Securities Law–a primer

7 09 2011

Every entrepreneur needs to know a little securities law.  Why?  Because when you form your business and want to sell shares to investors, these laws apply to you.  Also, when you form your business and want to invest money in your own company for your own shares, these laws apply to you.

What do you need to know?

1)  Don’t do anything without knowing what you are doing.  To learn what to do, either read a lot about the subject or speak to a lawyer.

2)  The general rule, stated simply, is that the issuance of any securities (most commonly stock) requires registration unless there is an exemption.  Registration is a big and expensive process.  Luckily, there are quite a few exemptions.

3)  If you want to avoid registration (which you want to do if you’re a new company), you need to fit one or more exemptions, both on a Federal level and on a State level.  Some of these require filing forms (such as Form D if you fit one of the Regulation D exemptions on a Federal level), others don’t.  It is very likely that you will need to file a form either on a Federal or a State level, possibly both.

4)  There are deadlines on when you need to file the forms, and they are not long (e.g. 15 days after becoming required to issue the shares).  It is best not to miss these deadlines.

5)  Your company should follow the correct company procedures (e.g. meetings, voting, resolutions) to issue the shares.

6)  None of the exemptions protect you from fraud and disclosure requirements.  You cannot withhold information that an investor might want to know when deciding whether or not to invest in your company.