Under the Securities Act of 1933, every offer and sale of securities must either be registered with the Securities and Exchange Commission or qualify for an exemption from registration. Regulation D provides several exemptions that private companies frequently use to raise capital without conducting a registered public offering. (sec.gov)

Companies relying on Rule 504, Rule 506(b), or Rule 506(c) of Regulation D generally must file a Form D notice with the SEC within 15 calendar days after the first sale of securities in the offering. The company may also have notice-filing, consent-to-service, and fee obligations under applicable state securities laws. (sec.gov)

Important Regulation D Requirements

The applicable requirements depend on the exemption selected.

Offering limits: Rule 504 permits eligible companies to offer and sell up to $10 million of securities during a 12-month period. By contrast, Rule 506(b) and Rule 506(c) do not impose a maximum offering amount. (sec.gov)

Investor eligibility: Rule 506(b) permits sales to an unlimited number of accredited investors and up to 35 qualifying non-accredited investors within the applicable period. Rule 506(c) requires every purchaser to be an accredited investor.

General solicitation: Rule 506(b) generally prohibits general solicitation and advertising. Rule 506(c) permits general solicitation, but the company must take reasonable steps to verify that every purchaser is accredited. Rule 504 generally prohibits general solicitation, although limited exceptions apply. (sec.gov)

Restricted securities: Securities sold in most Regulation D offerings are restricted securities. Investors generally cannot resell them freely into the public market unless the resale is registered or qualifies for an exemption.

Rule 144 provides a nonexclusive safe harbor for certain resales. Restricted securities of a qualifying SEC reporting company generally must be held for at least six months. Restricted securities of a non-reporting private company generally must be held for at least one year. Additional conditions may apply depending on whether the seller is an affiliate of the company. (sec.gov)

Investors’ Registration Rights

The goals of a startup’s founders and investors may not always align. Founders may want to maintain control and pursue long-term growth, while investors may eventually want an opportunity to sell their shares.

Investors sometimes address this issue by negotiating a registration rights agreement. Registration rights are contractual rights; they are not automatically provided by the federal securities laws.

Demand Registration Rights

Demand rights allow qualifying investors to require the company to register specified shares for resale, subject to the agreement’s conditions and limitations.

A demand right does not necessarily allow an investor to force the company to conduct an IPO. Depending on the agreement and the company’s circumstances, it may instead require the company to file a resale registration statement for shares held by investors. Demand rights commonly specify:

• when the rights may first be exercised;
• the minimum number or value of shares required;
• the number of demands permitted;
• whether the company may postpone registration;
• who pays the registration expenses;
• whether the offering must be underwritten; and
• circumstances in which underwriters may reduce the number of shares included.

Piggyback Registration Rights

Piggyback rights allow investors to request that their shares be included in a registration initiated by the company or another eligible shareholder.

These rights are usually subject to exceptions and limitations. For example, the managing underwriters may be permitted to reduce the number of investor shares included in an offering if they determine that including all requested shares could adversely affect the offering. (sec.gov)

Protections Commonly Negotiated by the Company

A company may negotiate limitations that prevent registration rights from unduly interfering with its operations.

Postponement rights: The company may be allowed to postpone a demanded registration if proceeding would interfere with a material transaction, require premature disclosure of confidential information, or occur during seriously unfavorable market conditions.

Minimum offering thresholds: Demand rights may apply only if the proposed offering exceeds a stated dollar amount or involves a minimum percentage or number of registrable shares.

Waiting periods: Investors may be prohibited from exercising demand rights until a specified date or until the company has reached a particular stage of development.

Limits on frequency: The agreement may restrict how many demand registrations investors can require or impose a waiting period between registrations.

Underwriter selection: The agreement may give the company or its board the right to select the managing underwriters, sometimes subject to investor approval rights.

Underwriter cutbacks: The managing underwriters may have authority to limit the number of investor shares included in an offering.

Lockup obligations: Investors may be required to refrain from selling their shares for a specified period following an IPO or another underwritten offering.

Can Investors Ultimately Force an IPO?

The answer depends primarily on the company’s governing documents, financing agreements, and registration rights agreement. Share ownership alone ordinarily does not give an investor the unilateral right to force an IPO.

