Corporate Finance & Securities

What is a Security and Why Does it Matter to Your Business?

When a company sells stock to raise money, the stock is called a “security.” But “security” is not just another word for stock. The term “security” can be many different things. And unfortunately there are scammers who try to sell phony company stock and other securities to raise money and give nothing in return. Consequently, securities are one of the more heavily regulated business practices. There are all sorts of restrictions on who and how and when and where you can sell securities. If you violate these restrictions you may face financial ruin or jail or both (see: Madoff, Bernie). Because securities are so heavily regulated, it is important to know whether something you sell or purchase is a...

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Corporate Finance & Securities

Raising Capital in Washington State: Part 4

In a recent post I provided an overview of raising capital under Washington States WAC 460-44A-505 (Rule 505). Today, I’m going to explain another exemption provided for by Federal and State law under which a company can raise capital, Rule 506. The basics of Rule 506, codified in WAC 460-44A-506, are as follows:

1) There is no maximum offering amount;

2) You can sell to an unlimited number of accredited investors;

3) You cannot sell to more than 35 non-accredited investors (you don’t want to sell to any non-accredited investors, however).

Disclosure Requirements

As discussed in our last post, the Securities Act of 1933 and 1934 were primarily put into place to protect investors in the wake of the stock market crash of 1929. In light of this, the most important factor in any securities offering is...

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Corporate Finance & Securities

Helpful Guide for General Solicitation and Start-up Fundraising

Joe Wallin, editor at Startup Law Blog, recently collaborated with Lauren Hakala, editor at Practical Law Company, on a guide that discusses the law, guidance and open questions on what activities constitute general solicitation or advertising in the context of transactions relying on the Rule 506 safe harbor from Securities Act registration. For those interested in learning more about the changing landscape of startup capital raising, you should check out this guide.

Specifically, the guide provides information about:

Implications of Using General Solicitation Public Website, Social Media and Print or Broadcast Mentions of Offerings Online Funding Platforms Product Advertising and Business Announcements Demo Days, Pitch Events and Other Meet-Ups

Check out the full article here.

...

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Corporate Finance & Securities

Raising Capital in Washington State: Part 3

Recently, I provided an overview of raising capital under Washington state’s WAC 460-44A-504 (Rule 504). Today, I’m going to explain another exemption provided for by federal and state securities law under which a company can raise capital.

The Washington Uniform Limited Offering Exemption (ULOE), codified in WAC 460-44A-505 (Rule 505), allows for an offering amount up to a maximum of $5,000,000 regardless of the location of investors. Additionally, this type of offering requires that:

1)      The offering cannot be sold to more than 35 non-accredited investors, regardless of residency;

2)      You can sell to an unlimited number of accredited investors;

Disclosure Requirements

As discussed in our last post, the Securities Act of 1933 and 1934 were primarily put into place to protect investors in the wake of the stock market crash of 1929. In light of...

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Corporate Finance & Securities

Raising Capital in Washington State: Part 2

Last week we provided an overview of raising capital in Washington State. Today, we are going to dive into one exemption provided for by Federal and State law under which a company can raise money.

The Small Offering Exemption (SOE) provided for in WAC 460-44A-504, allows you to raise up to $1,000,000 regardless of the location of investors. Additionally, this type of offering requires:

1)      The offering cannot be sold to more than 20 non-accredited investors within Washington;

2)      You can sell to an unlimited number of accredited investors and investors residing outside the State of Washington (subject to the $1,000,000 offering limit);

Disclosure Requirements

As discussed in our last post, the Securities Act of 1933 and 1934 were primarily put into place to protect investors in the wake of the stock market crash of...

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Corporate Finance & Securities

Raising Capital in Washington State: Part 1

You’ve exhausted all sources of funds for your business: family loans, bank lines of credit, and other sources of small business capital. However, you need additional capital to expand, grow and take your business to the next level. It’s time to start thinking about raising capital from investors through a securities offering.

This is the first post of my new series on raising capital and the various options available for your business.

As a brief primer, you should know that all businesses considering a securities offering must comply with federal and state securities laws. The Securities Act of 1933 and 1934 were put in place to protect investors after the market crashed in 1929 and prior to this point in time, securities were chiefly governed by...

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Corporate Finance & Securities

Private Placements: A Look into the Nature of Offerees

Typically, when you sell a security you must register the sale with the Securities and Exchange Commission (SEC). However, Section 4(2) of the 1933 Act exempts “transactions by an issuer not involving any public offering.” In these transactions, better known as private placements, the 4(2) exemptions apply to accredited investors, who are deemed by the SEC to be  sufficiently sophisticated and have sufficient bargaining power so as not to require the protection afforded by federal registration, as well as institutional investors who have obvious sophistication and bargaining power. You can learn more about the private placement exemption here.

In 1953, the SEC fought against Ralston Purina Co. over whether Ralston’s security offering to its employees was exempt under 4(2). Ralston argued that an...

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Corporate Finance & Securities

SEC Fails to Prove its Case; “Where’s Waldo?” Defense Prevails

The SEC failed to prove that Citigroup banker, Brian H. Stoker, had violated securities laws. A federal jury found that the SEC did not meet its burden of proving that Mr. Stoker knew or should have known that his statements were misleading in the documents prepared for the sale of a collateralized debt obligation based on subprime mortgages in 2007.

Citigroup settled with the SEC to resolve the civil charges, agreeing to pay $285 million in penalties.

The SEC did not bring any Rule 10b-5 claims—arguably its strongest securities fraud weapon—which requires showing intentional or reckless behavior. However, the claims it did bring under Section 17(a)(2) and (3)  of the Securities Act of 1933 only require showing negligence in making the misleading...

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Corporate Finance & Securities

Crowdfunding: Critcisms and Defenses

With the recent discussion surrounding the JOBS Act and crowdfunding, we thought it was a good time to discuss some of the criticisms surrounding crowdfunding, as well as reasons why some of the criticism may be lacking legitimacy.

Loosening regulations opens the door to reckless investing and scam artists Much of the criticism over the passing of the JOBS Act stems from the fear that loosening investment regulations is an invitation for get-rich-quick scam artists to take advantage of a larger pool of investors via the Internet. Economist Robert Reich argues that crowdfunding is just a means by which people whose net worth is less than $100,000 can “gamble away” up to 5 percent of their annual incomes. Another critic, Jack Hernstein,...

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Corporate Finance & Securities

Securities Registration and Private Placement Exemptions

Last week we talked about the securities registration requirements for public offerings. This week we’re taking a look at the registration exemptions.

Some Background on Securities Registration Exemptions Under the Securities Act of 1933 (the ’33 Act), a private securities offering is exempt from the registration statement and prospectus requirements of public securities offerings. Section 4(2) of the ’33 Act provides that the registration requirements “shall not apply to transactions by an issuer not involving any public offering.” Shockingly (if you’re not familiar with federal regulations), the terms “public” and “private” are not defined in the ’33 Act.

In general, an offering is considered to be private when the number of offerees and ultimate purchasers is relatively small, the investment is prudent in the...

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