So you are giving some thought to
involving one or more investors in
your business. How might those thoughts translate into exposure to SEC
regulations? We have all seen and heard
about companies that have run afoul of
the SEC, and we all want to make sure
that whatever we do, if it might involve
the SEC, we will follow the rules precisely. When do they apply?
“Whenever a company or institution is
going to accept money from investors,
public or private, it exposes the company
to scrutiny from investors and/or regulators,” says Scott Meyers, chair of the
Litigation Practice Group at Levenfeld
Pearlstein LLC. “You need to structure
things to satisfy both. Even if you have no
interest in going public, you still need to
be cognizant of the federal securities
laws.”
Smart Business talked with Meyers to
gain more insight into what one should be
aware of and how to keep up to date.
How do I know if my quest for one or more
investors is going to subject me to the SEC?
The main purpose of the SEC is to protect investors. If you are letting any segment of the general public know that you
are interested in seeking one or more
investors, you are subject to compliance
with federal securities laws and SEC regulations.
On the other hand, if you personally talk
to a group of sophisticated investors individually, that could be considered as part
of a private offering. While private offerings are not subject to all SEC regulations,
you will still want to make sure that you
are providing full disclosure to potential
investors in order for them to make an informed investment decision.
What are the main areas of the law that I
should be aware of?
Everything in the securities laws boils down to telling potential investors as much
information as they need to know to make
an informed investment decision.
In order to tell them all of the necessary
information or ‘material’ information, you,
the company, need to understand that
information first. If you have sloppy bookkeeping, how are you going to know the
overall condition of the company in order
to disclose it to them? If you are not aware
of the most up-to-date information on compensation law, how are you going to adequately disclose your compensation policies, especially in areas where they relate
to the current owners or investors?
What is the best way for me to keep up on the
various laws?
Your in-house counsel should be specifically tasked with the responsibility, working closely with outside counsel and other
professionals that specialize in the applicable area. Tax rules, employment laws,
employee benefits and accounting standards are also involved. It takes a team
with expertise in all these areas, because
all of these things will need to be disclosed to potential investors.
Some of the current litigation is developing because companies don’t recognize the
interconnectivity. The regulations do not
just apply to companies trading on the
New York Stock Exchange. If you are seeking investors, whether through public or
private offerings, and don’t disclose something that to a reasonable person would be
considered ‘material’ within the total mix
of the information disclosed, you are going
to have a problem.
What state laws should I also be aware of?
Most definitely, especially state securities
(or ‘Blue Sky’) laws as well as consumer
protection statutes.
Most states have a variety of laws to protect the residents of their state. If you take
on an investor from Illinois and do not
observe that state’s securities regulations
or consumer protection statutes, you are
going to have a problem — with the
investor, the state and the SEC.
The bottom line is that you need to know
who you are selling to, where the people
live, and what the applicable rules and regulations for that state are. Then you need to
make sure that you know and disclose to
them all material information so that they
can make an informed investment decision.
SCOTT MEYERS is chair of the Litigation Practice Group at
Levenfeld Pearlstein LLC in Chicago. Reach him at
[email protected] or (312) 476-7576.