When Do Security Laws, Equity, And Venture Funding Overlap?

Posted on: 17 March 2020

One of the trickiest things to navigate in business is figuring out whether and when securities laws apply to your particular situation. For example, when do you need a venture capital (VC) attorney to address SEC compliance issues? Private equity can be a great source of funding, especially as a company transitions from being a scrappy startup to becoming a fully securitized enterprise. It's important, however, to know when compliance should be on your radar.

Banking Involvement

Generally, once a bank or a similar financial institution gets involved in the process, the investments being made usually have to be more tightly regulated. That means the investments have to meet compliance requirements for securities. For this reason, most fund managers and private equity funds have to register as investment advisors.

VC Investors

A proper VC fund will usually make every effort to stay on the opposite side of those requirements. That means they'll be especially careful about funding sources, and many simply invest money on behalf of a single investor or a handful of investors who have significant experience in the market. You'll often see VCs who once participated in the startup process themselves and have since converted their profits into venture funding. They'll also typically have a venture capital attorney on retainer to make sure they don't step on any legal landmines.

Mergers and Acquisitions

As the structure of a company changes, the odds that it will be subject to greater compliance go up significantly. Especially with M&A, this ends up being the case because the combined value of the new company may grow to the point it passes specific thresholds. Similarly, the configuration of the business, such as the issuance of public shares, may also move the company into a greater compliance category. a listing on any exchange all but guarantees compliance requirements.

Bear in mind that many companies are subject to so-called small reporting, meaning they only have to submit limited information periodically. As a business grows, it's also likely to start engaging in more regulated activities, such as issuing bonds to raise further capital.

It's also worth noting that the M&A phase is often the stage where VCs cash out. It's prudent to have a mergers and acquisitions attorney to guide the process because company officers and the roster of investors will change rapidly during this period. As with other structural changes, these may have to be reported to regulatory authorities. 

To learn more, contact a securities attorney in your area.