
Dan Brecher
Counsel
212-286-0747 dbrecher@sh-law.comFirm Insights
Author: Dan Brecher
Date: August 29, 2016
Counsel
212-286-0747 dbrecher@sh-law.comIn many cases, start-ups and other small businesses are selling company stock without registering with the Securities and Exchange Commission (SEC) or state regulatory authority. However, the key question is whether the offering qualifies for one of several exemptions from registration under the federal Securities Act of 1933 or state laws regulating the offering and sale of securities (often referred to as blue sky laws).
By way of example, you generally don’t need to file with securities regulators when forming your corporation and selling stock to yourself as well as co-founding shareholders. You also may not need to file with regulators when raising some initial capital from friends and family. However, it is imperative to thoroughly analyze what exemptions, if any, may apply to your particular stock sale, issuance or grant. Companies should also be mindful that federal and state laws do differ, so registration may be required by one regulator and not the other.
Start-ups commonly take advantage of Rule 701 under the Securities Act when making equity awards to key members of the company. Rule 701 exempts certain compensatory equity awards issued to directors, officers, employees, trustees, service providers, etc. The key requirement is that the stock must be awarded pursuant to a written compensatory benefit plan or compensation contract. Accordingly, it may not be used for capital-raising transactions. Notably, Rule 701 is available to consultants and advisors, provided that they are natural persons who provide bona fide services to the issuer.
Start-ups also frequently rely on Rule 506(b) of Regulation D when awarding stock to directors and executive of officers. Regulation D is a “safe harbor,” meaning that if you comply with the rule you are considered to have engaged in an offering that is exempt from registration. Even if you fail to comply with Regulation D, that doesn’t mean that your corporation has conducted a public offering of securities that should have been registered. The issuance of shares to a founder, or even several founders, is almost always considered to be a transaction “by an issuer not involving any public offering,” which is an exempt securities offering under Section 4(a)(2) of the Securities Act. Accordingly, registration under the ’33 Act is not required for such sales. You don’t lose the 4(a)(2) exemption just because you did not file the Form D.
Don’t take exemptions as a license to then look for investors by offering the company stock or the stock that you received to others through the internet, a newspaper advertisement or other media without first registering that further offering. The important thing to keep in mind is that the ’33 Securities Act registers offerings and the ’34 Securities Exchange Act registers shares. It is a common occurrence today that an offering of shares that is exempt from registration under the ’33 Act does not mean that the offering, or the resale of those shares (which constitutes a different offering), is also exempt.
Securities transactions that are not exempt from registration and are not registered with the SEC violate Section 5 of the Securities Act. Violations may result in injunctive or other enforcement proceedings brought by the SEC, as well as private suits by securities purchasers seeking damages or rescission. In addition to costly SEC penalties, the company may also be required to make a rescission offer for all securities subject to the illegal transaction.
Registration and exemption issues are important to consider before making any offer to sell or commitment to issue company securities, therefore, if you are unsure how to approach the matter or have any questions, please contact me, Dan Brecher.
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
Corporate transactions can have significant implications for a corporation and its stakeholders. For deals to be successful, companies must act strategically to maximize value and minimize risk. It is also important to fully understand the legal and financial ramifications of corporate transactions, both in the near and long term. Understanding Corporate Transactions The term “corporate […]
Author: Dan Brecher
Ongoing economic uncertainty is forcing many companies to make tough decisions, which includes lowering staff levels. The legal landscape on both the state and federal level also continues to evolve, especially with significant changes to the priorities of the Equal Employment Opportunity Commission (“EEOC”) under the Trump Administration. Terminating an employee is one of the […]
Author: Angela A. Turiano
While filing annual reports may seem like a nuisance, failing to do so can have significant ramifications. These include fines, reputational harm, and interruption of your business operations. In basic terms, “admin dissolution for annual report” means that a company is dissolved by the government. This happens because it failed to submit its annual report […]
Author: Dan Brecher
Antitrust laws are designed to ensure that businesses compete fairly. There are three federal antitrust laws that businesses must navigate. These include the Sherman Act, the Federal Trade Commission Act, and the Clayton Act. States also have their own antitrust regimes. These may vary from federal regulations. Understanding antitrust litigation helps businesses navigate these complex […]
Author: Robert E. Levy
If you’re considering closing your business, it’s crucial to understand that simply shutting your doors does not end your legal obligations. Unless you formally dissolve your business, it continues to exist in the eyes of the law—leaving you exposed to ongoing liabilities such as taxes, compliance violations, and potential lawsuits. Dissolving a business can seem […]
Author: Christopher D. Warren
Contrary to what many people think, corporate restructuring isn’t all doom and gloom. Revamping a company’s organizational structure, corporate hierarchy, or operations procedures can help keep your business competitive. This is particularly true during challenging times. Corporate restructuring plays a critical role in modern business strategy. It helps companies adapt quickly to market changes. Following […]
Author: Dan Brecher
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
Consider subscribing to our Firm Insights mailing list by clicking the button below so you can keep up to date with the firm`s latest articles covering various legal topics.
Stay informed and inspired with the latest updates, insights, and events from Scarinci Hollenbeck. Our resource library provides valuable content across a range of categories to keep you connected and ahead of the curve.
Let`s get in touch!
Sign up to get the latest from the Scarinci Hollenbeck, LLC attorneys!