Business Lawyers Blog
Private offerings provide startups and growing businesses with a viable avenue for raising capital, but these transactions remain subject to federal and state securities laws. Companies that misunderstand or overlook applicable compliance requirements may create unnecessary legal and operational risks.
Structure Law Group’s Los Angeles startup and financing lawyers advise startups, founders, and emerging businesses on private capital raises, securities compliance, and financing transactions. Understanding the most common legal mistakes in private offerings can help companies structure fundraising efforts more effectively and reduce the risk of regulatory issues that could affect future growth.
What Is a Private Offering in California?
A private offering is a method of raising capital in which a company sells securities to a limited group of investors without conducting a public offering. Startups and private companies commonly use private offerings to raise funds from founders, existing shareholders, angel investors, venture capital firms, private equity funds, or other accredited investors.
Unlike a public securities offering, a private offering generally relies on exemptions from federal and California securities registration requirements. Although these exemptions can simplify the fundraising process, they do not eliminate compliance obligations. Companies must still comply with applicable securities laws, including requirements related to investor disclosures, solicitation practices, filing obligations, and eligibility for available exemptions.
Private offerings can take many forms, including the sale of common stock, preferred stock, convertible notes, SAFEs (Simple Agreements for Future Equity), membership interests, or other investment instruments. Before launching a fundraising effort, companies should evaluate which offering structure aligns with their capital needs, investor expectations, and long-term business objectives.
Raising Capital in California: Legal Mistakes to Avoid
Here are some of the most common mistakes:
Misusing a Federal Exemption
Startups typically rely on exemptions under Regulation D for making a private offering, but these exemptions must be used properly.
- Rule 506(b) permits up to 35 non-accredited investors to buy, but the offeror is required to provide a mini-prospectus. Additionally, there are restrictions on making a general solicitation.
- Rule 506(c) allows an offeror to advertise, but only if every investor is accredited and their status has been verified.
Many startups overlook these details and might try to sell to too many non-accredited investors or engage in general solicitation when it is prohibited.
Not Filing Form D with the SEC
An issuer relying on a Regulation D exemption generally must file Form D with the SEC. This is necessary for most private placements and must be done promptly
Failing to Register
Not every private placement fits neatly into an exemption. If not, then the offeror must register with the SEC. Failure to register can result in monetary fines, litigation, and other problems.
Failing to Disclose Material Information
Private offerings remain subject to federal and state antifraud laws. Potential buyers need full and accurate disclosures of all material information. Typically, this information is included in a prospectus or a mini prospectus. Too many companies fail to disclose all information, or they include inaccurate or misleading information, even if unintentionally.
Depending on the exemption and the types of investors involved, specific disclosure requirements may also apply.
Overlooking State Obligations
The State of California also regulates the sale of securities. An offeror must ensure they meet all applicable state requirements.
For example, it’s important to check if a private placement qualifies for a state exemption. It’s possible to qualify for a federal exemption but not a state one. Under California Corporations Code § 25102(f), one can make a limited offering to a maximum of 35 purchasers if they have a pre-existing relationship or if they are sufficiently sophisticated. No public advertising is allowed.
California also has notice-filing requirements that a lawyer can walk you through. Overlooking state registration requirements can result in invasive state regulatory investigations, litigation, and possible sanctions.
Contact SLG for Assistance
Private offerings can provide an effective mechanism for raising capital, but they also require careful attention to federal and state securities laws. Errors in offering documents, exemption analysis, investor communications, or regulatory filings can create legal and operational challenges that extend well beyond the fundraising process. Companies should evaluate compliance requirements before offering securities and throughout the capital-raising process.
Structure Law Group, LLP advises Los Angeles startups, founders, and emerging businesses on private offerings, securities law compliance, and financing transactions. To discuss a proposed capital raise, exemption eligibility, or offering documentation, contact a Los Angeles business attorney at Structure Law Group, LLP for a consultation at 310-818-7500.