A carefully drafted demand registration right may require a company to pursue registration once the contractual conditions are satisfied. However, it may still leave important decisions—such as timing, offering structure, underwriter selection, and postponement—with the company or its board. Corporate-law duties, securities-law requirements, market conditions, and the precise contractual language will also affect the outcome.

Registration rights agreements are voluntary when negotiated, but they become legally binding once executed. Companies and investors should therefore define clearly when registration rights may be exercised, what exceptions apply, who controls the offering process, and how the related expenses will be allocated.

The securities lawyers at Corporate Securities Legal LLP assist founders, companies, and investors with private offerings, registration rights agreements, corporate governance, and preparations for registered offerings. Contact the firm to discuss how registration rights may affect your company or investment.

While both categories are designed to identify investors capable of participating in higher-risk investment opportunities, qualified investors are subject to significantly higher financial thresholds and typically gain access to a broader range of investment vehicles.

Accredited Investors vs. Qualified Investors

An accredited investor generally qualifies based on income or net worth. The typical standards include:

• Annual income of at least $200,000 for an individual (or $300,000 jointly with a spouse); or
• A net worth of at least $1 million, excluding the value of a primary residence.

A qualified investor, by contrast, must meet much higher investment thresholds. Under standards derived from the Investment Company Act of 1940, a qualified investor typically must have:

• At least $5 million in investments for individuals, excluding primary residences and personal property;
• At least $25 million in investments for entities such as trusts, corporations, or partnerships.

Because of these higher thresholds, qualified investors are generally considered to have greater financial sophistication and the capacity to withstand potential investment losses.

Access to Exclusive Investment Opportunities

Qualified investors often have access to investment opportunities that are not available to the general public, including:

• Hedge funds
• Private equity funds
• Venture capital funds

These investment vehicles can offer the potential for higher returns, but they also involve greater risk and complexity. Regulators restrict access to these opportunities because they require investors who can both understand the risks and absorb potential financial losses.

Verification and Documentation Requirements

To participate in offerings restricted to qualified investors, individuals must undergo a verification process to confirm their eligibility.

This typically involves providing documentation such as:

• Brokerage account statements;
• Financial statements demonstrating investment holdings;
• Other documentation confirming ownership of qualifying assets.

Verification is often conducted by investment funds, financial institutions, or third-party verification services that specialize in reviewing investor qualifications. Accurate documentation protects both the investor and the issuer from potential legal issues.

Regulatory Protections and Disclosure

Even though qualified investors are considered more financially sophisticated, regulatory protections still apply. The U.S. Securities and Exchange Commission (SEC) imposes disclosure requirements designed to ensure transparency and reduce the risk of fraud.

Funds that accept qualified investors typically must provide detailed disclosures regarding:

• Investment strategies;
• Associated risks;
• Financial performance;
• Operational structures.

These funds may also be subject to audits and regulatory review to ensure compliance with federal securities laws.

Why Qualified Investor Status Matters for Private Placements

For companies conducting private placements, determining whether potential investors qualify as accredited or qualified investors is an important part of regulatory compliance.

Companies must perform appropriate due diligence to ensure that only investors who meet the financial and sophistication standards required by law participate in certain high-risk investment offerings.

These safeguards help:

• Protect less experienced investors from complex investment risks;
• Maintain integrity and stability in financial markets;
• Ensure compliance with federal securities regulations.

Legal Assistance with Private Placements

Private placement offerings require careful preparation of legal documentation and compliance with federal securities laws.

At Corporate Securities Legal, LLC, our attorneys prepare Private Placement Memoranda (PPMs) and related documentation for delivery to qualified prospective investors and assist companies throughout the private placement process.

The agreement typically specifies key details of the investment, including:

• The number of shares or securities being purchased;
• The price per share or unit;
• The total investment amount;
• Investor rights and limitations of liability;
• The intended use of investment funds;
• Confidentiality provisions and risk disclosures;
• The governing law and obligations of both parties.

