Financing Your Small Business

The Sale of Securities and the Issuer Exemption

Once you have decided to sell securities in your company, you can sell them yourself under what is called an issuer’s exemption or you can engage a licensed broker-dealer to sell for you. Federal and state securities laws require people who sell securities to be licensed unless an exemption from licensure exists.

Federal securities rules permit any partner, officer, director, or employee of an issuer of the securities to make and accept offers to purchase securi­ties, as long as that person:

• is not disqualified from selling securities for another reason;

• does not receive commissions or other remuneration based directly or indirectly on the sale of the securities;

• is not a broker or dealer, or an associated person of a broker or dealer of securities, at the time of the offering or within twelve months pre­ceding the offering of securities;

• primarily performs, or is intended to primarily perform, at the end of the offering, substantial duties for or on behalf of the issuer otherwise than in connection with the transaction of securities; and,

• does not participate in selling an offering of securities for any issuer more than once every twelve months.

Most states have a comparable provision to the federal issuer's exemption.

If the company engages a licensed broker-dealer, they customarily enter into a placement agreement that sets forth the terms of the selling engagement. Broker-dealers are licensed with the National Association of Securities Dealers (NASD) and with the states in which they conduct business.

Some companies enlist individuals or companies to act as finders of poten­tial investors. Finders are under the same limitation as issuers in that they can only approach people with whom they have had a preexisting relationship. Finders can only refer leads to the company and cannot offer the securities or discuss the offering with any prospective investor. If finders receive referral fees based upon a percentage of the amount raised, they run the risk of being regarded as unlicensed brokers under federal and state securities laws.

The legitimate use of a finder depends upon the law of the state where the investor resides. Some states allow a limited use of finders, while others are stri­dently opposed to finders. Check with that state's securities administrator and work with an attorney experienced in securities law before using a finder.

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