What are Small Business Securities?
When a company needs to raise capital, it might issue small business securities to its investors. These can be stocks, bonds, or other financial assets.
In order for businesses to execute them correctly, they need to be mindful of compliance with securities laws.
Read the rest of this article to explore small business securities in greater detail, their key features, and how a lawyer can help you structure them for legal compliance.
What are Common Types of Small Business Securities?
Some of the most common small business securities include:
- Common stock. This gives investors basic ownership in the company, such as with voting rights.
- Preferred stock. By comparison, this stock gives investors some advantages over other shareholders, such as getting paid first if the business issues dividends. But it doesn’t usually involve a say in business decisions.
- Membership units (LLC). This is the same as shares in a limited liability company.
- Promissory notes or bonds. Known as debt instruments, these involve the business borrowing money from investors and promising to repay it with interest.
- Convertible debt. This is a loan that’s transformed into equity after a specific milestone or triggering event occurs.
What Laws Apply to Small Business Securities?
The legal framework of small business securities includes the Securities Act of 1933 and the Securities Exchange Act of 1934, which rule how they’re sold. A company needs to be registered or be exempt from registration to be allowed to offer securities.
Registering with the U.S. Securities and Exchange Commission (SEC) can be time-consuming with many long-term requirements, which can be overwhelming for beginners. It’s common for small business owners to make use of available exemptions.
These include Regulation D, Regulation A, and Regulation Crowdfunding.
Regulation D
There are three types of Regulation D exemptions:
- Rule 506(b). These private placements prohibit companies from using general solicitation for their offering. They restrict sales to a maximum of 35 non-accredited investors over a 90-day period.
- Rule 506(c). Unlike the previous rule, this one allows general solicitation. It’s up to the issuer of the offering to ensure they have verified their buyers as accredited.
- Rule 504. Offers and sales can be up to $10 million of securities over a period of 12 months.
For all Reg D offerings, Form D needs to be submitted to the SEC within 15 days of the first sale. This requires using the SEC’s Edgar (Electronic Data Gathering, Analysis and Retrieval) system.
Regulation Crowdfunding (Reg CF)
Under this exemption, companies can sell securities on an online platform via a registered broker-dealer or funding portal. Offerings can be up to $5 million.
Regulation A
Although Regulation A is an exemption from full registration requirements, companies offering securities still need to follow certain disclosure and reporting rules. Under Reg A, offerings can be up to $75 million.
What are the Penalties for Lack of Compliance with Securities Laws?
If small business owners don’t comply with all federal and state securities when engaging in securities transactions, they might have to pay fines or face criminal charges.
There’s also the risk of an investor who feels misled by the offering to seek a refund. In the event that the business owner can’t pay the refund with their company funds, they might be held personally responsible to pay it.
How Can a Lawyer Help You with Small Business Securities?
It’s worth consulting a lawyer for help with securities laws because they can be complex. You also have to consider that you might have legal duties to take on, which a lawyer can guide you through.
Here are ways in which a qualified lawyer can help you:
- They’ll clarify what counts as a security so that you don’t accidentally violate the laws by not registering your securities.
- They’ll guide you on which securities exemptions apply so you don’t have to conduct time-consuming and costly registration processes.
- They’ll draft and review all your offering documents, like investor agreements. This ensures that everything in the documents is legal and clear to prevent misunderstandings.
- They’ll check for compliance with all securities regulations in your state and country. This keeps you on the right side of the law so you don’t risk fines or other consequences.
- They’ll structure deals with your investors and conduct due diligence checks on your behalf so you don’t get exposed to risks.
- They’ll help you with all filing and paperwork requirements, preventing mistakes that can cost you.
- They’ll step in if there are disputes with investors, such as if an investor requests a refund. They can negotiate and represent you if the dispute escalates.
Where to Find a Lawyer for Small Business Securities
If you need a lawyer to help you with your small business securities, you can easily find one on ContractsCounsel, one of the largest online legal marketplaces connecting clients with vetted, experienced lawyers.
To request a lawyer on the platform to draft or review your securities documents, follow these simple steps:
You can request a legal review of your AI contract by hiring a qualified lawyer on ContractsCounsel, one of the largest online legal marketplaces where clients can connect with vetted lawyers. Here’s how:
1. Go to the ContractsCounsel marketplace, where you can post your project for free.
2. Receive multiple bids from lawyers directly on the platform.
3. Once you receive the lawyer bids, you should review the lawyers' profiles. There’s lots of info on the platform to help you choose the best lawyer, such as their location, client ratings, years of experience, and field of expertise.
4. Select a lawyer you think is best suited to your requirements and hire them.
Drafting and reviewing projects aside, you can also work with a lawyer for guidance through the process of offering and structuring business securities. This will give you peace of mind that the process is legally compliant and minimizes your financial and legal risks.
