If you take money from someone who will share in
future company profits but will not actively participate in the operation of
your company, you have sold a security. This holds true whether you’re seeking to
raise Ten Thousand Dollars or Ten Million Dollars.
Hopefully, all business owners and entrepreneurs know that
their efforts to raise capital through investors –– even if soliciting only
from friends and family - must comply with federal and state securities law
which can be a complicated beast. Although
compliance can be burdensome, non-compliance invites criminal and civil
penalties most business owners would be wise to avoid.
In
short, securities law compliance requires that the company selling securities
either (i) register the securities with the Securities and Exchange Commission
(“SEC”) and with each state in which the securities are offered, or (ii)
qualify for an exemption to registration at both the federal level and with
each applicable state.
Many
small businesses can avoid the more onerous and expensive securities compliance
procedures because their financings qualify as private offerings as opposed to
public offerings. In upcoming posts,
I’ll discuss some of the securities registration exemptions commonly used by
start-ups and small companies.
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