Businesses can raise capital in many different ways, including by selling securities. The offer and sale of securities must be registered with the Securities Exchange Commission (SEC) or conducted according to one of the registration exemptions as a private placement. At Cutwater Law, our business attorneys provide individuals and businesses legal advice and representation for securities law matters, including private placements or unregistered securities offerings involving seed, startup and venture capital. Our Nashville securities attorneys also advise clients on crowdfunding.Securities Law
Securities offerings that are exempt from registration with the SEC are called private placements. Generally, companies cannot offer securities under federal securities laws unless the offering has been registered with the SEC or it falls into an exemption from registration. Private and public companies may engage in private placements in order to raise funds from investors.
Private placements are not subject to all of the laws and regulations that apply to public offerings. They may include common or preferred stock, a membership interest in a limited liability company, a note or bond, or limited partnership interests.
Issuers may rely on three SEC rules under Regulation D (Rule 504, Rule 505, and Rule 506) to sell securities in unregistered offerings, and each of these has its own requirements. Even when these exemptions are relied upon, certain notice filings must be made with the SEC and with state securities regulators. If you fail to comply with the applicable securities laws, you or your business's principals can be subject to rescission claims by investors and other penalties.
Rule 504 allows up to $1 million of unregistered securities to be sold in a one-year period. Unless specific added requirements are met, these are restricted securities. That means they were acquired in an unregistered private sale and you are not allowed to resell them in the public marketplace unless the sale is exempt from SEC registration requirements. This exemption cannot be used by a blank check company and companies that use the exemption do not have to file reports under the Securities Exchange Act of 1934.
Rule 505 allows up to $5 million of unregistered securities to be sold in a 12-month period. However, there are limitations about who may purchase them. The business issuing these securities can sell to up to 35 non-accredited investors, but to an unlimited number of accredited investors. When selling to non-accredited investors, certain financial disclosures must be made. However, there is discretion about what to disclose to accredited investors. Whatever is disclosed to accredited investors must also be disclosed to non-accredited investors.
Rule 506 of Regulation D is a safe harbor provision that has two exemptions that permit companies to raise unlimited funds. For one type, the business cannot use general advertising to sell the securities, but can sell to up to 35 non-accredited buyers that are considered financially sophisticated, and an unlimited number of accredited investors. The business can determine what information to give their accredited investors, but it needs to provide disclosure documents to non-accredited investors that are basically the same as what is used in registered offerings. With the other type of Rule 506 offering, the business is allowed to generally advertise the offering, but all the investors must be accredited investors and the business must take reasonable measures to ensure that the investors are accredited investors. These steps may include reviewing W-2s and other documents.
Some startups are not able to get off the ground because it is expensive to register a public offering or get access to angel investors. For some companies, crowdfunding is a boon that allows for the possibilities of many individual investments by a large group of people online. Although investments must be offered through intermediaries, crowdfunding allows for investment through a funding portal online. The federal Jumpstart Our Business Startups Act establishes a regulatory structure for crowdfunding for startups and small businesses. Title III adds an exemption from the registration requirements of Securities Act Section 5 for specific crowdfunding transactions that meet certain requirements.
There is also a Tennessee crowdfunding exemption that allows investors to contribute up to $10,000 to capital raises and permits Tennessee companies to raise up to $1 million from in-state investors.Consult an Experienced Nashville Securities Lawyer
If you are dealing with securities issues in Nashville, you should consult an experienced Nashville securities attorney. Problems with the fundraising stage can result in rescission claims and could adversely affect your ability to attract venture capitalists and institutional investors down the road. Call us at 615-933-3545 or via our online form. Our attorneys also handle entertainment law matters in the media and sports industries.