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Small Business and the SEC
A guide for small businesses on raising capital and complying with the federal securities laws
Important Note
This guide reflects the views of the staff of the Division of Corporation Finance of the Securities and Exchange Commission (the “SEC”). It is not intended to express any statements of the SEC, and the SEC has neither approved nor disapproved its contents.
This guide is not a legal interpretation or statement of SEC policy, nor is it a comprehensive manual on the regulation of private securities offerings, registered public offerings or the laws and regulations applicable to small businesses. This guide is not intended to provide legal advice of the SEC or the SEC staff and is not a substitute for, and may not be relied on instead of, the federal securities laws themselves, the SEC’s regulations and forms, and the advice of knowledgeable advisors.
This guide provides links to various statutes and rules that may lead to pages with lists of rules and regulations. Before clicking a link, please note the name or number of the rule or regulation you seek.
All the SEC laws, rules, forms and regulations associated with the Securities Act of 1933 and Exchange Act of 1934 are accessible from the SEC’s home page by clicking on “Divisions—Corporation Finance” and then clicking on “Statutes, Rules and Forms.”
October 10, 2013
Table of Contents
What are the federal securities laws?
How can I get answers to my questions on the federal securities laws?
How can my small business raise capital?
Should my company "go public"?
How does my small business register a public offering?
If my company goes public, what disclosures must it regularly make and what other rules apply?
Can my company legally offer and sell securities without registering with the SEC?
Non-public offering (private placement) exemption
Regulation D—Rules 504, 505 and 506
Regulation A
Accredited investor exemption—Section 4(a)(5)
Intrastate offering exemption
Coordinated limited offering exemption under California law—Rule 1001
Exemption for sales of securities through employee benefit plans—Rule 701
Resales of restricted securities
What are the new exemptions mandated by the JOBS Act?
Do state law requirements apply in addition to federal requirements?
What resources and opportunities are available through the U.S. Small Business Administration?
Where can I go for more information?
How can we improve this guide?
What are the federal securities laws?
In the 1920s, companies often sold stocks and bonds on the basis of glittering promises of fantastic profits and without disclosing any meaningful information to investors. Following the stock market crash of 1929, the U.S. Congress enacted the federal securities laws and created the SEC to administer them.
There are two primary sets of federal securities laws that come into play when a company wants to offer and sell its securities:
Securities Act of 1933 ("Securities Act").
Securities Exchange Act of 1934 ("Exchange Act").
Securities Act
The Securities Act regulates offers and sales of securities in the United States or that use the means of interstate commerce, such as the internet, U.S. telephone lines or the U.S mail. For offerings to the public, the Securities Act generally requires the company to file a registration statement containing information about itself, the securities it is offering and the offering. The SEC staff reviews these registration statements to see if the SEC’s disclosure rules are satisfied. The SEC does not evaluate the merits of securities offerings, or determine whether the securities offered are "good" investments or appropriate for a particular type of investor. Once the review is completed, the staff declares the registration statement “effective,” allowing it to be used to complete sales to investors. We describe this process in more detail below under “How does my small business register a public offering?”
In some circumstances, the Securities Act permits offers and sales of securities to occur without SEC registration. We describe these “exemptions” from the registration requirements below under “Can my company legally offer and sell securities without registering with the SEC?”
Exchange Act
The Exchange Act requires companies that meet certain thresholds to report information regularly about their business operations, financial condition, and management. These companies must file periodic reports or other information with the SEC. In some cases, the company must deliver the information directly to investors. We discuss these obligations more fully below.
How can I get answers to my questions on the federal securities laws?
This guide provides general answers to certain questions regarding the federal securities laws, but is not comprehensive. More information is available from private securities lawyers and on the SEC website, as discussed below, and from the sources discussed under “Where can I go for more information?”
Consider consulting a securities lawyer
Companies should always consider consulting a securities lawyer before engaging in any securities offering. You may be able to find a securities lawyer at the findlegalhelp.org website sponsored by the American Bar Association, or by contacting the bar association in the state where you live.