A subscription agreement differs from a shareholder agreement, which governs the relationship between shareholders after they already own shares. Subscription agreements focus on the initial investment transaction, while shareholder agreements address long-term governance matters such as voting rights, board appointments, and restrictions on share transfers.

Role in Private Placement Transactions

Subscription agreements are most commonly used in private placements, where securities are sold without registering the offering with the U.S. Securities and Exchange Commission (SEC).

Private placements frequently rely on exemptions under Regulation D, including:

• Rule 506(b), which allows companies to raise capital privately without general solicitation;
• Rule 506(c), which allows limited advertising but requires stricter verification of investor accreditation.

These exemptions allow companies to raise unlimited capital from investors while avoiding the time and expense associated with registering a public offering.

However, companies must comply with certain requirements, including:

• Limiting participation to accredited investors or qualified investors;
• Taking reasonable steps to verify accredited investor status;
• Conducting the transaction in a private manner consistent with the exemption used.

Benefits for Investors

For investors, subscription agreements provide a structured framework that outlines the risks and responsibilities associated with the investment.

In many cases, investors participate as limited partners, meaning:

• Their financial risk is limited to their initial capital investment;
• They generally do not participate in day-to-day management of the business;
• Their liability does not extend beyond their invested capital.

This structure allows investors to provide funding while avoiding direct operational responsibility.

Advantages for Companies

Subscription agreements can be particularly valuable for companies seeking early-stage financing. Businesses that are not yet ready to attract venture capital firms or investment banks may still raise capital from private investors through private placement offerings.

Key advantages include:

• Avoiding the cost and complexity of SEC registration;
• Raising capital more quickly than through public offerings;
• Accessing private networks of accredited investors.

Potential Disadvantages

Despite their advantages, subscription agreements also present certain limitations compared with other investment arrangements.

Common drawbacks may include:

• Investors typically do not receive voting rights in company governance;
• Investments are often made in one lump sum, rather than through incremental purchases;
• The investment may lack liquidity because there is no public market for the securities;
• Investors may face limited transparency since private placements are not subject to the same ongoing disclosure requirements as public companies.

Because of these factors, investors often need to rely on contractual rights and direct communication with management to remain informed about company operations.

Why Legal Guidance Is Important

Subscription agreements can be complex and must be carefully drafted to address the unique needs of both the company and its investors. Properly structured agreements help ensure compliance with securities laws while protecting the rights and expectations of all parties involved.

The attorneys at Corporate Securities Legal LLP have extensive experience drafting and negotiating subscription agreements and advising clients on private placement transactions.

Contact Corporate Securities Legal LLP to ensure your investment agreements comply with securities regulations and effectively protect your financial interests.

The process involves filing a registration statement—including a prospectus, financial statements, and other disclosures—followed by staff review, comment letters, amendments, and final approval. Once all regulatory requirements are satisfied and the company formally requests effectiveness, the SEC may declare the registration statement effective, allowing the company to proceed with its public offering.

Initial Staff Review

The SEC staff conducts an initial review of the registration statement to confirm compliance with disclosure and accounting requirements. The goal of the review is to ensure that the filing contains sufficient information for investors to make informed decisions.

Importantly, the SEC does not evaluate the merits of the transaction or determine whether the investment is appropriate for any particular investor.

The scope of review generally takes one of three forms:

• Full Review: A comprehensive examination of the entire filing for compliance with securities laws and disclosure standards.
• Financial Statement Review: A focused review of financial statements and related disclosures to ensure compliance with applicable accounting standards.
• Targeted Issue Review: A limited review focusing on specific disclosure issues or regulatory concerns.

Staff Comment Letter

After reviewing the filing, the SEC staff may issue a comment letter identifying deficiencies, questions, or areas where additional clarification is required.

Comment letters may request:

• Expanded disclosure to enhance investor understanding;
• Additional financial information;
• Clarification of statements that could potentially be misleading;
• Supplemental information that assists the staff in evaluating the filing.

Company Response to Comments

The company must respond to each staff comment, typically through a written response letter submitted alongside amendments to the registration statement.

Companies may address comments by:

• Providing additional explanations or analysis;
• Revising disclosure language within the filing;
• Supplying supplemental information requested by the staff.

