Thursday, February 4, 2010

Sorry folks, this Securities Offering is "Members Only"

Sometimes, when it rains it pours. Yesterday, I did a post on Free Stock a stunningly easy way to violate securities law. Then, today, I came across a local creamery that was violating one of the foundational tenets of securities laws -- they were making an unregistered public offering of securities.

Now, it may seem strange that an ice cream store could be making a public offering. Even a really good ice cream store (and trust me, this one is pretty good.) However, next to the register, they had a sign that said (roughly): "We value you our loyal customers. As a way of showing our appreciation (and as a way for you to help us survive the recession) we will sell you a share of stock in our company for $10 each."

BAM -- securities law violation.

You see, the thing about offerings of securities is that they must either be registered with the SEC (e.g. through an IPO) or they must be "exempt" from registration. There are a whole mess of exemptions, most of which you (and I) will never need to know about. (For example, interests in a railroad equipment trust are exempt. Who knew?) However, the most important exemption for a baby company is the exemption for transactions "not involving any public offering." That is, private transactions. There are a variety of safe harbors and legal interpretations that help us figure out what a non-public offering is -- you may have heard of Reg. D, which is the most common -- but at the most basic level your offering cannot be made to the general public. Under Reg. D, this is called (in classic lawyer speak) the prohibition on "general solicitations."

Let's just be clear here, there are plenty of subtleties involved in defining exactly what a "general solicitation" is, but -- when you post a sign in public asking folks to buy your stock, it's pretty darn clear that you are making a general solicitation.

Or to put it differently, just remember this, when you sell stock, the sale should pretty much always be "members only." If you are offering to sell stock to the general public and, if you are not kicking off a registered IPO (believe me, you'll know it if you are kicking off a registered IPO), then you are likely violating securities laws.

And, as I have said before, please be safe out there and try not to violate securities laws.

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Dividends and Preferences by Hank Heyming is licensed under a Creative Commons Attribution 3.0 United States License.