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What entrepreneurs should know about securities when seeking investors

Apr 5, 2023 | Investors, Securities

Investors play a critical role in the success of a business, particularly startups. When courting an investor, however, there are many detailed securities regulations to comply If you are an entrepreneur interested in finding investors, these are some of the fundamental aspects of securities law that you should know about in advance.

Securities: what to know

For the uninitiated, a security is a type of investment that one can buy, trade or sell. An example is when an investor puts money into a venture expecting to see a return in the future. In the U.S., the Securities and Exchange Commission (SEC) is the agency that regulates the securities market. One of the most important roles of the SEC is to protect investors.

A securities offering, broadly put, is when a business raises capital through investments. The government regulates securities offerings rigorously. The failure to comply can result in civil and even criminal consequences.

Regulation D and the right exemptions

Small businesses raising capital through private placements do not have to register with the federal government. However, you must still select the correct exemptions under Regulation D. These include:

  • Rule 504: You can raise up to $ 10 million per year with any number of unaccredited investors, but you cannot advertise offerings publicly.
  • Rule 506: While public advertising is not allowed, you can raise unlimited capital from up to 35 unaccredited investors.

Failure to comply with the law can have the following consequences:

  1. Expensive fines
  2. Audits
  3. Investigations
  4. Criminal prosecution

An investor’s financial contribution may seem like the most exciting facet of a deal, but it is far from the most important. Compliance is key to soliciting investments legally, avoiding regulatory investigations or prosecution and establishing a successful business backed by investors’ capital.