Investors: Rules to Follow When Raising Money

Investors: Rules to Follow When Raising Money

Rules to Follow When Raising Money (by Mat Sorensen)... It is absolutely crucial that you follow a few simple rules when raising money from others. The laws in the United States are very protective of investors and put numerous obligations and requirements on those who seek investment from others. Failure to follow the rules can not only result in civil liability but can also result in criminal prosecution. Here are a few important pieces of advice to follow when raising money from others.

1.    Never make general solicitations for investment.  A general solicitation is a solicitation made to the general public without regard to any prior relationship that you may have with the person on the other end of the solicitation. For example, a newspaper advertisement, a commercial, or a website that seeks investment from people whom you don't know violates this rule. In most instances you must have a publically registered security with the Securities and Exchange Commission ("SEC") which is traded on a stock exchange like NYSE, NASDAQ, etc. to make a general solicitation for investment. There are ways to raise money privately and without the need of making a public security registration with SEC and these types of offerings are referred to as Private Offerings. We've helped numerous clients raise money this way and it can be a great way to affordably raise funds for your business or investment. You can rise funds from those who are accredited investors (meaning they have $1M in assets or $200K a year in annual income) and you can also raise a certain amount of funds (up to $5M) from people who are not accredited. There are special rules that apply in these situations but a Private Offering can be an excellent tool in raising funds for a business or investment.

2.    Never take money from someone without proper legal documentation. Never just take someone's money without defining the terms of that investment. If the person investing money is receiving LLC units or stock in your corporation make sure you issue it to them and make sure you give them voting rights, an operating agreement or bylaws, and have them involved in your business. If you take money from someone who is the "cash partner" then you need to be very careful in how that investment is documented and in how you run that business. If that investor has no say of how their money is used and if they are not involved in and business decisions then it is likely that their investment will be deemed a security. If their investment is a security, that means you need to register it with the SEC. Failure to register an investment as a security is what people got to jail for.

3.    Always let the investor know how their funds will be used and always respond to their requests for information. Failure to use an investors funds properly can result in significant liability to you. Even if your investment was prudent and otherwise reasonable, failure to inform and properly disclose the use of the funds in your business can create a list of potential lawsuits from your investor. You can be certain to see these lawsuits of if you can't pay back the money.

If you are raising money from others, you must pay particular attention to the laws and rules of Securities and Exchange Commission as well as the relevant law and rules in your State. We've helped clients navigate this territory and have numerous structures and procedures created that will allow you to raise money and stay in compliance with the law.

For support on this process anywhere in the country, please give me (Mat Sorensen) a call and set up a brief consultation.  You can set up a time with Nikki Winslow at the office by calling 888-801-0010.  Mat Sorensen is an associate of Kyler, Kohler, Ostermiller and Sorensen, LLP running the Utah office of KKO located in Cedar City, Utah.

Reprinted with permission from the Offices of  Mark J Kohler, CPA, JD PC
7700 Irvine Center Drive, Suite 800 Irvine, California 92618 United States

KKO: 888-801-0010