Under the federal securities laws, a company may not offer or sell securities unless the offering has been registered with the SEC or an exemption from registration is available. The legal definition of “security” is extremely broad and includes, among other things:
“any note, stock, treasury stock, security future, security-based swap, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), . . . , or in general, any instrument commonly known as a “security”; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing; . . . .”
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States also have their own regulations of securities offerings, which are often similar, and typically require registration or exemption. While the above definition is very technical, the net effect is that the all-encompassing definition of “security” means that many early stage and small businesses, in their attempt to raise money, may be violating the federal and/or state securities laws by offering non-exempt securities without registration. The SEC pursues violators vigorously through criminal, civil, and administrative proceedings, and there is no exception for small businesses. State regulators take similar actions. And sometimes regulators direct their actions at smaller issuers.
In our previous blog series, we discussed equity crowdfunding under Title III of the JOBS Act as a new way for early stage and small businesses to raise capital without having to go through registration. As we explained, however, Title III crowdfunding remains illegal because the SEC has not adopted final rules to implement the JOBS Act mandate. Fortunately, Title III crowdfunding is just one of many types of exempt offerings. In this multi-post blog series, we will discuss some of the most commonly used exemptions, including Regulation D, Regulation A, and the new Regulation A+.
Stay tuned for our next post.
This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity.
About the Author
So-Eun Lee – So-Eun Lee is an associate attorney in the New York office of The R. Shawn McBride Law Office, P.L.L.C. She concentrates her practice on business law. So-Eun can be contacted at: (347) 921-0173 or [email protected]. Her profile is available on www.mcbrideattorneys.com.
R. 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.
 15 U.S.C. § 78b(a)(1).