A True Sense of Security

Raising funds starts with compliance to securities law

Utah Valley residents have long been known for appreciating a good business opportunity. In fact, entrepreneurism is one of the great hallmarks of our community.

However, even the best business ideas may not see the light of an “open for business” sign without money, which is why entrepreneurs routinely seek investors. But those looking for investment capital need to make sure their actions don’t violate securities laws.

As times have become tougher, securities fraud has made many-a-headline. Names like Bernard Maloff become as familiar as the neighbor down the street as news outlets cover his legal battles 24 hours a day. While we might only think securities law applies to large companies or asset managers, Utah law is carefully worded and applies to more people than you might expect.

“Many people seeking to raise capital for business operations and growth — or even for general investment purchases — do not understand that such efforts are likely governed by a broad and complex body of securities law,” says Dan McKay, partner with the Provo-based law firm Ascione, Heideman and McKay.

According to the Utah Division of Securities, “Securities are instruments or rights that show ownership or a creditor relationship with a firm or other organization. Securities can be equity ownership of a firm evidenced by stock or they can be debt, evidenced by a bond. The Utah Uniform Securities Act defines numerous financial products as securities, such as notes, stock, bonds, debentures, investment contracts and many others.”

If you want to make sure you’re protecting yourself, your new business and your investors, below are three steps to follow.

Hire representation
As you might imagine, securities law can be complicated. Consulting a lawyer with experience in securities law is step one. A good attorney can find out more about your situation and what your obligations to securities law may or may not be.

“An attorney can assist the entrepreneur in avoiding violations of securities law and in structuring a proper offering for the raising of capital,” says Justin Elswick, an attorney with Ascione, Heideman and McKay.

Building a strong relationship with that attorney will also be important as your company evolves and you require changes to your approach to securities.

Determine the right course of action
With the help of a solid attorney, entrepreneurs should determine their approach to raising capital.

“If it appears that an activity is governed by securities regulations, it is important to understand that the law will require the security itself to be registered, or exempted or excepted from registration,” Dan says. “However, many people do not realize the person engaging in the securities activity may need to be licensed himself — or exempted or excepted from licensure — to engage in the sale of securities.”

Each situation is different, so to ensure proper compliance with securities law, an entrepreneur should seek qualified legal counsel. In general, if there were any effort related to the raising of capital by the entrepreneur through the acceptance of investors’ funds, those efforts would likely be governed by securities law.

“Even if it is an offering for the sale of equity ownership in a company, it would behoove an entrepreneur to check with a securities attorney to see if securities regulations may come into play,” Justin says.

Be careful
Unlike “common law fraud,” which requires an actual intent to mislead, “securities fraud” may be implied merely because relevant or important information was mistakenly not included in disclosure documents.

“A person’s intent is irrelevant,” Dan says. “Even if a person does not intend to deceive, he or she may be found guilty of fraud merely by failing to include all material information to potential investors.”

The consequences may be harsh — including repayment to all investors, fines and actual prison time — if a person fails to comply with securities law.

Ascione, Heideman & McKay, LLC is full-service law firm that focuses primarily on business litigation, contracts, real estate transactions and estate planning. The firm’s clients include many established and growing businesses, and it has offices in Provo, St. George and Price.

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