Once a startup is up and running, founders might want to sell stock to investors. Founders need to be careful here, even if they are selling stock to family and friends and avoiding professional investors. You might be asking what’s the big deal if you are selling some stock to your aunt Ruth? The SEC has at least a couple of answers for you. There are at least two considerations you should keep in mind if you want to sell stock in your start up.
Stock is a considered a “security.” Every sale or offer to sell securities is governed by the SEC. The SEC requires that such securities be registeredwith the appropriate federal and state agency before such offers can be made. The registration process can be lengthy and costly. Underwriters and lawyers are usually involved. Luckily, however, there are some exemptions. You will need to check with a securities lawyer to see if you qualify for an exemption. Securities law is complex, so a good lawyer is worth it. The registration process is more suited to an older company than for a startup company.
Before selling or offering to sell securities, the anti-fraud rules require that you disclose all “material” information about the business, without omitting or misstating such material information. Material information is any information a reasonable investor would want to know before making an investment in your company. So if one of your partners got the company in some trouble, you’d need to tell aunt Ruth or else she could sue you. Not even the business-friendly Delaware courts could help you out.
(photo courtesy of: http://flic.kr/p/8j5zJc)