Securities Laws And Llps: What's The Deal?

Securities laws are relevant for all companies, whether they are public or private, and listed on a stock exchange or not. Securities laws apply to every business, and business owners should include securities compliance in their corporate oversight regimes. Securities law is part transactional, part regulatory, and part litigation. In the US, securities laws exist at both the federal and state levels. Securities laws have two fundamental elements: the requirement that anyone in the business of trading in securities must be registered with securities regulators, and the prospectus requirement.

Securities laws: public vs private companies

Securities laws apply to any issuer of securities, whether it is a public or private company. An "issuer" is simply a company that issues securities, and securities laws apply from the moment of that company's inception.

Securities laws are founded on the notion that companies and individuals that sell or trade securities on the public market should be honest and fair to promote consumer confidence and market stability. In the US, securities laws exist at both the federal and state level. Every state and the District of Columbia has securities or "blue sky" laws. When a business offers securities, it must comply with federal law, but it also needs to know which state laws may apply.

Publicly-traded companies have reporting and disclosure requirements set by the US Securities and Exchange Commission (SEC). This includes the public disclosure of financial statements and an annual 10-K report. In contrast, privately-held companies often do not meet SEC filing requirements and are therefore not obliged to disclose financial information. However, private companies are not exempt from "antifraud, civil liability, and other provisions of federal securities law".

In Canada, securities law is regulated provincially, and while many jurisdictions have harmonised their securities regimes in recent years, differences remain. Securities laws in Canada apply to all companies issuing securities, not just those publicly listed on a stock exchange.

Public vs Private Companies

A private company is typically owned by its founders, management, and/or a group of private investors. Information about its operations and financial performance is not available to the public, and it cannot use public capital markets to raise funds. A public company, on the other hand, has sold a portion of itself to the public via an initial public offering (IPO) and thus trades on a public stock exchange. Public companies are required to disclose certain business and financial information regularly and are owned by members of the public who purchase company stock as well as personnel within the company who possess shares.

Securities laws: public vs private offerings

Securities laws apply to any issuer of securities, whether it is a public or private company. An "issuer" is simply a company that issues securities, and securities laws apply from the moment of the company's inception.

Public Offerings

Initial public offerings (IPOs) are the first time a private company issues corporate stock to the public. Generally, any sale of securities to more than 35 people is deemed to be a public offering and requires the filing of registration statements with the appropriate regulatory authorities. The issuing company and the investment bankers handling the transaction predetermine an offering price that the issue will be sold at.

IPOs provide an attractive way to obtain capital without relinquishing operational control over business activities. However, it is not a financial panacea. IPOs are costly and complex, and they dilute the interests of existing shareholders.

Private Offerings

Private offerings are exempt from many of the requirements of public offerings. However, a state securities authority can always take action against a seller based on fraud, deceit, or unlawful conduct in the state.

There are multiple exemptions available for small businesses looking to raise capital from investors. For example, Rule 504 Limited Offerings allow companies to raise up to $10 million in a 12-month period, in many cases from investors with whom the company has a relationship.

Another example is the Private Issuer Exemption, which is used by most businesses in their initial stages of growth. Issuers that have distributed securities to fewer than 50 persons (not including employees and former employees) and that have not distributed securities of any class to members of the public can generally rely on this exemption.

Public vs Private Offerings

Public offerings are generally more costly and complex than private offerings. They also require ongoing public reporting. However, they can generate greater funds and increase the visibility and appeal of a company.

Private offerings are a more flexible option, allowing companies to tailor the amount of equity and debt involved in the offering. They are also less costly and less time-consuming. However, they may have more limited access to investors and may not generate as much capital.

Securities laws: registration requirements

Securities laws apply to any issuer of securities, whether the company is public or private. In the US, securities laws exist at both the federal and state levels. While federal law must always be complied with, it is also necessary to know which state laws may apply. This is because several state securities laws may apply to the same offering.

State securities laws generally prohibit the sale of a security unless it is registered with the state or fits into a statutory exemption from registration. These laws are designed to protect people within the state from unfair treatment.

In Canada, securities law is regulated provincially. While many Canadian jurisdictions have harmonised their securities regimes, differences remain. Securities laws in Canada apply to all companies issuing securities, not just those that are publicly listed.

Registration Requirements

Registration requirements are meant to protect investors from the risks associated with investment. Under securities law, every issuance of a "security" requires:

• The publication of a prospectus by the issuer
• Registration of any person who is in the business of trading the security

A "security" can be a wide variety of instruments, ranging from shares, units, and options to debt instruments and investment contracts.

The registration forms a company files provide significant information, including:

• A description of the company's properties and business
• A description of the security to be offered for sale
• Information about the management of the company
• Financial statements certified by independent accountants

Registration statements and prospectuses become public shortly after being filed.

