The Ultimate Guide to Financial Securities for 2020 Part 1

Intro to Part 1:

I hear this all the time.

“I invested in a company without consulting an attorney and now they are ignoring me. I think my money disappeared. What can I do?”

Many times investors rush into a business investment without doing their homework. Either they were promised that they could make millions or they trusted a familiar person from their past. Many times they are unaware of the consequences and are eager to get started.

Investing in a company without the proper leadership is a recipe for disaster.

I’ve seen situations where companies promise to make investors fast money. Often, an investment is made, no security is registered, and you can’t track down the money. When a company doesn’t register securities, the SEC doesn’t know who they are. Sometimes, these aren’t even real legal entities at all.

Other times, these entities are structured to purposefully hide their owners. For example, if a company is registered in Delaware, the owners are not listed anywhere. Further, some companies are owned by other companies which are owned by other companies in such a complex structure designed to avoid revealing their owners.

Because of these experiences, we at EPGD Business Law are presenting this informational, 2 part series on Securities.

Hopefully after reading this, you can learn some of the basics of securities, avoid beginners traps and make sure that all your money is protected.

If you have any questions about securities, please leave a comment below or contact us for a consultation.

Part 1: What is a Security and How do I Register One?

This area of the law is extremely complex with multiple regulation agencies, different rules for different securities, varying state laws, and an abundance of exceptions.

What is a Security?

In finance, a security is a negotiable financial instrument that holds some type of monetary value. A security can represent a number of positions. Typically, securities represent ownership in a publicly-traded corporation, known as equity securities, or represent a creditor-debtor relationship, known as debt securities. Debt securities generally entitle the holder to regular interest payments, and repayment of the principal by the maturity date. Equity securities may entitle the holder to dividends paid by the company.

Securities are “offered” to investors, and the company offering the securities is the “issuer” of the securities.

So, now in plain English, an equity security is typically stock in a corporation and the purchaser could receive dividends or sell the stock for more at a later date. A debt security is typically a bond and the purchaser will receive the principal, or amount they purchased, along with interest payments. In essence, buying a bond is the same as loaning money to a corporation; they pay you back after a fixed period of time along with interest.

Why are Securities Registered? Blame the Great Depression.

In the late 1920s, fraud in the stock market was at an all time high. Trading stocks and securities nationally was a fairly new concept Thus, consumers were vulnerable and issuers took advantage. The fraud eventually led to the 1929 stock market crash and eventually the Great Depression. Hunger, homelessness, poverty, and unemployment reached all time highs and the culture of a nation was in jeopardy. The federal government needed a way to prevent future fraud and give the American people a system they could trust. Accordingly, they passed the Securities Act of 1933 and the Exchange Act of 1934.

The Securities Act of 1933 and the Exchange Act of 1934 did the following:

  • Defined and regulated securities;
  • Established the SEC to enforce the securities regulations;
  • Required companies to provide investors and the SEC with financial information;
  • Required certain offerings of securities to be public;
  • Required certain offerings of securities to be registered;
  • Required issuers of offerings to notify the SEC of all offerings whether registered or not.

In the United States the majority of securities sold on national securities exchanges, like the NYSE, are registered with the Security and Exchange Commission (SEC).

How to Increase the Public’s Trust? With Required Disclosures

One way of achieving the goal of increasing the public’s trust is requiring companies offering securities to inform all potential investors of all material information about the company, its principals, and the investment opportunity that a reasonable person would want to know in order to make an informed investment decision. Determining what information is material is dependent upon the circumstances surrounding the company and investment opportunity. Most securities require the disclosure of the risks involved in the investment, the background of the company, subsidiaries of the company, the method of management, securities held by management, the net tangible book value of the company, financial statements, how proceeds are used, and whether the company is involved in pending litigation or has been found in violation of state or federal securities law in the past.

What is Form D?

A common mistake in securities is finding an exemption and then simply selling securities. Issuers believe that if they are exempt, there are no other requirements. However, even if the offering of securities is exempt from the registration requirement, the issuer still needs to notify the SEC.

Form D is used to notify the SEC of an exempt offering of securities. The form is standard and issuers must file the notice within 15 days after the first sale of securities in the offering. Failure to file Form D may result in the SEC taking action against the issuer. The action may have the issuer enjoined from future use of the exemption. Further, if the failure to file is willful, it could constitute a felony for improperly selling unregistered securities.

What are Restricted Securities?

Restricted securities are typically acquired in unregistered, private sales from an issuer or an issuer’s affiliate. The security certificate for a restricted security has a legend stamp indicating that the shares are restricted and cannot be resold until the legend stamp is removed from the certificate. Restricted securities may be resold under Rule 144 if they are either registered with the SEC prior to the resell or the subsequent sale also falls under an exemption, and these five conditions are met:

  1. The prescribed holding period must be met. A public company must hold the securities for a minimum of 6 months and a company that does not have to file with the SEC must hold the securities for a minimum of a year.
  2. There must be adequate current public information available to investors regarding the company, including historic financial statements, information about officers and directors, and a business description.
  3. The amount of securities to be resold in a 3-month period cannot exceed the greater of: (1) 1% of the total outstanding securities; (2) the average weekly trading volume during the four calendar weeks preceding the filing of Form 144; or (3) if no Form 144 is required, then the four calendar weeks preceding the date of receipt of the order to execute the transaction.
  4. Must meet all the normal conditions that apply to any trade.
  5. If the affiliate intends to sell, during any 3-month period, more than 5,000 shares or securities with a value exceeding $50,000, then the affiliated seller must file a proposed sale notice.

EPGD Business Law is located in beautiful Coral Gables, West Palm Beach and historic Washington D.C. Call us at (786) 837-6787, or contact us through the website to schedule a consultation.

*Disclaimer: this blog post is not intended to be legal advice. We highly recommend speaking to an attorney if you have any legal concerns. Contacting us through our website does not establish an attorney-client relationship.*

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Eric Gros-Dubois

Eric P. Gros-Dubois founded EPGD Business Law in 2013 and is the current head of the firm’s corporate, estate planning, and tax practice, and manages the firm’s Washington D.C. office. With a JD and MBA, and a specialization in finance, Eric is able to step back and view the legal world through a commercial lens while also acting as a trusted business advisor for his clients. He does his best to be solutions oriented, and tries to think like a business owner, not just a lawyer.


*The following comments are not intended to be treated as legal advice. The answer to your question is limited to the basic facts presented. Additional details may heavily alter our assessment and change the answer provided. For a more thorough review of your question please contact our office for a consultation.

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