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TED WILLIAMS

Outside Fenway Park stands this statue of Ted Williams.  Williams, who played his entire career for the Red Sox, twice interrupted his baseball career to serve as a pilot in the United States Marines.  Williams was the last baseball player to have a batting average of ".400," and it has been argued that he was the greatest hitter in the history of baseball.

FEDERAL SECURITIES LAW CONSIDERATIONS FOR START-UP BUSINESSES.

ENDEAVORLEGAL attorneys regularly advise clients regarding the complexities of Federal securities laws and their application in the offering and sale of any interest in a business enterprise.  In can not be emphasized enough that proper planning and precautions must be made to ensure that the offering and sale of interests in a business enterprise are conducted within the scope of the law.  Failure to adhere to SEC rules and regulations can open a business enterprise to investigation and costly law suits. 

Please contact us should you have any questions regarding the offering or sale of an ownership interest in a business enterprise and the application of Federal securities laws relating thereto.

The following information is a brief overview of certain Federal securities laws that commonly affect small businesses and start-up enterprises.  Securities laws are complex and must be taken seriously when incorporating or forming a limited liability company, especially when the founders wish to sell ownership interests in a business enterprise to investors and other persons or entities

WHAT ARE SECURITIES? Securities include shares of the capital stock of a corporation, partnership interests, and membership interests in a limited liability company (LLC).  A company, whether it be a corporation, limited partnership or limited liability company does not have any owner until it issues securities.  Anyone who operates a business under the umbrella of a corporation, partnership or LLC owns securities in the business enterprise.

ISSUING SECURITIES. Prior to commencing operations, a business entity must issue securities.  In order to issue securities, a business must either register an offer and sale of securities with the Securities Exchange Commission ("SEC") or establish an exemption from Federal and state securities registration.   The SEC oversees Federal securities law compliance.  Even the smallest company must comply with these laws to properly and legally issue its securities.

ENDEAVORLEGAL ensures that our clients properly offer their securities to prospective owners, investors, consultants and employees within the confines of the law.

The general rule of Federal securities law is that, absent an exemption from registration, all offers and sales of securities must be registered.  To register an offer and sale and conduct a “public offering," a registration statement must be filed with the SEC.  The disclosures required in a registration statement are detailed and complex, the document’s length is massive, and the costs of preparing a registration statement (including accountant, attorney, investment banker, and printer fees) can easily exceed the hundred thousand dollar mark.  This is obviously not a practical path for a fledging business venture.  We assist our clients in establishing an exemption to the SEC's registration requirements, issuing securities and avoiding liability under Federal law.

EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS. Federal law provides a number of exemptions from registration easing the burden on small business ventures.  This is not to say that small companies do not need to follow the rules, but rather there exists a different set of rules that must be followed in order to issue securities within the confines of the law.  We work with “start-up” ventures to determine the appropriate exemption from registration for each offering circumstance. Some common registration exemptions for small businesses and start-up ventures are described below.

INTRASTATE OFFERING EXEMPTION. This exemption is often used to facilitate the financing of local business operations. To qualify for the intrastate offering exemption, a business venture must:

Be incorporated in the state where it is offering the securities;

Carry out a significant amount of its business in that state; and

Conduct offers and sales only to residents of that state.

There is no fixed limit on the size of the offering or the number of purchasers.  The offering company is charged with determining the residence of each purchaser. If any of the securities are offered or sold to even one out-of-state person, this exemption may be lost. If a purchaser resells any of the securities to a person who resides outside the state within a short period of time after the company's offering is complete (the usual test is nine months), the entire transaction, including the original sales, may be in violation of Federal securities law.

It is difficult for a company to rely on the intrastate exemption unless the principals know the purchasers and the terms of the offer are negotiated directly with them.  If a venture holds assets outside the state of organization or derives a substantial portion of its revenues outside such state, it is likely that it will not qualify for this exemption.  Companies must also provide certain company information to persons to whom it offers securities.

SECTION 4(2) PRIVATE OFFERING EXEMPTION. Section 4(2) exempts from registration “transactions by an issuer not involving any public offering."  The guidelines of this exemption are as follows:

1.  The offering organization must not engage in general solicitation or advertising of the proposed offering.  An entrepreneur must be careful when e-mailing offers to purchase securities, as mass e-mailing and any resulting forwarding of the offering e-mail may be considered general solicitation.

2.  Each person to whom securities are offered must have, or at least have access to, the type of company information that is required by a registration statement.

3.  The offering venture must limit the number of persons to whom it offers its securities and take precautions against re-sales of the offered securities.

4.  The persons to whom the venture offers securities must be financially sophisticated and understand and bear the consequences and economic risk of an investment in a privately held company.

Perfection of an exemption from registration under Section 4(2) is not a clear cut matter; the rules and guidelines of this exemption were developed under various court decisions and are considered vague.  The precise limits of this exemption are uncertain. As the number of persons to whom securities are being offered increases and their relationship to the company and its management becomes more remote, it is more difficult to show that the transaction qualifies for this exemption.

SAFE HARBOR FOR SECTION 4(2) OFFERING: RULE 506.The SEC provides a "safe harbor" rule with objective standards that a business venture can rely on to meet the requirements of the Section 4(2) exemption. Under Rule 506 of Regulation D, if a company satisfies the following standards, it can be assured that it is within the Section 4(2) exemption:

1.  The business venture can raise an unlimited amount of capital;

2.  The organization cannot use general solicitation or advertising to market the securities;

3.  The company can sell securities to an unlimited number of accredited investors (as identified below) and up to 35 other purchasers.  All non-accredited investors, either alone or with a purchaser representative, must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment;

4.  It is up to the offering company to decide what information to give to accredited investors, so long as it does not violate Federal or state antifraud prohibitions; however, non-accredited investors must be provided with disclosure documents that generally are the same as those used in registered offerings. Information provided to non-accredited investors must be made available to accredited investors as well;

5.  The business venture must be available to answer questions by prospective purchasers;

6.  The prospective purchasers must also be provided with financial statements certified by a independent public accountant (in limited circumstances an audited company balance sheet dated within 120 days of the start of the offering will suffice); and

7.  Purchasers receive "restricted" securities. Consequently, purchasers may not freely sell, transfer, gift or otherwise dispose of the securities after the offering.

ACCREDITED INVESTORS.  “Accredited Investors" include:

A director, executive officer, general partner or member of the company selling the securities.

A business in which all the equity owners are accredited investors.

A person with a net worth of at least $1 million;

A person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.

A trust with assets of at least $5 million, not formed for the purpose of acquiring the securities offered, and whose purchases are directed by a sophisticated person.

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