Securities Law Basics for CEOs

SECURITIES LAW PHILOSOPHY

Understanding Securities Compliance as Protection

SECURITIES LAW FUNDAMENTALS

WHY SECURITIES LAW MATTERS:
☐ Personal liability for officers/directors
☐ Criminal penalties for violations
☐ Investor lawsuits (securities fraud)
☐ SEC/state enforcement actions
☐ Deal-killer in M&A due diligence

CEO'S ROLE IN SECURITIES COMPLIANCE:
☐ Ensure proper fundraising procedures
☐ Maintain accurate cap table
☐ Oversee 409A compliance
☐ Control insider information
☐ Sign required filings

SECURITIES LAW BASICS:
Every stock issuance is a "securities" sale.
Must either register with SEC or qualify
for exemption. Private companies use exemptions.

KEY SECURITIES CONCEPTS:
☐ Accredited investor: Meets income/net worth tests
☐ General solicitation: Public advertising of offering
☐ Private placement: Exempt offering to select investors
☐ Form D: SEC notice of exempt offering
☐ Blue sky: State securities laws

COMMON SECURITIES MISTAKES:
☐ Issuing stock without board approval
☐ Talking about fundraising publicly
☐ Not filing Form D
☐ Options priced below FMV (409A)
☐ No accredited investor verification
☐ Incomplete subscription documentation

THE SECURITIES MINDSET SHIFT:
"Securities laws exist to protect investors
from fraud. If you're raising money honestly
and documenting properly, compliance is
straightforward. The problems come from
cutting corners or not understanding the rules."

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COMPREHENSIVE SECURITIES COMPLIANCE

Securities Compliance Framework

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SECURITIES LAW BASICS FOR CEOS
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COMPANY: _______________
Assessment Date: _______________
Securities Counsel: _______________

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SECTION 1: SECURITIES EXEMPTIONS
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REGULATION D OVERVIEW:

Rule 504:
☐ Up to $10 million in 12 months
☐ State registration may be required
☐ Rarely used by VC-backed companies
Applicable: ☐ Yes ☐ No

Rule 506(b) (Most Common for Startups):
☐ Unlimited raise amount
☐ Unlimited accredited investors
☐ Up to 35 non-accredited (sophisticated)
☐ NO general solicitation/advertising
☐ Investor self-certification OK
☐ Disclosure requirements for non-accredited
Applicable: ☐ Yes ☐ No

Rule 506(c):
☐ Unlimited raise amount
☐ Accredited investors ONLY
☐ General solicitation ALLOWED
☐ Must VERIFY accredited status
    Verification methods:
    ☐ Tax returns (income test)
    ☐ Financial statements (net worth)
    ☐ Broker/attorney/CPA letter
    ☐ Third-party verification service
Applicable: ☐ Yes ☐ No

Regulation Crowdfunding (CF):
☐ Up to $5 million per year
☐ Must use registered portal
☐ Anyone can invest (with limits)
☐ Disclosure requirements
☐ Annual reporting required
Applicable: ☐ Yes ☐ No

CHOOSING THE RIGHT EXEMPTION:

Decision Matrix:
| Factor | 506(b) | 506(c) | Reg CF |
|--------|--------|--------|--------|
| Max raise | Unlimited | Unlimited | $5M |
| Advertising | No | Yes | Via portal |
| Non-accredited | 35 | No | Yes |
| Verification | Self-cert | Docs required | Portal |
| Cost | Low | Medium | Higher |

Recommendation: _______________

ACCREDITED INVESTOR REQUIREMENTS:

Income Test (Individual):
☐ $200K+ income in each of past 2 years, OR
☐ $300K+ joint income with spouse, AND
☐ Reasonable expectation of same this year

Net Worth Test (Individual):
☐ $1M+ net worth (excluding primary residence)
☐ Can be individual or joint with spouse

Entity Test:
☐ $5M+ in assets, OR
☐ All equity owners are accredited

Verification Documentation:
☐ Accredited investor questionnaire
☐ Self-certification (506(b) only)
☐ Third-party verification (506(c))
☐ Maintain records for 5 years

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SECTION 2: OFFERING DOCUMENTATION
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STANDARD FUNDRAISING DOCUMENTS:

Term Sheet/Summary of Terms:
☐ Non-binding term sheet
☐ Key economic terms
☐ Key governance terms
☐ Exclusivity/timeline

Subscription Agreement:
☐ Investor representations
☐ Investment amount
☐ Accredited investor rep
☐ Risk acknowledgment
☐ Signature and date