If the company does not fully understand a comment, it may seek clarification from the reviewing examiner before responding.

Certain technical accounting issues may also be addressed with the SEC’s Office of the Chief Accountant, while disclosure issues are typically handled by the reviewing division.

Iterative Review Process

The SEC staff reviews the amended filing and the company’s responses. Depending on the adequacy of the revisions, the staff may issue additional comment letters requesting further clarification.

This iterative process—involving comments, responses, and amendments—continues until both the SEC staff and the company agree that the registration statement satisfies regulatory requirements.

Request for Effectiveness

Once all comments have been resolved, the company may formally request that the SEC declare the registration statement effective. This request signals that the company believes the filing is complete and compliant with applicable disclosure rules.

Declaration of Effectiveness

If the SEC staff determines that the filing satisfies all requirements, the Commission will declare the registration statement effective. The SEC confirms this determination through a formal notice and records the effectiveness on the EDGAR system.

Once the registration statement becomes effective, the company may legally proceed with its public offering of securities.

Legal Guidance During the SEC Review Process

Preparing and navigating a registration statement review requires careful coordination among legal counsel, accountants, and company management. Errors or incomplete disclosures can significantly delay the process or trigger additional regulatory scrutiny.

The attorneys at Corporate Securities Legal LLP assist companies throughout every stage of the public offering process—from preparing registration statements to responding to SEC comment letters and securing the final declaration of effectiveness.

Contact Corporate Securities Legal LLP to learn how experienced securities counsel can guide your company through the SEC registration review process and help ensure a successful public offering.

Board members hold fiduciary duties of care, loyalty, and obedience, which require them to protect company assets, oversee management, and ensure that corporate operations comply with applicable laws and governing documents.

Strategic Oversight and Corporate Governance

The number of directors serving on a board typically depends on the needs and size of the company. Boards provide strategic guidance and long-term planning, while the day-to-day execution of business operations is delegated to executive officers.

As part of their governance responsibilities, boards are expected to:

• Provide strategic direction and long-term planning;
• Oversee executive management performance;
• Protect company assets and financial stability;
• Identify and mitigate operational and regulatory risks;
• Ensure transparency and ethical business practices.

The powers and responsibilities of the board are defined in the articles of incorporation and corporate bylaws. Major corporate decisions—such as amendments to governing documents or mergers with other companies—generally require approval from shareholders, who ultimately own the corporation.

Fiduciary Duties of Directors

Directors are generally protected from liability for decisions made in good faith while performing their fiduciary duties. However, this protection only applies when directors act responsibly and within the scope of their obligations.

The three primary fiduciary duties include:

Duty of Care
Directors must act with the same level of diligence and prudence that a reasonably careful person would exercise under similar circumstances.

Duty of Loyalty
Directors must place the interests of the corporation above personal interests and avoid conflicts of interest when making decisions on behalf of the company.

Duty of Obedience
Directors must ensure that the corporation operates in compliance with applicable laws and its own governing documents.

Corporate governing documents may limit liability for certain decisions, but they generally cannot eliminate liability for breaches of fiduciary duties involving fraud, misconduct, or illegal activity.

Directors of publicly traded companies may also face liability for violations of federal securities laws, including the Securities Act of 1933 and the Securities Exchange Act of 1934, particularly when anti-fraud or disclosure requirements are violated.

Indemnification of Directors

Most state corporate statutes provide indemnification protections for directors who successfully defend themselves against legal claims related to their service on the board.

Corporations may also voluntarily indemnify directors when the board determines that the individual acted:

• In good faith;
• In a manner reasonably believed to be in the corporation’s best interests.

These protections help encourage qualified individuals to serve as directors without undue personal risk.

Roles Within the Board Structure

Although the board acts collectively when making decisions, individual directors may hold specific leadership roles within the organization.

Common board positions include:

• Chairperson – Leads board meetings and guides the board in overseeing the company’s strategic direction.
• Vice Chairperson – Assists the chairperson and assumes responsibilities when necessary.
• Chief Executive Officer (CEO) – Implements the strategic decisions and policies adopted by the board.
• Chief Financial Officer (CFO) – Oversees financial management and reports to the board on financial performance and compliance matters.
• Corporate Secretary – Maintains board records, meeting minutes, and official corporate communications.
• Independent Directors – Provide objective perspectives and unbiased oversight in board decisions.

