Securities law compliance is an area that startups ignore at their peril.

Think that your company can just go out and seek financing from the public without regard to law and regulations? Think again. Federal and state securities laws generally require companies to prepare and file registration statements containing detailed disclosures about the company’s business plan, financial condition, and risks before raising money from the public, unless the funding round qualifies for an exemption. Often, attorneys not well versed in securities matters fail to adequately counsel their clients. At goodcounsel, we take securities compliance seriously. We know that failing to comply could result in investors suing you personally if the company fails. 

Securities compliance must also be assessed when a company issues equity or options to its employees, contractors, and advisors.

What is a “security?”

Practically speaking, it is just about any financial instrument that a company might issue in return for funding or for services provided: a note evidencing a loan obligation, a convertible note or SAFE, common or preferred equity, warrants, other rights, and anything else, up to and including the proverbial kitchen sink.

What exemptions to registration are available and how does my company qualify?

Exemptions are generally available for securities financings deemed to be offered privately rather than to the public. There is a range of available exemptions under state securities laws (a.k.a. “blue sky” laws) and federal securities laws, depending on the amount of money being raised, the number of investors and their income/wealth, the investors’ states of residency, and the manner in which the financing is publicized. Some exemptions require short filings and the payment of fees, while others may be “self-executing,” requiring no filing or payment.

Federal securities laws contain a number of “safe harbors” under a provision called Regulation D. If your company meets the criteria of a safe harbor and makes proper, timely filings, the securities offering will be presumed to be exempt and, in some cases, the burden of state law compliance will be minimized.

 Exemptions and safe harbors are also available for issuance of incentive equity to employees, contractors, advisors, and other individuals as compensation for their services.

What are the benefits of doing securities compliance?

The primary benefit of securities compliance is risk management: it insulates the company and its founders from governmental enforcement actions and claims by investors, particularly if the company fails.

Are there any disadvantages to doing securities compliance?

The disadvantages of securities compliance are minimal:

  • Compliance entails a modest administrative burden, e.g., the need to review laws and regulations, collect information from investors, and submit filings.
  • If safe harbor filings are made, these filings are publicly available. While it is possible to limit the specificity of disclosures, this information tends to be picked up by “bots” from financial news sites and published on the internet. 

How does goodcounsel help with securities law compliance?

goodcounsel can advise you on securities compliance issues and prepare the filings that a company might decide to make, including safe-harbor filings under Regulation D and state-law blue sky filings.

How much will this cost?

As a law firm that focuses on startups and early-stage companies, we understand the importance of predictability and value. We are generally able to include securities compliance in the fixed-fee engagements we offer for early financing rounds.

How long will this take?

Securities compliance is typically handled alongside or just after the closing of a financing round and does not add significant time to a matter.

Where can I learn more about securities compliance?

goodcounsel’s GoodGuide to the basics of private offerings is a helpful resource. Our goodthinking! blog also offers a variety of posts on securities regulation, including information about the evolving rules and regulations applicable to raising capital via “crowdfunding.”

Can I just do this myself?

Securities regulation is a complex area with many nuances. For experienced lawyers only!

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