The next several posts will cover:
- Securities Registration
- Federal Exemptions
- Minnesota Blue Sky Laws
- Isolated Sales and Limited Offerings
- SCOR (Small Corporate Offering Registration)
Broadly defined, a security is an interest in, or an obligation of, the business entity that issues the security. Examples of securities are corporate stock, interests in a limited partnership, and corporate bonds and debentures. Note that the label assigned to an interest in a business is not necessarily determinative, and that the definition of a security is a very broad one; note that many seemingly innocent activities, such as the use of a website can constitute the “offer” of securities.
A business owner who is giving or selling ownership interests in a business to other persons, even to friends and family members, is strongly advised to seek the advice of legal counsel. This is true whether the ownership interests are transferred when the business is organized or later in its life. In general, securities must be registered with the federal Securities and Exchange Commission and the Minnesota Department of Commerce before they legally can be advertised or sold to investors unless the security or transaction qualifies for an exemption under state or federal laws. A security or transaction may qualify for a federal exemption but not a state exemption or vice versa. Again, given the highly technical laws, regulations, and judicial decisions in this area, as well as guidance from the SEC (such as that issued on the use of electronic media), the advice of counsel is very important.
The basic purpose of both state and federal securities laws is to protect the investor. Therefore, sales in violation of these laws, even if done through inadvertence or in good faith reliance, can create civil and criminal penalties on both the state and the federal level. If interstate sales are involved, civil and criminal penalties in multiple states may apply. The anti-fraud provisions of these laws apply even if the securities or the transaction are exempt from registration.
Securities registration is a sophisticated area requiring the services of experienced professionals. In some cases these professionals may be able to assist in structuring the offering and sale to qualify for an exemption. In other cases their services may be necessary to register and to sell the securities. In all cases involving the offer or sale of securities, discussing the matter with legal counsel is the best starting point.
Some of the common exemptions to the registration requirements of the federal and state laws will be discussed in the future. Readers should be aware that this is not a comprehensive list of the exemptions. Minor changes in fact circumstances may result in the loss of the exemption. Also, both the Securities and Exchange Commission and the Minnesota Department of Commerce periodically amend their regulations in a way that may affect available exemptions. The business person contemplating the offer and sale of securities should consult with an experienced Minnesota attorney to determine the availability of any exemptions.
Further information on federal securities registration requirements and a pamphlet may be obtained from the publications office of the United States Securities and Exchange Commission.
Information on state regulations may be obtained from the Minnesota Department of Commerce Registration and Analysis Division.
The Minnesota legislature adopted the Uniform Securities Act. See the future post on Minnesota Blue Sky Laws.
CREDITS: This is an excerpt from A Guide to Starting a Business in Minnesota, provided by the Minnesota Department of Employment and Economic Development, Small Business Assistance Office, Twenty-eighth Edition, January 2010, written by Charles A. Schaffer, Madeline Harris, and Mark Simmer. Copies are available without charge from the Minnesota Department of Employment and Economic Development, Small Business Assistance Office.