Securities Straight Talk Vol. 4: Why you Need to Consider Blue Sky Laws Before Conducting a Capital Raise
December 15, 2016 | By Vela Wood
We get it, securities laws are the last thing you think of (if at all) when contemplating a capital raise. But they should be one of the first, and here’s why: and also, here:
A blue sky law is the term used to describe a state’s body of law governing all things securities (including registration, exemptions, and broker-dealer requirements). You must abide by the blue sky laws of every state in which a potential investor resides. For instance, a Texas company that raises $50,000 from each of three investors located in Texas, California, and New York will need to either qualify for an exemption in Texas, California, and New York, or register the offering in the states in which an exemption is not available.
Not taking securities laws into account prior to the start of your offering can create a dark cloud over your otherwise bright, sun-shiny raise. For example:
- Many blue sky laws require notices to be filed within a certain time of the first offer or sale in that state (typically 15 days).
- Your attorney will need to research applicable exemptions and filing requirements, prepare and submit the filings, and often pay a filing fee to the state, all of which costs you money. And these expenses should be considered during the planning process, not once the offering has been completed.
- It is possible—rare, but possible—that your offering would not qualify for an exemption in a certain state, thus the securities would need to be registered, a costly and burdensome process. Likely the expense of registration would be greater than the benefit of the investment. This results in you having to either pay to have the securities registered or offer the investor the right to rescind the investment.
Therefore, knowing in what states your potential investors reside, and having that conversation with your attorney before you begin the capital raise, can ensure that your offering qualifies for an exemption, save you money, and prevent an awkward and embarrassing conversation with investors.
So, consult with your attorney about securities laws early on and your capital raise will be nothing but blue skies and rainbows.