If you are trying to raise funding from potential investors, regardless of whether you’re asking them to make a loan, purchase equity, or purchase a SAFE or convertible note, you are doing what lawyers call a “securities offering.” Securities offerings are highly regulated by the federal and state governments. It is very important to consult with a lawyer before talking to anyone about investing in your business.
What is a securities offering?
A securities offering is an offer to sell securities. A security is any type of contract where the person who is giving you money is expecting some kind of financial return (the definition of what is or is not a security is beyond the scope of this post but much has been written about the topic!).
Just because you can’t legally make a securities offering unless it complies with applicable state and federal law, doesn’t mean you can’t tell the world about your business and how great it is!
What crosses over into a securities offering is when you tell people that you are raising money, how much you’re raising, any terms of the investment, etc.
The following statements are likely to be considered a securities offering under the law:
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- “We are planning to raise money and we will be offering promissory notes with a 4% annual interest payment. Do you think you would be interested in that?”
- “We’re looking for investors – do you know anyone who might be interested?”
You must know your federal and state securities compliance strategy before you can determine whether and how you can make a securities offering in a particular setting or to a particular person.
There are many federal securities compliance options including Regulation Crowdfunding, Rule 506(c), Rule 506(b), Rule 504, intrastate offerings, nonprofit offerings, and agricultural co-op offerings. CLICK HERE to download our chart comparing various federal securities compliance options!
The major differences among the various options are:
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- Whether and under what circumstances public advertising of your offering (described below) is allowed
- Whether you can include unaccredited (less wealthy) investors in your offering and/or sales of securities
- Whether you have to comply with substantive state rules for every state in which you want to solicit investors
- The cap on the amount you can raise (if any).
Once you choose your federal and state compliance strategy, you will be able to have clarity on the rules governing to whom and how you can offer your securities.
What is public advertising – a.k.a. general solicitation – in a securities offering?
Many securities compliance strategies require that the offering not be publicly advertised. Sometimes it’s a bit unclear when the line is crossed from private communication to public advertising.
An email to a single individual asking if they might be interested in talking about an investment opportunity probably is not public advertising, but the same email to a group of people probably is.
The SEC’s guidance is not very helpful on this: “Whether there has been a general solicitation is a fact-specific determination. In general, the greater the number of persons without financial experience, sophistication or any prior personal or business relationship with the issuer that are contacted by an issuer or persons acting on its behalf through impersonal, non-selective means of communication, the more likely the communications are part of a general solicitation.”
To make matters even more complicated, different compliance strategies may allow you to do public advertising but restrict what you can say in that advertising. For example, there are detailed regulations about what you can and cannot say in a public advertisement for a securities offering under Regulation Crowdfunding.
Conclusion
People are often surprised to learn that saying something as simple as, “hey, I’m looking for investors for my business” can be illegal. The securities laws were adopted in the early 20th century with the goal of protecting people from making unwise investments. The laws have evolved over the last 100 years into a rather complex regime that entrepreneurs unknowingly violate on a daily basis.
In 2012, Congress made the first major change to the federal securities laws in decades, adding many more pathways for capital raising. The Securities and Exchange Commission adopted rules in 2016 and 2020 that added even more complexity.
Be sure to check back next week for Part 2 of this post, where we’ll discuss some of the more recently adopted rules governing what you can say about your investment offering at a pitch event and how you may be able to “test the waters” with potential investors before formally offering an investment opportunity.
Disclaimer: The information contained in this article is for general informational purposes only and does not constitute legal advice. The content provided should not be relied upon as a substitute for consultation with a qualified attorney. For specific legal questions or situations, please consult with a licensed legal professional who can provide advice tailored to your particular circumstances.
