What the …? I’m Selling Securities?!

You have a new business or you’re thinking about expanding your existing business. And you think it would be great to offer some shares or membership interest in your company to an outside investor. Nothing could be easier. Right? Wrong! You may be selling securities and will need to comply with federal and state securities laws (also known as blue sky laws).


Let’s start by talking about securities. While some people believe a security is a share that is traded on a stock exchange, in reality many other things are securities as well.

There are definitions of securities under the Securities Act and the Securities Exchange Act. Feel free to review these in your leisure. But in essence it’s not that complex. As decided by the U.S. Supreme Court in SEC v. Howey Co., 328 U.S. 293 (1946), a “security” is “an investment of money in a common enterprise with profits to come solely from the efforts of others; and, if that test be satisfied, it is immaterial whether the enterprise is speculative or nonspeculative, or whether there is a sale of property with or without intrinsic value.” (To be fair, Howey has led to lots of litigation.)

Generally speaking, if you’re selling a piece of your business entity to a passive investor, you’re selling a security.


“So what?” you query. Well, if you’re offering to sell a security, you need to comply with federal and state securities laws. Among other matters, that means registering the security with the Securities and Exchange Commission (SEC). That’s probably a needless expense for a new or relatively small company. Fortunately, there are exceptions to the registration requirement.

First — and this probably does not apply to you — there are securities being issued from certain low risk companies or a government regulatory agency. These types of securities include:

  • Securities issued by the U.S. government or federal agencies
  • Local government bonds
  • Securities issued by banks, savings institutions and credit unions
  • Public utility stocks and bonds
  • Insurance policies and fixed annuities

Second, there are securities that are exempt from registration because of the type of transaction in which they are being offered or sold. Basically, these are

  • Private offerings to a limited number of persons or institutions
  • Offerings of a limited size
  • Offers and sales to residents of one state

These types of offerings come in all sorts of flavors. There are various offerings under Regulation D, Regulation A and A+, Regulation CF (federal crowdfunding), and intrastate offerings, including intrastate crowdfunding.

It’s outside the scope of this post to go into detail on all of these offerings. They differ in their requirements and restrictions. But one or more of them may be suitable for your purposes.

Notice Filings

Keep in mind that even if your offering fits under one of the exceptions from registration, you may still need to file certain forms with the SEC and state securities regulators. Federal forms include Form D, Form C and Form 1-A. States may have additional filing requirements.


Offering or selling a piece of your company is more complicated than you think. Tread carefully.

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