However, not all offerings of securities must be registered. The most common exemptions from the registration requirements include:

• Private offerings to a limited number of persons or institutions
• Offerings of limited size
• Intrastate offerings
• Securities of municipal, state, and federal governments

Exempting small offerings from the registration process is designed to foster capital formation by lowering the cost of offering securities to investors.

In the US, federal law says that a state cannot impose additional requirements on a Rule 506 offering (the federal "safe harbour" rule for private placements). However, the state can require the filing of a form and payment of a fee.

In Canada, most small businesses are able to rely on exemptions from registration requirements for much of their corporate lifespan. The exemption that most businesses use in their initial stages of growth is the Private Issuer Exemption. Issuers that have distributed securities to fewer than 50 persons (not including employees and former employees) and that have not distributed securities of any class to members of the public are generally able to rely on this exemption.

Other exemptions include the Accredited Investor Exemption, the Minimum Amount Investment Exemption, the Family, Friends and Business Associates Exemption, and the Offering Memorandum Exemption.

Securities laws: exemptions

Securities laws apply to any issuer of securities, whether it is a public or private company. However, there are several exemptions that can relieve private companies from complying with prospectus and reporting requirements under securities law when issuing securities. Here are some of the commonly used exemptions:

Private Issuer Exemption

The Private Issuer Exemption is the most common and useful exemption for small companies. It applies to issuers that have distributed securities to fewer than 50 persons (excluding employees and former employees) and that have not distributed securities of any class to members of the public. Issuers can use this exemption for several years, and in some cases, closely-held entities can use it for their entire corporate existence. The exemption allows distribution of securities to specific categories of investors, including directors, officers, employees, accredited investors, immediate family members of directors and officers, close personal friends, and close business associates of directors and officers, and existing security holders of the issuer.

Accredited Investor Exemption

The Accredited Investor Exemption focuses on the attributes of the investor rather than the issuer. It assumes that investors with certain financial means and knowledge do not require prospectus disclosure to make investment decisions. There are various classes of accredited investors, including individuals with a net worth or joint net worth with a spouse of at least $1 million, individuals with an income exceeding $200,000 in each of the last two years, banks, registered investment companies, certain employee benefit plans, and companies with net assets of at least $5 million.

Minimum Amount Investment Exemption

The Minimum Amount Investment Exemption is based on the amount of the investor's financial investment. It applies to investors who invest at least a specified minimum amount (e.g., $150,000) in securities of the issuer. This exemption assumes that investors with substantial financial investments have the means to absorb potential losses and the knowledge to assess the risks associated with the investment.

Family, Friends and Business Associates Exemption

The Family, Friends and Business Associates Exemption applies when close personal friends and close business associates of directors and officers of the issuer make an investment. The investor must demonstrate a sufficiently close relationship with the director or officer to properly evaluate their capabilities and trustworthiness. The relationship must be direct and not based solely on membership in the same club, organization, or social media connection.

Offering Memorandum Exemption

The Offering Memorandum Exemption gives issuers access to a broad range of prospective investors but requires the production of an offering memorandum, which can be time-consuming and costly. This exemption is typically recommended only when other exemptions have been exhausted and the issuer wishes to offer securities to the public without becoming a publicly listed company.

While these exemptions provide flexibility for private companies, it is important to note that securities laws are complex, and compliance is crucial. Failure to comply with applicable securities laws can result in legal and financial consequences.

Securities laws: litigation

Securities laws apply to any issuer of securities, whether the company is public or private. Issuers are simply companies that issue securities, and securities laws apply from the moment of inception.

Securities laws are in place to protect investors from the risks associated with investment. In the US, securities laws exist at both the federal and state level. Every state and the District of Columbia has securities or "blue sky" laws. When a business offers securities, it must comply with federal law and be aware of which state laws may apply.

State securities laws generally prohibit the sale of securities unless they are registered with the state or meet a statutory exemption from registration. Blue sky laws also outline penalties and remedies for those who make materially misleading statements in the process of selling securities. These laws are designed to protect people within the state from unfair treatment.

In the case of a dispute, an investor may be able to sue under multiple state laws. For example, if a company in Illinois sent offering materials to an investor in Los Angeles, and the investor returned paperwork and payment to Chicago, the investor could potentially sue under Illinois, California, or Arizona law.

To avoid litigation, it is important for companies to comply with the relevant state laws and federal regulations, such as SEC Rule 506. However, if litigation does arise, investors can file a securities fraud claim in federal court to recover damages sustained as a result of the actions of a firm or individuals related to the sale, trading, or price manipulation of securities.

The Private Securities Litigation Reform Act (PSLRA) was passed by Congress in 1995 to reduce the number of frivolous or unwarranted securities lawsuits. The PSLRA increased the amount of evidence that plaintiffs must present before filing a securities fraud case. It also gave judges the authority to determine plaintiffs and take other actions to reduce legal system abuses.

Frequently asked questions