Many privately held businesses unknowingly trigger federal and state securities laws when they raise capital, issue equity, or bring on outside investors. Despite common misconception, securities laws apply to privately held companies far more frequently than most business owners realize. Whether you’re raising capital, courting investors, or offering equity to key employees, understanding securities laws is an important part of protecting your business.
When Do Securities Laws Apply to Private Companies?
Regardless of whether a company is publicly traded or privately owned, securities laws regulate the offer and sale of securities. A “security” can take many forms, including stock, debt, a combination thereof, and other investment arrangements. As a result, even a relatively simple transaction—such as accepting an investment from a friend, family member, or business associate in exchange for an interest in a company—may trigger federal and state securities laws. The fact that a transaction is private does not automatically make it exempt from securities regulation.
How Private Companies Can Raise Capital Legally
Private companies frequently raise money by selling ownership interests or issuing other securities to investors. These transactions generally must be registered with the SEC or qualify for a registration exemption.
A commonly used exemption is Regulation D, which allows qualifying companies to raise capital through private offerings without undergoing the expense and complexity of a registered public offering. However, depending on the exemption used, restrictions may apply to how investors are approached, who may invest, and what information must be provided. Some exemptions prohibit general advertising, while others permit broader solicitation but impose additional investor verification requirements. Companies also may have notice-filing obligations with federal and state regulators under Regulation D.
Given these restrictions and obligations, it is important to structure the offering appropriately before approaching investors or accepting capital.
Investor Disclosures and Securities Fraud Risks
Another important consideration is what business owners communicate to prospective investors. Financial projections, pitch decks, and even conversations can create securities law exposure if they contain materially misleading statements or omit important information.
Federal securities anti-fraud provisions apply even when a transaction is exempt from registration. For example, overstating anticipated revenues, minimizing risks, or making unsupported promises about investment returns can expose a company and potentially its principals to significant liability.
Proper disclosure is about ensuring that investors receive accurate information concerning the investment and its material risks.
Common Transactions That Trigger Securities Laws
Issuing options or other equity compensation to employees, or issuing stock in connection with a merger or acquisition, can also raise securities law considerations. Even retaining someone to locate investors in exchange for a commission may implicate broker-dealer registration requirements. These issues often arise in otherwise routine business transactions, making early coordination with securities counsel can be particularly valuable.
Securities Compliance Best Practices for Private Companies: Planning Ahead Avoids Costly Problems
Securities laws often come into play long before a company considers going public. Businesses should evaluate:
- Applicable registration exemptions;
- Investor disclosure obligations;
- Federal and state filing requirements;
- Potential liability risks; and
- Implications for future financing and growth.
Involving experienced securities counsel early in the process can help protect your business and position it for future growth. Amundsen Davis works with businesses of all sizes, from emerging companies seeking their first round of outside capital to established businesses pursuing more sophisticated financing and transactional opportunities.
Visit our website at amundsendavislaw.com.
