Basic Start Up SEC and State Filings Requirements

Caveat: This is only a summary of a few basic rules; this is very complex and many exceptions apply. Consult your attorney before proceeding.

States generally require filings when selling securities into those states ("Blue Sky Laws")1 and filings usually require attaching SEC Form D.

SEC – When do you need to file with the SEC?

Every offer for sale of securities of a legal entity either has to be registered with the SEC (very complex, used, e.g., when "going public" with an Initial Public Offering (IPO) under the Securities Act of 1933) or qualify for an exemption.

Remember: There is no SEC exception for "friends and family." Rather, friends and family shares, also called "Directed Shares," relate to company stock offered to preferred individuals before an initial public offering (IPO). Also called "directed shares."

Non-profits generally are exempt from SEC registration – exceptions: unless issuing securities, notes, etc. – but must file with states, IRS, sometimes locally, etc.2

Exemptions: You MUST FILE to get some SEC exemptions – and list any states in which you
solicit investments.

SEC's Intra-State Exemption. Sec. 3(a)(11) TIP: KEEP LIFE SIMPLE. USE THIS IF YOU CAN. Non-public offerings ("Private Placements") are exempt from SEC filings (including filing a Form D)3 if company: 1) is organized in state where it's offering securities, 2) carries out significant amount of business in that state, 3) makes offers & sales only in that state, other requirements. No limit on size of offerings or number of purchasers. Exempt from Form D filing.

Regulation D provides Rules 504, 505, and 506 which have some exemptions
(Form D needs to be filed).

*Rule 504 Exemption of Reg. D ("Seed Capital Exemption") – exemption if offering not exceeds $1 million over 12 mos.

Unlimited number of accredited or unaccredited investors

Must inform investors they have "restricted securities" not sold up to a year.4

 *Rule 505 ("Accredited Investor Exemption") – exemption if:

Up to $5M in any 12 mo. period to unlimited number of accredited investors and up to 35 non-accredited investors. Securities are restricted.

Non accredited investors must disclosure documents similar to registration offerings and audited financial statements.

Section 4(a)(2) ((Private Placement Exemption") – No Form D required but is required if you claim under Safe Harbor Rule *506 of Reg. D. No aggregate dollar limit.

Sales to no more than 35 non-accredited investors but must be "sophisticated investors5" able to evaluate the risks and merits of the investment.

Non-accredited investors must receive a disclosure document and at least an audited balance sheet by a CPA.6 This can be a lot of work + audit expenses.

Unlimited number of accredited investors; and If sales exclusively to accredited investors no disclosure document need be delivered to them. TIP: KEEP LIFE SIMPLE. JUST SELL TO ACCREDITED INVESTORS IF YOU CAN.

*Who is an "Accredited Investor"? Per Rule *506:

Individual or joint net worth with a spouse over $1M at the time of purchase, exceeding the value (and any debt) of a primary residence

Individual annual income over $200K in each of two most recent years or joint income with spouse over $300,000 for those years, and a reasonable expectation of the same income level in the current year, etc.7

General Solicitation and General Advertising Rules

New Rule. Effective date Sept. 23, 20138 – removes the prohibition on general solicitation or advertising for securities offerings under Rule 506, provided: 1) sales limited to accredited investors; and 2) issuer takes reasonable steps to verify all purchasers [note: not those solicited] are accredited. Must file Form D 15 days in advance of general solicitation, much more required, plus final filing.

Other Exemptions. There are other exemptions and options, but are not as frequently used, such as:

Regulation A: exemption for public offerings not exceeding $5m over 12 months, but it is complex and requires a Form 1-A with a notifications, offering circular, and exhibits and is similar to a registered offering.

Rule 701 exempting sales of restricted securities to compensate employees up to $1M or more (under certain circumstances). Must not be subject to the Exchange Act. (no Form D filing)

False and Misleading Statements. All securities transactions, even exempt ones, are subject to antifraud provisions of federal, state security laws. Laws; enforced with criminal, civil and administrative proceedings and private party actions.

Private parties as well as governmental entities may bring actions. You and your company are responsible for false and misleading statements either orally or written. Even omitted information can make the information false and misleading.

1Note: exceptions for “Covered Securities” under SEC’s Rule 506, Sec. 18, Securities Act of 1933 (“Securities Act”). Most states ask for a copy of Form D, which the companies have to file with the SEC within X days of the offering), and a fee (around $300). Some states require pre-filing. E.g., New York requires the pre-filing with Form 99 prior to any offer (Notification Form Under National Securities Market Improvement Act of 1996 - NSMIA), a State Notice, and Form U-2 if the company has been formed outside of New York, etc.

2See Sec. 3(a)(4) Securities Act for criteria. Re def. of “Security,” See SEC v. Howey Co., 328 U.S. 293 (1946).

3Sec. 3(a)(11) of Securities Act and Safe Harbor Rule 147. 

*Indicates that Form D must be filed to obtain the exemption.

4Except if the transaction is registered with the SEC or under Form 144 procedures.

5The company must reasonably believe that non-accredited investors (either alone or together with their investment representatives) have sufficient financial and business knowledge to allow them to evaluate the risks and merits of an investment.

6Rule 506(b)(2)(ii). Private Placement Exemption per Sec. 4(a)(2) of the Securities Act.

7There are other categories as well. Reg. D contains Rules 504, 505 and 506.

8Jumpstart our Business Startup Act (JOBS Act), Sec. 201(a)(1), per SEC rule issuance, Apr. 2012.