Today I begin a series of posts geared to answering the question many small business owners should ask but few seldom do: how can I legally seek investors for my small business?
Let’s begin with the big picture and work our way down to the fine details.
First and foremost, selling an interest in your business to any investor touches on state and federal securities laws. Under these laws, a “security” is broadly defined to mean any investment in a common enterprise whose return is dependent on the efforts of others. As an extreme example of this, I remember working on a case when I was a judicial clerk in which the court had no difficulty finding a real estate agent potentially liable for violating the securities laws by marketing condo units that were part of a rental pool. The court believed that the condos were investments whose return depended on the efforts of the rental pool manager.
Its not difficult to see that if the sale of a condo can potentially involve the sale of a security, a business owner’s sale of an ownership interest in the business is undoubtedly the sale of a security. So what? Well, under state and federal securities laws, its unlawful for you to sell a security without first registering the sale with the appropriate securities regulators. So what? Well, the process of registering the sale of a security is long, hard, and expensive, typically involving a team of legal eagles and bean counters and costing more than most small business owners ever hope to raise. In other words, registering the sale of securities is not a viable option for small businesses.
But there is hope. The laws prohibit the sale of unregistered securities, but those same laws also provide for exemptions to the registration requirement under certain circumstances. It is within these exemptions that small business owners find their salvation, with the “private placement” being the most common among them. And that is the subject of the next post on this topic.