Ensuring compliance with securities laws for founders
[The following is not legal advice and should not be relied on as such]
Every time a company sells its shares, it is engaging in the offer and sale of securities. Even shares that are sold to initial founders implicate a labyrinth of state and federal securities laws that typically require either registration of the securities offering, or (more commonly for early stage companies) an exemption from registration pursuant to state and federal law.
We receive many intakes from founders who have disregarded or ignored securities obligations even after issuing shares in California or other states. It is really important that founders are aware of, and abide by the variety of laws that implicate the sale of securities. Failure to comply with securities rules can result in civil or even criminal penalties.
The generic federal exemption from registration is known as “Section 4(a)(2)” (formerly Section 4(2)). Section 4(a)(2) exempts from registration any offering of securities that do not involve a public offering. This is a very ill-defined standard, so the SEC has promulgated “Regulation D,” a series of regulations that permit Companies to know in advance that the sale of securities will comply with the Section 4(a)(2).
In California, the most common exemption from registration is known as a “25102(f)” filing, dully based on the same-named section of the California Corporate Code. This statutory provision exempts from registration an offering of securities made privately and to less than 35 people, all of whom have a preexisting personal or professional relationship with the issuer, or have relevant investment experience.
California requires that a 25102(f) notice be filed within 15 days of the first sale made in California.
Other states have similar regulations with respect to the sale and offering of securities.
Prior to offering shares in a Company, founders should ensure that they will be able to comply with the securities regulations in their state, and will also reserve enough time to file whatever paperwork needs to be taken care of after the offering. Many securities deadlines have a small 15-day window, and occasionally need to be notarized. Care should be taken to ensure that these deadlines can be met