5 ms·

I love the idea of small scale stock offerings, but isn't this illegal? My understanding was that selling stock like this is a private equity offering and that

by kauffj 12y ago

I love the idea of small scale stock offerings, but isn't this illegal? My understanding was that selling stock like this is a private equity offering and that private equity offerings are limited to a small number of people unless the investor is sufficiently rich (the government likes to use the term "accredited investor").

mathattack 12y ago
Giving in lieu of services isn't illegal. I believe that selling them without some kind of legal preparation is. (Strange) Another challenge is you are limited to the # of owners you can have in a pre-IPO company.
sgk284 12y ago
The "accredited investor" restriction usually only applies if you're shopping the stock around. If the person getting the stock qualifies as a "friend or family", the restriction doesn't apply. Hence the term "Friends and Family Round".
tptacek 12y ago
There's a whole mess of exceptions to the rule you're referring to, but equally importantly, it's not so much "illegal" as "unlawful". For instance, many of the bad things that happen if you flout this rule only happen if you have disgruntled (or ruthless) shareholders. It's a very bad idea to ignore the "reg D" type rules, but it's not the kind of thing where random people are likely to be able to report you to the SEC and get you fined.
- gcb0 12y ago
  he did mention they had disgruntled shareholders. e.g. complaining about paying $300k for a $100 item. couldn't they have used that to halt the payment to the small (and illegal) shareholders of the past?
  - tptacek 12y ago
    I don't know, but the sense I got is that those stakeholders were larger, more formal investors, in which case RegD doesn't help them --- they're assumed to be sophisticated.
deleted 12y ago
[deleted]
- matthewmcg 12y ago
  The Securities Act has existed since 1933.
teachingaway 12y ago
>> the very beginning, I wanted all my friends to be shareholders. If I had a deep, intellectual conversation with someone, I’d give them 10 shares. Yeah, it probably violates some securities laws... but when everyone makes lots of money on the deal, there's rarely an issue. When investors lose money, they're all too happy to bring up securities law violations and fraud claims. Better to do everything by the book and not give anyone an excuse to sue you later. I'm not a securities lawyer, but in a nutshell, startup companies should prefer a very small number of professional (and accredited) investors.
- dnautics 12y ago
  I think most of the accredited investor rules deal with solicitation. If someone approaches you and makes an offer and you agree to it it's okay (pitching to friends and family), but I am not a lawyer.
zaroth 12y ago
The most basic provision on a private sale of private stock places no restrictions on the sale that 'does not involve a public offering'. So in theory it's only when you start "looking" for investors, when you are "publicly" selling the shares, then you want a Reg D 506 exemption, and accredited investors. However, in practice the Section 4(a)(2) exemption is often not strong enough protection (since we're talking potentially significant civil and criminal charges) so companies go for the Reg D safe harbors even when not technically required. Particularly for unsophisticated / unaccredited investors, the courts have found that 4(a)(2) is not good enough, even when the sale was arguably private. See, for example, SEC v. Ralston Purina Co., 346 U.S. 119 (1953). [1] Following the path of Reg D 506 is actually quite simple, and carries no downside. But even with Reg D 506 you generally try to avoid unsophisticated investors, since then you get into scenarios where you are supposed to provide 'access to the kind of information that a registration statement would disclose' which is very difficult. The crowdfunding regs in theory are supposed to help alleviate this. [1] - http://scholar.google.com/scholar_case?case=6019539454143305122 http://scholar.google.com/scholar_case?case=6019539454143305... [2] - IANAL
- zaroth 12y ago
  Just going to follow up on this to excerpt part of that Supreme Court decision; Exemption from the registration requirements of the Securities Act is the question. The design of the statute is to protect investors by promoting full disclosure of information thought necessary to informed investment decisions.[10] The natural way to interpret the private offering exemption is in light of the statutory purpose. Since exempt transactions are those as to which "there is no practical need for [the bill's] application," the applicability of § 4 (1) should turn on whether the particular class of persons affected needs the protection of the Act. An offering to those who are shown to be able to fend for themselves is a transaction "not involving any public offering." I truly dislike the logic, why can't we stick with the plain meaning of the text, but they are trying to protect people from swindlers so I can understand their goal. The end result is selling shares to the night janitor is almost certainly not allowed by 4(a)(2) but glad it turned out alright this time.
rbcgerard 12y ago
There are a lot of exemptions - for example rule 504 of reg d is pretty liberal regarding how you raise funds as long as you raise less than $1m in a given 12 month period... I recall that if you raise money from people in only one state you may be able to rely on state level rules and registration requirements

by kauffj 12y ago

mathattack 12y ago

Giving in lieu of services isn't illegal. I believe that selling them without some kind of legal preparation is. (Strange) Another challenge is you are limited to the # of owners you can have in a pre-IPO company.