Board Committees

Boards frequently establish committees to assist with oversight responsibilities. These committees provide recommendations to the board but do not exercise the board’s full authority.

Common board committees include:

• Audit committees responsible for financial oversight;
• Compensation committees reviewing executive compensation structures;
• Governance committees addressing corporate governance policies and practices.

Preparing for Public Company Governance

Companies preparing for an initial public offering (IPO) must establish formal corporate governance policies and board procedures that comply with federal securities regulations and stock exchange requirements.

The attorneys at Corporate Securities Legal LLP assist companies in developing governance frameworks, advising boards of directors regarding fiduciary duties, and implementing the governance practices required for publicly traded companies.

Contact Corporate Securities Legal LLP to learn how effective corporate governance practices can strengthen your organization and prepare it for future growth and public market opportunities.

The risks presented by artificial intelligence (AI) are becoming an increasing concern for corporate boards as emerging technologies influence business strategy, operations, and long-term planning. At the same time, regulators are closely examining how accurately companies disclose AI-related risks and the mitigation measures being implemented.

The U.S. Securities and Exchange Commission (SEC) has already initiated enforcement actions challenging misleading or incomplete disclosures related to artificial intelligence claims.

Growing Focus on AI Risk Reporting

A recent study conducted by Cornell University analyzed more than 30,000 filings from over 7,000 companies during the past five years. Using both quantitative and qualitative analysis, researchers identified a significant increase in AI risk disclosures. Mentions of AI-related risks in company filings increased from 4% of filings in 2020, to more than 43% of filings in 2024. This dramatic increase reflects both expanded corporate reliance on artificial intelligence and heightened regulatory scrutiny.

The Role of Form 10-K Disclosures

Evaluation of AI-related risk disclosure begins with Form 10-K, the annual report most U.S. public companies must file with the SEC. The Commission establishes required disclosure topics and prescribes how information must be presented to investors.

Companies must disclose:

• Material risks affecting business operations;
• Methods used to evaluate emerging risks;
• Strategies implemented to mitigate potential threats.

Because artificial intelligence can affect nearly every aspect of business operations, AI risks may be considered material at multiple levels, including:

• The broader economy;
• Industry-wide impacts;
• Geographic exposure;
• Company-specific operational risks.

Material Disclosure Obligations

Federal securities laws prohibit companies from:

• Making materially false or misleading statements; or
• Omitting material information necessary to prevent investor deception.

To reinforce accountability, both the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) must certify the accuracy and completeness of Form 10-K disclosures.

Categories of Material Risk

Companies generally evaluate disclosure obligations across four recognized categories of material risk.

Market Risk

Market risk arises from broad economic fluctuations such as:

• Interest rate changes;
• Foreign exchange volatility;
• Commodity price movements;
• Stock market valuation shifts.

These risks are largely outside company control but must still be disclosed when material.

Credit Risk

Credit risk evaluates the likelihood that customers or counterparties may fail to meet payment obligations. Companies may manage this risk through:

• Structured repayment terms;
• Collateral requirements;
• Credit evaluation procedures.

Liquidity Risk

Liquidity risk concerns a company’s ability to meet financial obligations as they become due. Companies must assess how quickly they can:

• Obtain financing; or
• Convert assets into cash during downturns.

Operational Risk

Operational risk involves failures in internal systems or external dependencies, including:

• Cybersecurity threats and AI system vulnerabilities;
• Ineffective internal controls;
• Employee training deficiencies;
• Supplier concentration risks;
• Financial reporting fraud or system failures.

Why Compliance Matters

Failure to comply with SEC disclosure requirements—including Form 10-K reporting obligations—can result in significant regulatory consequences and enforcement actions. Accurate disclosure not only promotes investor confidence but also protects companies from allegations of misleading statements.

Consultation with experienced securities counsel helps companies maintain compliance while developing practical risk mitigation strategies aligned with evolving regulatory expectations.

