What are “Securities”?

On what seems like a weekly basis, an existing or potential client will ask me whether the raising of capital for a business venture (a specific proposed plan of investment, purchaser incentive arrangement or some other system of providing a benefit to a participant in exchange, at least potentially, for a return based upon the success of the business endeavor being considered) will amount to an offer of the sale of securities, subjecting the investor with the burden of compliance with the Securities Act of 1933 (either through registration or exemption compliance). Depending upon who you ask, you may find the answer you are looking for with respect to your plan, but as a rule of thumb it is my belief (primarily due to the great risk in the event that you are wrong in your interpretation) that if you are interested in raising capital, or bringing in participants into your business endeavor, realize that the SEC takes a rather broad view of what “securities” are.

When most folks think of securities, they think of the stock exchange, stock in large corporations, hedge funds and the like. They think of stock brokers and dealers, wheeling and dealing on Wall Street. However, securities are not solely limited to equity instruments issued by a corporation. The exchange of a few promissory notes (whether convertible in the future to equity, or not) in exchange for borrowed funds, may be the issuance of “securities”. It is highly recommended that you not make assumptions in this area, and if there is any doubt that you seek competent legal counsel to analyze your plan.

If the plan that is being considered will amount to the issuance of securities, you need to always remember that there are only three possible outcomes of your activity: 1) You take the appropriate steps to register the issuance with the SEC, 2) You take proper steps to exempt the issuance or offer (and appropriate filings are made depending upon the exemption being applied for), or 3) your issuance is illegal. There are no other results, and “illegal” is definitely to be avoided, so I urge you to be careful.

Tom Grella