Unregistered securities: Overview, definition, and example
What are unregistered securities?
Unregistered securities are financial instruments such as stocks, bonds, or other investment products that have not been registered with the relevant regulatory authorities, such as the Securities and Exchange Commission (SEC) in the United States. These securities are not listed on public exchanges, and they typically cannot be sold or traded on the open market until they are registered or meet certain exemptions.
Unregistered securities are often issued by companies that are raising capital through private offerings, such as private placements, or other exemptions like Regulation D. They are typically offered to a limited number of accredited or institutional investors rather than the general public.
Why are unregistered securities important?
Unregistered securities are important because they provide businesses with an alternative way to raise capital without the lengthy and expensive process of going through public registration with the SEC. For companies, issuing unregistered securities through private offerings allows them to raise funds more quickly and with fewer regulatory hurdles.
However, because these securities are not registered, they are considered more risky for investors. The lack of public disclosure and regulatory oversight means that investors may have less information about the company’s financial health, business operations, or future prospects. As a result, investors are typically limited to those with the financial experience and resources to bear the risks associated with these investments.
Understanding unregistered securities through an example
Imagine a startup company, ABC Tech, that needs to raise $5 million to fund its expansion. Instead of going through the costly process of an initial public offering (IPO), the company decides to issue unregistered securities in a private offering to a group of accredited investors. These investors may include venture capital firms, angel investors, or wealthy individuals who meet certain criteria set by the SEC.
The securities issued in this private offering are unregistered, meaning they have not been filed with the SEC for public trading. However, these investors are able to purchase shares in the company, and they are often subject to restrictions on reselling the securities for a period of time (such as a "lock-up" period).
In another example, a private equity firm might invest in a company by purchasing unregistered bonds. These bonds are not available on the public market, but the private equity firm negotiates directly with the company for the purchase. The company benefits from the capital raised, and the private equity firm assumes the associated risks in exchange for potential future returns.
An example of an unregistered securities clause
Here’s how an unregistered securities clause might appear in a private placement memorandum or investment agreement:
“The securities offered pursuant to this agreement are unregistered securities and have not been registered under the Securities Act of 1933 or any state securities laws. These securities are being offered in reliance on exemptions from registration provided by Regulation D of the Securities Act. As such, the securities may not be sold or transferred without registration or an applicable exemption from registration.”
Conclusion
Unregistered securities are an important tool for raising capital through private offerings and exempt transactions. While they provide businesses with a quicker and less costly way to obtain funds, they also carry greater risks for investors due to the lack of public disclosure and regulatory oversight.
For SMB owner-managers, understanding unregistered securities can help in raising funds through private placements or other exempt offerings while ensuring compliance with securities laws and regulations. It is essential to carefully consider the potential risks and benefits when issuing or investing in unregistered securities.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.