The securities lawyers at Corporate Securities Legal LLP assist companies in navigating disclosure obligations, strengthening compliance frameworks, and implementing effective governance practices related to emerging technologies such as artificial intelligence.

Contact Corporate Securities Legal LLP to ensure your company’s SEC disclosures remain accurate, compliant, and aligned with current regulatory standards.

Forward-looking statements are designed to address that final element: how management expects the company to perform going forward. While these statements can provide valuable insight into a company’s strategic vision, they also carry legal risk if not prepared carefully and in compliance with federal securities laws.

What Is a Forward-Looking Statement?

A forward-looking statement is a management prediction or projection regarding the future performance of a business. These statements are typically included in SEC registration materials and other public disclosures and may address a wide range of anticipated outcomes.

Common categories of forward-looking statements include:

• Financial performance
  Forecasts of revenue, losses, earnings per share, dividends, operating expenses, capital expenditures, and retained earnings.
• Operational plans
  Planned business development initiatives, mergers or acquisitions, capital investments, and anticipated product lines or services.
• Risk factors
  External conditions that could impact performance, such as economic trends, regulatory changes, or competitive pressures.
• Management assumptions
  The underlying assumptions and reasoning that support the company’s projections and strategic direction.
• Independent review
  Reports or analyses from outside reviewers that lend credibility to the reasonableness of management’s projections.
• Legal disclaimers
  Statements clarifying that projections are inherently speculative and not guarantees of future performance. The SEC requires such disclaimers in published management materials to prevent investors from treating projections as assurances.

Legal Protections for Management

To balance investor protection with the need for companies to communicate future plans, Congress enacted the Private Securities Litigation Reform Act of 1995 (PSLRA). The PSLRA provides a “safe harbor” that protects corporate officers and directors from unwarranted securities fraud claims based solely on forward-looking statements, provided those statements meet statutory requirements.

Under U.S. Supreme Court interpretations of the PSLRA, an investor bringing a claim based on a forward-looking statement must prove:

• A material misrepresentation or omission meeting the legal definition of fraud;
• Direct reliance on that misrepresentation when deciding to buy or sell a security; and
• A resulting financial loss caused by the transaction.

Absent these elements, claims based on forward-looking statements are unlikely to succeed.

Procedural Requirements Under the PSLRA

The PSLRA also introduced procedural safeguards designed to curb frivolous shareholder lawsuits and abusive litigation practices. These safeguards include:

• Stricter pleading standards – Allegations of negligence are insufficient. Plaintiffs must plead facts creating a “strong inference” of fraudulent intent.
• Lead plaintiff requirements – Class actions must be led by the shareholder with the largest financial interest in the claim, not random or nominal investors.
• Automatic stay of discovery – Discovery is paused while motions to dismiss are pending, preventing plaintiffs from engaging in costly fishing expeditions.
• Limits on damages and attorneys’ fees – Recovery is limited to actual losses, and caps are placed on permissible attorneys’ fees.
• Auditor obligations – Auditors must report illegal acts to management and, if necessary, to the SEC.
• Proportional liability – Defendants are liable only for their share of the harm, rather than being jointly responsible for the entire damage award.

Why Proper Drafting Matters

To qualify for PSLRA safe harbor protection, forward-looking statements must meet specific statutory and regulatory requirements. Poorly drafted projections, missing disclaimers, or unsupported assumptions can expose a company and its leadership to unnecessary legal risk and SEC scrutiny.

Need Guidance on Forward-Looking Statements?

The attorneys at Corporate Securities Legal LLP have extensive experience preparing compliant forward-looking statements and full SEC registration filings. Our team understands how to balance meaningful disclosure with legal protection, helping companies avoid delays, revisions, and enforcement exposure.

Contact us to ensure your forward-looking statements meet SEC requirements, qualify for PSLRA safe harbor protection, and move smoothly through the registration process.

A mandatory arbitration provision requires investors to arbitrate claims arising under the federal securities laws with the issuer of the securities, rather than pursuing those claims in federal court. In the context of an SEC registration statement, this is commonly referred to as an issuer-investor mandatory arbitration provision.

