Washington State Department of Financial Institutions

Small Business Securities Offerings Frequently Asked Questions

The following questions are representative of inquiries frequently received by staff members of the Small Business Section:

Question: I'm thinking about starting a business but I need to raise more money. Can I advertise for investors?

Answer: NO! In order to advertise, you must do a registered securities offering with the Division. Our experience has been that start-up businesses have a very difficult time getting investors from the general public. Mostly, you will be relying on family, friends, and business acquaintances to invest in your company. One or more exemptions from registration may be appropriate for your needs. The Options for Small Business in the Securities Market booklet describes the exemptions that are available to businesses.

Question: What is a "security"?

Answer: "Security" is broadly defined. It includes all of the readily recognizable investment vehicles, such as stocks, bonds, limited partnership interests, and notes, as well as lesser-known items. In general, any transaction that involves an investment of money in an enterprise, with an expectation of profits to be earned through the efforts of someone other than the investor, is a security.

Question: What is the role of the Securities Division?

Answer: In order to protect investors, Washington law requires that every security that is offered or sold must either be registered or subject to an exemption from registration. Many of the registration and exemption provisions require a filing to be made with the Division. The filing requirements depend on the registration or exemption provision relied upon. In some cases, the filing requirements may be minimal. In other cases, it will be necessary to file a disclosure document, typically called a "prospectus" or "offering circular," and various exhibits. Regardless of an issuer's filing requirements, the law requires that all material facts regarding the issuer and the offering be disclosed to prospective investors.

Question: Does making the appropriate exemption or registration filing in Washington allow me to sell my company's securities in other states?

Answer: No, the Company must generally register or qualify for an exemption from registration in each state in which it wishes to sell. Issuers should also note that the federal government, through the Securities and Exchange Commission (SEC), also regulates securities. The federal system is similar to the state system in that federal registration is required unless an exemption from registration is available. Many issuers making an offering entirely within one state rely on the intrastate exemption from federal registration. This exemption could be lost by making offers or sales in more than one state. For information on federal securities regulation, contact the SEC's Office of Small Business at 202-942-2950. The SEC also has a section for Small Business on its home page at http://www.sec.gov/info/smallbus.shtml

Question: I want to sell the company's offering myself. Do I need to be licensed as a securities salesperson?

Answer: Registered offerings (SCOR, Regulation A, registration by qualification or coordination) must be sold by licensed securities salespersons. If no commissions will be paid to sell the shares, officers and directors of the issuer may become licensed without taking any qualifying examinations. In that instance, a license is obtained by filing a Form U-4 application with the Division and paying the required $40 licensing fee.

For offerings exempt under Regulation D Rule 504, no securities salesperson license is required; however, no compensation can be paid to sell the securities.

For offerings exempt under Regulation D Rule 505, WAC 460-44A-505(2)(b)(i) provides that “No commission, fee, or other remuneration shall be paid or given directly or indirectly, to any person for soliciting any prospective purchaser that is not an accredited investor in the state of Washington unless such person is registered in this state as a broker-dealer or salesperson.”

For offerings exempt under Regulation D Rule 506, there are no licensing requirements and no restrictions on the payment of compensation.

Question: I want to use a broker to sell my offering. Does the Securities Division have a list of brokers that have sold small offerings in the past?

Answer: No. Our experience has been that most small offerings, particularly those under $1 million or so, are marketed by officers of the issuer. Broker interest in these small offerings has been very limited to date.

Question: I'm interested in doing one of the "fill-in-the-blanks" offerings (SCOR/Regulation A). How can I get a copy of a previously completed offering circular to use as an example?

Answer: Copies are available through the public disclosure process. You can download the Public Disclosure Request Form or call the Division and ask them to send you a Public Disclosure Request Form. Simply indicate the offering circular that you would like to see and return the form. If you would like us to suggest an offering circular for a company that is in the same business as yours, please give us a call. A small fee will typically be charged (approximately $5.00) to cover copying charges. The files may also be examined in our offices during normal business hours. For your convenience, as well as ours, however, we request that you contact our public disclosure coordinator, Carol Kelsey at carol.kelsey@dfi.wa.gov or 360-902-8760 prior to visiting us.

Question: My business has no operating history. Can I still make an offering of securities?

Answer: There are generally no rules stating that a company must be in business for a certain period of time before it can sell its securities, although there are rules that would make it difficult for a newly formed company to make a public offering of debt securities. Please be aware, however, that a company without significant operating history may find it difficult to answer the questions on the SCOR Form. At the very least, a company should complete a thorough (and realistic) business plan before attempting to draft a securities disclosure document. Companies without significant operating histories may also have a more difficult time attracting investors to their offerings.

Question: What is the filing fee?

Answer: The fee is generally dependent on the dollar amount of securities that you wish to sell in this state. Please see Options for Small Business in the Securities Market.

Question: Do I need a lawyer to fill out the SCOR offering circular?

Answer: There is no legal requirement that a lawyer be retained to fill out the SCOR Form. It will be necessary to obtain a legal opinion on the legality and validity of the offering. That is, an opinion that the corporation has been correctly formed and the securities will be legally issued. SCOR was designed as a "do-it-yourself" form. It is usually quite helpful, however, to at least get input from a lawyer familiar with securities matters. It is also smart to consult with a lawyer to make sure that your company is properly structured for your proposed offering.

Question: Can the Division recommend a lawyer?

Answer: We cannot recommend any particular lawyer. We suggest you ask for referrals from your friends and business associates. Lawyers that specialize in securities generally practice with major law firms. One way to get started is to look in the "Attorneys" section of the Yellow Pages. Following the alphabetical listings will be listings by specialty. One of the specialties usually listed is "securities."

Call us at 360-902-8760 or send an e-mail to Small Business Assistance Section