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Sell your small businesses to raise capital while meeting the securities laws

Updated: Jul 5, 2022

June 27, 2022

Business owners have many options to fund their business. They can fund their business with their own money. They can fund their business by taking a personal loan from their friends or a commercial loan from banks. Selling partial or whole ownership to raise capital for your small business is also an option as well. However, you need to comply with federal and state securities laws. Failure to meet the requirements of federal and state laws on securities could lead to penalties.

This article is offered with general advice for public education purpose. For specific advice about your situation, we recommend that you talk to your current attorney or schedule a consultation with aiLegal Law attorneys.

What’s equity securities?

Equity almost always refers to stocks and a share of ownership in a company (which is possessed by the shareholder). Equity securities usually generate regular earnings for shareholders in the form of dividends. An equity security does, however, rise and fall in value in accord with the financial markets and the company’s fortunes.

How are securities regulated?

The Securities Act of 1933 and the Securities Exchange Act of 1934 are two critical sources of rules on the sale of securities. Under the Securities Act of 1933, the company must either be registered or exempt from registration to offer securities for sale.

Registration can be a long and expensive process, and there are ongoing requirements after registration is effective. For this reason, many small business owners turn to the list of exemptions. It is up to the business owners to decide if they should "go public" or seek an exemption from registration. There are different requirements under federal and state law for registration and exemptions.

Registration Under the Securities Act

The Securities Act of 1933 has two basic objectives:

  • To require that investors receive financial and other significant information concerning securities being offered for public sale; and

  • To prohibit deceit, misrepresentations, and other fraud in the sale of securities.

The SEC accomplishes these goals primarily by requiring that companies disclose important financial information through the registration of securities. This information enables investors, not the government, to make informed judgments about whether to invest in a company's securities. Here’s an overview of how the registration process works. In general, all securities offered in the United States must be registered with the SEC or must qualify for an exemption from the registration requirements. The registration forms a company file with the SEC provide significant information, including:

  • A description of the company's properties and business;

  • A description of the security to be offered for sale;

  • Information about the management of the company; and

  • Financial statements certified by independent accountants.

Registration statements and prospectuses become public shortly after the company files them with the SEC. All companies, domestic and foreign, are required to file registration statements and other forms electronically. Investors can then access registration and other company filings using EDGAR.

Exemptions from Registration Under the Securities Act

There are several common exemptions that small business owners can use to sell securities.

  • Non-Public Offerings. To qualify for the "private placement" exemption, securities must be sold to "sophisticated investors" who have access to the type of information that is usually disclosed in the registration process. Additionally, the investors must agree not to resell the securities.

  • Rule 504. This Regulation D exemption allows "for the offer and sale of up to $1,000,000 of securities in 12 months." This exemption can't be used for a blank check company (a developing company with no business plan). Whether or not you can do general advertising and solicitation under this exemption depends on the circumstances.

  • Rule 505. This Regulation D exemption allows "for offers and sales of securities totaling up to $5 million in any 12-month period." Business owners can use this exemption to sell securities to accredited investors (individuals or entities with a high net worth and/or income) and up to 35 non-accredited investors. Non-accredited investors must receive disclosure documents with the type of information usually disclosed in the registration process. The investors' purpose must be to invest, not to resell the securities. Only under certain circumstances can securities purchased under this exemption be resold.

  • Rule 506 (b). Rule 506 (b) is a safe harbor provision. If the specific requirements under Rule 506 (b) are met, a prospective issuer can feel confident that their offering qualifies for the "private placement" exemption. Under Rule 506 (b), general solicitation and advertising aren't allowed. Additionally, you can sell your securities to no more than 35 non-accredited investors. Those non-accredited investors must receive disclosure documents.

  • Rule 506 (c). Rule 506 (c) allows issuers of securities to use general solicitation and advertising. However, all purchasers of securities must be accredited investors, and the issuer must take steps to verify that the purchaser is an accredited investor. The securities purchased under this exemption generally can't be resold.

  • Regulation A. Regulation A allows for transactions of up to $5 million in a 12-month period. An issuer's obligations under Regulation A are similar to the requirements that issuers of registered offerings have. A document that is like a prospectus must be provided to investors. However, the financial statements provided don't have to be as complex. Companies often use a Regulation A offering to test the waters before going through the registration process. General solicitation and advertising are allowed under Regulation A, and purchasers can distribute the securities. SEC reporting companies and blank check companies are prohibited from Regulation A offerings.

  • Accredited Investor Exemption. This exemption applies to transactions with accredited investors in which the price is lower than $5 million. There are no requirements for disclosure documents under the Accredited Investor Exemption.

  • Intrastate Offering Exemption. To qualify for the Intrastate Offering Exemption, your business must be organized in the state in which you're making the offering, you must conduct a significant portion of your business in that state, and you make offerings in that state only. There could be a violation if you sell securities to an investor who resells to someone outside of your state within a short period of time. A violation of this kind could put the entire offering at risk.

  • Rule 701. Rule 701 allows companies to sell at least $1,000,000 to employees. The employees can't freely distribute the securities that they receive under Rule 701, except under certain circumstances.

Form D Filings

Under the federal securities laws, a company must file a Form D notice of exempt offerings for securities sold under:

  • Rule 504

  • Rule 506

  • Section 4(a)(5) (also referred to as the Accredited Investor Exemption)

A company must file this notice within 15 days after the first sale of securities in the offering. For this purpose, the date of first sale is the date on which the first investor is irrevocably contractually committed to invest.

Penalties for Violations of Securities Laws

There are several penalties that individuals may face for failure to comply with federal and state securities in securities transactions. Fines or criminal charges could result from violations of securities laws.

Additionally, investors who have suffered a loss due to misleading or false statements may be entitled to a refund. If an investor is entitled to a refund and the business funds aren't available, a business owner might be held personally liable.


Securities compliance and registration can be a long and expensive process, and there are ongoing requirements after registration is effective. Small business owners may not have sufficient resources to afford the security compliance and registration. Therefore, it is recommended to small business owners to consider the following when selling their equity securities:

  • Look for applicable exemption from registration under the Securities Act

  • Look for private placement instated of public placement

  • Provide truthful statements and provide reasonable disclosure about business, management, financial statements to the potential buyers

  • Set a priority to sell businesses to accredit investors. To be an accredited investor, a person must have an annual income exceeding $200, 000 ($300, 000 for joint income with spouse) for the last two years with the expectation of earning the same or higher income in the current year. A person is also considered an accredited investor if they have a net worth exceeding $1 million, either individually or jointly with their spouse.

Disclaimer: The above content is published for the public education instead of providing legal advice. Should you have any specific questions, please schedule an attorney consultation with our office here or email us at

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