Selling stock in your company to raise needed capital is a very serious action. There are numerous state and federal laws that must be complied with. Before attempting to raise money for your company through the sale of corporate stock, you should consult your legal counsel. Every detail must be done correctly or both the principals and the company may face serious repercussions in the future. A good understanding of who you might be allowed to sell stock to, an understanding of state and federal laws and documents required to give to investors in essential.
Below is a brief discussion of a few topics that might be helpful. The material contained herein is informational only and is in no way intended to be construed as legal advice.
Accredeited Investor - An Accredited Investor is a definition described by the Securities and Exchange Commission (SEC) for individuals that meet certain standards, usually applied to individuals and organizations, especially in determining certain eligibility in purchasing securities being offered by companies.
SEC Definition of Accredited Investors:
The Securities and Exchange Commission (SEC) has definite descriptions of an Accredited Investor”. This especially refers to companies that are raising capital, especially in a private placement of their securities. It is very important that a company that intends to raise capital from private investors understand the laws which could affect them legally. Under the Securities Act of 1933, a company that offers or sells its securities must register the securities with the SEC or find an exemption from the registration requirements. The Act provides companies with a number of exemptions. For some of the exemptions, such as rules 505 and 506 of Regulation D, a company may sell its securities to what are known as "accredited investors." The new “Crowdfunding” laws may make new and exciting exceptions to the rules.
While the SEC defines a number of organizations that would qualify as an Accredited Investor, the description below primarily refer to the type of investors that a small business might approach.
a director, executive officer, or general partner of the company selling the securities;
a business in which all the equity owners are accredited investors;
a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person;
a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or
a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.
For more information about the SEC’s registration requirements and common exemptions, you can go directly to the SEC website.
Blue Sky Laws -“Blue Sky Law” is laws enacted in a state in the United States that regulates the offering and sale of securities of a company which is supposed to help protect the public from fraud. The specific provisions of blue sky laws will vary among states, but all require the registration of all securities offerings and sales, as well as stock brokers and brokerage firms. The blue sky laws of every state are administered by its appropriate regulatory agency. These agencies can also provide causes of action for private investors who have been injured by securities fraud.
Private Placement- Private Placement is the document used by a company to raise capital from private investors. It is an extremely complex document and should be prepared by a good attorney, along with the assistance of company officers. The primary purpose of the PPM is give a potential “full disclosure” about the company to a potential investor. However, of equal importance is that the PPM also can help protect the company If the company gives full disclosure, which means that the company has told the investor everything important about the company, the investor cannot come back later and say that “he was not this”. The PPM will outline the terms of the investment and perhaps contain such documents as an “Investment Letter”.
It is important that the company retains a good attorney to assist in developing the PPM to be sure that it covers all important aspects of the company and complies with all federal and state rules and regulations.
There are many outlines and descriptions of a Private Placement Memorandum on the internet.