Help, I Need Money to Start My Project!
Where in the world am I going to get enough money to fund my fabulous project? This is a question which confounds entrepreneurs and new businesses. The lack of cash is hindering your ability to start your own business or launch a terrific product or business idea. What to do? Crowdfunding? Calling up friends and family? These are all great ideas, so what is the problem? Well, for one thing, these people who give you money are called “investors” and in the United States, investors have rights. Indeed, all 50 states also have stringent laws protecting investors from people or companies who take their money.
What do I do to Protect Myself?
First of all, educate yourself. That education will require you to hire a lawyer who knows a great deal about state and federal securities laws. Most lawyers don’t take securities law courses in law school and even most business lawyers steer clear of securities; leaving this niche to practitioners who work in this highly specialized area of the law.
Once you meet with your securities lawyer, you should have a list of things to ask him or her; i.e., how can I raise money without breaking the law, what exemptions from registration are available for me, how do I ensure that these exemptions protect me in this sale, what documents and/or contracts do I need with my investors and what business plans or marketing information should I prepare? These invaluable questions will probably lead you to the lawyer recommending that you prepare a seminal document to give to your investors. This document is often called a “private placement memorandum” or “confidential memorandum” and it is written by your securities lawyer.
The Private Placement Memorandum is your Best Avenue of Defense Against Fraud.
One of the suggestions that your lawyer will advise you is that you should consider a “private placement memorandum”. This document, usually a bit expensive, and lengthy, outlines virtually all of the risks and issues related to the potential investment to your targeted group of investors. It is NOT a sales document since it really points out potential problems and things that can go bad about your investment. Most often, when you read a really well done private placement memorandum, your one thought is, “Why would anyone invest in this if there are so many obstacles”? The reason that this document is so important is it will be the first exhibit in front of regulators and angry investors who are frustrated that they lost money or did not make as much money as they thought they would make by investing with you.
Sometimes, the investors are mad that they are not making money fast enough even if your project or new business is wildly successful. And invariably, your investors will start to resent the money that you make as well as the fact that you are taking a salary or living expenses from these funds. So what evidence do you trot out to prove that this investor knew of these risks BEFORE they invested? You guessed it! Your primary exhibit, the lengthy private placement memorandum which you thought was too expensive and worthless as a sales document.
This memorandum, if well written, will have, in print, the exact issues that your investors are complaining about now. This evidence of written disclosure will go a long way towards exculpating any allegations of “fraud” or “nondisclosure” to these investors. They simply cannot deny that this material was there for them to read before their investment.
Get an Experienced Securities Lawyer.
Moral of the story? Spend some money on the front end and save yourself some major life mistakes on the back end. Investors are a powerful group that you do not want to antagonize or make mistakes with. You will live to regret it once you really understand that the securities laws very much favor the investor.
Call me, Bonnie Spencer, as I have 45 years of working with small businesses and individuals who are trying to raise money for their life projects, at 713-961-7770.
Comments