It is common to think of securities laws as something that applies to companies that are publicly traded on the NASDAQ or New York Stock Exchange. But, securities laws have a much broader reach. Any equity or debt instrument is presumed to be a security that is subject to registration. However, several common exemptions are available for the issuance of securities if certain conditions are met. It is not uncommon that real estate developers and oil and gas investors will raise capital for development or investments through an investment vehicle such as a limited partnership. Occasionally, developers and other people raising capital have a misconception that the interests in a partnership are not securities. However, even partnership interests are “securities”. Having said that, it is unlikely that such real estate development and oil and gas investments will need to be registered with the Securities Exchange Commission. Rather, exemptions commonly apply if the offering is handled properly. Nevertheless, best practices dictate that the sponsor of the investment offers the securities only to accredited investors by means of a confidential private placement memorandum. That memorandum will serve as a prospectus about the investment opportunity, disclose any legal or business risks, and provide other critical information such as the legal terms of the investment, disclaimers, and waivers.
Even in small capital raises of a few million dollars it is prudent and necessary to ensure that the securities offering complies with state and federal laws and does not include any material misrepresentations or omissions about the investment opportunity. Sometimes real estate and oil and gas deals don’t work out and lead to litigation. To make matters worse, if the offering process was not accurate, thorough, and in full compliance with applicable state and federal law, the sponsor of the capital raise may face litigation from the investors for securities fraud or investigation from the SEC or a state securities board.
So, even in a small offering among friendly investors, do the right thing and provide the prospective investors a properly prepared offering memorandum.
Doug McCullough and Amy Akers | McCullough Sudan PLLC