Note: This information was retrieved from a newsletter sent by DeAnn Chase of the Chase Law Group, South Bay Business Lawyers located in Manhattan Beach, CA. I found it informative and wanted to share with you in the event this is something you'll be considering in your business.
Many of our clients come to us with questions as to how to fund their start-up or existing business. Of course, funding options vary depending upon many factors, including the length of time a business has been operating. Depending upon the economy, traditional sources of capital, such as bank loans, are not always available. Accordingly, many of our clients have turned to alternative approaches to raise capital, such as soliciting funding from personal contacts or other investors. We have found that many entrepreneurs are not familiar with the regulations and risks associated with these types of investors.
Unless the investor is going to be actively involved in the management and day-to-day operations of the business, the sale of stock in a corporation or membership interests in an LLC invokes securities laws under the Securities Act of 1933 (Securities Act). The Securities Act also applies to someone who performs services in exchange for equity, or to someone making a loan to an entity. The purpose of the Securities Act is to protect investors by requiring that they receive financial and other significant information concerning their investments, as well as to prohibit deceit, misrepresentation and fraud.
The Securities Act requires that every offer for the sale of a security be registered with the Securities & Exchange Commission (SEC) unless it falls within an exemption from registration. There are several exemptions that may apply, which are very fact specific. Exemptions may apply to someone with a pre-existing personal or business relationship with the business or its principals, or depend upon the state of residence of the investor.
When considering taking on an investor, it is important to determine whether that person qualifies as an "accredited investor." An accredited investor is someone whose net worth exceeds $1M, excluding the value of his or her primary residence, or someone whose income is in excess of $200,000 for the past 2 years (or in excess of $300,000 joint income if married) and has a reasonable expectation of reaching the same income level in the current year. If an investor qualifies as an accredited investor, it significantly reduces the level of disclosures that the company must give to the investor.
When engaging in discussions with investors, it is very important to engage legal counsel from the start as the burden rests with the company issuing the security to ensure compliance with applicable securities laws. At Chase Law Group, we regularly advise our clients on the complexities involved with taking on investors and compliance issues. We are happy to speak with you, or anyone you may refer, who is taking on investors or considering investment in a business venture.
If you have any questions regarding this information, please contact DeAnn Chase of the Chase Law Group, South Bay Business Lawyers.
