Law Implicated When Raising Money for a Business
by Ken Mitchell-Phillips
August 1, 2009
Whether large or small, when you raise money for your business or otherwise are involved in a financing transaction, a variety of laws may be implicated. Many companies engaging in a private financing transaction often overlook the impact of applicable laws because they are not involved in a public financing. However, this lack of attention could be a costly mistake. Most financing transactions involve the issuance of a security and therefore significant state and federal laws are applicable. The following are examples of key laws may apply to your next financing transaction:
- Federal Securities Laws. Whenever you engage in a financing transaction that involves a note, stock, bond, evidence of indebtedness, transferable share, investment contract, any other interest or instrument commonly known as a security, or warrant or right to subscribe to or purchase the foregoing, you are issuing a security. As a result, the Securities Exchange Commission (SEC) who regulates the sales of securities requires registration or an exemption. In Oregon, securities may be offered or sold without registration but the offeror must file a notice and pay a fee to the Director of the Department of Business and Consumer Services prior to the offering of certain covered securities in the state. However, the securities laws can be extremely complicated and failure to recognize a security and follow the law in this area can have serious consequences so hiring a competent attorney is vital.
- State Securities Laws. Every state also has a set of securities laws designed to protect investors and Oregon is no exception. ORS 59.015(19(a) defines the word security and it includes any obligation secured or purportedly secured by an interested in real property. Although Oregon law concerning securities is similar to the federal law, there are significant differences. Thus, if a security is involved in your financing transaction, you'll need to hire an attorney to make sure you comply with the securities laws in Oregon or the respective state you are in.
- Anti-Fraud Laws. Antifraud laws are also implicated when a security is involved in your financing transaction. In essence, the antifraud laws require the person or business that is selling a security to make all material information available to the investors, and not fail to disclose any material information. The anti-fraud laws are designed to protect investors from being defrauded and any violation of these laws will incur serious financial penalties.
- Usury Laws. If you are borrowing money, your company may also be subject to usury statutes, which limit the amount of interest that can be charged. In Oregon, the general usury rate for personal loans in Oregon that are below $50,000 is 12% or 5% above the discount rate for commercial paper. Although there are several exemptions from the Oregon usury laws, consulting a business attorney prior to lending money say you from costly mistakes.
- State Corporate Laws. Often forgotten when entering into a financing transaction is the need to comply with the corporate laws of the state. Many times, this means you will need to file the proper documents with state authorities, obtain the proper approval from board members or shareholder, and take other appropriate steps.
Although this list of laws is not exhaustive, it should show you the importance of having a good corporate finance lawyer involved in your financing transactions. A good corporate finance lawyer can help with a wide range of issues involved in a financing transaction such as helping you assess your realistic potential for financing, identifying financing sources, advising you as to the laws implicated when engaging in a financing transaction, making sure your corporate records are in compliance with the law, and explaining key terms in the financing documents.
If you need help with or have questions about your next financing transaction, please contact Mitchell-Phillips Law, P.C. at 503-471-1330 or info@mitchellphillipslaw.com.
