Make sure you understand applicable recordkeeping requirements for securities transactions

January 9, 2014

OLYMPUS DIGITAL CAMERAWhile all of you should be familiar with the recordkeeping requirements imposed under state corporate law statutes you should not forget that both state and federal laws typically include separate recordkeeping requirements for securities transactions.  For example, corporations and other securities issuers that have qualified an offering of their securities for sale under the California Corporate Securities Law are required to keep and maintain a complete set of books, records, and accounts of the sales of their securities and the disposition of the proceeds of the sales. Corporations and other securities issuers that have qualified an offering of their securities must also, at such times as are required by California’s Commissioner of the Department of Business Oversight, make and file with the Commissioner a report, setting forth the securities sold by it under the qualification for the offering, the proceeds derived from the offering, and the disposition of those proceeds. [Corp. Code, § 25145].

At the federal level every corporation that is a reporting company under section 12 of the Securities Exchange Act of 1934 (15 U.S.C.A. § 78l) must comply with the record-keeping requirements of the Foreign Corrupt Practices Act (15 U.S.C.A. § 78dd-2). [15 U.S.C.A. § 78m(b)(2)]. The Foreign Corrupt Practices Act requires reporting companies to make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of those companies. [15 U.S.C.A. § 78m(b)(2)(A)]. Reporting companies are also required to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that [15 U.S.C.A. § 78m(b)(2)(B)]:

(1)        Transactions are executed in accordance with management’s general or specific authorization;

(2)        Transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and to maintain accountability for assets;

(3)        Access to assets is permitted only in accordance with management’s general or specific authorization; and

(4)        The recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

Reporting companies must also comply with the requirements of the federal Sarbanes-Oxley Act of 2002 relating to management responsibility for financial reports and assessment of internal controls. Specifically, the chief executive and financial officers of reporting companies are responsible for internal accounting controls and must ensure that the public disclosures documents of such companies report any deficiencies in internal accounting controls. In addition, the annual report of such companies must include an internal control report stating that management is responsible for an “adequate” internal control structure, and an assessment by management of the effectiveness of the control structure. Any deficiencies in the internal controls must be reported and the annual report must also include a statement from the company’s outside auditors attesting to the accuracy of management’s assertion that internal accounting controls are in place, operational and effective.

Finally, any company, regardless of whether or not it is a reporting company, that relies on one of the exemptions from registration for issuance of its securities should collect and retain such records as are reasonably necessary to support the use of the exemption relied upon to avoid registration.  In determining those requirements you should carefully review relevant statutes and cases and make sure that the offering is conducted appropriately.  You should expect to maintain investment letters and questionnaires and create a permanent record of the distribution and use of any offering materials.  When the availability of an exemption is conditioned upon “accredited investor” status of one or more of the purchasers you should collect such information as is reasonably necessary to verify such status