Matt Dickstein
Business Attorney
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39488 Stevenson Place #100, Fremont, CA 94539

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Introduction to Private Offerings of Securities

IMPORTANT NOTE -- I was a securities lawyer for many years, but I no longer represent companies in their offerings of securities.  I keep my prior articles on securities law available here, but I do not check whether they are current anymore, and I do not vouch for the accuracy of the articles.  Please consult with a practicing securities attorney before taking any action.

In this article I give a bird’s eye view of private offerings of securities (also called limited offerings or private placements). My goal is to show the big picture, then discuss the details in other articles.

A company conducts a private offering (that is, sells its stock to investors) to raise capital. In doing so, the business becomes subject to federal and state securities laws. For every offering, you must comply with federal securities laws and the laws of each state where an investor resides. This can add up to a lot of law. Further, you cannot opt out of these laws – securities laws will apply to your company whether you want them to or not. Pretending the laws don’t exist won’t save you.

The Fundamental Concept

Section 5 of the federal Securities Act of 1933 requires the filing of a registration statement with the SEC prior to an offering of any security, unless an exemption is available. In other words, if you want to sell stock in your company, you must either register your stock, or use an exemption from registration. 

This is an either / or requirement: either register or use an exemption. If you register your securities, the offering is public. If you use an exemption, the offering is private. Big companies usually raise capital through public offerings involving registration, and we follow these companies in the Dow Jones, the S&P 500 etc. Registration is a time-consuming process that can cost hundreds of thousands of dollars to initiate and maintain. 

Smaller businesses usually cannot afford registration. Hence smaller businesses raise capital through private offerings in reliance on the exemptions from registration. This is our subject.

What is a Security?

Returning to the fundamental concept, remember that registration / exemption is required for the offering of a security. Securities laws only apply if you sell a security. Hence, what is a security? Federal and state laws define a security as a note, stock, evidence of indebtedness, participation in any profit-sharing agreement, investment contract, and more. Some things are clearly not securities, for example, a commercial loan or interest in real property. If you seek to raise capital, however, be very careful of the broad definition of a security. Sometimes things are not as clear as they seem – for example, a tenancy-in-common interest in real property clearly is not a security, except when offered as part of a TIC venture (in which case it is a security).


When offering your stock, you probably will use the state and federal private placement exemptions. Exemptions are the key to any private offering of securities. 

The majority of offerings use the federal exemptions under Section 4(2) of the Securities Act and/or Regulation D, plus corresponding state exemptions. In California, the most popular state exemption is Section 25102(f) of the Corporate Securities Law of 1968.

These exemptions will provide the majority of law applicable to your offering. Due to their complexity, I will address these exemptions in other articles.

Private Offerings – No General Solicitation

Most exemptions severely restrict your advertising and solicitation in selling your securities. You may not sell securities to just any person by any means. When selling securities, you may not advertise or otherwise solicit the general public. This applies to your company and anyone acting on its behalf (usually officers and brokers). Hence you may not use any advertisement, article, notice or other communication in any newspaper, TV or similar media. You may not use seminars whose attendees have been invited by any general solicitation or advertising. In brief, you may only sell to investors with whom you have a pre-existing, substantive relationship.


Not only does the law restrict how you sell securities (above), it also restricts the people who may help you sell your securities. Extensive broker regulations apply to you and all other people who sell your securities. In brief, no one involved in the offering may be regularly engaged in selling securities unless that person is licensed as a securities broker. Many professionals in the field forget about broker regulations; instead they concentrate exclusively on the exemptions. This can be a fatal mistake if the investors bring litigation.


As a final matter, I will quickly summarize the consequences of violating your applicable securities laws. Securities violations usually come in two flavors: a technical defect in compliance with your exemption, and/or securities fraud. Securities fraud occurs when you misstate some material fact or fail to disclose some material fact. In brief, purchasers of securities may bring an action against the company and even you personally for a securities violation.

If you remember nothing else from this article, remember this: securities laws favor the investors, not you, and you can become personally liable for your company’s violation of securities laws.

This article only gives a brief introduction to private offerings. I have only scratched the surface. I strongly urge you to get competent legal, accounting and tax counsel when you offer securities.

Matt Dickstein, Business Attorney - 39488 Stevenson Place, Fremont CA 94539
(510) 796-9144

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