Love a Local Business? Advise it to be careful about selling shares!

In a recent article on CNNMoney.com called “Love a Local Business?  Buy A Share,” there were some wonderful stories about small businesses that offered shares to their local communities to raise capital.  For example, according to the article, “In January 2009, Vox Pop, a popular bookstore and coffee shop in Brooklyn . . . offered shares . . . for $50 apiece, calling community meetings and buttonholing patrons as they came through the door. Each share entitles its holder to a small dividend once Vox Pop’s debt is paid.”

No additional detail is provided, but I had to wonder – did this business comply with the securities laws before doing this?!?

Offering shares to the public requires a very extensive state and federal compliance process.  Stories like these mislead small businesses into thinking they can offer shares to the public just by printing some flyers and “buttonholing” prospects.  Nothing could be further from the truth!

Katovich Law Group encounters this issue almost every day because our clients want to be able to go to the public with their wonderful ideas and solicit small investments.  We hate to be the bearer of bad news when we have to tell them they can’t do it.

Michael Shuman has written extensively about this problem.  Here is an excerpt from a recent blog post:

Suppose you wished to play blackjack in one of the more than one thousand casinos operating across the United States. Do you first have to prove that you’re an accredited gambler? Must you read a thick disclosure statement letting you know the risks of blackjack before you place your first bet? Everyone understands that these would be silly requirements.

We have two fundamentally contradictory legal regimes operating today. One, called gambling, allows every adult, irrespective of income, to risk everything for a probable loss. Another, called small-stock investing, prohibits 98 percent of us from investing in the local businesses that are essential for the well-being of community, unless businesses pay prohibitively expensive lawyers’ fees to prepare the unreadable disclosure statements.

Katovich Law Group is creating a working group of leaders in the field from all over the country who will be compiling the following information:

  1. A comprehensive inventory of creative ways that small businesses can raise equity capital without extensive legal hurdles, such as direct public offerings using the SCOR process, taking advantage of the state securities law exemptions for cooperatives, selling commodities rather than securities, using creative financing mechanisms such as business improvement districts, etc.
  2. Legislative and regulatory changes that could be proposed to make equity capital raising easier for small business
  3. Practical tools that will help businesses comply with the legal requirements of raising equity capital without spending the tens of thousands of dollars on legal and consulting fees that they are now required to spend.

Please contact us if you are interested in contributing to this discussion.

About Jenny

Jenny Kassan is an attorney specializing in environmentally friendly and socially responsible ventures. Her legal practice areas include small business start-up and financing, securities regulation, nonprofit law, business agreements, real estate development, franchising, cooperatives, and assessment districts.
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