Securities Implications Involved In Raising Money for Your Business


Securities regulation in the United States followed several centuries of regulation in England. Brokers were licensed in England as early as 1285. All such regulation was aimed at the curtailment of dubious money-raising schemes, such as the one in England during the early 18th Century when thousands of people were persuaded to purchase stock in a company based upon the representation that the company founders were preparing to carry “on an undertaking of great importance, but nobody to know what it is.” The investors in this scheme, as well as many others who invested in similar schemes, had their bubbles burst, lost their money and, as a result, the “Bubble Act” was passed in 1720. The Bubble Act focused on “persons who contrive or attempt such dangerous and mischievous undertakings or projects, under false pretenses of public good, do presume . . . to open books for public subscriptions, and draw in many unwary persons to subscribe therein towards raising great sums of money . . . ”.

The Securities Act of 1933 (the “1933 Act”) was prompted by the Wall Street crash of 1929. The first administrator of the newly created bureaucracy was Joe Kennedy. The pronounced goal of the legislation was consumer protection. Subject to certain exemptions, the 1933 Act requires registration of all securities being sold. The purpose of registration under the Act is “[t]o provide full and fair disclosure of the character of securities sold in interstate and foreign commerce and through the mails and to prevent frauds in the sale thereof....” To achieve this goal, the 1933 Act generally requires a company which proposes to issue its securities to file a registration statement with the Securities and Exchange Commission. The registration process is designed to protect investors by providing them the information necessary to make informed investment decisions. The process, however, is time consuming and expensive. Therefore, when you have determined that you need to raise money for your business, you will want to answer two questions:

1. Whether your efforts will involve the offering of “securities” and, if so,

2. Whether your efforts can be undertaken either without registration or with an abbreviated registration.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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