• Know the Law: Outside Investors Can Be Impractical
  • August 29, 2017 | Author: Tyler Haynes
  • Law Firm: McLane Middleton, Professional Association - Manchester Office
  • Q: I recently decided to raise capital for my small business by relying on outside investors. Now what?

    A: Although raising capital through outside investors appears to be an attractive solution to expand your business, it is critical to consider all of the pros and cons. While such a move may provide immediate financial assistance and provide cash flow, investors will undoubtedly enter with high expectations regarding returns and potentially affect the control of your company due to their newly acquired interest as part owners.

    Furthermore, once you elect to sell interests in your company to outside investors, you are participating in the offer and sales of securities, subjecting you to both federal and state requirements.

    Depending on the nature of the offering, you may be required to file a registration statement with the U.S. Securities and Exchange Commission (SEC), which will detail material information about your company. This is no small undertaking and will take time and money.

    For most any small business, it is completely impractical. Small businesses are, however, provided with various “safe harbors” to avoid registration, yet allow them to legally offer and sell securities.

    At the federal level, there is the safe harbor for the private placement exemption under Regulation D of the Securities Act of 1933. The private placement exemption essentially permits the sale of securities to “sophisticated investors” who have access to your business’s material information and agree not to resell the securities to the public.

    Regulation D provides various exemptions based, among other considerations, on the amount of capital raised, duration of the offering, and the type of investor. Although Regulation D exempts a business from the registration requirements, Form D must still be completed, which provides authorities with notice of the offering.

    Similar exemptions exist in New Hampshire as well, specifically providing safe harbors for your business when selling securities to a limited number of investors.

    There are also ongoing reporting requirements related to the sale of securities, which again can be scaled down if certain thresholds are met. Although you may be confident that your business is ready to expand through outside investors, it is essential to understand the nuances of securities law and the subsequent impacts on your business.

    Tyler Haynes can be reached at [email protected].

    Know the Law is a bi-weekly column sponsored by McLane Middleton, Professional Association. We invite your questions of business law. Questions and ideas for future columns should be addressed to: McLane Middleton, 900 Elm St., Manchester, NH 03101 or emailed to [email protected]. Know the Law provides general legal information, not legal advice. We recommend that you consult a lawyer for guidance specific to your particular situation.