Selling Equity in Your Company and Compliance with Federal Securities Laws

In my last posting, I explained that when you sell equity in your company, you must either (i) register with the Securities and Exchange Commission (“SEC”) and with each state in which investors reside, or (ii) qualify for an exemption to registration. 

Registration is time-consuming and costly. Fortunately, private offerings qualify for an exemption.

However, categorizing an offering as private versus public is often a subjective determination dependent on the number of investors, the amount of the money being raised, and other factors. Your sale of securities need not be as large as one of the IPO’s discussed in the Wall Street Journal to qualify as a public offering.

To reduce the uncertainty of knowing whether your offering qualifies as a private offering or a public offering, the SEC in 1982 adopted Regulation D which defines three categories of offerings that qualify as private. The regulation consists of eight sections referred to as Rules and numbered from 501 to 508. Rules 504, 505, and 506 each describes characteristics for one type of private offering. If you meet all the requirements of Rule 504, 505, or 506, you are in a “safe harbor” and can be certain your offering qualifies as private under federal law.

I’ll discuss the characteristics of Rule 504, 505, and 506 offerings in my next posting