If you’re hoping to sell stock to Angel Investors (or Sharks!), be sure you know the law. The JOBS Act has shifted the landscape a bit, but there are basics that still apply. Here’s a quick primer on the 5 key concepts you should know before moving forward with any equity investor or stock sale. Follow the links in each definition to get more detail, or call your CFO for more.
Small businesses who need to raise funds may qualify for exemptions which allow them offer securities via private sales to small groups of accredited investors, intrastate sales, and friends and family offerings. Regulation D, the most common exemption used under federal law is detailed in the Securities and Exchange Commission (SEC) Regulation D – Rules 504, 505 and 506.
2 Filings / Information Disclosure
You generally have the obligation to disclose material information relating to the offering — that’s any information that a reasonable investor would want to know prior to making an investment decision. Failure to do so is considered fraud. SCOR (the Small Company Offering Registration program) offers a simplified disclosure document that you can reference as a guide for the type of information you might want to provide to your investors.
3 Other State Laws
You need to comply with the securities laws in your resident state and the states where your investors are based. State securities rules can be accessed by selecting the appropriate state/s on the North American Securities Administrators Association (NASAA) website.
4 Qualifying your Investors
If you intend to offer a private placement sale of securities, investor accreditation is critical. Investors are considered accredited if they meet Rule 501 of Regulation D requirements.
In general an accredited investor includes an individual with a net worth of at least $1 million (individually, or with a spouse), or someone whose income has exceeded $200,000 ($300,000 joint income) in each of the two most recent calendar years and who has a reasonable expectation of achieving that same income this year. Entities can be accredited through several methods, which may include having a minimum threshold of assets, being a specific type of entity, etc., For some raises, business owners must conduct reasonable due diligence to establish or confirm an investor’s accreditation status. The law allows several ways to do this — including through a private third party: Companies, such as VerifyInvestor.com, provide third-party verification of accredited investor status. However you do it, it’s important to choose a trustworthy service as the law requires that you only work with third-party verifiers that you have a reasonable basis to rely upon.
5 Selling Stock to Angels / Sharks
If all the owners are actively managing the business, it is likely that their ownership interests are not considered securities. If there is an owner who is not directly involved in the daily workings of the business, the answer may change. In any event, consult with a financial advisor to find out if the ownership interests are considered securities under federal or state law.
Please Note: This article is not intended, nor should it be used, as legal advice. It’s incomplete, but it gives you an idea of preliminary issues to think about. Securities laws are complex, and you should seek professional guidance to fully understand and comply with the regulatory requirements that impact your business.
Guest Blogger Michelle Delio writes for VerifyInvestor.com. Fuse Financial Partners has no affiliation or interest in VerifyInvestor.