When startups and small businesses decide to expand and raise additional capital, they need a capital-raising strategy. A capital-raising strategy is essentially a roadmap to how your company will raise funds to fuel growth. It creates a plan that your company can use to ensure that you are meeting your goals. This includes: setting a financial goal, preparing financial documentation and readiness assessments, developing materials for investors to be fully informed of your business and their investment, practicing your pitch to potential investors, and meeting with investors. One of the main essential components of raising capital is ensuring your company’s legal structure is in order, you meet the compliance requirements of securities law if you decide to raise a certain amount of money, and selecting the correct venue to raise capital.
The most common sources of raising capital for small businesses are:
- friends and family investing;
- incubators or accelerators;
- angel investors; or
- venture capitalists.
Small firms that have ambitious plans for growth often raise capital through third-party investors. Regardless of where you raise your capital from, you ought to reach out to a business lawyer in order to ensure that the money you accept from investors is compliant with securities laws, particularly if the investment comes from third-party investors. There are certain third-party investors, called accredited investors, who must meet certain financial requirements in order to invest in your business. Accredited investors must also make certain disclosures to you in order to invest.
Raising such funds requires an organized business plan, projections that accurately reflect the business’s financial growth – losses and profits, legal documentation and disclosures, and securities laws compliance. Business attorneys experienced in capital raising can help with the required legal documentation and disclosures as well as ensure that your capital raise is legally compliant. A way to create the requisite disclosures is through preparing private placement memorandums (PPM). Having an experienced attorney can greatly reduce the stress of navigating and preparing documentation to present to potential investors.
Private placement memorandums usually include legal disclosures, risks of investments, among other disclosures related to the investment. Of course, the Securities and Exchange Commission has laws, rules, and regulations regarding how businesses communicate and market their capital raises to potential investors, whether by word of mouth, email, through advertisements, or social media, or any other venue where business are trying to market their capital raise. Any business raising funds through third-party investors must be aware of the type of communications they may make to potential investors and whether those communications are in compliance with securities laws. Further, PPMs often include who is the management team of the business, growth history, growth plans using the new capital, and due diligence items such as the company structure and company operating agreements.
Raising capital with third-party investors can be a minefield of legal and compliance issues, that if not done correctly, can have a serious impact on your business. Develop a capital-raising strategy along with following the legal due diligence required for disclosures and compliance with professionals who can help navigate the entire process successfully.