If you are looking to raise capital for your business, a private offering of securities might be one way for you to consider. Selling securities, whether it be to friends and family or angel investors, is an excellent means of raising capital if you are prepared and do it the navigate the maze of state and federal laws and regulations involved.  The following is intended to provide a basic understanding of raising capital via the private placement process. You should retain the services of a private placement attorney to advise you through the entire private placement process.

The SEC created Regulation D, which creates certain rules for private offerings. By following these rules, an issuer (i.e. a company selling stock or other form of security to raise capital) generally may raise up to $5,000,000 without a public offering.

Generally, a private offering may have no more than 35 investors. On the federal level, though, certain high-net-worth investors defined as “accredited investors” may be excluded when calculating the number of investors. There must also be NO general solicitation of investors by the issuer – no advertising. Just this weekend I came across someone soliciting the “private” sale of securities on Twitter – definitely not a good idea if you are trying to comply with the registration exemptions under Regulation D.

The federal securities laws for both public and private offerings are based on the premise that investors in securities are best protected by the disclosure of all relevant information regarding the securities and the issuer. The underlying guideline in this respect is Rule 10b-5, which requires the issuer to disclose to investors anything material that a reasonable investor would want to know prior to making a decision to invest. This is why PPMs are stocked to the brim full of material facts, disclaimers, and lots and lots of risk factors. Failure to properly include these and other items may subject the issuer to serious liability, including being forced to buy back the securities from the investor, as well as damages. If you want to avoid liability, overdisclose, do not hide anything, and do not mislead (among other things of course).

Keep in mind that there are also state “blue sky” laws to comply with – and they will need to be complied with in every state that a security is offered and/or sold.

Make sure to consult a private placement attorney / securities law attorney before you raise capital for your business.

Related posts:

1. Private Placements – A Brief Overview of Rule 505
2. Private Placements – A Brief Overview of Rule 504
3. Private Placement – A Brief Overview of Rule 506
4. What is an Accredited Investor?
5. Raising Venture Capital – What form of entity should I choose?