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What SEC and other laws do you need to know about for fundraising?

I'm working on writing an article on funding small businesses with money from family, friends, investors, etc. and I'd like to include quotes from here, responding to the following questions:

1) Under what circumstances can businesses fundraise without SEC filing?
2) What laws to keep in mind with venture capital fundraising?
3) What to keep in mind with getting funds from:
a) Family
b) Friends
c) Investors
d) crowdfunding investors
etc.


10 Replies

Mike Moyer
1
1
Mike Moyer Entrepreneur • Advisor
Managing Director at Lake Shark Ventures, LLC
Founders should always be perfectly fair when it comes to equity in their start up company for friends, family, and early investors. The Slicing Pie model for equity allocation and recovery is by far the most fair way to divide up equity in early stage companies that are bootstrapped. If you haven't read the book Slicing Pie I would be happy to send you a copy.
Jonathan Poston
0
0
Jonathan Poston Entrepreneur
Yiveo.com | Medical Marketing Agency
Thanks Mike, just sent you a LI invite. Do you have a pdf version you can send to [removed to protect privacy] ? Do you mind if I quote from it?
Julie Tittler
0
0
Julie Tittler Entrepreneur
CEO & Founder of Semafores, Inc.
Can I get a copy of Slicing Pie? I'm dealing with these issues now.

Thanks.
John Seiffer
1
0
John Seiffer Advisor
Business Advisor to growing companies
When dealing with family and friends, the entrepreneur should assume the company will go bust (most do and even those that don't often don't return any money to founders or friends & family) and calculate if they can they still enjoy Thanksgiving dinner afterward. If not, then don't put the relationship at risk. Friends & Family should consider the "investment" as a gift and if they can't afford a gift don't do the investment.

That said, friends & family usually invest on the same terms as founders - common stock etc.

Another thing that should be considered when there's more than one founder is a vesting schedule so that if a co-founder leaves they don't walk away with a whole lot of the stock that they haven't "earned."

Founder's Dilemmas by Noam Wasserman is a good book on the topic.

Also if a company will need future rounds beyond F&F then they should structure those F&F investments in such a way that it won't complicate future raises by more sophisticated investors. That would include putting correct paperwork in place, including drag along provisions etc. Should not be done w/out professional advice any more than you should take out your own appendix by reading how to on the internet.
Mike Moyer
1
0
Mike Moyer Entrepreneur • Advisor
Managing Director at Lake Shark Ventures, LLC
Contact me through SlicingPie.com! -Mike
Nicole Gravagna, PhD
0
0
Author at Myth of Stability: Why safety is like a donut
I recommend my book, VC for Dummies. You can get access to the first half of venture capital for dummies online for free. Peter and I wrote the first chapters to answer many of the initial questions for founders who think they want to raise capital. In many cases, VC funds are not necessary. If you'd like a quote on something specific, feel free to reach out.
Elon D. Rubin, Esq.
2
0
Elon D. Rubin, Esq. Entrepreneur
Entrepreneur, Attorney, Strategist, App/Web Designer and Tech Geek
Pursuant to legal ethics rules, this does not constitute legal advice, it is for the purposes of discussion only. Accordingly, consult a licensed attorney before relying on any of the information below:

(1) Typically an SEC filing is necessary when an investor invests pursuant to rules 504, 505 and 506 of the 34' Securities Act. A way to not have to file, right away, is to do a convertible note where the "investment" is a loan that's triggered into equity at some point in the future. At the time equity is "triggered," this would probably require a filing.
(2) This relates to your first question. A VC investment would be governed, most likely, under rule 504, 505 or 506, depending on how a deal is structured. Another thing to keep in mind is compensating a third party for helping get an investment. This would be considered a "promoter," which is not legal under securities laws. Only broker dealers (investment banks) can get a percentage of a fundraise. You would have to have proper structure in this instance.
(3) One thing to keep in mind is the requirement of an accredited investor in 506. An accredited investor is someone who has certain earnings per year or savings that meet statutory requirements. It is possible to have an unaccredited investor, but, in this instance, this investor would have to be "sophisticated" and the issuing company would have heightened disclosure requirements (typically in the form of a private placement memorandum). Also, there are certain due diligence requirements that companies may need to meet depending on which Rule they use. Finally, there are, in some cases, state securities laws that companies need to be cognizant of.

Happy to talk more. I do a lot of work in the tech/fundraising/securities legal spaces, and have a tech company of my own.
Stephen G. Barr
0
0
Stephen G. Barr Advisor
Independent Snowsports Journalist, USSA Masters Ski Racer, Advisor @ World Pro Ski Tour
Shaun Randolph recently published a new concept on Linked In called Crowd-Servicing as a way for startups to raise capital without an SEC filing for specific tasks or subcontract services from freelancers:

Ming Tsui
0
0
Ming Tsui Entrepreneur
HabitatForAll.org
Just can't understand why our government keep on creating and inventing rules for almost everything and many times they rules don't make any sense. I guess this is just a way for government to impose who they are to the ordinary citizens. Otherwise the government is nobody. Now, they are somebody who can have power over all people everywhere. I guess people just love the concept of how government is created for society almost everywhere. I for one love to have less rules and less regulation and more logical laws as well as tougher sentences of criminal acts.
Lonnie Sciambi
0
0
Lonnie Sciambi Advisor
"The Entrepreneur's Yoda"- inspiring, guiding entrepreneurs to achieve their dreams - CEO Mentor/Advisor, Author/Speaker
No matter what you do, keep the capital structure simple, especially before (or if) any professional investor money (angels, VCs, etc.). One class of stock, a simple stock option plan and a philosophy for any employee shares, options, etc. that "you have to be present to win." If an employee leaves, they have to sell back their shares. Establish a short window(maximum 90 days) for any vested option exercise once an employee leaves and a formula (in the company's favor) for a buyback of all stock from any employees who own shares and leave. And for this last point, always preaching the gospel of cash flow, I have had companies set up a multi-year payment plans (in the form of a non-interest bearing note secured by the shares) to spread the cost out over time. Minimizes impact on cash flow. And this philosophy always keeps the shares "inside the company (and family). Hope this give another perspective.
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