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Securities and Small Businesses: Key Takeaways from the SEC's Visit to Tennessee

October 23, 2023

by Fall Associate Matthew Hubbs with Guidance from William E. Mason, Esq.

The Securities and Exchange Commission (“SEC”) recently visited several non-Reserve cities to meet with small-to-medium business owners, investors, and lawyers in order to discuss the possibilities and risks of using securities to raise capital. On September 25, 2023, Knoxville was the very first city on the SEC’s circuit. Leading the presentations were Erik Gerding, the Director of the Division of Corporate Finance within the SEC; Jennifer Zepralka, Chief of the Office of Small Business Policy (“OSBP”); and Jeb Byrne, Counsel to Gerding. Here are a few key takeaways from the presentations.

The tour’s purpose was to visit oft-overlooked parts of the country to raise awareness about securities generally, and how the OSBP can assist small-to-medium businesses in raising capital. Gerding noted that raising money is often one of the most difficult tasks for any business, whether that business is just starting out or has been operating for several years. Securities can offer business owners a possible solution.

While securities provide a vehicle for acquiring capital, they come with an important warning. Per Zepralka, “securities are either registered, exempt, or illegal.” Failure to register or exempt a security can result in lawsuits and the automatic disgorgement of any ill-gotten investments. As Gerding noted, “securities are not marketing tools,” meaning they should not be used to drum up interest in your business.

Registering a security, or “going public,” is easily recognizable (think IPOs, the stock market, day-trading, etc.) and appears to result in a large influx of capital and interest in the business. However, the presenters noted two significant factors that should be considered before pursuing registration. First, registering can be costly; it’s time-consuming, expensive, and requires significant disclosures to the SEC and the public. Second, the amount of money in the private capital market is actually almost double the amount in the public market.

In lieu of registration, there are nearly a dozen ways to exempt a security. Qualifying for an exemption depends on a business’ ability to satisfy certain conditions which regulate the capital-raising process, such as:

  • who can issue the security;
  • who can purchase the security;
  • whether a solicitation can be private or general;
  • what disclosures (if any) need to be made;
  • what amount of capital can be raised; and
  • whether the security be resold.

Even though the interplay among these conditions can be subtle and complicated at times, the presenters emphasized that business owners shouldn’t shy away from securities for these reasons alone. Properly exempted securities can allow even small business owners to tap into a huge pool of capital that can fund their enterprises.

If you are interested in how securities can be implemented for your business and its growth, please do not hesitate to contact us at (865) 546-7311. Our attorneys have decades of corporate governance and compliance work and are ready to assist you.

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