Remember sitting in your high school history class junior year and learning about the Stock Market Crash of 1929? Well, that was when the epic event occurred which started The Great Depression and was the catalyst for Congress enacting the federal securities laws followed by the formation of the SEC to administer them.

Fast-forward 85 years… now as a small business owner, why do you need to know about the SEC? Moreover, how can their rulings and requirements affect your business?

Before the SEC, stocks and bonds were often sold with outlandish promises of guaranteed profits and without disclosing any real information to investors (hence an overinflated stock market that busted losing millions of dollars). Now when a company decides to sell securities to the public, the Securities Act requires the company to file a registration statement containing information about the business’ operations, financial condition, results of operations, risk factors, and management plan along with audited financial statements. All companies may use SEC Form S-1 to prepare a registration statement for a securities offering which is called the “prospectus” (and must be delivered to everyone who buys the securities as well as anyone who is made an offer to purchase the securities once it has been approved). Information about how to list and categorize your registration application can be found in the additional form Regulation S-K, which contains form and content rules for non-financial portions of registration statements. The SEC staff will then review these statements to see if the SEC’s disclosure rules are satisfied. If your statement is deemed “effective,” then you’ve completed your initial public offering (IPO).

Confused? We’ve only just started. You still need to determine if your small business qualifies as a “smaller reporting company,” as defined in Item 10(f)(1) of Regulation S-K or as an “emerging growth company,” as defined in Section 2(a)(19) of the Securities Act. Call your business lawyer and see if he or she knows an experienced securities lawyer. This is something that you cannot mess up, so get the best attorney who specializes in sec laws that you can find and/or afford.

 Now let’s assume that you have all your legal work in order and that you are currently selling securities. There are a couple of additional regulations to keep in mind, the first concerns crowdfunding. Many entrepreneurs are turning to the internet and crowdfunding to find a larger pool of investors. Unfortunately, Congress and the SEC have been dragging their feet for the past two years road blocking any proposals towards becoming law. The positive elements for investors and entrepreneurs in this 585 page proposal is that, “once a company has more than 2,000 people with ownership stakes, businesses are no longer considered a ‘microcap’ company and must register with the SEC… The exemption therefore ‘decreases the level of compliance and regulatory burden crowdfunding will impose on companies,’” commented Richard Swart, director of research for the Innovation in Entrepreneurial and Social Finance program at the University of California at Berkeley.

Ryan Feit, board member for Crowdfund Intermediary Regulatory Advocates (CFIRA) and lobbyist for the crowdfunding industry, noted that the original law seemingly implied that firms would have to establish a specific funding target and either raise exactly that amount or nothing at all. “Now you could say ‘I want to raise at least $250,000 but I’ll take all the way up to $750,000 if there is more demand from investors,’ ” Feit said. “That’s very important they added that in there.”

The downside is that all firms that raise more than $500,000 a year (or less than a maximum $1 million) must provide audited financial statements. “The proposed rule is meant to protect investors from oversized scams or losses, but some worry that a full audit will prove too costly for promising young firms, particularly those that are not yet generating revenue,” explains Washington Post reporter J.D. Harrison.

In this cyber-age of predatory hackers or website crashes, you may want to know that this month U.S. regulators required stock exchanges and some larger trading platforms to take steps to protect against market disruptions such as technology glitches or natural disasters. This was enacted on the heels of Nasdaq OMX’s huge mishandling of Facebook’s initial public offering to the shutdown of the stock market during Hurricane Sandy. This new law is supposed to ensure that trading platforms establish and enforce policies to guarantee that their systems are resilient and secure.

“The rules adopted today [Nov. 19, 2014] mark a historic shift in the Commission’s regulation of the U.S. securities markets that will better protect investors by requiring comprehensive new controls for the technological systems that form the core of our current markets,” said SEC Chair Mary Jo White.  “The rules provide greater accountability for those responsible for our critical market systems, helping ensure that such systems operate effectively and that any issues are promptly corrected and communicated to market participants and the Commission.”

Writer and journalist Ron Chernow once said, “Because of the love affair with the American public and the stock market, it is possible for entrepreneurs, technological visionaries and inventors of every sort to get financing.” Securities and stocks offer headaches and confusion, but with the right lawyer they can also offer endless potential.

(Photo credit: Michael Nagle/Bloomberg)

About the author


Christina Morales

Christina helps provide useful business and legal tips on UpCounsel for our customers and visitors. Having over a decade of writing experience in a variety of industries, she has also been very close to the legal space from a young age with family members who continue to practice business and tax law.

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