When looking to raise capital for their business entities, owners, officers, and their businesses (issuers) have options when it comes to the securities they offer potential investors. People don’t always realize it, but shares of stock and membership interests of companies are not the only assets included in the definition of what is considered a security for the Securities and Exchange Commission (SEC). When selecting which type or types of securities to include in a private offering, it’s essential to remember that these are securities, subject to all applicable securities laws and regulations, and compliance with those laws and regulations is incredibly important for the long-term success of any business.
Besides equity, the SEC includes bonds, notes, options, warrants, profit-sharing interests, anything commonly known as a security, and a catch all for “investment contracts”.
Your first reaction might be to question what qualifies as an “investment contract”. Well, the US Supreme Court answered that question with a 4-part test called the Howey Test. The SEC will likely find an arrangement to be a security if it involves:
- An investment of money (or other assets with a risk of loss financially);
- Into a common venture or enterprise;
- Where the buyer or investor has a reasonable expectation that there will be a financial return on the investment; and
- The buyer or investor’s potential profits would come primarily or substantially from the efforts of others.
Informed issuers have flexibility in the types of securities they can offer so long as they keep in mind that what they are offering are, in fact, securities and require compliance with applicable laws and regulations. Once that’s established, they could offer any or a combination of different securities to their potential investors. Each have their pros and cons. Some of the most common ways private companies offer unregistered securities is through private placements exempt from registration under Regulation D. Read more about those transactions.
O’Brien Law has experience assisting clients in private placements of various securities and guiding its clients through the compliance processes required by federal and Florida law. Our attorneys are available to discuss options and potential representation for your private placement opportunities.