Startups and small businesses are crucial to our economy while also promoting more creativity for future entrepreneurs. Small startups and businesses often face challenges when it comes to growth and financial stability because of securities laws and other entrepreneurial activities. Regulations on securities help to govern how much capital someone can own, but these regulations can impact small businesses in a large way. In this blog, we want to discuss what securities regulations affect startups and what hurdles you may have to jump over to register your securities. 

What Are Securities Regulations?

Securities regulations govern investments and other financial sales that are offered to the public. Securities must be registered with the SEC to prevent deceit, fraud, and misrepresentations. Different securities acts have been enacted over several years to protect the owners of securities and limit fraudulent activity like insider trading. Some common regulations that startups or small businesses will encounter include:

• Initial Public Offerings
• Insider Trading Enforcement
• Broker-Dealer Regulation
• Periodic Reporting

Disclosure Burdens

One of the first hurdles that startups and small businesses have to face is disclosure problems. Potential investors often look at a business’s offerings before they invest. This judgment helps them to see if their investment is worthwhile. Disclosures may be helpful for complex offerings, but they do not reduce fraud in small offerings. Financial disclosures often don’t provide enough information to investors when it comes to small businesses because they don’t have a rich financial history. This often means that investors will look at a startup’s mission and story, rather than their financial offerings. This is where disclosures can be a waste of time for certain companies, especially if they aren’t helping protect them or investors from fraud.

The Need To Rely On Exemptions

Businesses must be registered with the SEC, but this is often too expensive for startups and small businesses, forcing them to rely on special exemptions to get around this registration requirement. Common exemptions that startups can utilize include:

• Reg D, Rule 506(b): The most common exemptions, which are dedicated to startups raising money from angel investors and venture capital, prohibit advertising and solicitation. 
• Reg D, Rule 506(c): This exemption allows for general solicitation if all investors are accredited and the company takes steps to verify this.
• Regulation Crowdfunding (Reg CF): Raising money is often crucial for small businesses, but in order to qualify for future accredited investments, you will need this exemption that allows up to $5 million raised from non-accredited investors.
• Regulation A (Tier 2): The second tier of crowdfunding allows you to raise up to $75 million without registering as a public company, but is often followed by higher audits and ongoing reporting requirements.

High Compliance Costs

The high costs of starting a business can really add up, especially if you want to register as a public company. Compliance with securities laws can often cost money for startups and small businesses. Registering securities or your business will be expensive and time-consuming because there are many hoops to jump through with the SEC. 

In addition to compliance costs, failure to adhere to SEC regulations can result in fines and legal consequences. Serious cases can result in criminal charges, which can involve legal fees, attorney fees, and excessive fines. While compliance may seem expensive, non-compliance can result in much more severe consequences and financial ruin for your company.

Limited Access To Accredited Investors

Small businesses have a smaller range of accredited investors to choose from, especially because they are based primarily on wealth thresholds. Without access to accredited investors, it will be difficult for startups to raise capital. This limited access can dampen the growth of your business, especially in rural areas or underrepresented communities.

Securities Law Help From WW Partners

Securities laws can be difficult to navigate, especially as a small business or startup. While these laws are in place to protect investors and businesses alike, they may feel like hurdles for smaller companies. If you want to stay protected from deceitful practices while also helping your business to thrive, work with our lawyers at WW Partners. Our professionals have been working with small businesses and individuals for many years, allowing us to help you navigate legal battles with ease. 

Our attorneys can help if you have been a victim of securities violations or are being blamed for securities fraud. WW Partners can give you peace of mind about the safety and longevity of your business, so you can focus on offering products and services to your clients.

Certain elements of your business shouldn’t be easily accessed by members of the public, so protecting them may be necessary if you want your business to maintain some secret information. Trade secrets aren’t information that is damaging to your business, but are specific insights and information that can help you have a leg up on competitors. Different states have varying laws around trade secrets and how they are protected, so it is best to do your research or work with a legal professional. There are reasonable measures that business owners must take to protect trade secrets for the longevity of their business. 

What Are Trade Secrets?

A trade secret is a formula, pattern, device, or compilation of information that helps a business have a competitive edge. This information is not generally known or easily discoverable by outside parties. The information often only has value because of the secrecy that surrounds it. Some examples of trade secrets include:

• Recipes
• Algorithms
• Product designs
• Customer lists
• Formulas
• Pricing schedules
• Manufacturing techniques or locations
• Marketing
• Technical data

Reasonable Measures To Maintain Secrets

The owner of a business has the responsibility to protect any information they don’t want in the hands of competitors. These reasonable steps are used to guard your secrets and customer information that could be considered private. Practical protection is needed if you want to keep your products or services as the best on the market. Companies like Apple, KFC, Coca-Cola, Nike, and other large companies have used reasonable measures to protect their processes or specific products. Learn more about different measures of protection below.

Contracts

There are different types of contracts that can help protect trade secrets. Some of the most common options include NDAs, confidentiality contracts, or ownership establishment contracts between owners and contractors. Agreements will need to have clear language and be signed by each employee or third party that may have a hand in your manufacturing or product creation.

Internal Policies And Training

Another way to protect your internal processes and trade secrets is to work from the inside out. Some internal policies can help employees from making major mistakes or prevent someone from stealing from the company while working there. Consider limiting personal device use for work tasks, limiting who has access to information, labeling documents as confidential, hosting recurring trainings, and conducting interviews before employees leave to ensure confidentiality obligations.

Digital Security

Since most of our information is digital in today’s world, digital security is crucial. Password-protected servers and thorough IT hiring processes can protect your trade secrets from being released. Another great option for digital security is to implement data loss prevention software. These DLP tools can help you catch suspicious downloads or transfers as it happens. Stop your secrets from getting into the wrong hands almost instantly.

Things That Invalidate Trade Secret Protection

While protecting your trade secrets is crucial, it is important to keep in mind what could cause these protections to be seen as invalid in court. If a protection is seen as invalid, this information could become public and used by competitors to take away your loyal customers. Making a mistake could cost business owners their trade secrets and, in turn, their business success. 

Factors that invalidate trade secrets include:

• Publishing or posting information online or in marketing materials
• Neglecting confidentiality agreements with third parties or failing to dispose of documents
• If the product or process can be easily dissected and replicated by a competitor
• If a party develops a product or process that is similar without stealing, the original holder doesn’t have exclusive rights
• The information or technological advancements are outdated or rendered obsolete

How Do I Know If My Information Qualifies As A Trade Secret?

Information that has been developed by your business and gives you a competitive edge is considered a trade secret. If you benefit from keeping it private or holding on to confidential information, it can qualify for reasonable protection. If you feel that your trade secrets have been stolen, make sure that they will qualify under your state’s trade secret law and if it is subject to federal protection. 

Business Insights From WW Partners

Our lawyers are experts in business law and can help your legal journey end in success. Combining expertise and experience, our lawyers can help you get over any legal hurdles, providing peace of mind to individuals and business owners. Operating a business can be overwhelming at times, so having a legal expert on call can help you feel prepared for anything life throws your way. Our attorneys have experience working with many different complex situations in Salt Lake City and the surrounding areas. Reach out to our team to learn how we can help you and your business.