Raising Capital? 2 People You Shouldn’t Speak To

Raising Capital? 2 People You Shouldn’t Speak To

  • April 9th, 2015
  • Russell Weigel
  • Comments Off on Raising Capital? 2 People You Shouldn’t Speak To

Raising Capital can be tricky.  Make sure you’re speaking to the right people.


It is no secret. Raising capital is intrinsic to the success of every business owner. Whether raised by a collaborative effort of friends and family, by third-party investor capital, or supported by an entrepreneur’s personal resources, a business cannot run without a consistent flow of cash to support its activities. In attempting to see projects flourish and to communicate the message that the business is open for business, entrepreneurs will go to great lengths to secure the necessary funding.  But who should the entrepreneur be wary of approaching?

  1. An investor residing in a state in which the business has not registered or complied with local solicitation compliance requirements;
  2. An individual who will introduce the business to a prospective investor who is not a licensed broker or dealer.

Nancy is a restaurant owner in the State of Florida. Her business is thriving and she needs to expand her operations. She becomes aware of a Meet and Greet in the State of New York where she has the potential to interact with various entrepreneurs of her industry as well as investors seeking sustainable businesses in which to invest. Randy, the event organizer, greets Nancy and after some conversation informs Nancy that he knows several suitable investors for her business. He said he would be glad to make the introductions and hoped she would consider a small retribution of 5% if any of the investors he introduced pursued the opportunity of investing in her business. After considering that Randy’s actions would be that of a salesperson who should receive compensation for his efforts, Nancy agreed and felt it was proper to award Randy if an investor funded her business. Randy introduced her to Lou, the investor. Nancy energetically shared the details of her growing business with Lou.   With a critical eye, Lou evaluated Nancy ‘s abilities, recognizing her vibrant and thriving spirit and experience in the restaurant business. He also was attentive to her plan and explored its viability to render results for his investment. After he has researched Nancy and her business, Lou visited Nancy’s establishment and was convinced he wanted to invest in her venture. They set a date to meet for lunch to finalize the details of the opportunity and sign agreements. Within two weeks, Nancy was handed a $35,000 check which she deposited. She met with her staff and made plans for the careful use of the investment funds, which Nancy felt would situate the restaurant for another growth spurt.   A few days later, Nancy remembers that a promise was made to Randy and shortly thereafter mails a check to him for all of his help. Nancy, Lou and Randy were all happy campers. Happy ending right? Well……

What Nancy failed to realize was that she had just set herself up for potential litigation at the whim of the investor, and broke laws that are enforced both civilly and criminally by various regulatory and criminal justice agencies, which could one day jeopardize her business and even her liberty. For starters, Nancy neither registered the opportunity of investing in her business with the SEC, federal level, nor attempted to comply with certain registration exemptions. The subsequent step, however, was to ensure she had registered or qualified her offering and herself in the state in which the investor resides, in this scenario, the State of New York. Failing to satisfy applicable legal compliance requirements rendered this transaction voidable by the investor and punishable by state and federal authorities. What about the 5% commission check to Randy? This payment can have multiple layers of problems. One consequence can be that the investor and state and federal authorities allege that the undisclosed payment was a material omission of fact from the terms of the offering thereby supporting claims that the investment solicitation was a fraudulent offering. Likewise, the fact that Randy is not licensed to act as a broker dealer can make his participation in the transaction a reason for the investor to void the transaction. Criminal authorities could view the payment to Randy as an illegal “kick back,” exposing Nancy to the possibility of a five-year federal prison term.

Suppose instead that Nancy never gets sued because of the investment and broker registration issues noted above, but one day she decides to sell the restaurant business. Potential buyers in their due diligence of the business are made aware of or learn of Nancy’s prior investment offering. They learn that appropriate filings and procedures were not followed, and they decide not to acquire the business because of these outstanding regulatory and investor compliance exposures.

Looking back, all of these innocent missteps exposed Nancy and her business to reputational and financial damages at least, but all exposures were avoidable with proper planning and consultation with a qualified securities attorney.

For more tips on raising capital, purchase your copy of Capital for Keeps so you can plan informed capital raising initiatives and limit litigation risk.

Yesenia-Otero-50x50  by Yesenia Otero, Business & Marketing Strategist empowering startups and new venture management.


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