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Legal Issues In Raising Capital (First in a Series)

On Behalf of | May 1, 2014 | Business Transactions

There are four stages with levels through which the typical company goes as it grows and attracts investment; formation, angel investment, venture capital and finally private or public offerings.

At each stage there are a multitude of legal considerations to deal with in the area of securities law.

Before we deal the issues at each stage, first, an overview.

Securities Laws

Unlike many other areas of the law where if there are both Federal as well as State laws, the Federal law does not preempt the State law. In other words, you have to make sure that you meet the requirements of both. Also, if you are offering securities in multiple states, you have to meet the requirements in each state in which securities are sold or will be sold. The State laws are often referred to as “Blue Sky Laws”.

Equity, when issued is either subject to registration or is it exempt from registration. The registration of stock, is an expensive and exacting process. As I stated above the federal rules as well as state rules must always be considered when deciding whether the sale or issuance of stock will be exempt.

The federal law that governs the sale and issuance of stock is The Securities Act of 1933, as amended (the “Act”) along with the Regulations issued pursuant to the Act.

New Hampshire Securities Laws may be found at NHRSA 421-B.

Massachusetts Securities laws may be found at Chapter 110A of the General Laws.

Another concept or definition that is crucial in the fund raising process is the definition of who is an accredited investor.

Pursuant to the Act, only accredited investors may invest in private equity, venture capital, hedge funds, and private placements. Regulation D, Rule 501 of the Act defines accredited investor as:

“(a) an individual (or married couple) whose (joint) net worth exceeds $1 million, excluding the value of the primary residence; or

(b) an individual with income exceeding $200,000 in each of the two most recent years, or a married couple with joint income exceeding $300,000 for those years, and a reasonable expectation of the same income level in the current year.”

It is always a best practice to make every potential investor complete a questionnaire.

If you have any questions or would like additional information on this issue or other corporate challenges, please contact Paul D. Creme.

Paul D. Creme is an attorney with Hamblett & Kerrigan PA. His practice is focused on business and corporate law. Of particular interest are the areas of software and emerging technologies. You can reach Attorney Creme at [email protected].