Securities Laws for "Friends and Family" Offerings

There is a popular misconception that operators of privately held companies do not need to think about federal and state securities laws when raising funds through “friends and family” offerings. The reality is that any time a company seeks investment funding – even from friends and family of the company’s operators – the company is almost certainly engaging in an offering of securities that is regulated by federal securities law and any number of state securities laws (known as “blue sky” laws).

Federal and state securities laws generally require all securities – including stock, bonds, options, warrants, membership interests, and promissory notes – to be registered at the federal level and at the state level before being offered or sold. Registration is time consuming and expensive, thus not feasible or practical for most privately held companies.

Fortunately there are several exemptions from the registration requirements, and it is generally easy to structure a “friends and family” offering to fall within one of the registration exemptions. These exemptions are not automatic – it is always important to analyze the investment structure, identify the appropriate exemption, and take all actions necessary to satisfy the exemption.

Failing to recognize the securities implications of investments from friends and family and offering unregistered securities without an exemption can have serious consequences, including:

• repaying investments, along with interest from the time of investment;
  
• paying additional damages;
  
• paying fines; and
  
• personal liability for officers, directors, employees, and agents participating in the offering.
  

This SEC Q&A discusses the basics of federal securities laws and exemptions from the registration requirements, with a focus on privately held businesses. For more information about this topic, please contact Jeremy Garner at garner@bowie-jensen.com.