This will be a multi-post blog entry. This seventh post discusses the need for certain businesses to comply with securities laws, and consequences of violation or non-compliance thereof.
Post 7 – Violation or Non-compliance of Securities Laws
Some Businesses are family run and owned by a single owner. Most others are operated by multiple owners, some of which, at some point in the future, will likely seek private investments by investors to fund their business expansion plans into diverse markets. Such Businesses need to be compliant with federal and state securities laws in order to issue securities and extend a share of their Business ownership to investors.
The term ‘security’ entails a variety of instruments which have some monetary value attached and may or may not represent ownership interest in an entity, but for the purpose of this post we will assume securities to imply ownership interests in a Business. The securities market regulator – Securities and Exchange Commission (“SEC”) oversees the enforcement of securities laws. In terms of the Securities Act of 1933 (“Act”) whenever a security is sold, the seller or issuer must either register the security with SEC or seek an exemption under the Act. Section 4 of the Act specifically provides for certain types of transactions that are exempt from registration. Businesses that seek private investments from a limited investor forum, typically seek exemption under one of these transaction types. To seek the benefit of an exemption, the issuer entity must strictly comply with the rules that follow, violation of which may cause the issuer company to lose the exemption.
Simply obtaining an exemption from registration, however, does not insulate the issuer company from application of the anti-fraud, civil liability and other penalty provisions of the Act, in the event the issuer violates or fails to comply with the exemption rules. In certain circumstances, the natural persons who ultimately own the Business or the issuer company (“Control Persons”) are also jointly and severally liable along with the entity, if the issuer has been held liable under other provisions of the Act.
This subjects business owners to personal liability and also therefore, underscores the need for them to be compliant with the SEC rules while issuing securities. Moreover, depending on the state securities laws, the issuer company may need to comply with further state-specific regulations.
Our next post will discuss certain administrative and logistical issues which become the cause for personal liability for owners of emerging companies.
About the Author
Shawn McBride – R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Office, P.L.L.C. which helps clients in legal issues related to starting companies, joint ventures, raising capital from and negotiating with investors and outside General Counsel functions. Shawn can be contacted at: 407-517-0064; [email protected], or www.mcbrideattorneys.com.
Saurabh Nathany – Saurabh Nathany is a Paralegal at The R. Shawn McBride Law Office, P.L.L.C. Saurabh can be contacted at: (312) 394-9924, or [email protected].