SEC Compliance regarding investment proposals

Raising Capital and/or looking for investors while ignoring SEC compliance is a classic mistake

Being uninformed may:

  • trigger the SEC to take criminal, civil or administrative actions
  • make you liable to the investor(s) and have you refund the investors' total investment
  • make you liable to private lawsuits


What are the rules, what do you need to know?


The SEC, or Securities and Exchange Commission, is an American federal agency that regulates the issuance and sales of securities. It was created after the stock market crash of 1929. The intent was to protect the public, and investors in particular, from fraud and/or misleading statements.


The SEC administers a set of regulations and laws. Basically what they require is that when public offerings are made, the issuer of those offerings needs to file that information with them.

There are a number of exemptions to that rule. Not every small business is capable to make public offerings and comply with all of these 'extensive' requirements.


The SEC's basic piece of advice to reach SEC compliance, is to consult with a legal adviser.


One exemption is by means of a 'Private Placement' for non public offerings.

The first idea here is that the offering is made to 'sophisticated investors', meaning that these investors have access to information that the general public usually does not have. The following part of the idea is that the investor is an 'accredited investor', meaning, not only do they have access and knowledge of financial information, they are also qualified as being able to 'bear the risk' of their investment decisions.

To make SEC compliance matters even more complicated, is that all of these intents and ideas are 'guidelines open to interpretation'. Exemptions based on the total amount of investment, the number of investors, the kind of investors (banks, institutions, accredited investors, etc), are all part of these interpretations. No set rules describe 'General Solicitation'.


Regulation D describes those exemptions in rules numbered 501-508. Here is a description of  rules 504,504 and 506.(new window will open).

Important to note is that:

  • State laws may be different from federal laws, and may allow selling of securities with sufficient disclosures and delivery of those disclosures
  • Public advertising of investment proposals is not allowed, except when offers are made to 'accredited investors'(new window) in certain states, or if certain conditions are met

It is clear that, in order to obtain SEC compliance, you need to consult with a legal adviser. The risk of making mistakes in this stage of starting your business is too significant. The laws are complicated, and are consistently assessed and tested by Supreme Court rulings.

To illustrate this statement, take a look at this link. This law firm describes the process of 'General Solicitation' with several examples of Supreme Court rulings. Consulting with a specialized law firm is  a necessity to protect yourself. Your new business or your great idea needs to grow without constraints or severe backlashes.


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