IPO and US SEC

[odin1985]

I being working on making a proposal to put on coinsortium or cryptostock, or a place similar. Researching on the legality of the issue and the part of incorporating so everything is ready.

I was informed that a company incorporated in the US would need to get SEC approval to list any type of security, and an offshore company would need permission to sell securities to US citizen.

Has anyone got any information or known about this, I'm still torn between incorporating in the US, outside or just not caring about the whole thing.

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[Bonam]

Offering an IPO for a US company without jumping through all the hoops required by the SEC is completely illegal. So is offering shares of such an IPO to US citizens. The vast majority of bitcoin "companies" (i.e. scams, frauds, and failures) are operating in a completely illegal manner.

If you want to run a legitimate business, at this point, stay far far away from trying to raise IPO funds via bitcoin.

[SebastianJu]

I believe i once read a legal way would be not to sell it as shares but handling it like investments. So that all customers are investors and own a part of a business, a machine or something.

Im not fully sure if thats true but i remember that someone claimed it would be a workaround he found.

[NotLambchop]

...
Im not fully sure if thats true but i remember that someone claimed it would be a workaround he found.

SebastianJu, you've been duped again, 'coz that's exactly what "shares" are.

Not surprised though, you're still waiting on Ukyo to make good.  How's the LabRat lawsuit going, BTW?

[jaysabi]

I work in this field, so let me give you some really general information.

No matter what you're selling (shares, interests, etc.), it's still a security, and to comply with the law, you will need to register the security with each state you plan to offer it in. The regulatory hurdle for registering securities is high, at least much higher than I anticipate you want to deal with.

There are ways to legally sell securities without registering. The most common way is through an exemption under Regulation D. There are three exemptions under Reg D: Rule 504, 505, and 506. Each carries different requirements that must be met, otherwise you blow your exemption and are selling an unregistered security, which the SEC and the states take seriously. They regularly and effectively punish people doing so for the safety of the public.

As an example, under Rule 504 of Regulation D, you can raise up to one million dollars, but all your investors must be "accredited" investors, which means they have a net worth of at least one million dollars excluding their primary residence (so $1M not counting their home), or they must have an annual income of more than $200,000. So we're talking about rich people. Also, I believe there is a ban on general solicitation for investors, which means you can't advertise to the public. And this is just the federal rule, in addition, you will have to comply with any state rules that are in place for each state you offer your security in.

There are different requirements under Rule 505 and 506, but 504 is probably the least stringent. To say the least, to fulfill the legal obligations of selling a security, you would have to jump through a lot of hoops, and the expense to get everything in order would be high, as you would need to hire a securities law firm to help you navigate the regulatory landscape.

I am not a lawyer and nothing in this post should be construed as legal advice.

[odin1985]

Thanks for the replies guys, so basically everyone in cryptostock, coinsortium and similar including nxt assests are just doing everything illegally?

And i dont have an option unless i want to spend thousand of dollars just trying to go legal on the SEC part?

[jaysabi]

Thanks for the replies guys, so basically everyone in cryptostock, coinsortium and similar including nxt assests are just doing everything illegally?

And i dont have an option unless i want to spend thousand of dollars just trying to go legal on the SEC part?

Basically any website or company, especially the gambling sites, using pooled money from "investors" to operate and is sharing profits or promising to share them with American citizens is violating US securities laws. Because of the mostly-anonymous way it's being done though through bitcoins and the internet, it makes it a pretty low priority for regulators, although it's scrutiny that is only guaranteed to grow the more common or bigger it gets. You'd be rolling the dice. There's already been one case I know of of regulators hitting someone with a bitcoin business for selling unregistered securities, he had to pay more than $50,000 in fines and disgorgement:  http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370541972520#.VCsCV_ldVqI

[burnside]

There's another piece that has not been discussed yet, which is that even if you IPO outside the USA and you IPO only to non-US citizens, if you yourself reside in the USA you still must follow US law.  Incorporating the entity doing the IPO overseas does not alleviate your legal obligations if you are the principal behind the incorporation and you are running the show from within the USA.

I am not a lawyer.  Hope that helps.

Cheers.

[SebastianJu]

I work in this field, so let me give you some really general information.

No matter what you're selling (shares, interests, etc.), it's still a security, and to comply with the law, you will need to register the security with each state you plan to offer it in. The regulatory hurdle for registering securities is high, at least much higher than I anticipate you want to deal with.

