Expert: Paul Henneman - 10/28/2005

Question
Hi,

My question asks how do you avoid being under the jurisdiction of the US Securities and Exchange Commission (SEC) that regulates public securities?

You probably don't know very much about SEC regulations. However, I know nothing about them other than what I read from the internet. So I would greatly appreciate hearing anything you do know and don't expect you to answer all my below questions.   

I want to be able to contact investors and use their money for a business idea I have without having to file with the SEC or be under their jurisdiction. My main reason for not wanting to be under SEC jurisdiction is because my business ideas are confidential and I really don't want my business ideas disclosed pubically. Another main reason is I don't like being entangled with the Federal government regulating my business. Anyway, I've read some SEC documents posted to the internet. However, I am somewhat confused by what they say.

Initially I thought the SEC only had jurisdication over things like publically traded stocks and bonds. I became confused when an SEC document defined public solicitations to also include mailings! So it sounded like any public solicitation whether through mail or email would also cause your investment to be considered public and would then fall under the jurisdiction of the SEC! That really shocked me!

In fact, it appeared the only way to avoid filing with the SEC is if you do one of the following:

1)   Private offerings confined to only one state because once you offer investments outside your home state it is considered interstate commerce and then the SEC has jurisdiction.
2)   Private offerings are limited to a limited number of people or institutions.
3)   Offerings of a limited size.
4)   Or the offering is from a government entity. Since I'm not a government entity, this doesn't apply to me.

Here are my questions:

1)   Is it true that I can't solicit investors throughout the world using advertisements or letters that I mail out without falling under SEC jurisdiction? Do I have to limit all my solicitation mailings and emails to only my home state of Texas?
2)   Am I safe in limiting all my investment efforts including advertisements and mailings to just Texas? Or are advertisements and mailings only in Texas also considered a public offering requiring SEC jurisdiction? What happens if my investor later moves outside of Texas? To keep it a private offering must I limit my investment solicitations to strictly a person to person level?    
3)   Are there any state restrictions besides the SEC that also regulate investments? What kinds of things do you think Texas would regulate related to investments, ie a license?


Answer
Brison,
  Thank you for your question! You are right that I do not have a great deal of knowledge regarding SEC regulations, so please take any advice I give as my 'best guess', I am no expert! But I have been running a company for a while, so have had some minor experience.
Essentially there is no way around the following:
You need to incorporate, or create a limited liability company of some form. While it is possible to do this on your own, it is not advisable. I strongly recommend that you get a corporate attorney to get your business set up. This should only take a few days and cost a few hundred dollars.
The next step is networking. Create a business plan, make calls, try to find partners that you could offer a share in your business in return for the capital you need.

Do not take short cuts. Spend alot of time on your business plan. It should be 10 to 20 pages at a minimum, and well researched. There are numerous books out there that can help give you the basic format of a good business plan. The below website has information regarding this and many other aspects to start a business:

http://www.myownbusiness.org/s2/

You could also create a website that could serve a presentation tool. THe more professional you are, the more likely you will be to find partners.

Starting a business is not easy. lots of people have lots of ideas all the time, make a half hearted effort, and fail becuase they think it will be easier than it is. If it were easy to make it in business, everyone would be doing it! It sounds like you feel strongly about your idea, that is great. Get the corporation formed, and draft that business plan. Lots to do before worrying too much about the SEC! Be careful about sharing your ideas, if it is truly unique, someone could steal it. Of course you must share your ideas to find partners, so be sure to have everyone you present your business plan to sign a non-disclosure/non-compete form. You can find these online also, or your lawyer can provide them. Your corporate attorney could also provide advice regarding the SEC, but I do not think this will be a problem for you. The key will be to form a privately held company, with no public offering of shares.

Best Regards,
Paul Henneman
President
ValuEngine, Inc.
www.ValuEngine.com
www.VEInsitutional.com
(800) 381-5576