Federal and state laws closely regulate the offer and sale of securities, which include stock, options, warrants and SAFEs. Securities laws are meant to protect investors from unscrupulous business owners. These laws require corporations to follow certain procedures before issuing any securities. Technically, a corporation is required to register the sale of shares with the U.S. Securities and Exchange Commission (SEC) and its state securities agency even before granting stock to the initial corporate owners (stockholders). Many small corporations are exempted from the registration process under federal and state laws. For example, SEC rules don’t require a corporation to register a “private offering,” which is a non-advertised sale of stock to a limited number of people (generally 35 or fewer). For sales to non-U.S. persons, a special exemption, known as “Regulation S” may be available.
In addition to the federal securities laws, issuers and sellers of securities must comply with state securities regulations also referred to as “blue sky laws.” Many blue-sky laws provide exemptions from their requirements modeled in some manner on the typical federal exemptions. Variations in these state statutes include (1) limitations on the number of offerees within the state and/or total offerees; (2) similar limitations on the number of purchasers within a 12-month period; (3) affirmative filing requirements with the state securities administrator before and/or after the offering; (4) possible limitations on commissions paid; (5) limitations on the manner of the offering and prohibitions on general solicitation and advertising; (6) requirements concerning minimum amount of investment; and (7) use of state registered broker-dealers in connection with the offering. Many states also provide an exemption for “isolated” transactions, involving very few sales within a prescribed period meeting the statutory, regulatory or case law interpretation of the relevant state.
In addition to compliance with U.S. federal and state securities laws, on the corporate level, the Board of Directors must approve all offers and issuances of securities.