Do Securities Laws Apply to the Sale of Stock to Friends?

Posted by Eli Solomon

 

If you need investors to expand your business, you may have considered selling stock to friends and acquaintances. And you may have wondered whether you can do this without having to abide by securities laws.

So do securities laws apply when you sell stocks to friends?

The short answer is: yes, they do.

However, if your offering is small and you are only selling to a few people, there may be a way for you to get around having to register with the S.E.C.

Here are a few things to keep in mind.

Are you selling stock to “accredited investors”?

If your friends are “accredited investors”, you are allowed to sell securities to them without registering with the S.E.C. under a Rule 506 exemption.

In this case, you are still required to file a Form D with both the S.E.C. and your local securities commission. However, this form is only 11 pages long and includes limited information about your business.

Unfortunately though, the rules for who counts as an “accredited investor” are very strict. Here are some of the types of people and entities who fall under this category:

  • Financial institutions: banks, savings & loans, brokers or dealers, insurance companies, etc.
  • 501(c)(3) non-profits with over $5 million in assets.
  • Individuals with net worth of over $1 million.
  • Individuals with incomes above $200,000/year or married couples with incomes above $300,000/year.
  • Trusts that have over $5 million in assets.
  • Companies whose shareholders are all accredited investors.

 

The full explanation of who counts as an “accredited investor” can be found on the U.S. Government Publishing Office website, here.

 

Other exemptions for the sale of securities.

If your friends are not accredited investors, you may still be able to avoid registering with the S.E.C.

One way of doing this is by claiming a Rule 504 exemption. You can do this by taking a number of steps, including:

  • Registering with your state’s securities commission.
  • Doing 80% of your business in your local state.
  • Issuing less than $5 million in securities.
  • Filing a Form D.

The bottom line is that if you are going to sell securities to friends and acquaintances, you must abide by the securities laws; just like you would if you were selling to complete strangers.

But the law does contain provisions designed to protect small businesses from onerous registration and disclosure requirements that were intended only for large firms.

If you need more information about SEC rules or to find help with local securities law filings, please contact Blue Sky Filings at 8440723-4537 or by filling out our online form.


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