The path most private companies follow when attempting to raise capital from investors typically involves developing a business plan or executive summary and then promoting that document to investors. This is also the primary reason why the vast majority of those companies fail at raising capital for their business or project.
Business plans have significant limitations regarding accommodating investment from individual investors:
Issue #1 – Regulations: There are regulations that apply to a private company raising capital from investors. Unless you can claim that the investor is a founder in the business or project – and was inherently involved in the development of the business – that investor will be deemed an “outside” investor. Raising capital from that individual, even if they are a friend or family member, will require the use of a proper securities offering. We have seen numerous instances of companies that raised capital improperly to only have it cause significant problems later including fines and forced recission of the investors capital. A Regulation D offering ensures you are raising capital in compliance with State and Federal rules.
Issue #2 – Lack of structure: Raising capital from investors involves far more complexities than simply providing them a summation of your business plans. Are the investors purchasing equity or debt securities? If equity – are the shares or units preferred or common? Are they convertible? Do they have voting right? Do they have a liquidation right or other security attached to the securities? You will fail at raising capital unless you provide concise and proper structure to investors. Sophisticated investors will expect and demand this from you as it is your responsibility to provide investor these critical transaction particulars. Even soliciting an indication of interest from an investor will require that you provide them specific transaction structure and data. Without this information they are incapable of vetting the investment opportunity and expressing interest.
Business plans serve an important function for certain businesses – but they should not be utilized as a means to solicit investment or accommodate investment from investors. A Regulation D private placement provides the needed structure to properly interact with investors, solicit interest, and accept investment.
Wednesday May 22, 2013
Category: Capital Formation and Regulation D
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