If this is a securities offering (with passive investors contributing funds), then the “issuer” of the securities has an obligation to inform prospective investors of all material facts necessary to make informed consent prior to making their investment decision. An omission of a material fact known to the issuer that wasn’t disclosed to investors could be considered fraud or misrepresentation, which is illegal in a securities offering.
After the raise, if the issuer has sold passive interests in a company such as a limited liability company, the LLC Act of the state where the entity is formed may have additional laws regarding fiduciary obligations, fraud, misrepresentation, good faith and fair dealing, that may also be applicable if management knowingly conceals material facts from the members. As others have stated, a well-drafted LLC operating agreement should have language that would prevent management from withholding material facts and/or removal provisions for a manager who doesn’t comply.
Bottom line, the specific facts pertaining to the transaction would have to be examined to know when or whether an illegal act has occurred, and what remedies are available to investors who were harmed as a result.
It’s always best practice to keep investors informed of all relevant information related to their investment (good or bad), both before they invest and during the period of ownership of the investment.