There are ways to legally sell securities without registering. The most common way is through an exemption under Regulation D. There are three exemptions under Reg D: Rule 504, 505, and 506. Each carries different requirements that must be met, otherwise you blow your exemption and are selling an unregistered security, which the SEC and the states take seriously. They regularly and effectively punish people doing so for the safety of the public.

As an example, under Rule 504 of Regulation D, you can raise up to one million dollars, but all your investors must be "accredited" investors, which means they have a net worth of at least one million dollars excluding their primary residence (so $1M not counting their home), or they must have an annual income of more than $200,000. So we're talking about rich people. Also, I believe there is a ban on general solicitation for investors, which means you can't advertise to the public. And this is just the federal rule, in addition, you will have to comply with any state rules that are in place for each state you offer your security in.

There are different requirements under Rule 505 and 506, but 504 is probably the least stringent. To say the least, to fulfill the legal obligations of selling a security, you would have to jump through a lot of hoops, and the expense to get everything in order would be high, as you would need to hire a securities law firm to help you navigate the regulatory landscape.

I am not a lawyer and nothing in this post should be construed as legal advice.

What about some guys getting together and building a business? Whats the difference there then? Or lets say 10 guys put their money together and buy one of those bitcoin ATM's. They would all own it but it doesnt sound like its something like a security then. Is the difference that the shares of the company cant be sold so easily? Or that there is no issuer? But even when you are a partly owner of a business you would be able to sell your part of the business. And i cant believe that you have to apply for SEC rules only for creating a business with others. Though im no american so...

[jaysabi]

I work in this field, so let me give you some really general information.

No matter what you're selling (shares, interests, etc.), it's still a security, and to comply with the law, you will need to register the security with each state you plan to offer it in. The regulatory hurdle for registering securities is high, at least much higher than I anticipate you want to deal with.

There are ways to legally sell securities without registering. The most common way is through an exemption under Regulation D. There are three exemptions under Reg D: Rule 504, 505, and 506. Each carries different requirements that must be met, otherwise you blow your exemption and are selling an unregistered security, which the SEC and the states take seriously. They regularly and effectively punish people doing so for the safety of the public.

As an example, under Rule 504 of Regulation D, you can raise up to one million dollars, but all your investors must be "accredited" investors, which means they have a net worth of at least one million dollars excluding their primary residence (so $1M not counting their home), or they must have an annual income of more than $200,000. So we're talking about rich people. Also, I believe there is a ban on general solicitation for investors, which means you can't advertise to the public. And this is just the federal rule, in addition, you will have to comply with any state rules that are in place for each state you offer your security in.

There are different requirements under Rule 505 and 506, but 504 is probably the least stringent. To say the least, to fulfill the legal obligations of selling a security, you would have to jump through a lot of hoops, and the expense to get everything in order would be high, as you would need to hire a securities law firm to help you navigate the regulatory landscape.

I am not a lawyer and nothing in this post should be construed as legal advice.

What about some guys getting together and building a business? Whats the difference there then? Or lets say 10 guys put their money together and buy one of those bitcoin ATM's. They would all own it but it doesnt sound like its something like a security then. Is the difference that the shares of the company cant be sold so easily? Or that there is no issuer? But even when you are a partly owner of a business you would be able to sell your part of the business. And i cant believe that you have to apply for SEC rules only for creating a business with others. Though im no american so...

It gets pretty granular and specific to the situation, but you're talking about an exemption from the rules in this case. Very generally speaking, there is a litmus test the Supreme Court established a long time ago to help determine whether or not the investment is a "security."

If the venture has the following four characteristics, it is generally a "security":

1. investment of money due to
2. an expectation of profits arising from
3. a common enterprise
4. which depends solely on the efforts of a promoter or third party

Most likely, the situation you're talking about would not meet the 4th criteria because people pooling money together to start a business would be active participants in the business, and not be third parties or outsiders who expect to profit off the work of the people running the business. That's generally the difference between owning a part of a business and owning a security.

The rules differ for every state, and by the specifics of the situation.

[bigasic]

If you sell a piece of a company/idea, whatever, it needs to be approved by the SEC.I know of many "companies" that try to jump thru hoops by calling things different names but they are just trying to manipulate the system. If someone is going to invest in your company and its more than one person, then it has to be registered. Granted, if you only get a couple investors, then you can make an LLC to form a company. Still, there are rules that you have to abide by even doing that.. Bottom line, don't get investors unless your 100 percent legal with the SEC and your state authorities. Thats why you see so many companies say its not for US investors.

