Private Placement and Equity Financing
Many start-ups intend to raise money for their new venture by raising capital in exchange for equity in the new business. This means that an investor, whether it’s a friend, family member, or high net worth individual, exchanges cash for an equity percentage in the new business.
What many start-up business owners don’t realize is that selling equity in the new venture constitutes the selling of securities. Why is this is a big deal? Because securities laws are regulated by the state and federal government and carry potential criminal penalties, including jail time, if violated.
Offering equity in your new start-up to potential investors may require your business to have a Private Placement Memorandum (PPM) in place. The Private Placement Memorandum will contain a number of disclosures and information about the new start-up to help the potential investor make an informed decision about whether to invest and receive equity in the start-up.
Private Placement Memos can be quite lengthy and complicated, but they are meant to protect the founders from claims of fraud or misrepresentation by the investors, as well as abide by securities laws. While it’s tempting to use a Private Placement Memo you’ve found online or from another start-up, this is dangerous, as you don’t know if it pertains to the same kinds of investors you are targeting or if you’ve disclosed everything that is necessary.
Keep in mind that state and federal securities laws also mandate what kinds of securities filings need to be completed depending on how many and what kind of potential investors you are going to target. After all, the law wants to protect people like Grandma Mabel from taking all of the money hidden under her mattress and giving it to some founder of a start-up without knowing what she’s getting herself into.
If you need help with, or want to see if you need a Private Placement Memorandum for your business when raising equity from family, friends or potential investors, reach out to our office for help.