According to Paul S. Atkins, Chairman of the U.S. Securities and Exchange Commission (SEC):

“A mandatory arbitration provision requires an investor to arbitrate its claims arising under the federal securities laws with the issuer of the securities.”

Mandatory arbitration provisions offer an alternative forum for resolving disputes and have long raised questions regarding enforceability and investor protections under federal securities laws.

Is Arbitration a Satisfactory Alternative to Federal Court Litigation?

The Federal Arbitration Act of 1925 (“FAA”) established a strong federal policy favoring arbitration agreements. Section 2 of the FAA, its principal substantive provision, states in relevant part:

“A written provision in a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction shall be valid, irrevocable, and enforceable.”

Whether the FAA applies to issuer-investor mandatory arbitration provisions depends initially on whether there is a valid and enforceable written agreement to arbitrate between the parties.

Do Federal Securities Laws Override the FAA?

Chairman Atkins has explained that issuer-investor mandatory arbitration provisions have historically been viewed as potentially inconsistent with federal securities statutes in at least two ways:

They may violate the anti-waiver provisions of federal securities laws by foreclosing a judicial forum; and
They may impede investors’ ability to bring private actions—particularly class actions—to enforce their rights under federal securities laws.

Anti-Waiver Provisions Under Federal Securities Laws

Section 14 of the Securities Act of 1933 and Section 29(a) of the Securities Exchange Act of 1934 contain anti-waiver provisions that invalidate contractual clauses which:

•Require investors to waive compliance with federal securities laws; or
•Eliminate substantive investor protections, including remedies for fraud.

Supreme Court Resolution of Arbitration and Anti-Waiver Conflicts

In a series of decisions issued in the late 1980s, the U.S. Supreme Court clarified the relationship between arbitration agreements and federal securities laws. The Court held that:

1. Anti-waiver provisions prohibit waivers of substantive obligations, not procedural or jurisdictional provisions;
2. The arbitration process does not inherently undermine substantive rights granted under the Securities Act; and
3. To override the FAA, Congress must express a “clear and manifest” intention to do so in subsequent legislation.

These rulings significantly strengthened the enforceability of arbitration agreements in securities-related disputes.

New SEC Policy Statement

On September 17, 2025, the SEC issued a policy statement titled Acceleration of Effectiveness of Registration Statements of Issuers with Certain Mandatory Arbitration Provisions.

In announcing the policy change, Chairman Atkins stated:

“The Commission has determined that the presence of an issuer-investor mandatory arbitration provision will not impact decisions regarding whether to accelerate the effectiveness of a registration statement.”

This policy marks a significant shift, making clear that mandatory arbitration provisions will no longer impede SEC approval or acceleration of registration statements.

Need Legal Guidance on Mandatory Arbitration Provisions?

The attorneys at Corporate Securities Legal LLP advise companies on the advantages and risks associated with mandatory arbitration provisions, registration statement disclosures, and all aspects of the IPO process.

Our team is prepared to help you evaluate strategic considerations, comply with SEC requirements, and structure registration statements for a successful public offering.

By Christopher A. Wilson

Until January 31, 2019, Regulation A+ (“Reg. A”) was not available to reporting companies under the Securities and Exchange Act of 1932. However, in 2018 Congress mandated that the Securities and Exchange Commission (“SEC”) make reporting companies eligible to use Reg. A.

The SEC has issued final rule amendments (Amendments) permitting companies reporting under Section 13 or 15(d) of the 1934 Act to offer securities pursuant to the registration exemption Reg. A. See Securities Act Release 33-10591 (Dec. 19, 2018). Previously, offerings pursuant to Regulation A were expressly limited to non-reporting companies. The Amendments also provide that, so long as the reporting company is current in its 1934 Act periodic reports, the reporting company has no additional periodic reporting obligations under Regulation A. The Amendments became effective on Jan. 31, 2019. Regulation A+ is the informal name given to the amended SEC rules that expanded the Regulation A offering exemption.

