Author: David Wunderlich
If you find yourself in the enviable position of having your business outgrow your cash flow, you may start thinking about how to obtain investments to help you scale up your business. But business owners should beware that the process of selling an investment in your business is not as simple as it may seem. Both federal securities laws and state equivalent laws tightly control how such investment securities may be sold.
A business should not openly solicit investments via publications, online bulletin boards, or advertising. This March the Colorado Securities Commissioner issued a cease and desist order to a cannabis business which published an investment opportunity on Craigslist in the summer of 2016.
Public advertising isn’t the only area of risk for entrepreneurs selling investments. Courts may find that securities offerings occurred via private solicitations of investment from the community, friends, and family, depending on the context. Without proper registration of securities or use of a licensed broker-dealer, an entrepreneur selling investments risks regulatory sanctions or even private causes of action for securities fraud in civil court from investors.
Publicly traded companies sell their securities via highly regulated securities exchanges such as the NYSE or the NASDAQ. But even smaller private companies seeking investments by offering equity must comply with securities laws.
Under the law, selling any investment in your company is considered a sale of securities. The law doesn’t differentiate between names of investments: any interest in a company’s equity or debt for sale can be considered a security whether it is called a note, stock, debenture, or investment contract. Courts will look beyond the form of any particular transaction to determine whether business owners sought to use the money of others on the promise of profits.
A company selling securities must first either register the securities with the proper regulatory agencies, or ensure that the securities are legally exempt from registration. Individuals selling securities to investors also require a license from the state and possibly the SEC. Business owners would therefore be wise to avoid temptations to publicly advertise securities for sale or otherwise solicit investments without seeking counsel first. The law places further limitations on the in-state residency of targets of any securities offering and whether a business can pay a commission for the sale of securities.
As demonstrated by the Colorado Securities Commissioner this March, securities regulators are watching for illegal securities activities and illegal public offerings, and pursuing violations with legal sanctions. The cannabis industry attracts risk-tolerant investors seeking quick returns, but be cautious; the sale of unregistered securities is a likely way for your business to draw unwelcome regulatory scrutiny, and regulators are watching the cannabis industry as much as any other.
McAllister Garfield, P.C. has represented companies facing subpoenas regarding alleged securities law violations from both the SEC and state regulators. If you have any questions or concerns about this issue, do not hesitate to contact us.