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Legal Issues In Raising Capital (Last in a Series)

On Behalf of | May 9, 2014 | Business Transactions

Selling Stock As we said previously most companies sell their equity pursuant to an exemption from both state and federal law. The state Blue Sky laws can be complex and require the retention of a lawyer familiar with each state’s requirements. Also, remember, even if your company falls under the safe harbor rules under the rules in Reg D, you may still be required to file with each state in which you make an offering. Also, there may be timing issues from state to state. For instance, New Hampshire allows a filing within a period of time after a sale, New York State requires the filing before any sale occurs.

If you are selling stock without an exemption the process becomes far more expensive. Audited financials are required. The company has to file with the SEC (and this is true for all public companies no matter how they became public) annual reports, quarterly reports, reports when the company wants to make a significant announcement that may affect the stock price, S-3’s when you want to register for sale more shares and shelf registrations when the company want to register shares for sale at a later date.


In Massachusetts Section 110A of the General Laws provides to the Secretary of the Commonwealth the power to regulate sales of securities in the Commonwealth.

The usual reason that may result in an investigation is a shareholder complaint. In other words, a person who may be unhappy with the performance of the company or their treatment may retain counsel and as part of the process, make a complaint that the company violated state securities laws. As you can see from the two excepts below the Secretary has fairly broad powers to investigate and if a violation is found may take affirmative action, including the imposition of an administrative fine, the issuance of an order for an accounting, disgorgement or rescission or any other such relief as in his judgment may be necessary to carry out the purposes of this chapter.

The Secretary of State in New Hampshire has almost identical powers and they be found at NHRSA 421-B.

The SEC is empowered to enforce federal securities laws and also is tasked with reviewing filings. They powers extend to issues dealing with registration of securities, as well also insider trading issues and short swing sales.

Conclusion – Do’s and Don’ts

The process of raising money and growing your company through outside investment is exciting but can be complicated and time consuming.

I have seen some people lose the company because they spend all their time chasing investments.

When raising money only become involved with licensed dealer-brokers if you are going to raise money with the help of a third party.

Stay away from people who want a fee regardless of success and be wary of the people who overpromise access to money or people.

Always tell the truth and while this may seem obvious do not leave out information even if you think it hurts your position, include everything, and be realistic about the market and your company’s potential to hit certain revenue and profit numbers. Do not oversell or overstate the potential of the company and its products. The most overused phrase when raising money is “The product will disrupt the market”.

Read everything put in front of you and hire the right professionals to help you through the process. Not all money is the same, that means, some investors may have requirements that will hinder you in the future or make it more difficult to raise money. Also, some investors bring more than just the money, but also they bring expertise and connections.

Talk to people who have had success raising money and growing companies. If possible and they are willing bring them on-board. Investors invest in people who have done it before, not in your ideas.

Raising money is not for everyone and it does not have to be the only away to grow your company.

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].