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Securities Registration Disclosure Tips


Section 36b-16 of the Connecticut Uniform Securities Act prohibits any individual or entity from offering or selling any security in or from Connecticut unless 1) the security is registered; 2) the security or transaction is exempt from registration; or the security is a "covered security" as that term is defined under the Securities Act of 1933. The reason that securities are registered is to ensure that prospective investors receive full disclosure of all material facts necessary for them to make an informed investment decision. This includes information about the issuing company, its principals and the investment itself. Full disclosure also helps to minimize an issuer’s liability if a dissatisfied investor later asserts a claim for fraudulent misrepresentations or omissions.

The Division conducts a "disclosure review" of applications for securities registration. By contrast, other states may conduct a so-called "merit review" of offerings within their borders. Before a securities offering may proceed in those states, the securities agency must determine that the offering is fair, just and equitable. The Division’s review covers the issuer’s prospectus or offering document and is followed by a comment letter pinpointing specific deficiencies and requesting that the issuer address them through an amended filing.

The Connecticut Uniform Securities Act requires that various items be disclosed when an issuer is registering its securities by qualification. Where an issuer is registering by coordination, most of the disclosure requirements are prescribed by federal law.

The importance of a well-prepared offering document cannot be underestimated. Inexperienced issuers are strongly encouraged to consult with legal counsel for advice on preparing the offering document and developing their business plan. Each topical area must be addressed in detail with an eye toward maximizing disclosure to the investor. Although this may be a time-consuming process, the end results are well worth it. Above all, the areas must be presented objectively and without hype. Unsubstantiated data and financial projections raise red flags. Remember: The offering document is a disclosure tool, not a marketing device. All material facts concerning the company and its principals must be disclosed - warts and all.

What follows is a snapshot of Connecticut’s disclosure requirements. It is not intended to be comprehensive. Issuers seeking to raise capital should consult the Connecticut Uniform Securities Act and its regulations for additional information.

Key Disclosures in the Offering Document

  • Description of the Company’s business and operations (including financial results), and that of the Company’s affiliates and subsidiaries

  • Description of the Company’s physical properties and equipment

  • Business Background of Company Management

  • The General Competitive Conditions in the Industry in which the Company conducts operations

  • Amount of the Company’s securities held by its officer, directors and 10% shareholders

  • Executive compensation

  • Whether any officer or director has a material interest in a material transaction involving the Company or a significant subsidiary. An example would be an officer who owns the real property housing the Company and who economically benefits from the Company’s rental payments.

  • The amount and type of securities being offered and the price. This includes the minimum amount of securities, if any, that an investor is required to buy in the offering. If the entire offering will not go forward unless a minimum amount of securities are sold by a certain date, the offering document must spell this out. Here, the Company would customarily deposit investor subscription monies in an escrow account at a bank until the minimum amount of securities are sold The document should describe the escrow provisions and disclose to investors that, if the minimum amount is not sold, monies paid into escrow will be returned directly to subscribers.

  • Estimated aggregate sales commissions in connection with the offering and the identity of each broker-dealer, underwriter or finder involved

  • Other selling expenses such as legal, engineering and accounting fees

  • The estimated cash proceeds from the offering, how the Company will use them (“Use of Proceeds”) and how their use will be prioritized. If the offering is subject to a minimum offering amount, the offering document must indicate how the funds will be used if the minimum offering amount is realized as well as how the proceeds will be used if the maximum offering amount is raised. The offering document should reflect the anticipated use of proceeds in areas such as accounts payable; salaries; marketing expenses; research and development; real estate rental or purchase; inventory and equipment; and working capital.

  • Material contracts involving the Company

  • Material litigation and disciplinary items involving the Company, its affiliates and principals

  • Amount of “Dilution” investors will incur in the offering. Dilution is the difference between the net tangible book value after the offering and the offering price.

  • Financial statements for the Company

Risk Factors

Connecticut law requires that the offering document disclose the principal factors that make the offering speculative or one of high risk. Risk factors are unique to the type of offering being conducted. Each risk factor must be fully explained and geared to the operations of the specific issuer. It is not enough to say that the Company is minimally capitalized - you must explain how and why this makes the particular offering one of high risk. Following are some common examples:

  • The Company is a development stage concern with no established track record

  • The Company’s business is seasonal

  • Management is inexperienced in the particular line of business

  • The Company has a precarious financial position or a history of past losses with no expectation of immediate profits

  • Limited operating revenues

  • Minimal capitalization

  • Substantial portion of Company assets comprised of intangibles

  • Company depends on the offering to continue operations or to pay off significant indebtedness to the benefit of current management

  • Need for future financing to support operations

  • Uncertain market for the Company’s products or services

  • Unproven product or business

  • Competition in the industry in which the Company engages

  • Little or no manufacturing capability

  • Government regulation of Company products or services (e.g. licensing; environmental)

  • Company reliance on technology that may become obsolete

  • Need to pay royalties for patents and trademarks that are not Company-owned

  • Dependence on key personnel, including certain members of management

  • Management’s record in similar or other prior businesses resulted in investor losses

  • Management retains substantial voting control of the Company

  • The Company’s principals or promoters have criminal or other disciplinary histories

  • Substantial compensation is paid to management or a substantial amount of the offering proceeds will benefit management

  • Material conflicts of interest and material transactions exist between management and the Company

  • Promoters have received substantial amounts of cheap stock (i.e. stock issued at a discount from the offering price) and options from the Company

  • Promoters own a significant amount of shares that will be available for immediate resale

  • Investors will experience immediate, substantial dilution of their investment

  • Investors face the risk of losing their entire investment

  • The Company’s securities are not publicly traded, and there can be no assurance that a market will develop

  • The offering price for the securities has been arbitrarily determined

  • The Company has no plans to pay dividends in the immediate future

Securities Registration, Exemptions and Notice Filings