What are Unregistered Securities?
Unregistered securities are financial instruments that don’t get registered with the U.S. Securities and Exchange Commission (SEC). Although not all unregistered securities are to be avoided, they do come with greater risks and fewer investor protections. They are also prone to scams.
Read the rest of this article to explore common features of unregistered securities, how to identify a scam, and more. We’ll also explain how a lawyer can help you navigate the complex and risky landscape of unregistered securities.
Are Unregistered Securities Illegal?
One of the biggest questions people have about unregistered securities is if they’re illegal. Not all unregistered securities are illegal. To help you check the legal status of a securities offering, there are some important things to look for.
Generally, a security is only considered illegal if it was supposed to be registered but it wasn’t, and it doesn’t qualify for any exemption.
Here are other things to check:
- Disclosure. It’s common for both exempt and non-exempt securities offerings to have disclosure requirements. If these are not conducted properly, the company offering the securities can be seen as misleading investors.
- Marketing. In some securities exemptions, advertising and promoting the securities publicly is prohibited.
- Legal compliance. What makes securities laws challenging is that they can vary quite a bit in different countries and U.S. states. The offering needs to meet all relevant laws to be legally valid.
Why Are Securities Usually Registered?
Before a company can sell or offer a security, they must register it with the SEC, unless they are under exemption from registration. Securities registration has many benefits:
- It provides investors with information about the company’s financial and historical data, as well as offering details, so they can make an informed decision.
- It prevents misrepresentation and fraud.
When a company registers a security, they’ll fill out a form that includes information about the company, its business, and the security being offered. This form is filed electronically on the SEC’s EDGAR (Electronic Data Gathering, Analysis, and Retrieval system) where investors can access them.
What are Common Registration Exemptions?
Not all securities have to be registered. Three common exemptions include Regulation A and Regulation D.
- Regulation A. This requires the company to meet certain requirements to offer and sell securities. Instead of submitting a registration form via EDGAR, the company will file an offering statement with financial disclosures to investors.
- Regulation D. Under this exemption, the company offering the security will file a Form D on the SEC after their first securities sale. It’s a simple form that includes company information and offering details.
- Regulation Crowdfunding (CF). This involves raising capital online without registering the offering on the SEC. But, only registered platforms or broker-dealers are allowed to be used.
How Do You Spot an Unregistered Securities Scam?
Being aware of potential scams can protect your interests. Here are red flags that you could be dealing with an unregistered securities scam.
- Guaranteed promises of high returns without risk. This is a classic scam warning sign because all investments include some risks. There is also never a guarantee of high returns.
- Unregistered persons. If the person selling securities isn’t registered and licensed, this is a red flag.
- Aggressive tactics. It’s common for scammers to try to pressure you into accepting their offer. When in doubt, pause and take time to research the offering and investor.
- Unprofessional offering documents. If there’s missing information or the document wording contains errors, it can’t be taken seriously.
- Lack of third parties. If the salesperson seems to be the only one offering the deal, this should be scrutinized. It’s common for other parties, such as accountants and brokers, to be involved in the process.
What are the Consequences of Violating Securities Laws?
If an individual selling securities isn’t registered as a broker-dealer on the SEC or isn’t following securities laws, they can face hefty consequences. This includes paying fines and having to deal with injunctions that prevent them from participating in unregistered activities in future. Some cases can even land the offenders in jail.
To protect yourself, you should conduct due diligence on broker-dealers. Check that they’re members of the Financial Industry Regulatory Authority (FINRA). You can use the website’s free tools to check the financial brokers’ experience and registration status.
How Can a Lawyer Help You with Unregistered Securities?
It can be challenging to know if a securities offering is legal and compliant with all regulations, which is why consulting a qualified securities lawyer can help you. Here’s what a lawyer will do to assist you.
- They’ll check the security status. A lawyer will use their experience to check that you’re dealing with legally-valid security and what regulations need to be considered.
- They’ll check what registration requirements are in place. If the security needs to be registered with the SEC, a lawyer will inform you of your obligation and assess if exemptions are a possibility.
- They’ll structure the exceptions. If exemptions do apply, a lawyer will check that they have been structured legally and that investor disclosures are conducted properly.
- They’ll draft and review any necessary documents. This includes offering documents. A lawyer will ensure that nothing is misleading or non-compliant.
- They’ll represent you if there are disputes. If there are complaints raised by investors, your lawyer will represent you and guide you through the process.
Where to Find a Lawyer for Unregistered Securities
Now that you know the importance of hiring a lawyer for help with unregistered securities to protect you legally and financially, you might wonder where to find the right securities lawyer.
On ContractsCounsel, one of the biggest online legal marketplaces where clients connect with vetted lawyers on the platform, you can find a securities lawyer without having to cold-call traditional law firms. You can search for lawyers based on research provided by the platform, such as their level of expertise, years of experience, client ratings, and previously completed projects.
This transparency will give you peace of mind that you’re working with an experienced professional who will guide you through the tricky process of dealing with unregistered securities.
