The 8 Dos and Dont’s When Talking with Potential Investors

So you want to raise money for your business venture right? Well, there is a RIGHT and WRONG way to raise capital—-one that will keep you “IN business and OUT of Court” and one that will have the ever present Securities and Exchange Commission (“S.E.C.) knocking at your door and shutting you down before you can even get started. Take my advice and choose the former option. It will save you time, money and years of aging. Remember to secure great legal counsel to help you accomplish this goal.

You have to remember that if you are selling “securities”, which has a defined definition under the Securities Act, you are subject to the Securities Act and the S.E.C. will be watching you as you attempt to raise capital even to POTENTIAL investors. Here are some practical “Dos and Don’ts” when talking to potential investors that I suggest you internalize and share with all members of your team.

  1. DO be aware of swindlers. As it becomes known that you are seeking to raise money, there will be numerous offers to help you. However, if someone proposes to help you raise money in exchange for being paid, make sure they are a “registered broker-dealer” as defined by the Securities and Exchange Act. Otherwise, involving them can violate securities laws.
  2. DO NOT discuss deal details in early meetings. Avoid being specific as to potential terms of any deals. You don’t want to give even the illusion that you are “offering” any securities. This could trigger a host of state “blue sky” laws and federal laws if you are deemed to be giving an “offering”.
  3. DO keep track of details of early meetings. This includes who you spoke with, what you said, dates and other details that matter. This is a precaution to make sure that if you need to correct your presentation at a later date or review your notes for any reason, you have an accurate record.
  4. DO NOT use boilerplate documents. Investments are highly detailed and customized to each situation, company and offering. There is no generic form that can accurately access YOUR offering and specific terms. Do not use documents you find online or even one that was used in another deal. This extends to using boilerplate terms in any documents as well.
  5. DO identify risks in your business model. In my experience, most business owners are overly optimistic about their offering and downplay the potential risks and setbacks. This can cause major problems with the S.E.C. so make sure that you are open and honest about any risks in your business model in your business plan (which you should have) and that you highlight it in verbal communications as well.
  6. DO NOT treat potential investors differently. In essence, don’t play favorites. Every individual or corporate investor should have the SAME information as the others. No one should have inside information or different information. What you share with 1 investor, share with all!
  7. DO have a written business plan. The S.E.C. does not require a business plan (as of the date of this blog), just an offering statement if you are applying for a regulation D exemption. However, as a practical business purpose, potential investors want a business plan and it helps hedge against any verbal communications you may have had with potential investors and puts everyone on the same page.
  8. DO NOT fail to prepare for the legal compliance process. Many investees are so concerned with the process of preparing to raise money that they forget that at the same time there is a LEGAL aspect to raising capital. Not only that, remember that there is a STATE component to securities laws and a FEDERAL so don’t ignore either. Make sure you have adequate legal counsel ready to go as soon as you are ready to make your first offering.

These tips and so many others can help you successfully navigate the field of raising capital for your business the RIGHT and LEGAL way. This is one of the advantages of having in house counsel and someone who understands the rules of engagement for raising capital. I hope that you build the right team to keep you on the right track towards reaching your fundraising goals. Best of luck!

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