Everyone generally thinks of “securities” as shares of stock in a corporation. But, beyond that, there is a great deal of confusion. When you are starting a new business and if you are thinking of issuing shares, you should consult with an experienced San Diego securities attorney. Here are answers to a few commonly asked questions. A basic understanding to securities is important to keep yourself and your business out of legal trouble — both criminal and civil.

FAQ #1: What is a “Security?”

Shares in a corporation are, indeed, securities as defined by statute and by the courts. However, legally speaking, securities encompass a much broader range of financial and investment vehicles. Under federal securities laws, the legal definition of “security” breaks out into four parts:

  • “at risk” money that is invested
  • in a common enterprise
  • with an expectation of profit
  • to be realized primarily through efforts of others

The key parts are the first and fourth – money at risk and a passive investment. See S.E.C. v. Howey Co., 328 U.S. 293 (US Supreme Court 1946). California has a similar four-part test. See Silver Hills Country Club v. Sobieski, 55 Cal.2d 811 (Cal. Supreme Court 1961) (“[1] an attempt by an issuer to raise funds for a business venture or enterprise; [2] an indiscriminate offering to the public at large where the persons solicited are selected at random; [3] a passive position on the part of the investor; [4] and the conduct of the enterprise by the issuer with other people’s money.”)

FAQ #2: What are Examples of Securities?

In addition to shares of stock in a corporation, a few other examples include:

  • Sale/offering of promotional memberships in a country club
  • Sale/offering of cryptocurrencies
  • Management and service contracts for payphones, ATM machines, etc.
  • Promissory note investments
  • Certain life insurance schemes
  • Oil and gas investment contracts

FAQ #3: What are Securities Laws?

Securities in California are governed by both federal and California securities laws — the Corporate Securities Law of 1968 (Corp. Code, §§ 25000-25707) and the federal Securities Act of 1933 (15 U.S.C. § 77b).

FAQ #4: What do the Securities Laws Require/Prohibit?

In general, both the California and the federal securities laws prohibit the offering or sale of a security unless the offering/sale has been registered with the respective regulatory agencies. Both sets of laws also require various disclosures of information to potential investors and prohibit all types of fraud and misrepresentation with respect to the securities being offered or sold.

FAQ #5: What is the Purpose of the Securities Laws?

Securities laws serve at least two purposes: First, they are designed to protect the buyer and potential investors from spurious and fraudulent schemes devised to attract investments. Securities laws are an offshoot of general laws that forbid fraud and misrepresentation. Second, punishing fraud and misrepresentation helps the market for legitimate businesses who want to find investors. Less fraud means less risk which increases the chances of people being willing to invest.

FAQ #6: What Happens if I do Not Comply With the Laws?

Both California and federal securities laws provide criminal punishments for various failures to comply with the laws. In addition, any violation of the laws allows the investors to sue and recover their money with interest, plus hefty fines and statutory penalties. The laws also allow for injunctive relief whereby a court prohibits you and/or your company from offering or selling securities in the future.

Moreover, the securities laws are designed to punish the individual as well as the corporation. Thus, the corporate entity will not shield or protect an officer, director, or employee of the corporation from personal liability.

FAQ #7: What Should I do?

First and foremost, hire a good, trusted, and experienced San Diego attorney who knows securities laws. Your attorney can provide advice and counsel on how to comply with various securities laws. There are exemptions available from the registration requirements for those seeking to raise smaller amounts of investment capital. A good corporate lawyer can help.

Contact San Diego Corporate Law

For further information, contact Michael Leonard, Esq. of San Diego Corporate Law. Mr. Leonard provides legal services related to securities and can help with any private securities offerings/sales, preparing a private placement memorandum, and related legal services. Contact Mr. Leonard by email or by calling (858) 483-9200.

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