1. Who Can Invest in Your Company?
Securities Laws and Raising Capital
Benjamin M. Hron
bhron@mccarter.com
617.449.6584
@HronEsq

2. Short Answer: Accredited Investors
♦ Natural Person with
– Net Worth (w/ or w/o spouse) >$1M (excl. home)
– Income >$200K in past 2 years and current year
– Joint income >$300K in past 2 years and current
year
♦ Director, executive officer or general partner of
the company
♦ Business in which all the equity owners are
accredited investors
♦ Entities with > $5M in assets

3. What is a “Security”?
Any note, stock, treasury stock, security future, bond, debenture,
evidence of indebtedness, certificate of interest or participation in any
profit-sharing agreement, collateral-trust certificate, preorganization
certificate or subscription, transferable share, investment contract,
voting-trust certificate, certificate of deposit for a security, fractional
undivided interest in oil, gas, or other mineral rights, any put, call,
straddle, option, or privilege on any security, certificate of deposit, or
group or index of securities (including any interest therein or based on
the value thereof), or any put, call, straddle, option, or privilege entered
into on a national securities exchange relating to foreign currency, or, in
general, any interest or instrument commonly known as a "security", or
any certificate of interest or participation in, temporary or interim
certificate for, receipt for, guarantee of, or warrant or right to subscribe to
or purchase, any of the foregoing.

4. What is a “Security,” really?!
Ownership interest in a common enterprise
where the holder is led to expect profits solely
from the efforts of others.
Examples
– stocks, options, bonds ...
– Interest in a citrus grove

5. Why do Securities Laws Matter?
♦ Companies use securities for:
– Fundraising
– Incentive Compensation
♦ Failure to comply may result in:
– Civil and criminal penalties
– Right of investors to get their money back
(“rescission”)
– Chilling effect on future fundraising

6. What are Securities Laws?
♦ Regulate issue and transfer of securities
♦ Apply to public and private companies
♦ Intended to protect “widows and orphans”
♦ Generally require disclosure of information
material to an investment decision
– Public Offering Prospectus
– Private Offering Private Placement Memo

7. What are Securities Laws?
♦ Federal Laws
– Securities Act of 1933 (“33 Act”)
– Securities Exchange Act of 1934 (“34 Act”)
♦ State “Blue Sky” Laws
– Generally similar in nature to Federal laws
– Federal preemption in limited circumstances

8. Securities Law in a Nutshell
♦ Prohibit offer or sale of securities unless
– the securities are registered
– an applicable exemption is available
♦ Registration (ex. IPO) $$$$
♦ Exemptions
– Exempt Securities
– Exempt Transactions (ex. private placements)
– State exemptions required unless federal
exemption preempts state law

9. Private Placements
♦ Section 4(2) of the 33 Act
♦ Regulation D under 33 Act (Rules 501-508)
– Rule 501: incl. def’n of “Accredited Investor”
– Rule 502: incl. disclosure requirements
– Rule 504
– Rule 505 Safe Harbors
– Rule 506

10. Regulation D
♦ Rule 504: $1M max. in 12 months
– No investor qualification requirements
– Requires separate state exemption(s)
♦ Rule 505: $5M max. in 12 months
– Unlimited “accredited” investors
– Up to 35 non-“accredited”
– Requires separate state exemption(s)
♦ Rule 506: No $$$ limit
– Unlimited “accredited” investors
– Up to 35 non-accredited, sophisticated investors
– Preempts state law only notice filing/fee required

11. Benefits of Selling to Accredited Investors
♦ Premise: Wealthy can fend for themselves
♦ No affirmative disclosure obligation
♦ No limit on # of Accredited Investors
♦ No limit on $$$ raised
♦ Limited diligence required to confirm status
– Questionnaire
– Representations Warranties
♦ Bottom Line: Lower Transaction Costs

12. Accredited v. Non-Accredited Investors
♦ Financing with Non-Accredited Investor(s)
– Rely on 4(2) (but no “safe harbor”)
– Rely on 504 or 505 (but need state exemptions
and/or PPM)
– If “sophisticated,” rely on 506 (but PPMs = $$$)
♦ Accredited Investor Financing (Rule 506)
– Confirm “accredited” status of investors
– Provide information upon request
– Notice filings due within 15 days of first sale

13. Summary
♦ “Security” is very broadly defined
♦ Federal and State securities laws apply to
sales of securities by private companies
♦ Regulation D provides “safe harbor”
♦ Rule 506 preempts state securities laws
♦ Fewer restrictions on sales to Accredited
Investors lower costs

14. McCarter English LLP
Questions?
Benjamin M. Hron
bhron@mccarter.com
617.449.6584
@HronEsq