California Revises Securities Requirements for Equity Compensation

Traditionally, California has had the nation's strictest rules for the issuance of equity awards in closely held companies. Among other rules, awards had to be issued at not less than 85% of fair market value, vesting for non-management employees had to be at least 20% per year over a five-year period from the grant date, there were specific repurchase requirements for shares bought back from employees, there was a 30% limit on the amount of equity that could be issued unless there was a two-thirds vote of shareholders to approve more, and shareholders had to approve a plan within 12 months of the plan's adoption (as opposed to the issuance of awards, as is the case in federal rules).

In July, California changed these rules to make them more consistent with federal rules, particularly the exemptions from registration requirements under Rule 701 under the Securities Act of 1933.