Small Business Debt As a Security- Issuing Equity

issuing small business equity and securities





In considering whether a note held a strong family resemblance to an exempt note, the Court looked at four factors:

1.  Whether the seller intended the issuance of the note to raise capital for general business use and whether the purchaser intended the note to generate a profit (usually in the form of an advantageous interest rate.

2.  Whether the issuance of notes was part of a “common plan” of distribution to generate investment

3.  Whether the public had a reasonable basis for believing that the note in question was a security.

4.  Whether other bodies of regulations existed, aside from the securities laws, that would have governed the type and issuance of the notes in question, i.e. certificates of deposit, for example, are substantially subject to regulations promulgated by the Federal Deposit Insurance Corporation.

Applying the “family resemblance” test to the case before them, the Supreme Court held that the notes issued to members and non-members of the agricultural cooperative were, indeed, securities and that more comprehensive disclosures were required under the securities’ laws anti-fraud provisions.

As explained in our prior article--Issuing Equity-- issuers of securities who run afoul the securities laws hazard personal liability as well as civil penalties and the fees and expenses incurred by claimants.

The take away:

  • All debt instruments issued by a business should be carefully analyzed to ascertain whether they would fall into a category of note that would make them exempt from the securities laws.


  • If there is any doubt that a note squarely fits into one of the exempt categories, it should be analyzed in terms of the four factors described above to determine if there is a “strong family resemblance” to one of the exempt categories of notes.

Basically, if it looks like a security, and feels like a security, it probably is, and the disclosure provisions of the anti-fraud provisions of the securities laws probably apply;

  • When in doubt, consult with competent legal counsel.

Many a business owner has been inadvertently caught violating the securities laws leading to the end of their business before it had even begun. Ignorance of the law will not be deemed an excuse or mitigating factor, and the extent of personal liability associated with violating the anti-fraud provisions of the securities laws can be significant.

Related articles:

Part one: Keys to Issuing Equity for Small Business Owners

The Complexities of Co-Ownership

Pros and Cons of Capital Gains


About the author

Robert Goodman

Robert Ian Goodman, Esq. represents clients worldwide in the areas of complex commercial immigration and international and domestic commercial law. Mr. Goodman also provides general counsel services to entrepreneurs and start-up businesses and counsels foreign businesses interested in establishing a presence in the U.S. marketplace and U.S. businesses interested in expanding abroad. Mr. Goodman is principal of Goodman Immigration. He is also Special Counsel to the international boutique law firm, Sharma & DeYoung LLP ("S&D"), where he directs the firm's commercial immigration practice. He also co-chairs that firm's Technology and Emerging Companies Practice Group and is a member of S&D's Commercial Litigation and Arbitration Practice Group.