Stock Purchase Agreement:
☐ Terms of sale
☐ Representations and warranties
☐ Conditions to closing
☐ Indemnification

Investor Rights Agreement:
☐ Information rights
☐ Registration rights
☐ Board observer rights
☐ Pro-rata rights

Voting Agreement:
☐ Board composition
☐ Drag-along rights
☐ Voting commitments

Right of First Refusal/Co-Sale:
☐ ROFR on transfers
☐ Co-sale rights
☐ Exemptions

REQUIRED FILINGS:

Form D (SEC):
☐ File within 15 days of first sale
☐ Amendments for material changes
☐ Annual amendment (if offering ongoing)
Filing portal: EDGAR

Blue Sky (State) Filings:
☐ Check each state where investors reside
☐ File notice or registration as required
☐ Many states accept Form D
States with investors: _______________

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SECTION 3: 409A COMPLIANCE
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409A OVERVIEW:

What is 409A?
IRS rule requiring stock options to be
granted at fair market value (FMV).
Failure to comply = 20% tax + penalties
on employees.

VALUATION REQUIREMENTS:

Safe Harbor Valuation:
☐ Independent appraisal (preferred)
☐ Less than 12 months old
☐ No material events since valuation
☐ Performed by qualified appraiser

Valuation Firm: _______________
Last Valuation Date: _______________
FMV per Share: $_____
Expiration: _______________

VALUATION TRIGGERS:
Update 409A valuation when:
☐ 12 months have passed
☐ New equity financing round
☐ Major customer/revenue milestone
☐ Significant product launch
☐ M&A activity (discussions even)
☐ Material change in business

OPTION GRANT PROCESS:

Pre-Grant Checklist:
☐ Current 409A valuation on file
☐ Options remaining in pool
☐ Grant terms defined (vesting, etc.)
☐ Board approval scheduled

Grant Approval:
☐ Board approves grant(s)
☐ Exercise price = FMV from 409A
☐ Grant date = board approval date
☐ Option agreement prepared

Documentation:
☐ Board resolution/consent
☐ Option agreement executed
☐ Grant notice delivered
☐ 83(b) election if early exercise

83(b) ELECTIONS:

When Needed:
Early exercise of unvested options, OR
Restricted stock grants subject to vesting

Filing Requirements:
☐ File with IRS within 30 days
☐ Send copy to company
☐ Keep copy with tax records
☐ Attach to tax return (info only)

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SECTION 4: INSIDER TRADING
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MATERIAL NON-PUBLIC INFORMATION (MNPI):

Examples of MNPI:
☐ Financial results (before public)
☐ Funding round in progress
☐ Major customer wins/losses
☐ M&A discussions
☐ Executive departures
☐ Regulatory issues
☐ Major product announcements

INSIDER TRADING RULES:

Prohibited Activities:
☒ Trading based on MNPI
☒ Tipping others (sharing MNPI)
☒ Recommending trades to others
☒ Trading during blackout periods

Who is Covered:
☐ Directors and officers
☐ Employees with access to MNPI
☐ Significant shareholders (10%+)
☐ Family members of above
☐ Anyone receiving tips

TRADING POLICY ELEMENTS:

Pre-Clearance:
☐ Required for directors/officers
☐ Request form submitted
☐ Approval obtained before trade
☐ Trade within approval window

Trading Windows (if public):
Open window: ___ days after earnings
Blackout: ___ days before earnings

10b5-1 Plans:
☐ Pre-arranged trading plan
☐ Adopted in good faith
☐ When not aware of MNPI
☐ Provides safe harbor

Securities Compliance Checklist

Item	Frequency	Owner	Status	Last Done
409A valuation current	Annual/Events	CFO	☐
Option grants at FMV	Each grant	Legal	☐
Form D filed	Each offering	Legal	☐
Blue sky filings	Each offering	Legal	☐
Accredited investor verified	Each investor	Legal	☐
Cap table reconciled	Quarterly	CFO	☐
Insider trading policy reviewed	Annual	Legal	☐
Stock ledger current	Monthly	CFO	☐

409A Valuation Tracker

Valuation Date	FMV/Share	Common Shares	Valid Until	Firm	Status
	$				☐ Current
	$				☐ Expired
	$				☐ Expired

Form D Filing Tracker

Offering	First Sale	Amount	Filed	States	Status
Seed		$	☐
Series A		$	☐
Series B		$	☐

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