HERE THERE BE DRAGONS

Size: px

Start display at page:

Download "HERE THERE BE DRAGONS"

Julian Hawkins
8 years ago
Views:

1 HERE THERE BE DRAGONS Small Business and Securities Law Craig A. Taylor Phone:

2 WHY DO CPAs NEED TO KNOW ABOUT SECURITIES LAWS? - Bank financing is limited, but businesses need capital to grow - Owners must seek friends and family financing or find angel investors - CPAs may be first advisors to know about clients plans to seek capital - Professionals involved may have liability to investors! 2

3 WHAT S THE PROBLEM? It is illegal to offer securities to the public unless: 1. The offering is registered with SEC and/or state regulators OR 2. The offering qualities for an exemption 3

4 WHAT IF RULES ARE BROKEN? - Seller must return investor s money plus interest, less any profits investors received - Joint and several liability for issuer and persons involved in soliciting sales - Plaintiffs lawyers will frequently pursue issuer principals and advisers, possibly including preparers of financial statements 4

5 WHAT IS A SECURITY? - Stock - Notes, Bonds, Debentures loans from family members can be securities! - Options, calls, puts - Investment Contract: catch-all 5

6 WHAT IS A SECURITY? Investment Contract SEC v. W.J. Howey & Co. (1946) - Case involved interests in orange groves (1) A person invests money (2) In a common enterprise (3) Is led to expect profits (4) Primarily from the efforts of others - Scotch Whiskey, chinchillas, cemetery lots, earthworms, and cosmetics may be securities! 6

7 WHAT IS A SECURITY? What about LLC interests? - Definitely can be securities for Federal law purposes under the Howey test - NC presumption: - member-managed LLCs not securities - manager-managed LLCs are securities - presumption can be overcome - a manager or member-manager must have substantial rights or be expected to provide substantial services 7

8 WHAT DOES IT MEAN TO REGISTER? 1. Traditional Initial Public Offering ( IPO ) - Very expensive and time consuming - Underwriters fees, legal fees, accounting fees, broker s fees, etc. - Ongoing reporting (SEC, Sarbanes Oxley) burdensome and expensive 8

9 2. Regulation A - Short-form registration - Theoretically, a streamlined IPO for small businesses - Limited to $5,000,000 - Requires full financial disclosures under GAAP - Must comply with state blue-sky laws - Infrequently used because the transaction costs are too high for $5,000,000 9

10 ARE EXEMPTIONS AVAILABLE? Section 4(2) Exemption non-public offerings - narrowly construed, multi-factor test - must comply with state blue sky laws - risky to rely on burden of proof on issuer - only applies if all investors shown to be able to fend for themselves - knowledgeable investors with access to information 10

11 ARE EXEMPTIONS AVAILABLE? Section 4(6) Offers only to Accredited Investors - limited to $5,000,000 - no advertising or public solicitation - must comply with state blue sky laws - only accredited investors see below 11

12 ARE EXEMPTIONS AVAILABLE? Section 3(a)(ii) Intrastate Exemption - Issuer must be incorporated and do significant business in state - Offers and sales only to residents of state - Strictly and narrowly construed - Issuer can t have substantial business or assets outside the state - Must comply with state blue sky laws 12

13 REGULATION D SAFE HARBORS - Provides clarity and certainty for private offerings - Avoids uncertainty of 4(2) and 4(6) - Allows multi-state offerings - State blue sky compliance required, except Rule No public advertising or solicitation allowed - Note all Reg D offerings have resale limitations 13

14 WHAT IS AN ACCREDITED INVESTOR? Institutional Investors (Banks, pension funds, insurance companies, etc.) Nonprofits with over $5,000,000 in assets Trusts with assets over $5,000,000 and run by sophisticated persons Individuals: Net Worth over $1,000,000 excluding principal residence OR Income over $200,000 OR Income with spouse over $300,000 Directors, executives, or general partners of issuer 14

15 Special NC LLC Rules - If issuer is an LLC, LP, or GP: - All investors must have $225,000 net worth excluding home and cars OR $60,000 net worth and $60,000 income - All investors must receive notice of requirements - Must make additional disclosures to NC 10 days before first offer - Rules generally don t apply if all buyers are individuals who will be actively engaged in issuer s business 15

16 REGULATION D RULE $1,000,000 limit - No special disclosures required (but antifraud laws still apply) - Per NC rule, may only offer to 25 people - Must follow special NC LLC rules - File Form D and all sales materials with NC 10 days before first sale (but not if all buyers actively engaged in business, plus up to 5 nonengaged persons) - Many mom & pops accidentally fall into this exemption 16

17 REGULATION D RULE $5,000,000 limit - 35 unaccredited/unlimited accredited investors - Unaccredited investors must receive full Regulation A disclosure documents - No special disclosure required for accredited investors (but antifraud provisions still apply) - Simple Form D filing to SEC - BUT must comply with all state blue sky laws 17

18 REGULATION D RULE NC rules make Rule 505 unattractive - issuer must reasonably believe investment is suitable for investors, even accredited investors (unless sold to accredited investors through registered broker) - additional NC requirements if LLC - Form D required 10 days before first sale - Other burdensome disclosures required if there are more than 5 non-insider investors 18

19 RULE 506 THE REG D CADILLAC 19

20 REGULATION D RULE Best Exemption for Small Business - Unlimited Offering Amount - 35 unaccredited investors - Unlimited accredited investors Best part: limited blue sky compliance! 20

21 REGULATION D RULE Generally, only accredited investors approached - Full Regulation A disclosures required for unaccredited investors - File Form D with SEC and NC 10 days after first sale - No special NC requirements for LLCs - No additional NC filings, even if more than 5 outsiders 21

22 IS MY CLIENT A BROKER? Effects transactions in securities for the account of others Watch out for commission compensation If unregistered broker/dealer involved, investors may have rescission rights Issuer and broker jointly liable for repayment to investors 22

23 IS MY CLIENT A BROKER? - Transaction-based compensation - success fees - finder s fees (very narrow exception) - sales commission - All brokers must register or be associated with registered firm - Beware of out of state, unregistered advisors - no-action letters from other states or attorney opinion letters may not be sufficient 23

24 What is Securities Fraud? Under Section 10b-5 of 34 Act: any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading With intent to defraud, manipulate, or deceive 24

25 Craig A. Taylor 235 N. Edgeworth Street Greensboro, NC Phone:

SEC Approves Crowdfunding

SEC Approves Crowdfunding On October 30, 2015, the Securities and Exchange Commission (SEC) approved finalized rules for investment crowdfunding for nonaccredited investors in accordance with requirements of Title III of the Jumpstart