Securities come in many forms, including investments in stocks, bonds and mutual funds, just to name a few. Even an ownership interest in your business that you might offer to a friend or neighbor is considered a security. Each of these investment tools may be subject to state or federal regulation. In the case of public companies, to ensure a fair playing field, it is imperative that the institution provide full and fair disclosure of corporate financials and related operations. Securities laws are designed to protect investors who suffer financial loss due to non-disclosure or deceptive practices. In considering securities laws the public tends to think that these laws only apply to public companies. However, if you are involved in soliciting investments from third parties, state and/or federal law may also apply to that activity. Therefore, care should always be taken when seeking investors for your business in order to not run afoul of the securities laws.
At the federal level, the Securities Act of 1933 regulates the issuance of securities and is the backbone of securities law and regulation. This act, although typically designed to deal with public companies, can also apply to private companies or individuals selling securities to or seeking funding from a third party. The Securities Act of 1934 governs trading and purchase of securities. These laws empower the Securities and Exchange Commission (SEC) to oversee trading activity. The Sarbanes-Oxley Act of 2002 addresses corporate compliance and is one of the more recent and talked about SEC regulated security laws.
Any public company issuing securities must disclose financials to the SEC accurately stating the company's value and assets. They must abide by generally accepted accounting practices. An individual cannot use insider knowledge for their own personal investment gain, a practice commonly referred to as insider trading. Other abuses may include fraud - knowingly altering financial statements or using deceptive accounting practices, and market manipulation - providing false information regarding the price movement or trading activity of a stock.
Brokers are subject to strict rules put in place to prevent misconduct. An investor may seek remedy through litigation for abuses such as unauthorized trading (when a broker executes a trade in direct contradiction of a client's request or without consent), unsuitability (investments made that are known to be counter to the objectives of the client), and misappropriation (diversion of monies from a client's account into a broker's personal account), among others. Investors can bring suit in state or federal court and seek remedy through class action or arbitration. Insider trading and improper earnings reports have become synonymous with class actions where a large group of investors were harmed. Regarding arbitration as a remedy, some regarding this option as generally tilting in favor of the broker however, some would argue that investors have been faring better as of late.
While many of the securities laws referenced above apply primarily to public companies, there are still laws and regulations rules that also apply to the private placement or sale of securities and investments. Therefore, some caution should be observed when trying to raise private capital for small business investment. Contract one of our attorneys before you start the process of raising private equity. We have experience with private placement memorandums, convertible debt, the sale of corporate stock, limited liability companies and partnership interests. We can advise you on what is needed in order to stay compliant with state and federal securities laws and regulations in the purchase and sale of these types of investments.