Introduction to Private Offerings of
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for many years, but I no longer represent companies in their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
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
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
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
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
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.