Even a Deal with Friends and Family Needs Proper Documentation

If you are an entrepreneur looking to raise capital by selling shares of your company to an individual that won’t be an active partner in your business, you have to be sure you are compliant with federal and state securities laws.  If you are selling a portion of your company to an investor, you are subject to securities regulations. That is, UNLESS you fall under an exemption and you properly document, and in some cases, file for an exemption.  This is a trap for many unwary entrepreneurs, who think they don’t have to worry about formal documentation of their deal because they are just offering shares of their company to a few friends and family.

While the offering they are contemplating may very well qualify for an exemption, if they don’t follow the laws and regulations by drafting a formal private placement memorandum (PPM) and complying with certain filing requirements, they run the risk of personal liability. This liability could include accusations of fraud and potential civil and criminal penalties for failure to properly register securities with federal and state agencies.

Drafting the PPM

The rules and regulations are designed to avoid Ponzi schemes and other fraudulent investing activities by making the transaction transparent and well documented.  The creation of a PPM is not as difficult as many law firms and pundits may make it sound.  We are not talking about an initial public offering with a six figure legal cost.  Our experienced securities lawyers can walk you through the process and help you evaluate your project as suitable for a PPM.  In many instances we can give you a flat fee project cost for documenting your deal.  We have drafted PPMs ranging in size from a startup, fast casual restaurant to a multi-million-dollar alternative energy project.

Minimizing Personal Risk

Raising equity capital from outsiders is typically done to avoid personal debt, risk and liabilities while sharing the upside with those equity investors.  If the deal is not properly documented, you are potentially erasing all of those protections and neutralizing the purpose of raising private money in the first place.  Put another way, a poorly documented deal leaves the entrepreneur with all of the downside risk personally, with a portion of the upside sold off to investors.  That is not a good business deal.  Let us help you understand the cost, time and effort that it will take to draft a private placement memorandum for your deal.  Call us at 215-525-1165 for more information.