By Steve Trusty
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 or (312) 476-7576.
© 2007 Smart Business Network Inc. Reprinted from the April 2007 issue of Smart Business Chicago.
