Having lost faith in the promises of wealth and job security once espoused by the titans of corporate America, many former employees have decided to set off in a different direction and establish their own business ventures. Although it can rightfully be said that those of us that endeavor to create and own an enterprise do so with the best of intentions (for the most part), we mustn’t forget that the road to ruin is paved with much of the same (good intentions, that is). More to the point, what most folks interested in starting their own company lack has far less to do with good intentions and much more to do with money. In a world where cash is king and investment capital is at an all-time premium it pays to understand how best to go about raising capital.
The following represents a limited analysis of the legal requirements associated with early stage investment capital fund raising in the United States of America with respect to domestic investment opportunities. Please note, the information provided below offers parties contemplating fund raising a general understanding of some of the key issues to be addressed when doing so, and it is recommended that the aforementioned information be strictly relied upon as an introduction to various points of interest by any and all parties seeking to solicit investment. Further information with respect to this complex topic merits far more detailed communication and analysis than can be offered in the format of this article. Accordingly, the information found herein does not constitute legal advice and should not be relied upon as a substitute for specific guidance provided by qualified professionals.
DOCUMENTATION
Assuming a solicitation of investment beyond the scope of a “friends and family raise”, parties seeking investment should be prepared to present prospective investors with certain forms of documentation including but not limited to the following:
- Non-Compete/ Non-Disturbance and Confidentiality Agreements- Confidentiality is key to the success of your fundraising efforts and must be maintained throughout the process;
- Term Sheet/ Business Plan / Pro-forma Budget (all with proper disclaimers and exculpatory provisions);
- Venture Entity “Governing” Documentation – i.e. a shareholders’ agreement for a corporation or an operating agreement for a limited liability company, etc. Please note, partnerships are not the preferred entity for this type of an investment;
- Subscription / Share Purchase Agreements- Are widely considered to be the most insular of the various forms of fund raising documentation and govern the terms of sale/purchase regarding ownership in the venture.
The documents referenced above are both anticipated by sophisticated investors and are necessary for the soliciting entity and its principals to provide proper disclosure as required by law.
BLUE SKY
Blue Sky Laws refer to the securities laws and rules promulgated and enforced by each individual State. These State specific securities laws typically vary with regards to regulations, fees, pre or post-solicitation requirements, and like-type issues. Furthermore, the applicable requirements will be determined in part by the number of investors, which state (or states) they are in, and whether they are all “accredited investors”. At this juncture, Federal filings are not advisable or cost-effective.
In the event that the soliciting party anticipates converting more than four (4) prospective investors (on average) per U.S. State to active investors, it is recommended that Blue Sky securities filings be prepared in conjunction with the same. Generally speaking, said filing preparation would require the production of (i) various forms of the documents referenced above in the prior section of this article, and (ii) other State-specific documentation, with the production of each document to be determined on an individual case basis.
INFORMAL COMMUNICATION REGARDING INVESTMENT
It is strongly recommended that all communications with potential investors regarding investment opportunities be kept to a minimum at this stage in the fund raising process. In the alternative, should it become necessary to provide prospective investors with preliminary documentation concerning the investment opportunity, any and all dissemination of marketing/promotional material should take the following into account:
- All recipients of promotional material should qualify as “accredited investors”. Investors who are not accredited may later claim they did not receive the required written disclosure materials, that they did not fully understand the risks associated with investment, and/or that they have a right to a refund of their investment (a “rescission”);
- Avoid all general solicitation or general advertising. Contact should be direct and personal, and kept between fund raising parties and persons with whom they have an existing, established relationship;
- Attempt to confine the information presented to that which concerns the Company’s products or services, unless said information shall be presented in the form of more detailed types of documentation, such as an executive summary or a business plan.
Once again, investment capital fund raising can be complex, expensive, and time consuming for even the most well versed professionals. Discussing the topics referenced above with your attorney will provide you with a proper introduction and a framework for structuring the development of your individual fund raising plan.