Most people envision stock or bonds when thinking of securities.   However, partnership interests, options, warrants, agreements to invest, partnership interests, participations in a pool of assets, certain types of promissory notes and many other arrangements which might commonly be considered an "investment", involve securities.

Any person who offers or sells any type of a security must comply with the securities laws and regulations of each applicable securities authority.   The federal government, through the Securities and Exchange Commission (SEC) and the several states have each promulgated securities laws and regulations.   Compliance with the laws of one securities authority does not necessarily constitute compliance with the laws of another.

At a minimum, therefore, sellers of securities must comply with at least two separate set of laws, i.e., the federal law and the law of the state in which the securities are to be offered and sold.   If a broker-dealer firm assists in the selling effort, the rules of the National Association of Securities Dealers additionally come into play.

Any time an offering of securities is made the seller must register the offering with applicable securities authorities, or an exemption from registration must be found.   One of the first things an entrepreneur should do after deciding to sell securities is to structure the securities offering to comply with a particular form of registration or to satisfy the requirements for an exemption from registration.

For a number of economic, legal and other practical reasons, most entrepreneurs will most likely offer their securities on an exempt basis.   From a federal standpoint, the most likely exemption is one for non-public offerings to a limited number of sophisticated persons who have prior business relationships with the seller or who privately negotiate their securities purchases.   Another common exemption, known as a regulatory "safe harbor", involves offerings with specified dollar limitations and/or limitations on the number of "non-accredited" investors.   Under certain narrow circumstances, an offering that is entirely intrastate can be exempt.

Either registering an offering or as a condition to establishing an exemption, a seller of securities will almost always be required to make available or prepare and deliver certain disclosures to prospective investors.   The breath and content of these disclosures varies depending upon the particular requirements for registration or exemption imposed by the applicable securities authority.

Moreover, a seller of securities will always be subject to the antifraud provisions of the applicable securities authorities, whether the offering is registered or exempt.   As a general proposition, the antifraud provisions prohibit deceit and mandate "full disclosure", i.e., the seller of securities must disclose everything which is material to the proposed investment in the securities.   Although most sellers of securities have honorable intentions, it is not uncommon for sellers to experience great difficulty when identifying which matters should be disclosed and which matters need not be disclosed.

Not surprisingly, a seller of securities must be very cautious when making an offering.   The implications for failure to comply with the securities laws are severe.   For example, noncompliance may result in federal and state securities administrators imposing civil, and possibly criminal, penalties.   As importantly, a failure to comply can result in civil lawsuits from one's investors seeking damages and a return of the invested money.

In most commercial transactions, the rule of thumb is that the "buyer should beware".   Quite to the contrary, under the securities laws, the rule of thumb is that the "seller should beware".   This fundamental difference between securities transactions and commercial transactions should never be forgotten by entrepreneurs considering selling securities.