If you are raising money from private investors in the United States (other than from hard money lenders who are in the business of lending money), then you need to qualify your “offering” for an exemption from securities registration (by following a specific set of rules) or you risk getting in trouble with securities agencies for selling unregistered securities and/or selling securities without a license. Each securities exemption—there are several from which to choose at the federal or state level—has a specific set of rules that govern such things as:
- Advertising (which may be prohibited or restricted).
- Limits on the amount you can raise within a certain time period.
- Limit on the percentage of an investor’s net worth or annual income he or she can invest in your offering.
- Minimum investor financial qualifications on who can invest, such as minimum net worth, income or investing experience requirements.
- Required disclosure documents such as a Private Placement Memorandum or offering circular describing the risks of the investment.
- Securities notice filing requirements with the Securities and Exchange Commission and state securities agencies—usually required within 15 days of accepting an investment.
To comply with an exemption, you typically must have a “securities offering” or “private placement” in hand before you begin offering investment opportunities to private investors. The offering documents should be structured and drafted by an experienced securities attorney, who will also help you determine the appropriate entities, securities exemption, tax provisions, voting rights, investor buyouts and other important matters. You should select an attorney who drafts securities offerings on a regular basis and has legal malpractice insurance specifically covering securities legal work. It is extremely important to hire the right law firm to draft your legal documents.
Once you have a securities offering and advice of qualified securities counsel, then you should be able to solicit private investors to invest with you at rates lower than hard money and/or offer a share of equity instead of paying fixed interest with personal guarantees. These are necessary options if you want to grow your business.
If you don’t want to set up a securities offering, then you should not be soliciting funds from private investors, and you should only be getting money from hard money lenders (which will be at much higher interest rates than private funds) or institutional lending sources (banks, insurance companies, etc.). If those sources aren’t available to you, then you need to seek securities legal advice or proceed at your own peril—and at the peril of your investors, whose investment will likely be lost if you get in securities legal trouble.
In conclusion, before you raise money from private investors, you need to educate yourself on securities laws or you could wind up in legal trouble. Securities legal defense bills can quickly approach five or six figures. It doesn’t matter if investors lend you money or invest in an LLC—both are securities. Plus, if you do it wrong and get a “cease and desist” letter (or similar order from a state or federal securities regulator), under certain exemption rules you may be precluded from ever again raising money from private investors.
A good place to begin your education on securities law is to go to our website at www.SyndicationAttorneys.com, where there are many free articles, videos, audio recordings and information about upcoming live syndication and crowdfunding educational events. If you sign up at our website, you will be informed of upcoming events, and you might just learn something that can both help you grow your business and keep you out of trouble!
NOTE: This information is of a general, educational nature and may not be construed as legal advice pertaining to your specific offering, exemption or situation. Any such advice must be sought from your own attorney pursuant to an attorney-client relationship, after consideration of your specific facts or questions. At Syndication Attorneys, PLLC, we will be happy to discuss your investing goals with you. You can schedule a free, 30-minute consultation by clicking this link.