Startup Filing Essentials: Federal, State, and Corporate Filings
Louis Lehot, business lawyer and partner at Foley & Lardner LLP in Silicon Valley, and formerly the founder of L2 Counsel, P.C.
By Louis Lehot
After you have decided to take the plunge and incorporate your new business, the byzantine and time-consuming process of corporate formalities begins. Key documents must be prepared and filed with government agencies. These filings triggered by federal and state corporate, securities, and tax laws may seem daunting but will protect your company from potential legal issues down the road. This post provides a brief overview of what to watch for.
Corporate filings are state-specific
While corporate filings are state-specific, you are not required to incorporate in your home state. The cost to incorporate, tax rates and corporate laws are some of the most important considerations when choosing your location. A corporation doing business outside its state of incorporation must file a qualification to do business in each of those states. You’ll want to check each state for their requirements. For example, a Delaware corporation that does business in California must file to qualify as a foreign corporation and then file an information statement in California within 90 days following the date of incorporation.
Many filing requirements will vary from one state to another, and there will be events in a corporation’s lifecycle that can trigger a filing in most states.
Once you have decided to form your corporation, it’s time to file the charter. If you are filing in Delaware, that charter is referred to as a “certificate of incorporation,” in California, the charter is called “articles of incorporation.” In addition to other matters, the charter sets forth the corporation’s classes of stock, the rights and privileges of those classes of stock, the corporation’s mission, and the agent’s address. As time passes and additional classes or series of stock are authorized, or if the preferences, rights, or privileges of any class or series of stock are changed, amendments will need to be filed to the charter and the new charter may be referred to as an “amended and restated” if the modification is extensive.
• Name, goal, or agent changes: If the corporate name or if the corporation’s business purpose or registered agent is changed or modified, you will need to fill out an amendment to the charter. A domestic (California) or foreign (out–of–state or out–of–country) business entity can change the recorded information by filling the application form with the Secretary of State.
• Taxes: annual statement or report. A certificate of incorporation is filed upon formation with amendments or restatements filed as needed. Additionally, a corporation is required to file an annual report or annual statement, and typically before the corporation’s yearly taxes can be paid. Annual reports or statements can be quickly submitted online.
Federal and state securities, Laws, and the risk of non-compliance
Security is the legal manifestation of ownership or investment in a company, whether denominated in shares of stock, convertible notes, bonds, or debentures. Securities laws exist at both the federal and state levels and are in place to govern the sale and issuance of securities with the primary objective of protecting investors. If a company does not comply with applicable securities laws, there can be serious ramifications for both the company and those involved in marketing the securities, including rescission, damages, and other civil and even criminal penalties. Lack of compliance could also lead to loss of future investment if potential new investors become concerned about historical compliance risk.
Federal and state securities filings. Once your filings are in place to maintain corporate governance standards, it’s time to look at which federal and state securities laws require filings. If a corporation issues security, whether stock, options to purchase stock or compensatory equity awards, warrants, or convertible notes, the corporation must follow both federal and state securities laws.
At the federal level, complying with securities laws requires either registering the issuances or grants of shares with the SEC, which can be a complicated and expensive process.
Corporations can also find an exemption from registration, which is the path most startups and private companies will follow. There are several exemptions available under federal securities laws, with certain exemptions requiring a securities filing:
Form D or not? The SEC requires companies to submit a Form D when it issues securities in a private placement using the safe harbor provided under Regulation D. This includes offerings made under Rule 506, a frequently used securities law exemption. Form D is free to file and quite simple. It requires necessary information such as the amount of capital raised and who the investors were. Form D is required to be filed 15 days after the first sale of securities. The form preempts most state securities laws so that startups don’t have to file in state jurisdictions so frequently. Some startups seeking stealth will choose to rely on other securities law exemptions to avoid the publicity around a public filing of Form D.
State law requirements. Assuming your corporation is in California and subject to California securities laws, the following are common securities filings that fulfill California state securities law requirements.
• 25102(f) notice. The 25102(f) notice can be filed online quickly, and it must be filed every time a corporation issues stock.
• Compensatory equity: 25102(o) notice. At the federal level, corporations frequently rely on the Rule 701 securities law exemption for compensatory equity issuances, such as stock option grants, which does not require a filing. In California, your corporation would have to file a 25102(o) notice, which can be submitted online. The notice must be filed within 30 days following the initial issuance of any security under the corporation’s option plan. Additionally, a new 25102(o) notice must be filed whenever the corporation increases the number of shares reserved under its option plan.
If your company plans to raise money by selling stock or securities, then your company must comply with federal and state securities laws. If not, the company and its investors could become subject to adverse legal consequences.
Finding a strong outside counsel with a team of paralegals that process these filings on a daily basis and in volume can ensure you avoid the pitfalls of following corporate formalities and complying with federal and state securities laws, and at a price point that works.
