Securities
Federal & State Securities Law Compliance
If you are raising private money from family, friends, "angel" investors, or Venture Capital investors, compliance with Federal and State securities laws cannot be overlooked. Securities laws are implicated:
- When a corporation issues stock;
- An LLC issues membership interests
- When any enterprise issues a security in exchange for a cash investment.
The Consequences Of Failing To Comply
Failure to comply with securities laws (whether or not intentional) could result in substantial penalties assessed by the state and could result in the finding that an offering is illegal and that the investors have the right to rescind their investment.
State Securities Law Exemptions Versus Federal Law
The vast majority of start-up and ongoing businesses qualify for State securities law exemptions. However, a very common misperception is that qualifying for a State law exemption automatically insulates an issuer from liability under Federal securities laws. Any offering, regardless of the existence of a State exemption, must qualify as a "private" offering under Federal rules (not subject to public registration).
Federal Fraud Protection
Rule 10(b)(5) under Federal Securities Act 1933 protects all investors against fraud in the purchase or sale of stock. Under rule 10(b)(5), issuers of securities may not provide misleading information to investors to induce them to buy stock. Misleading information on sales or financial information may result in an investor claiming a 10(b)(5) violation. The rule also applies to misleading information provided by, say, a company redeeming its own stock to induce a stockholder to sell the stock back to the company. Though it may seem counter-intuitive, the seller (not an investor receiving money) could institute a fraud claim based on receiving information that caused him or her to sell at an artificially low price.
Full & Complete Disclosure
The most important aspect of any offering is full and complete disclosure of material information about the issuing company.
Documentation Requirements
If you do qualify for an exemption, there are still strict filing requirements under New Hampshire and other State's "blue sky" laws, as well as fees that must be paid to claim the exemption. In addition, certain documentation is customary to bolster defenses to claims of fraud. Depending on the nature of the offering, it may be advisable to prepare a "Private Placement Memorandum" for investors to review prior to investing. These documents provide risk factors, disclaimers, financial information and other disclosures that are critical to establishing defenses to a securities fraud claim. Investment agreements signed by the investor are common as well as questionnaires to ensure the investor is sophisticated or "accredited" under applicable legal tests.
Commonly Used Exemptions
Generally speaking, under New Hampshire law, the two most commonly used exemptions are the "Start-Up exemption" and the "Isolated Sales exemption."
- For start-up companies, the "Start-Up exemption" allows a company to make up to 10 sales of securities within 60 days after the formation of the Start-Up.
- If a company finds that more than 60 days are needed, it can rely on the "Isolated Sales" exemption which permits 10 sales to investors over a rolling 12 month period subject to a limit of 25 sales during the life of the company.
Call Us For A Securities Law Consultation
If you have questions regarding securities, please contact our securities attorney, Michael Kasten.