8 Facts About Securities Law

Raising funds for your startup? Start by understanding the law.

1.State and Federal Law Establish Your Obligations

State and federal law should guide you as you look into your funding options. Federally, the most significant laws are the Securities Act of 1933 and the Securities Exchange Act of 1934. These laws form the core of what the Security and Exchange Commission (SEC) enforces. Together, they require businesses to register with the SEC before offering securities to the public and to regularly report on business activities. Other important securities laws include the following:

• Trust Indenture Act of 1939
• Investment Company Act of 1940
• Investment Advisers Act of 1940
• Sarbanes-Oxley Act of 2002
• Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
• Jumpstart Our Business Startups Act of 2012 (JOBS Act)

These laws incorporate more offerings into SEC regulation and require more robust disclosures.

Your state will also have its own securities statutes and regulations called blue sky laws. Several states have adopted the Uniform Securities Act of 2002, but many more have unique laws. Consult an attorney familiar with state and federal securities laws to ensure you know the law, follow all rules, and have your bases covered as you embark on your new venture.

2. You Have Several Options to Raise Capital

During business planning, you may realize you need a little or a lot more money than you currently have available. Before you can investigate other types of capital, you often need to grow your core financial capital. You may fund your startup through:

• Self-funding—You rely on your personal funds and the support of family or friends to finance your business.
• Venture capital—Investors provide funds in exchange for securities.
• Crowdfunding—You ask for donations from a large group of people who provide funds in exchange for a gift.
• Loans—Institutions offer small business loans to support potentially profitable businesses.

Each funding option has pros and cons, but investors are the most highly regulated. By securing venture capital, a small business can often take more risks. However, you sacrifice some control and may owe significant obligations.

3. If You Offer Securities, You May Need to Follow Additional Requirements

Offering securities is a powerful way to attract investors. Startups typically offer several kinds of securities, including:

• Stocks, including stock options and restricted stocks
• Membership or ownership interests
• Convertible notes, frequently loans that convert into stock or ownership interests
• Debts, typically loans

Many investors and businesses refer to an investor’s interest in the startup as their equity.

Unless a business meets an exemption, it must publicly register its securities with the SEC before offering them. To register, you file documents that do the following:

• Describe the business’s properties and activities, ownership and management, and the securities offered.
• Explain the plan for the securities and the proceeds of the offering.
• Provide financial statements certified by independent accountants.

These requirements for making a registered offering allow investors to know exactly what they’re investing in.

4. Your Business May Be Exempt

Many small businesses meet exemptions from the SEC’s registration requirements. You may qualify to make an exempt offering if the offering is:

• Not public
• Up to $1,000,000-$5,000,000 if you meet special conditions, and the offering is part of an employee benefit plan
• Up to $1,000,000 or less over 12 months
• Up to $5,000,000 in securities to accredited investors and up to 35 other investors over 12 months
• Only extended to in-state investors

Even exempt security offerings generally require filing limited documents with the SEC.

Alternative Filing Requirements

You may qualify for alternative requirements if your business is a smaller reporting company or an emerging growth company. A smaller reporting company has less than $75 million in public equity or less than $50 million in annual revenue. An emerging growth company has annual revenue under $1 billion and has not sold common securities. Both are allowed eased reporting requirements, including omitting statements from independent auditors. Emerging growth companies can also file confidentially.

Qualifying Through the Exchange Act Alone

You may come under SEC oversight regardless of the securities you have offered. This can happen if your business has $10 million or more in total assets and securities held by 500 people who are not accredited investors—or 2,000 people who are accredited investors. Listing any securities on a U.S. exchange also brings you under SEC oversight.

5. Non-Exempt Businesses Must Follow Additional Regulations

Businesses without an exemption must also file regular reports with the SEC, including quarterly and annual reports. In addition, non-exempt businesses must file current reports when events affect the structure, control, or ownership of the business or its equity. These businesses must also:

• Meet the SEC’s proxy voting rules
• Meet listing standards
• Follow the SEC’s tender offer rules
• Not retaliate against whistleblowers
• Not make personal loans to directors or officers

Each of these requirements relies on provisions of the laws identified above.

6. Crowdfunding Is Subject to Limited Regulation

With the dawning of the internet age, crowdfunding has become a viable way to fund certain businesses. In response to this trend and based on the JOBS Act, the SEC created regulations related to individual funders. No funder can provide more than 5-10% of their annual income to a business through crowdfunding.

7. Failing to Comply with Securities Law Can Have Serious Consequences

The SEC can enforce federal securities laws through civil and administrative actions. Through these actions, the SEC can impose penalties on violators, such as:

• Imposing fines
• Suspending or barring your company from further offerings
• Shutting down your business

Each year, the SEC recovers billions of dollars from securities violators.

8. You May Have to Provide Beneficial Ownership Information

In January 2024, new regulations came into effect requiring many small businesses to file beneficial ownership information (BOI) with the Financial Crimes Enforcement Network (FinCEN). Beneficial ownership information includes details about every individual who:

• Exercises substantial control over your business
• Owns or controls 25% or more of the ownership interests of your business
• Applied to create your company

This means major investors will have to be disclosed to the U.S. government by name.

Raising Capital in Compliance with the Law

Complying with securities regulations is essential for all businesses. Every startup should consult a lawyer to ensure understanding and compliance with the finer points of securities law, so they can focus on bringing their vision to life.