The fundraising process requires countless hours to develop and refine an investor pitch.  While the majority of that time will be focused on how to find and raise money from the best investors on the best terms, it is critical to remember that there are limits to what can be said and done under applicable securities laws.  Failure to comply with securities laws can be a trap for the unwary – with potential consequences that include the right of an investor to ask for his or her money back.  While the laws are complex, understanding a few basic concepts can go a long way.

  1. Don’t talk about stock in early meetings.  During initial or informal networking sessions, avoid describing potential deal terms, such as valuation, price per share or type of security (even convertible notes).  Dissemination of those terms could be considered an “offering” of securities under applicable law, and should be done in a controlled fashion.
  2. Don’t post your offering materials online.  Private offering documents are not supposed to be made generally available to the public.
  3. Keep track of what you say and to whom.  If you are concerned that you may have said something that in hindsight was too optimistic, or is no longer accurate, make sure to correct the record directly.  Do not rely on boilerplate disclaimers in investment documents.
  4. Don’t play favorites.  No individual potential investor should have an “inside scoop” or be provided with special information.  If something is important to one investor, it is probably important to all of them.
  5. Beware of finders.  If someone proposes that they be paid to help you raise money, make sure to ask if they are a “registered broker-dealer.”  The involvement of an unregistered broker-dealer can violate securities laws.

Fundraising is hard enough.  Securities law problems are the last thing that any emerging company needs.  But with some advance planning, and some basic guidelines, the path to securities law compliance can be fairly straightforward.