sgk284 12y ago

The "accredited investor" restriction usually only applies if you're shopping the stock around. If the person getting the stock qualifies as a "friend or family", the restriction doesn't apply. Hence the term "Friends and Family Round".

tptacek 12y ago

There's a whole mess of exceptions to the rule you're referring to, but equally importantly, it's not so much "illegal" as "unlawful". For instance, many of the bad things that happen if you flout this rule only happen if you have disgruntled (or ruthless) shareholders. It's a very bad idea to ignore the "reg D" type rules, but it's not the kind of thing where random people are likely to be able to report you to the SEC and get you fined.

gcb0 12y ago
he did mention they had disgruntled shareholders. e.g. complaining about paying $300k for a $100 item. couldn't they have used that to halt the payment to the small (and illegal) shareholders of the past?
- tptacek 12y ago
  I don't know, but the sense I got is that those stakeholders were larger, more formal investors, in which case RegD doesn't help them --- they're assumed to be sophisticated.

deleted 12y ago

[deleted]

matthewmcg 12y ago
The Securities Act has existed since 1933.

teachingaway 12y ago

>> the very beginning, I wanted all my friends to be shareholders. If I had a deep, intellectual conversation with someone, I’d give them 10 shares. Yeah, it probably violates some securities laws... but when everyone makes lots of money on the deal, there's rarely an issue. When investors lose money, they're all too happy to bring up securities law violations and fraud claims. Better to do everything by the book and not give anyone an excuse to sue you later. I'm not a securities lawyer, but in a nutshell, startup companies should prefer a very small number of professional (and accredited) investors.

dnautics 12y ago
I think most of the accredited investor rules deal with solicitation. If someone approaches you and makes an offer and you agree to it it's okay (pitching to friends and family), but I am not a lawyer.

zaroth 12y ago

The most basic provision on a private sale of private stock places no restrictions on the sale that 'does not involve a public offering'. So in theory it's only when you start "looking" for investors, when you are "publicly" selling the shares, then you want a Reg D 506 exemption, and accredited investors. However, in practice the Section 4(a)(2) exemption is often not strong enough protection (since we're talking potentially significant civil and criminal charges) so companies go for the Reg D safe harbors even when not technically required. Particularly for unsophisticated / unaccredited investors, the courts have found that 4(a)(2) is not good enough, even when the sale was arguably private. See, for example, SEC v. Ralston Purina Co., 346 U.S. 119 (1953). [1] Following the path of Reg D 506 is actually quite simple, and carries no downside. But even with Reg D 506 you generally try to avoid unsophisticated investors, since then you get into scenarios where you are supposed to provide 'access to the kind of information that a registration statement would disclose' which is very difficult. The crowdfunding regs in theory are supposed to help alleviate this. [1] - http://scholar.google.com/scholar_case?case=6019539454143305122 http://scholar.google.com/scholar_case?case=6019539454143305... [2] - IANAL

zaroth 12y ago
Just going to follow up on this to excerpt part of that Supreme Court decision; Exemption from the registration requirements of the Securities Act is the question. The design of the statute is to protect investors by promoting full disclosure of information thought necessary to informed investment decisions.[10] The natural way to interpret the private offering exemption is in light of the statutory purpose. Since exempt transactions are those as to which "there is no practical need for [the bill's] application," the applicability of § 4 (1) should turn on whether the particular class of persons affected needs the protection of the Act. An offering to those who are shown to be able to fend for themselves is a transaction "not involving any public offering." I truly dislike the logic, why can't we stick with the plain meaning of the text, but they are trying to protect people from swindlers so I can understand their goal. The end result is selling shares to the night janitor is almost certainly not allowed by 4(a)(2) but glad it turned out alright this time.

rbcgerard 12y ago

There are a lot of exemptions - for example rule 504 of reg d is pretty liberal regarding how you raise funds as long as you raise less than $1m in a given 12 month period... I recall that if you raise money from people in only one state you may be able to rely on state level rules and registration requirements