SEC website
The SEC maintains a website at www.SEC.gov containing information on the federal securities laws. You can find information on the website tailored for small businesses at “Information for—Small Businesses.” You can also find documents filed by companies, such as registration statements and periodic reports, at “Filings—Search for Company Filings.”
How can my small business raise capital?
A small business can raise capital in a number of different ways, including borrowing money from banks, other financial institutions or friends/family and by selling securities. If a small business is offering and selling securities, even if to just one person, the offer and sale of the securities must either be registered with the SEC or conducted in accordance with one of the many registration exemptions under the Securities Act. Registering an offering with the SEC would make your company a public company. Going public is a very significant step for any company.
Should my company “go public”?
Potential advantages:
Companies go public for a number of reasons, and these reasons can be different for each company. Some of the reasons include:
To raise capital and potentially broaden opportunities for future access to capital.
To increase liquidity for a company’s stock, which may allow owners and employees to more easily sell stock.
To acquire other businesses with the public company’s stock.
To attract and compensate employees with public company stock and stock-option compensation.
To create publicity, brand awareness, and prestige for a company.
Before deciding to become a public company, there are important factors to consider:
Your company’s public offering will take time and money to accomplish.
Your company will take on significant new obligations, such as filing SEC reports and keeping shareholders and the market informed about the company's business operations, financial condition, and management, which will take a significant amount of time for your company’s management and result in additional costs.
Your company and you may be liable if these new legal obligations are not satisfied.
You may lose some flexibility in managing your company's affairs, particularly when public shareholders must approve your company’s actions.
Information about your company, such as financial statements and disclosures about material contracts, customers and suppliers, will become available to the general public (including your competitors).
How does my small business register a public offering?
If you decide on a registered public offering, the Securities Act requires your company to file a registration statement with the SEC before it may offer its securities for sale. This process is often referred to as an initial public offering, or “IPO.” Your company may not actually sell the securities covered by the registration statement until the SEC staff declares the registration statement "effective."
Registration statements have two principal parts
Part I is the prospectus, the legal offering or "selling" document. Your company—the "issuer" of the securities—must describe in the prospectus important facts about its business operations, financial condition, results of operations, risk factors, and management. It must also include audited financial statements. The prospectus must be delivered to everyone who buys the securities, as well as anyone who is made an offer to purchase the securities.
Part II contains additional information that the company does not have to deliver to investors but must file with the SEC, such as copies of material contracts.
The basic form for registration statements—Form S-1
All companies may use SEC Form S-1 to prepare a registration statement for a securities offering. The prospectus you include in the registration statement should provide clear, readable information written in plain English.
If your company decides to prepare and file a registration statement using Form S-1, it must include specified disclosures about the company in the prospectus, including:
a description of your company’s business, properties, and competition;
a description of the risks of investing in your company;
a discussion and analysis of the company’s financial results and financial condition as seen through the eyes of management;
the identity of the company’s officers and directors and their compensation;
a description of material transactions between the company and its officers, directors, and significant shareholders;
a description of material legal proceedings involving the company and its officers and directors; and
a description of the company’s material contracts.
The company must also provide information about the offering, including:
a description of the securities being offered;
the plan for distributing the securities; and
the intended use of the proceeds of the offering.
Information about how to prepare these and other non-financial disclosures in the registration statement is set out in Regulation S-K, which contains form and content rules for non-financial portions of registration statements. In addition, the SEC staff has issued guidance to aid small businesses in preparing these disclosures for initial public offerings of securities.
Registration statements also must include financial statements that comply with the form and content requirements of Regulation S-X. For most companies, financial statements must be prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). Companies that are organized outside of the United States and that meet the requirements to be a “foreign private issuer” under Rule 3b-4(c) may prepare their financial statements under U.S. GAAP or under international financial reporting standards or generally accepted accounting principles in their home jurisdiction, with reconciliation to U.S. GAAP on certain key line items if required.
Annual financial statements must be audited by an independent certified public accountant registered with the Public Company Accounting Oversight Board or “PCAOB.” The PCAOB registers and regulates public accounting firms that audit financial statements filed with the SEC.
In addition to the information expressly required by Form S-1, your company also must provide any other information that is necessary to make your disclosures not misleading.
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