The following is a guest post written by Samuel E. Whitley, a valued WealthForge partner and managing partner at Whitley LLP Attorneys at Law.
YES. Or you need to hire someone who does. While some small businesses may not deal with public or private offerings, many companies do. Often a company will want to raise capital through a public offering, or via the Internet (crowdfunding) for instance. Because of this, all business owners should have a working knowledge of securities law.
What are Securities?
Essentially, a “security” is defined as common or preferred stock, certain kinds of debt, options/warrants and/or any combination thereof, or other instruments evidencing an investment of money with respect to which the investor is led to expect to realize profit solely from the efforts of others. The Securities Act of 1933 and Securities & Exchange Commission (SEC), and various state securities laws and securities administrators in each state where the securities are sold (Blue Sky Laws and Blue Sky Administrators, respectively) govern and regulate the sale and issuance of these securities.
How can Smaller Companies sell Securities?
Because of the state qualification and federal registration and disclosure requirements, registering a securities offering with the SEC and qualifying it under applicable Blue Sky Laws is an expensive and time-consuming process. This is what businesses go through to initiate an initial public offering (IPO). Because of the high cost and often complicated legal procedures, many businesses structure the sales of their securities to private investors (family/friends, seed and venture capital investors) in a way that will be exempt from those registration/qualification requirements.
Perfecting the applicable state and federal exemptions can be fairly technical and complicated, and the downside risks of non-compliance are enormous. Therefore, it’s critical to speak with your attorney before attempting any securities sales.
The Importance of Small Company Compliance
Some smaller businesses may believe the SEC or state Blue Sky Administrators won’t pay attention if they sell securities to friends and families. They think securities law is something reserved for large, public companies.
That is far from the case. The state and federal penalties for noncompliance can be steep (including possible rescission and return of investors’ money with interest), and a civil or criminal case brought against a small company could easily send it into bankruptcy.
What Do I Need to Know?
Depending on your unique situation, a general knowledge of securities law as it may apply to you is important. One area of concern for instance, is if you are dealing with the issuance of interests in an LLC or corporation. State and federal laws can be complicated. Here are some general concepts you should be aware of:
- Do you intend to issue securities?
- Will they be registered or exempt?
- Will you take advantage of Regulation D Rule 504/SCOR (small corporate offering registration)?
- Will you be involved in an Internet offering of securities?
If your answer is yes to any of these questions, or you simply aren’t sure, it is highly advised to seek legal counsel to ensure you will be in compliance with all relevant laws and regulations.