SEC Compliance: Regulations, Registration, & Reporting

November 3, 2022

What is SEC compliance? Who needs to comply with the rules of America’s securities watchdog, and how can you avoid harsh penalties?

The SEC continues to adapt its rules, created nearly a century ago, to stand the test of time against a developing digital market. Cryptocurrencies, NFTs, and other digital assets walk a fine line when it comes to securities regulation, but the SEC has made it clear it’s keeping a close watch.

In particular, companies that want to raise funds through an initial public offering (IPO), initial coin offering (ICO), or other forms of selling securities to investors must register with the SEC and follow strict annual requirements.

In this post, we’ll cover some essential SEC regulations to be aware of, who needs to register with the SEC, and an overview of the compliance process.

SEC Compliance: Who Needs to Register with the SEC?

Companies or individuals looking to raise capital have the option to go public through IPOs or ICOs.

  • An IPO, or initial public offering, refers to the first time a company is offering its shares to the general public.
  •  An ICO, or initial coin offering, is a similar process, but it’s conducted digitally by selling various types of cryptocurrency tokens.

If the decision has been made to ring the bell, its best to be prepared for the litany of requirements outlined by the SEC regarding the sale of securities.

Securities can include stocks, certain types of digital tokens, and other assets that represent partial ownership in a company. Anyone working and operating in the securities industry must practice SEC compliance.

This includes:

  • Companies that are selling securities, as defined by the SEC
  • Officers, directors, and principal stockholders of publicly owned companies

Before offering or selling securities, a company must comply with the SEC registration process in order for an IPO to be deemed lawful. Otherwise, SEC penalties can include substantial fines and other obstacles to your business.

While the market for ICOs has been less regulated, the SEC is starting to crack down due to the increased risk of fraud and market manipulation.

SEC Rules and Regulations: A Crash Course

SEC regulations are clear-cut and direct. While it can seem overwhelming to comply with each request, it saves time, money, and stress in the long run. Our SEC attorneys can guide you through the entire process!

After the Stock Market Crash of 1929, Congress focused on regaining investors’ confidence in the market by establishing rules and regulations to promote fair trading, the disclosure of important market information, and protection against fraud.

Below are several of the SEC regulations and laws that help maintain an impartial securities market:

The Securities Act of 1933

  • Passed by Congress during the Great Depression, this act requires companies to provide investors with important information about the offered securities.
  • Prohibits misrepresentation and the fraudulent sale of securities.

The Securities Exchange Act of 1934

  • Led to the creation of the SEC, empowering the agency with broad authority over the securities industry.
    Gives the SEC the power to register, regulate, and oversee brokerage firms, clearing agencies, and national self-regulatory organizations (SROs) such as NASDAQ and the New York Stock Exchange.
  • Provides the SEC with disciplinary powers over companies and individuals operating in the securities industry.
    Provides investors with access to the financial information and operations of all publicly traded companies.

Investment Advisers Act of 1940

This Act requires investment advisors and firms who receive compensation for their securities advice, register with the SEC and adhere to their rules. Since amended in 1996 and 2010, the Act requires advisers working with an investment firm as sole practitioners or those with $100 million or more assets under management.

Sarbanes-Oxley Act of 2002

This Act mandated several reforms to enhance financial disclosures, corporate responsibility, and the prevention of corporate and accounting fraud. It also led to creating the Public Company Accounting Oversight Board (PCOAB) to oversee auditors.

Dodd-Frank Wall Street Reform Consumer Protection Act of 2010

This law’s sole purpose was to restructure several areas of the regulatory system, including:

  • Consumer Protection
  • Credit Ratings
  • Trading Restrictions
  • Corporate disclosure and governance

Jumpstart Our Business Startup Act of 2012

  •  Often referred to as the JOBS Act, this law loosened regulatory requirements to help certain businesses raise money in public markets.
    Lowers disclosure requirements for businesses with less than $1 billion in revenue.
  • Allows many more companies to sell stocks or securities without having to register with the SEC, under a process known as Regulation A.

SEC Compliance: Registration

By now you probably know this, but just in case, here’s another reminder: If a company uses securities as a means of raising funds, whether through an IPO or ICO, it must be registered with the SEC to avoid harsh penalties.

There are certain exceptions, but a legal review should be step number 1 before any funds are raised through any public offerings.

The SEC is actively focusing on protecting crypto investors as more ICOs and token funding campaigns appear. In February 2022, The SEC made a loud statement by charging the DeFi lending company BlockFi $100 million in penalties for failing to comply with SEC regulations.

Here’s a breakdown of the SEC registration process:

  1. A company must file a registration statement with the SEC. The type of registration used for IPOs is Form S-1, which includes two parts.
    •  Part 1: The prospectus or legal offering document includes essential facts about the security, such as financial condition, business operations, etc., that must be disclosed to the public.
    • Part 2: Additional information that doesn’t need to be disclosed to the public, such as fully executed contracts, the recent sales of unregistered securities, etc.
  2. The SEC reviews the registration statement to ensure compliance with disclosure requirements. It does not determine whether the security is considered a “good” investment.
  3. The SEC provides comments or concerns regarding the security within 30 days after the filing date.
  4. Once declared “effective,” the security can be sold to the public.
  5. The issuer must continue its SEC compliance by filing annual and quarterly reports as outlined in the Securities Exchange Act of 1934.

Although most companies are required to register their securities, some organizations may have the option to avoid going through these rigorous requirements.

SEC Compliance: Registration Exemptions

There are options for companies to raise funds without undergoing the full SEC registration process. Regulation D fundraising and Regulation A fundraising are 2 alternative pathways.

It’s important to note that Regulation D and Regulation A are not easy passes to restriction-free fundraising. They still involve a lot of red tape!
SEC Regulation D allows business owners to sell equity to private investors without SEC registration.

Companies looking to become exempt from registering public offerings may do so under SEC Regulation A. Companies offering $75 million per year or less may qualify for this type of fundraising.

SEC Filings: Annual Compliance Requirements

Once the SEC has deemed a company’s securities “effective” and allowed a public offering, are the regulatory hurdles finally over? Not quite.

Companies that sell securities on the public market are required to submit annual reports and financial statements to the SEC and to shareholders.

The information that must be reported includes:

  • Financial Statements
    • Balance sheet
    • Income statement
  • Unregistered sales of equity securities
  • Changes in company operations

The SEC makes all of this information free and accessible to the public through its database, EDGAR. Each company must also make its annual reports available to shareholders through its website.

If you think you’ve conducted an improper ICO—or, even worse, if the SEC has contacted you—it’s probably time to call an attorney ASAP.

Understanding SEC compliance can prevent your company from facing off against the SEC and racking up huge penalties. Whether you’re a startup founder gearing up for an IPO or you want to use token funding to launch a new blockchain project, it’s essential to have all your ducks in a row and comply with SEC regulations.

If you need help with SEC compliance for your business, contact the elite team of lawyers at Gordon Law Group for assistance!

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