Financial Securities Law
Stay Compliant with Federal and State Securities Regulations
As you are most likely aware, the Securities and Exchange Commission (SEC) regulates securities, but what is a security? The definition of a “security” was established in the Supreme Court case SEC v. W. J. Howey Co., a security is defined using a four part test: (1) the investment of money (2) in a common enterprise (3) with expectation of profits (4) solely from the efforts of others. This very broad definition is commonly known as the Howey test. As you can see, something as simple as a promissory note that provides for the payment of interest is a security and subject to securities law regulation and compliance.
Compliance with federal and state securities laws is essential and prevents three types of liability to clients and potential clients: (1) criminal liability, (2) civil liability under enforcement actions brought by the United States Securities and Exchange Commission (SEC) and state securities agencies, such as the Securities Division of the Nevada Secretary of State's office, and (3) mostly commonly civil liability in private actions brought against issuers of securities by purchasers of securities.
What if you could sell stock in your company and/or raise capital without having to surrender control of your company or comply with the overbearing SEC regulations? You may be able to using what is known as a private placement.
*Professionally Written Private Placement Memorandums (PPM) with Optional Business Plans, written by award winning business plan writers.*
While our firm handles civil securities litigation for private clients, both prosecuting and defending, the vast majority of our securities work is transactional, primarily small and private offerings of securities.
Investors are increasingly eager to invest in well-run private companies with strong cash flow and solid revenue growth. Private placements often involve dozens, if not hundreds, of investors, most of them high-net-worth individuals, and tend to offer business owners more control than deals with a single venture capital firm or angel groups.
Additionally, many businesses are able to offer private placements on a take-it-or-leave-it basis, virtually eliminating the usual haggling over issues like preferred stock and board seats. Instead, investors are presented with a one-size-fits-all proposal, which they make either take or leave.
Under the Securities Act of 1933, any offer to sell securities must either be registered with the SEC or meet an exemption. Regulation D provides three exemptions from the registration requirements, allowing some smaller companies to offer and sell their securities without having to register the securities with the SEC. For more information about these exemptions, read the SEC publications on Rules 504, 505, and 506 of Regulation D.
Because such deals are private, determining how many take place each year is tricky. A good indicator is the number of Form D filings submitted by companies under Regulation D. In 2004, Regulation D filings, jumped 14% to nearly 16,000.
Investors taking part in private placements tend to have lower expectations than venture capitalists. Many venture capitalists, and even some angel groups, expect a return of 10 to 15 times their initial investment within about five years, usually through a sale or IPO. Individual investors, on the other hand, are apt to look for returns of about 20 percent over a longer time frame.
Companies must also follow SEC guidelines or risk losing exemption status, in which case investors would be able to demand an immediate refund. Rules governing private placements vary slightly according to factors such as deal size, but, in general, offerings raising greater than $1 million in a 12 month period can involve an unlimited number of accredited investors (individuals with at least $1 million to invest or $200,000 in annual income), but no more than 35 unaccredited investors. Keep in mind that accredited investors are preferable, since they tend to be more savvy and financially stable, and less likely to panic if your company encounters problems down the road. Unaccredited investors are often the first to sue if they get cold feet.
Please call us today to schedule a consultation so that we may help you further your goals.
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