[Keyser Soze]

What about some guys getting together and building a business? Whats the difference there then? Or lets say 10 guys put their money together and buy one of those bitcoin ATM's. They would all own it but it doesnt sound like its something like a security then. Is the difference that the shares of the company cant be sold so easily? Or that there is no issuer? But even when you are a partly owner of a business you would be able to sell your part of the business. And i cant believe that you have to apply for SEC rules only for creating a business with others. Though im no american so...

In your scenarios, these people would just form some kind of legal entity (Corporation, LLC, Partnership, ect.) and have no problems. If one of the principals on the business wanted to sell their share, they would have to be sure and follow SEC and state regulations regarding the sale. Rules vary depending on the type of entity, but generally they limit number of people solicited and/or may require investors to be "accredited". The SEC website would be a good place to look for additional information though.

Generally most every offering in this section runs afoul with SEC regulations. For example, many of the offerings are offered openly to anyone who wants to invest, and often times there is no business entity behind the offering. If you are a US person/entity or are offering securities to a US person, the SEC expects you to follow their regulations. Obviously if you are trying to raise funds from different people in different countries it can be daunting due to the various regulations.

jaysabi posted some good information about the specific exceptions if you are interested to learn about them.

I am not a lawyer ect...

[User705]

I work in this field, so let me give you some really general information.

No matter what you're selling (shares, interests, etc.), it's still a security, and to comply with the law, you will need to register the security with each state you plan to offer it in. The regulatory hurdle for registering securities is high, at least much higher than I anticipate you want to deal with.

There are ways to legally sell securities without registering. The most common way is through an exemption under Regulation D. There are three exemptions under Reg D: Rule 504, 505, and 506. Each carries different requirements that must be met, otherwise you blow your exemption and are selling an unregistered security, which the SEC and the states take seriously. They regularly and effectively punish people doing so for the safety of the public.

As an example, under Rule 504 of Regulation D, you can raise up to one million dollars, but all your investors must be "accredited" investors, which means they have a net worth of at least one million dollars excluding their primary residence (so $1M not counting their home), or they must have an annual income of more than $200,000. So we're talking about rich people. Also, I believe there is a ban on general solicitation for investors, which means you can't advertise to the public. And this is just the federal rule, in addition, you will have to comply with any state rules that are in place for each state you offer your security in.

There are different requirements under Rule 505 and 506, but 504 is probably the least stringent. To say the least, to fulfill the legal obligations of selling a security, you would have to jump through a lot of hoops, and the expense to get everything in order would be high, as you would need to hire a securities law firm to help you navigate the regulatory landscape.

I am not a lawyer and nothing in this post should be construed as legal advice.

What about some guys getting together and building a business? Whats the difference there then? Or lets say 10 guys put their money together and buy one of those bitcoin ATM's. They would all own it but it doesnt sound like its something like a security then. Is the difference that the shares of the company cant be sold so easily? Or that there is no issuer? But even when you are a partly owner of a business you would be able to sell your part of the business. And i cant believe that you have to apply for SEC rules only for creating a business with others. Though im no american so...

What does America have to do with this.  These type of laws exist in Europe as well.  There's a huge difference between people doing a business together and people selling shares in a business to strangers.  Do you honestly not get it? 

[odin1985]

Yeah i see that, but i find it interesting that mostly all securities in bitcoins are for everyone and just dont seem to care about registration or anything.

Now i wonder is it possible to lets say create a ipo to raise money to make a company and go legal with the sec and open a new ipo with this new company that is legal and just close or rebuy the first one that was made?

Or is it possible to go legal after created and IPO has being sold to members?

Im just reading or trying to read this page that is usefull http://www.sec.gov/info/smallbus/qasbsec.htm#fsl

[User705]

Yeah i see that, but i find it interesting that mostly all securities in bitcoins are for everyone and just dont seem to care about registration or anything.

Now i wonder is it possible to lets say create a ipo to raise money to make a company and go legal with the sec and open a new ipo with this new company that is legal and just close or rebuy the first one that was made?

Or is it possible to go legal after created and IPO has being sold to members?

Im just reading or trying to read this page that is usefull http://www.sec.gov/info/smallbus/qasbsec.htm#fsl

No, not in the eyes of regulators.  But if you do it right you'll get a slap on the wrist.  Go read about Satoshi Dice and Erik Voorhees.

[odin1985]

yeah i read that post, mostly says that he got to pay the earning plus fees and is unable to make any new securities for 5 years