules.

5. Ongoing Reporting and Documentation

Once you’ve successfully issued RSUs, compliance doesn’t end there. Maintain comprehensive records of all RSU transactions, including grant dates, vesting schedules, and any forfeiture or clawbacks. These records are crucial not just for internal audits but for demonstrating compliance in the event of an SEC inquiry or other regulatory investigation.

9. International Regulations

For those with employees outside the U.S., the complexity multiplies. Different countries have distinct securities laws, and often, you'll need to get local legal opinions to ensure your RSU plan complies with these. Failure to understand and adhere to international securities laws can lead to unexpected liabilities and could even hamper your company's ability to operate in certain jurisdictions.

Securities Compliance for Public vs. Private Companies

When it comes to securities compliance, not all companies are created equal. Public companies have distinct compliance requirements distinct from private ones.

Registration Requirements for Public Companies

If your company is publicly traded, the issuance of RSUs will most likely require registration with the Securities and Exchange Commission (SEC). Unlike private companies, which often can rely on exemptions like Rule 701, public companies are usually obligated to provide a prospectus and register the offering with the SEC under the Securities Act of 1933. The documentation and disclosure requirements are far more exhaustive, and non-compliance can result in severe penalties, including financial sanctions and reputational damage.

Periodic Reporting for Public Companies

Issuing RSUs isn't a one-time event; it has ongoing implications. Public companies must continually disclose information about their RSU plans in their periodic SEC filings, including Forms 10-K and 10-Q. These filings help the SEC and investors evaluate the financial condition of a company and can influence stock prices. Therefore, meticulous record-keeping and timely disclosure are non-negotiables.

Exemptions and Limits for Private Companies

For private companies, Rule 701 provides some relief from the registration requirements, as previously mentioned. However, there are limits on how much you can offer. Under Rule 701, you can offer securities up to $10 million in a 12-month period, provided the total value doesn’t exceed 15% of the company's total assets or 15% of the outstanding securities of that class. Breaching these limits can trigger public reporting obligations, which you'll want to avoid at all costs.

Employee Notifications for Private Companies

Rule 701 also mandates that private companies provide specific written disclosures to employees, detailing the risks associated with the RSUs. This must be done a reasonable period before the date of vesting. Failure to deliver these disclosures accurately and on time can lead to non-compliance issues and could make the company liable for damages.

Stock Exchange Rules for Public Companies

Don't forget that public companies often also have to comply with stock exchange rules. For instance, if your company is listed on the NASDAQ or NYSE, you may have additional rules around shareholder approval for RSU plans. Consult with legal experts familiar with stock exchange regulations to ensure your RSU plan is in compliance with these rules as well.

Governance and Oversight Mechanisms

Regardless of whether your company is public or private, implementing robust governance mechanisms is a must. These systems should involve periodic audits, internal reviews, and employee training on RSU policies. In public companies, the board of directors and shareholder meetings often play a significant role in approving and overseeing RSU plans, whereas in private companies, the control might rest more with the founders or key executives.

Understanding Accounting Standards for RSUs

When you issue RSUs, you’re not just giving away pieces of your company; you’re also creating a financial obligation that must be properly accounted for. Accounting for RSUs involves recognizing their fair value on the grant date and then expensing that value over the vesting period. Understanding how to properly recognize RSUs in your accounting books is essential for both internal decision-making and external reporting.

Timing of Expense Recognition

The vesting schedule has a direct impact on when and how RSUs are expensed. If your vesting schedule is time-based, the accounting process is relatively straightforward; the total fair value of the RSUs is typically expensed evenly over the vesting period. However, for performance-based or market-based vesting schedules, the accounting becomes more complex, and you may need to adjust the expense recognition based on specific milestones or market conditions.

Fair Value Calculation

The notion of “fair value” is critical in accounting for RSUs. This is typically determined based on the market price of the shares on the grant date for public companies. For private companies, determining fair value can be more complicated and may require input from valuation experts. The fair value becomes the basis for recognizing the compensation expense related to RSUs in your financial statements.

