Starting a new business is an exciting time, and as a startup founder, you’re likely focused on developing your product, building your team, and raising capital. However, when it comes to raising funds from investors, there are numerous issues related to securities laws that you need to be aware of. In this blog, we’ll explore some of the key things that startup companies may not know about securities laws.

  1. Securities laws apply to all offerings of securities.

Many startup founders believe that securities laws only apply to public offerings of securities and only pertain to the largest companies found on the NASDAQ. However, the truth is that securities laws apply to all offerings of securities, including private placements. This means that if you’re raising funds from investors, you need to be aware of the regulations that apply to your offering.

  1. The definition of a security is broad.

Under the Securities Act of 1933, a security is broadly defined to include any investment contract, note, stock, bond, or other type of investment vehicle. This means that even if you’re not issuing traditional stocks or bonds, you may still be offering a security.

  1. Failure to comply with securities laws can lead to serious consequences.

 If you fail to comply with securities laws, you can face serious consequences, including fines, penalties, and even criminal charges. In addition, if an investor sues you for securities fraud, you may be held personally liable for damages, not just the company itself. 

  1. Offering documents must be carefully drafted.

 When raising funds from investors, you need to prepare offering documents that provide detailed information about your business and the investment opportunity. These documents must be carefully drafted to ensure that they comply with securities laws and accurately disclose all material information. This includes the terms of the offer, all the potential risks that come with the investment, detailed company information, and any other relevant information necessary to inform the investor of what they are investing in. 

  1. Accredited investors have different requirements.

 When offering securities to accredited investors (i.e. individuals who meet certain income or net worth requirements), you may be able to rely on certain exemptions from registration requirements. However, these exemptions have their own set of rules and requirements that you need to be aware of. Even exempt securities must still follow SEC and state filing registration rules (Form D). It is also important for proactive purposes to draft a clear contract outlining the terms of the investment, the investor acknowledging they have “accredited” status, and the investor accepting the risks as an accredited investor. 

  1. State securities laws also apply.

In addition to federal securities laws, each state has its own set of securities laws that apply to offerings made within the state. This means that if you’re offering securities to investors in multiple states, you need to be aware of the regulations that apply in each state. 

In conclusion, understanding securities laws is critical for startups looking to raise capital from investors. While the regulatory landscape can be complex, working with experienced securities counsel can help ensure that your offering is in compliance with both federal and state regulations. By taking the time to understand the requirements and properly disclosing all material information, you can help minimize your risk of liability and build a strong foundation for your business’s growth.