Corporate News: A Legal Update

Many privately held businesses unknowingly trigger federal and state securities laws when they raise capital, issue equity, or bring on outside investors. A common misconception is that state and federal securities laws only apply to publicly traded companies. After all, if your company isn’t listed on an exchange or market, why would the SEC be concerned with your business? The answer may surprise you. Securities laws apply to privately held companies far more frequently than  business owners may realize. Whether you’re raising capital, issuing debt, courting investors, or offering equity to key employees, understanding the securities laws is an important part of protecting your business.

When Do Securities Laws Apply to Private Companies?

A common misconception among business owners is that securities regulation begins when a company goes public. In reality, securities laws regulate the offer and sale of securities, regardless of whether a company is publicly traded or privately owned.

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 either be registered with the SEC, such as in an IPO, or qualify for an exemption from registration.

One of the most commonly used exemptions 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.

The important point is that the offering should be properly structured before the company begins soliciting investors or accepting funds.

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 not simply about preparing documents. It is about ensuring that investors receive accurate information concerning the investment and its material risks.

Common Transactions That May 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, which is why early coordination with securities counsel can be particularly valuable.

Securities Compliance Best Practices for Private Companies: Planning Ahead Can Avoid Costly Problems

Securities laws often come into play long before a company ever considers going public. Before raising capital, issuing equity, or pursuing other securities transactions, businesses should evaluate:

• Applicable registration exemptions;
• Investor disclosure obligations;
• Federal and state filing requirements;
• Potential liability risks; and
• Implications for future financing and growth.

Whether your company is considering its first investor, pursuing a private placement, or evaluating a more complex securities transaction, involving experienced securities counsel early in the process can help protect your business and position it for future growth.