Accounting for Forfeitures

Not all RSUs make it to the vesting finish line. Employees might resign before their RSUs vest or other forfeiture conditions might apply. For accounting purposes, estimates of expected forfeitures can be factored into the expense recognition, reducing the compensation cost. However, these estimates should be revisited and adjusted as actual forfeitures occur.

Liabilities vs. Equity Classification

In most cases, RSUs are considered equity awards and are thus accounted for as equity. However, in some instances, they might be considered liabilities, particularly if they can be settled in cash at the option of the employee or the company. The classification as either a liability or equity award has distinct accounting implications that you'll need to understand and apply consistently.

Amendments and Modifications

Should you decide to amend the terms of an existing RSU agreement, say by accelerating the vesting schedule or changing the number of shares granted, accounting adjustments are needed. These modifications can affect the previously recognized compensation expense and may require a “true-up” to accurately reflect the modified fair value.

Recognition and Measurement of RSUs on Financial Statements

Recording RSUs on your financial statements isn’t a one-time deal—it's an ongoing obligation. For each reporting period, you'll need to reassess the number of RSUs that are expected to vest and adjust the recorded cost accordingly.

The point here is that your financial statements should be an accurate snapshot of your financial position. Don't overlook the adjustments needed for forfeitures or modifications to the RSU plan. Any changes can have downstream impacts that need to be accurately reported.

Differences between ASC 718 (US GAAP) and IFRS 2 (IFRS) in Accounting for RSUs

While both ASC 718 under US GAAP and IFRS 2 under IFRS focus on share-based payments, they are not identical twins. For example, IFRS tends to be more flexible in estimating the fair value of RSUs, while ASC 718 provides more detailed guidance.

Moreover, under ASC 718, forfeitures can be estimated and revised in subsequent periods, but under IFRS 2, they can only be recognized when they actually occur. Understanding these nuances is essential for accurate financial reporting, especially if your company operates internationally and must comply with multiple accounting standards.

Tax Reporting

While not strictly a securities regulation, the taxation of RSUs triggers its own set of reporting requirements. When RSUs vest, it's a taxable event that must be reported to the IRS. For employers, this usually means withholding and reporting the income and employment taxes through Form W-2 for U.S. employees. For international employees, the reporting will vary by jurisdiction, but the need for accurate and timely tax reporting remains consistent worldwide.

Record-keeping and Internal Documentation

While the spotlight is often on external reporting, maintaining a robust internal record-keeping system is equally vital. Document all RSU grants, including amendments, cancellations, and forfeitures, meticulously. These records serve multiple purposes—they're essential for accurate financial reporting, internal audits, and any potential regulatory reviews or litigation.

Financial Statement Presentation

RSUs must be accounted for in your company’s financial statements, whether you’re a public or private company. Public companies usually present these in the footnotes to their financial statements in their annual reports, offering a detailed breakdown of RSU activities. For private companies, while the level of scrutiny is lower, RSUs still must be properly accounted for in financial statements, especially if you’re planning to raise capital or go public in the future.

Compliance Audits

Finally, be prepared for the possibility of compliance audits by regulatory bodies. In the case of a review, you’ll be required to provide extensive documentation proving your adherence to reporting obligations. Setting up periodic internal audits can help you prepare for such eventualities and ensure ongoing compliance.

Understanding your reporting obligations for RSUs and fulfilling them diligently is crucial for avoiding regulatory pitfalls and maintaining the trust of both investors and employees. Given the complexity and variability of reporting requirements, it’s advisable to consult legal and accounting professionals to ensure that you’re fully compliant.


By now, you should have a solid understanding of the legal and regulatory landscape for RSUs. It's not a walk in the park, but it’s manageable if you keep these points in mind. Engage experts, maintain rigorous documentation, and be vigilant about reporting.

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