Integration . . .

refers to the combining of two or more securities offerings under the rules of the federal Securities and Exchange Commission. When it occurs, it can cause serious problems for an issuing company and its management.

This is because the federal securities rules treat the combined offerings as one and require that all of the securities sold in both offerings be registered for sale to the public or qualify under a single exemption from registration. If a company conducts two or more offerings (that is, closes two venture fundings or a private placement and a venture funding), they may be integrated if they are not sufficiently distinct and separate in the eyes of the SEC. This integration can void the registration exemptions that were relied upon even if the company intended for the offerings to be distinct and separate. If the exemptions are voided, the company and management may become subject to significant liability.

Potential integrations of previous offerings with a company’s present efforts to raise capital can also delay its ability to raise money without a public offering. Because of this, it is important to determine what constitutes an offering whenever securities are sold.

Factors that the Securities and Exchange Commission considers when determining whether two or more offerings will be integrated into one include:

• Whether they are part of a single plan of financing.
  

• Whether they involve the issuance of the same class of security.
  

• Whether they are made at or about the same time.
  

• Whether the same type of consideration is received for the security.
  

• Whether the offerings are made for the same general purpose.

There are a number "safe harbors" that can be relied upon to avoid integration. These safe harbors should be taken advantage of whenever possible. If their requirements are met, they can prevent integration and the potential securities liabilities created by an integration. Experienced legal counsel should be retained whenever company securities are sold. Counsel can guide a company safely through the many peculiarities (including avoiding integration) contained in the complex federal and state securities laws. See: Private Placements, Reg D, Restricted Securities, Safe Harbors, SEC (Securities and Exchange Commission), 33 Act.