Raising capital is tough and using all of the free social media resources available to you is tempting. However, under current law, if you are a startup trying to raise capital, you have to be extremely careful how you go about it.
If you plan on using the most common securities law exemption for startups, Securities and Exchange Commission (SEC) Rule 506, you can’t post to the world at large on Twitter, LinkedIn, or Facebook, that your company is trying to raise funds.
There’s nothing more relaxing than a long drive right? The stereo’s bumping, you’ve got your bouncing baby startup strapped tightly in the car seat in the back, and you’re looking for ice cream, because your startup is about to startup some major crying without ice cream. If you speed, you’ll get to it quickly. If you jump the curb and cut through someone’s lawn you might get to it even faster. But all of that is illegal and dangerous. Do it even once and there’s a chance you could suffer a calamitous outcome, and above all, you’d be putting your precious baby startup in jeopardy. The same applies to private company financings. You’ve GOT to know and adhere to the “rules of the road” or all of the work you’ve done up to this point could be for not.
The rules for most private company financings are found under the Securities Exchange Commission’s (SEC) “Rule 506,” which dictates how individuals and startups must conduct themselves when seeking investment funds by selling securities (a share of stock, a convertible note, etc.). Running afoul of these rules can not only prevent you from raising the funds that you need, it could subject your personal assets to exposure (no corporate liability shield will be there to protect you), and in the worst case scenario, subject you to civil and criminal penalties. So, these rules can’t be taken lightly.
Entrepreneurs create jobs, but they generally don’t do it out of thin air. Usually, they need investors. These investors are generally very wealthy people who are 1) inherently private and 2) usually very busy doing wealthy person stuff. So imagine learning, after going through all the work of finding an investor, that the Congress and the Securities and Exchange Commission (SEC) want to make it harder to raise money, including in some cases requiring investors to respond to a checklist of private and probing questions to find out if they are or have been at any time within the last 10 years a “bad actor.”
If you haven’t had the chance to read the SEC’s proposed rules on “bad actors” disqualifying companies from using the Rule 506 securities law safe harbor exemption, you ought to. The proposed rules, if adopted, will fundamentally change Rule 506 offerings and the startup financing legal landscape.
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