Private Equity Venture Capital
Securities law is one of the most complex and technical areas of law. The general rule is that before a company offers its securities to the public, it must register the securities with the Securities and Exchange Commission. Registration is a long, expensive process, so businesses are well advised to structure a securities offering so that it falls into one or more exemptions from the general registration requirements. These exemptions vary, but they generally allow for an issuer to sell securities to certain types of investors subject to certain disclosure requirements and maximum offering amounts. Failure to comply with US securities laws when raising funds can result in the investor having the right to rescind the investment, the SEC prohibiting the business from raising money in the future pursuant to exemptions and, in certain cases, even criminal fines. As a result, consultation with an attorney experienced in securities law is very important when your company is raising funds.
When looking for investors for your company, one important consideration is whether the potential investor is an “accredit investor”. For individuals, an accredited investor is a person with net worth greater than $1,000,000 or income in excess of $200,000 per year (or $300,000 for the individual and his/her spouse). Securities law presumes that accredited investors are generally more financially literate and capable of sustaining losses; as a result, accredited investors can participate in certain so-called “private placement offerings” (offerings exempt from the general registration requirements). Potential investors who are not accredited investors can pose special challenges to an equity offering.
In addition to complying with federal securities laws, issuers must also comply with state securities laws. These so-called “blue sky” laws vary from State to State and generally apply based upon the location of the investor. As a result, issuers should consider the geographic scope of their offering as well.
Finally, there are numerous ways a company can structure a securities offering. The offering can be debt that is convertible to equity, it can have preferred or guaranteed offerings, it can be entitled to a preference in the event if a liquidity event and it can be entitled to elect one or more directors to the board of directors, all depending upon how the offering is documented.