Friday, March 22, 2013

Securities Law - Making Up the Truth

By Jim Verdonik

I'm an attorney with Ward and Smith PA.  I also write a column about business and law for American Business Journals, have authored multiple books and teach an eLearning course for entrepreneurs.  You can reach me at or  Or you can check out my eLearning course at or or purchase my books at

 I started my career as a securities lawyer in a big New York law firm.
Counseling clients about securities law has always been a big part of what I do.

What is securities law?
Basically, it’s a search for truth.

But it's not like a hunt for pirate treasure.
You don't find a map and then dig up a big treasure chest of truth.

The truth is usually more complicated than that.
It usually comes in small bits and pieces.

Sometimes pieces of truth are hidden inside of half-truths or even inside of lies.
You have to break the pieces apart and separate the truth from everything else.

But just accumulating a big pile of pieces of truth is usually fairly worthless.
You have to reassemble the pieces to tell a story people can understand.

Telling the truth story is the interesting part.
Of course, people often have different opinions about which part of the truth is more important.

That's why a dozen people telling the same story will tell it differently even though they are all telling the truth.
And, of course, people sometimes bend the truth for their own purposes.  Even good people are tempted to do that.  People easily convince themselves something is true because they want it to be true.  My job as a securities lawyer is to bring clients back to reality – to separate desire from fact. 

Let's see how we do that in this video, which recreates a counseling session I had with the CEO of a publicly traded company in which we explored the dark caves of untruth before returning to the bright light of the truth.
So, what is the truth?

Telling the truth is different than not lying.  Telling the truth means you give people the important facts they need to understand what you are telling them.  That means you can't mislead people by showing them part of the picture and knowing that they will probably inaccurately draw the other half of the picture.
How do you tell how much of the picture you need to show investors?

You have to disclose all "material facts."
What's the difference between material facts and immaterial facts?
A material fact is a fact that might affects a reasonable investor's decision whether to buy or sell securities.

That's a fairly loose definition.  What's material and not material differs from one business to another and one industry to another.  The same fact might be material to a small company and not material for a big company.
Of course, nothing you do with Government is as simple as producing the truth.

Securities laws also require you to jump through a number of other hoops before you can tell the truth and sell securities.  Who you sell too?  How many people do you sell to?  How you find buyers determines your path to raising money.
Basically, there are two pathways to selling securities:

·         Registering the securities by filing a registration statement with the Securities and Exchange Commission is one way.  Registration is usually a long expensive process.  Registration is the equivalent of running a marathon.  It takes training and endurance.

·         Finding an exemption from registration.  Doing a private placement is the most common exemption.  There are multiple ways of doing a private placement.  Finding the best way for your business is like assembling the pieces of a puzzle.

You can explore the ins and outs of private placements and how you comply with securities laws in this video:

I note that this was written before the SEC released its rules about crowdfunding.  Crowdfunding rules are supposed to make it easier for people to use the internet to contact lots of people to make very small investments.
Some people think that only big companies can be publicly traded.  But thousands of small to medium size businesses are pubic.  Many become public by merging with a public shell company or by registering with the SEC without an investment banking firm or underwriter.

The primary attraction being a small public company has is that you can sometimes raise capital in PIPES deals from investors who specialize in investing in small public companies.  Because investors like the liquidity offered by small public companies, they will often invest at valuations that are two or three times higher than if your business was not publicly traded.
Being a small public company isn't for everyone.  You should look carefully before you leap.  This video can help you decide whether it makes sense for your business and what you'll have to do to get there:

Some people think securities laws are very complicated, but the complications come from simplicity.  Just a few very broad rules cover securities laws.  How you apply those simple rules to different businesses is the challenging part.

If you would like to learn more about securities laws or other issues important to your success, you can reach me at or  Or you can check out my eLearning course at or or purchase my books at

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