Invest With Our Company – Read All About It! Not!

One of the biggest mistakes that startup and emerging companies make was a major topic for discussion while we were having dinner with some friends this past weekend.

Our friends’ mentioned that their website about their thoroughbred racing farm referenced that they were looking for investors for their upcoming syndication. This was their first time they had considered raising money from angel investors – and they didn’t understand the legal constraints of a private placement offering.

Once they understood the onerous consequences that come from violating state and federal securities laws, they immediately changed their website — and are now both listening to my five-hour audio course called Funding Foreplay. before they move forward with any fundraising activities. (Funding Foreplay teaches entrepreneurs the right way to romance prospective investors for your company while still complying with securities laws.)

Executive Summary

Here’s the executive summary about one of the biggest mistakes that startup and emerging companies make: Advertising to the general public, in any way, that you’re looking for investors.

This means, in general, that you cannot discuss your investment offering on your publicly accessible web pages, in an e-mail blast to 10,000 people, in newspapers and magazines or walking up and down the street carrying a big sign.

The federal government, and all 50 states, have very specific rules, regulations and requirements in order to qualify for their securities law private placement exemptions.

The operative word here is “private.” This means that public is not invited.

It doesn’t matter if you’re raising $10,000 or $10 million. You cannot solicit the general public.

Period.

Some of the Penalties

Some of the penalties you could face from violating these specific requirements include:

• Having to rescind your offering — which basically means that you will need to give back all the money.  This is the usual consequence – although it gets a LOT harder to do once you have already started spending the investors’ money!
• Being barred from continuing your offering or ever sponsoring any future offering.
• Going to jail. (This usually won’t happen on the first offense — but it can!)
• Etc.  There are a LOT of these – but too numerous to list.

It’s totally understandable why fundraising virgins wouldn’t know about these kinds of laws – or even know to ask about them.  However, I can tell you that state and federal investigators won’t care.  Ignorance of the law won’t work as an excuse.

Hopefully, from this, you can see that it might, just maybe, be worth your time to make sure you understand the legal constraints and implications of fundraising before you consider raising investor capital.

Solutions

I offer a variety of fundraising services at my website, www.Chiefi.com including my audio course, Funding Foreplay which is also available from Amazon.com.

But, whether you use my services are not, please do yourself a very big favor and do the necessary research to get the right professional help to make sure you comply with securities law – before you even start on your Quest to raise money from angel investors.

(PS: Note:  I am not an attorney – just an MBA – so this is business advice not legal advice.)

Please leave your comments and ideas below.

Entrepreneurs: How Can I Raise Angel Investor Money For Start Up Costs?

The following is a question I recently received from a client:

Do you have any ideas how I can raise money legally just for start up expenses?  The only real start up expenses left would be getting through our capital raising phase.  People want to invest – but I know that I can’t take their money as investors due to SEC rules.  What should I do?

As you can imagine, I get this question a LOT from my clients. Generally, this is referred to as seed capital and it is usually the hardest money to raise since it is almost always perceived as a highly risky investment. The inside joke in the investment community is that you can only find this kind of seed capital from three sources – The Three “F’s”: Friends, Family and Fools.

The double whammy is that raising seed capital is usually considered to be like all the other kinds of fundraising pursued by start up companies – meaning that you typically have to go through the usual Reg D offering rules including preparation of a private placement memorandum, or PPM, just like you would to pursue any kind of angel investor.

The one exception I know of: bringing in a co-founder, or co-founders, who contribute time, energy, effort and money to both start AND manage the new venture. Of course, this usually means that the co-founder(s) are going to want a significant ownership position in the company…and the more money they contribute v. your cash contributions, the more of the company they may demand. Plus, when you get around to really raising the capital you need to execute your business plan, you and the other co-founders will almost always be subjected to more dilution of ownership.

One of the keys in this is that the co-founder cannot simply be a passive investor. If they are a passive investor, then we are back to all the Reg D rules. This is based on my three decades of experience as an entrepreneur – since I am not a lawyer you should check with your own securities attorney to see if they have some legal maneuver around this constraint.

All of that being said, you and your idea and your vision – could be the very rare exception to all of the above. But the probabilities are not with you.

My usual suggestion to my clients: Try not to stop for seed capital rounds…do whatever you can to get the company formed and the initial products or services at least fully formulated with a well thought out action plan and business plan with realistic financial projections based on the action plan. Then, do what you have to do in order to combine all of this with a legitimate Reg D PPM.

Armed with this kind of planning, you will know that the numbers work and the idea is sound…and you will be able to offer a much more compelling investment opportunity to angel investors.

Fundraising: Can I Use Investor Money To Pay Me Back?

As I get questions from readers from my Ask The Chief ImpleMentor series, I will take some of the questions that I think might have a broad audience and post them here on the blog.

This one is filed under “Dragons – Fundraising: Can I Use Investor Money To Pay Me Back?”

Question:

Love the blog! Finally someone answering real life startup company questions! I want to raise $1.8 million from investors for my computer business to take it to the next level. Can I use $250,000 of the $1.8 million to pay me back the money that I have already invested in getting my company started?

Thanks again!

Walt

Answer:

This is one of the most frequent questions I get from clients: Can I get back all of my money that I have invested so far in starting my company from the new investment dollars I get from angel investors or venture capital?

The short answer is almost never.

• Most will see it as a red flag and not invest.
• Most want to see you so committed, financially, to the company that you can’t afford to let it fail.
• If you don’t get paid back, then the company only needs $1,550,000 instead of $1,800,000 to accomplish the same goals that are in your business plan.

The longer answer is maybe a little. Read more >>

Fundraising: Can I Spend The Angel Investor or VC Money As I Get It?

As I get questions from readers from my Ask The Chief ImpleMentor campaign, I will take some of the questions that I think might have a broad audience and post them here on the blog.

This one is filed under “Dragons – Fundraising: Can I Spend The Investor Money As I Get It?”

Question:

Thanks for your comments about accredited angel investors. It was very helpful. We just finished your business plan and are starting to pitch our deal to angel investors and venture capital. Since we are already spending money on buying stuff for the company, can we start spending the investor money as we get it?

Steve

Answer:

The first thing you need to buy is a big sword – so you can fight off all the dragons that are getting ready to hatch! Firstly, you didn’t say – but I hope you have a Reg D PPM for a LOT of reasons. Please see FundRaisingDocuments.com

One of the things that should be covered in your Reg D PPM is how you handle investor funds as you receive them. For every successful offering I have ever been involved with or even watched from the sidelines, the money is ALWAYS escrowed as it is collected. That means that the money is deposited in a separate, untouchable escrow account UNTIL all of the minimum level of funding is reached. None of it goes into the company’s operating account until then.

Why? Read more >>