Raising capital is one of the most challenging aspects of operating a business, and it is absolutely critical for business success. Often times, companies are unaware of the legalities involved during the capital raising process, including securities laws. Failure to comply with these laws could result in SEC action, lawsuits and potentially having to return investor money, known as the “right of rescission”. To help you avoid these potential setbacks in your business, we’ve compiled some of the most common mistakes that companies make when raising capital.
1) Not Hiring a Lawyer
Companies might be tempted to save costs by skimping on legal advice, but this can be disastrous, as discussed above. All capital raises must either be registered or prove exemption from registration. Many companies will complete a Regulation D filing for a private placement, which can be a complex process. Companies would be well-served to hire legal experts, and avoid potentially violating securities laws.
2) Selling Stock to Family & Friends
Many entrepreneurs first turn to family and friends to raise the initial capital for a business, but often these close relations are not accredited investors, and as such, entrepreneurs stand the risk of violating securities laws (specifically Rules 501 and 506 of Regulation D).
3) Advertising or Soliciting Investors
Advertising or soliciting money publicly from investors without registration will run you afoul of securities laws. Companies filing through Regulation D are generally disallowed from general advertising of an offering, and must instead rely on investors with whom the company has a “substantial and pre-existing relationship”.
4) Using Unregistered Agents
Sometimes companies utilize the services of a fundraising agent (also known as a consultant) to help raise capital, however they must ensure that the consultant is a registered broker / dealer. The Securities Exchange Act of 1934 requires that anyone engaged in capital raising on the behalf of others register as a broker, otherwise the offering will violate securities laws.
5) Not Complying With Blue Sky Laws
While it’s important for companies to first comply with securities laws on the federal level, failure to abide by the securities laws within individual states (known as “blue sky laws”) where investors reside could be problematic. Blue sky laws vary from state to state, with different interpretations of what is required for compliance.
Raising capital is a complex process requiring legal assistance. At Blue Sky Filings, we take care of the entire blue sky filing process for you. If you need more information about Blue Sky Laws or to get assistance with your blue sky filings, please contact us at Blue Sky Filings by calling (844) 723-4537 or by filling out our online form.