Private Placements, Initial Public Offerings, and Public Company Regulation

Federal and state securities laws apply to every issuance of stock or other securities by private and public companies. Securities laws violations create a right of rescission in the purchasers of the securities, and investors are leery of investing in companies with that contingent liability. The basic rule is that all sales of securities must either be registered with the Securities and Exchange Commission (SEC) or exempt from registration. In addition to being registered or exempt from registration, any sales of securities must also comply with the antifraud provisions of federal and state securities laws. There are a number of federal securities statutes, but the principal one applicable to private companies is the Securities Act of 1933. The two principal exemptions for sales of stock by private companies in financing transactions are the private placement provisions: SEC Regulation D and Section 4(2) of the Securities Act.