The SEC’s final rules just recently became effective, and Reg. A now is one of the most attractive methods for reporting companies to sell securities, particularly the companies whose stock is listed on the OTC Markets, such as the PinkOTC Market, OTCQB, and OTCQX exchanges. In 2017, there were 267 registered offerings valued under $50 million by companies whose securities were not listed on national exchanges (i.e., in the OTC Marketplaces). These offerings would now be eligible to use Reg. A. For such non-exchange listed companies, the advantages of Reg. A include the following:

• Tier 2 offerings (up to $50 million in aggregate sales) are exempt from “blue sky” filing requirements. Thus, Reg. A is much more attractive for OTC-listed companies as opposed to a traditional registered public offering which does not preempt compliance with such blue sky laws.

• Lower legal costs and compliance expenses. Additionally, Reg. A offerings are not subject to liability under Section 11 of the Securities Act, reducing the legal risk associated with the offering.

• Investors in Reg. A offerings receive free-trading securities.

• Reg. A offerings are not integrated with prior offers and sales of securities, or with subsequent sales of securities in registered sales. This affords OTC companies with greater flexibility to choose between Reg. A offerings and registered offerings.

• An issuer may “test the waters” by soliciting interest from investors, including individuals, without filing test-the-waters materials with the SEC. In registered offering, emerging growth companies may solicit investor interest but only from qualified institutional buyer and institutional accredited investors after filing the solicitation materials with the SEC.

• Reg. A permits sales by selling shareholders (up to $6 million in Tier 1 offerings and $15 million in Tier 2 offerings, but not more than 30% of the offering in the first Reg. A offering).

• A reporting company automatically complies with the reporting requirements of Reg. A by filing its quarterly and annual reports.

• The age requirement of the financial statements is more lenient than that of a registered offering.

The review process for Reg. A offerings appears much less stringent. Reg. A offerings typically receive fewer comments and issuers generally report that the process is quicker than that of a registered offering.

Reg. A does have a number of restrictions that may still limit its usefulness. Reg. A offerings cannot be “at-the-market,” so the sales price must be a fixed price which is determined at the time of the offering circular’s qualification. This restriction makes continuous offerings less attractive because the issuer may not adjust the offering price to reflect business developments. Also, sales of Tier 2 securities may only be made to accredited investors, otherwise the purchase price of the securities may not exceed 10% of the greater of an individual investor’s net worth or annual income (revenue or net assets for entity investors).

Notwithstanding these restrictions, hundreds of OTC-listed companies that conducted registered public offerings last year may find that Reg. A presents a less costly and more attractive way to raise capital.

The Securities and Exchange Commission (“SEC”) charged two companies, CarrierEQ Inc. (“Airfox”) and Paragon Coin Inc., (“Paragon”) who conducted Initial Coin Offerings (“ICOs”) after the SEC published its famous DAO Report of Investigation concerning the topic of ICOs.

On November 16, 2018, after an undisclosed investigation period by the SEC, two orders by the SEC forcing Airfox and Paragon to Cease and Desist their ICOs and register their tokens as securities. However, there is no guarantee that such tokens will ever make it through the registration process.

Airfox raised $15 million worth of digital assets to finance its development of a token “ecosystem” where they would start a mobile application that would create a market that would allow users to interact with advertisers. Airfox targeted users in developing countries.

Paragon raised $12 million to add blockchain technology to the cannabis industry to further legalize cannabis and related products.

As is customary with ICOs, the SEC alleges that neither company registered their tokens as securities, nor did they fit an exemption. Both companies paid $250,000 in penalties and the orders included undertakings to compensate any investors who may have been harmed as a result of purchasing tokens in the offerings.

How could Airfox and Paragon have conducted their ICOs legally? By registration, of course. How does that work? The law is still unclear. However, there has only been one ICO registration case where the SEC decided that there was no fraudulent intent, which is Munchee, Inc. The Commission did not impose a penalty or include undertakings from Munchee, which stopped its offering before delivery of tokens and returned all proceeds to the investors. The SEC highlights Munchee, Inc. as a virtuous ICO, since they disgorged their proceeds to the investors. This result is not promising.

If you would like to raise capital, then contact Wilson Bradshaw & Cao, LLP so you can raise capital in a compliant manner. We restrict our practice to securities law, in particular private and public offerings and SEC enforcement work.