Top 5 SEC Regulations Your Need to be Aware of When Starting a Business

SEC Business Regulations

For anyone considering the ins and outs of starting a new business, funding concerns will always take center stage. Not everyone has rich parents from whom to borrow, and the thought of a business loan strikes many as unacceptable.

Nevertheless, many new entrepreneurs who attempt to finance a business startup by taking selling stock are shocked to learn that governments at the state and federal levels have some ideas of their own. The Securities and Exchange Commission means business, and while its restrictions may seem excessive and trivial, you’ll find yourself forced to follow them or face the consequences. The law insists upon your compliance, so here are some things to consider.

1. The SEC and Securities Registration

In its vast and complex set of rules and regulations, the SEC insists above all upon equity registration. This means that all companies, large and small, who intend to raise money through the sale of debt and equity securities cannot proceed without first registering these instruments with the SEC. You must also do the same with the securities commissioners of every state in which your current and potential investors either currently live or could possibly reside in the future.

2. The SEC and Registration Exemptions

In certain cases, a private placement exemption per Regulation D of Rule 506 may free your company from the need to register its securities. To qualify, however, your company must:

  • File notice of your intentions with the SEC and the various state securities commissioners.
  • Agree to operate within predetermined boundaries. These could include restricting your equity sales to accredited investors or abandoning some planned marketing efforts.
  • Take extra measures to sidestep any hint of fraudulent selling activity.

3. The SEC and Disclosure

Anyone who starts up a business must take special pains to keep potential investors well-informed concerning all relevant aspects of the company’s expected methods of operation. It is vital to refrain from misleading them either by making capricious statements or omitting significant facts. The drafting of a disclosure packet, also known as a private placement memorandum, is one of the best ways to do this. A securities attorney can assist you with its preparation.

4. The SEC and Data Analytics

In their continuing effort to keep trading activity on the straight and narrow, the SEC and its sister regulators have tapped into the talents of big-data analytics for assistance. The ability of these programs to analyze transaction statistics at lightning speed has gone a long way in helping to uncover cases of insider trading and other forms of investor fraud.

The SEC’s National Exam Analytics Tool currently enables the examination of as many as 17 million transactions in less than two days. To stay ahead of the game, any business that engages in the sale of stock will be wise to engage in some advanced data analysis of its own.

5. The SEC and Regulation Crowdfunding

Known by many as Title II, this fashionable money-raising option allows companies to fund their operations through modest investments made by a relatively large base of stakeholders. The popularity of this alternative has earned it an inclusion in the JOBS Act of 2012, and it is just area in which the SEC has an opinion.

In this case, it’s a popular one. Although you may still need to register your securities on the federal level, a company that intends to raise no more than $1 million a year through crowdfunding will be exempt from state registration requirements. You may, however, still need to make state-level notice filings and pay a fee as well.

Despite this seeming laxity, the SEC does insist that regulation crowdfunding investments take place only through registered brokers or funding portals. It also limits the maximum annual expenditure of each individual investor in accordance with his or her net worth or annual income.

Meeting Your SEC Responsibilities

Getting your new business financing off on the right foot means ensuring that your methods for raising capital sit well with the SEC. Getting this right can mean more than you think, since the penalties for noncompliance can include:

  • Lawsuits brought by money-losing investors.
  • Criminal charges at the state and federal levels.
  • Fines and injunctions prohibiting future capital-raising endeavors.

Once a company has lost the right to finance through the sale of securities, it will find itself forced to rely on the assistance of venture capitalists or angel investors who might simply choose to abandon ship if due diligence should uncover any evidence of questionable earlier activities.

The securities attorneys at Odgers Law Group will ensure that your startup’s funding measures conform to the SEC’s requirements. Don’t let noncompliance ruin your company’s chances for success. Call Odgers Law Group today.



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