Thursday, August 5, 2010

Securities Law Violations -- It Never Ends

I've been working with a baby company.  They have a good idea and have been putting together their formation documents and getting their IP straight.  No serious conversations yet about raising money.

Then -- BAM -- on Monday I got this email [certain details removed to protect the guilty]:

Howdy!

I'm sending you this email because [Super Cool Company] is raising funds for our new project, the [Super Cool Idea].  Its a really cool project where we're getting people around the world to [Augment their Social Gaming Reality in a Consumer Facing, Location Based, Real Time App].

I'll be posting some project updates on it today and in the coming weeks, but I figured I'd send you an email letting you know this is going on so you can follow the progress as we try to raise $3000 from at least 50 investors by the end of August.

Please share this with anyone you know that might be interested, we're also looking for developers ([Code Ninja], you'll be getting a call from me soon) and future participants!
Thanks, hope you have a great week.
-[Clueless Founder]
Founder, [Super Cool Company]

Congratulations -- you just violated securities law.

To be clear, telling your friends or even investors about your company/idea is not a securities law violation.  It is even ok under certain circumstances to email a potential investor and ask for money -- though you need to be careful and should certainly consult with a lawyer before you do so.

But what you should almost certainly not do is send out a blast email asking for money.  Even worse, you should NEVER tell people to share your offer with anyone they know who might be interested.

That my friend is a "public offering" of securities.  And the SEC has a thing about companies that do public offerings of securities without first registering them.

Just remember that an offering of securities must either be registered with the SEC (e.g. through an IPO) or 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.  

The offering above -- where the founder is urging his buddies to "share this with anyone you know that might be interested" -- is unquestionably a public offering.  Since it is unregistered, securities laws = violated.

As I have said before, be safe out there folks.  And please 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.