Chapter 4. PRIVATE PLACEMENTS, INITIAL PUBLIC OFFERINGS, AND PUBLIC COMPANY REGULATION

BASICS OF SECURITIES REGULATION FOR PRIVATE COMPANIES

Federal and state securities laws apply to every issuance of stock or other securities by private and public companies, no matter how big or small they are or their stage of development. It is important to comply with the securities laws from start-up through initial public offering (IPO) and beyond. Litigation over securities laws violations is almost nonexistent in the world of private technology companies, but compliance still is extremely important because sloppiness here may interfere with the company's ability to get venture financing, do an IPO, or be acquired. Securities laws violations create a right of rescission in the purchasers of the securities, and investors are leery of investing in companies with that contingent liability. The same goes for the underwriters in an IPO and the potential acquiror in a merger and acquisition (M&A) transaction, particularly in the latter case if the purchase price per share in the acquisition is less than what all or certain stockholders paid in acquiring their stock.

The basic rule is that all sales of securities (i.e., in this context, founders' stock or preferred stock sold to venture capitalists [VCs]) must either be registered with the Securities and Exchange Commission (SEC) or exempt from registration. As the next section explains, registration with the SEC, other than in connection with an ...

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