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.