Broadly defined, a security is an interest in, or an obligation of, the business entity that issues the security. Examples of securities are corporate stock, interests in a limited partnership, and corporate bonds and debentures. Note that the label assigned to an interest in a business is not necessarily determinative, and that the definition of a security is a very broad one; note that many seemingly innocent activities, such as the use of a website can constitute the “offer” of securities. A business owner who is giving or selling ownership interests in a business to other persons, even to friends and family members, is strongly advised to seek the advice of counsel. This is true whether the ownership interests are transferred when the business is organized or later in its life. In general, securities must be registered with the federal Securities and Exchange Commission (SEC) and/or the Minnesota Department of Commerce before they legally can be advertised or sold to investors unless the security or transaction qualifies for an exemption under state or federal laws. A security or transaction may qualify for a federal exemption but not a state exemption or vice versa. Again, given the highly technical laws, regulations, and judicial decisions in this area, as well as guidance from the SEC (such as that issued on the use of electronic media), the advice of counsel is very important. The basic purpose of both state and federal securities laws is to protect the investor. Therefore, sales in violation of these laws, even if done through inadvertence or in good faith reliance, can create civil and criminal penalties on both the state and the federal level. If interstate sales are involved, civil and criminal penalties in multiple states may apply. The anti-fraud provisions of these laws apply even if the securities or the transaction are exempt from registration. Securities registration is a sophisticated area requiring the services of experienced professionals. In some cases these professionals may be able to assist in structuring the offering and sale to qualify for an exemption. In other cases their services may be necessary to register and to sell the securities. In all cases involving the offer or sale of securities, discussing the matter with legal counsel is the best starting point. The JOBS Act of 2012 made substantial changes to federal securities law in three areas: raising the dollar limit for securities offered under Regulation A; removing the general solicitation prohibition on offerings to accredited investors Under Regulation D Rule 506; authorizing a crowdfunding exemption to registration. As noted in the sections below, rules implementing and expanding operation of Regulation A were added in 2015; rules implementing the changes to Regulation D Rule 506 were added in 2013. Final rules implementing the federal crowdfunding exemption were adopted by the Securities and Exchange Commission on October 30, 2015 with an effective date of 180 days after publication in the Federal Register. In June, 2019, the U.S. Securities and Exchange Commission published its “Concept Release on Harmonization of Securities Offerings Exemptions.” That lengthy release discussed potential changes to the exemptions from federal securities registration for the types offerings described below. It also discussed the possibility of changes to the definition of “accredited investor” that would not be tied to an investor’s net worth but could involve other standards such as permitting individuals with certain professional credentials, or individuals who passed an accredited investor examination, to qualify as accredited investors.
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