Woodland Hills Business Law Blog

Thursday, February 13, 2014

Soliciting Investors

More Opportunities for Businesses to Solicit Investors but What Are the Legal Challenges and Risks?

Since the 1930s, businesses wishing to secure investment dollars have faced regulations banning them from appealing directly to the public via advertising. Instead, businesses have only been allowed to pursue investment funds via prescribed channels and from wealthy individuals. The reasoning behind the ban was that if the general public were subjected to direct appeals for investment by hedge funds, venture capitalists, start-ups and others, the rate of financial fraud would increase.

The investment advertising ban has long been considered an obstacle to entrepreneurship; it has been identified as a drag on growth, employment and businesses’ ability to raise funds, as well as an impediment to everyday investors’ awareness of legitimate and promising investment opportunities.

In the summer of 2013, the investment advertising ban was lifted and changed the way in which business owners may solicit and secure financing from investors. On July 10th, the Securities and Exchange Commission voted four to one to lift the advertising ban as part of the Jobs Act. The fear of fraud remains, but it is believed by many, including a majority in congress, that the lifting of the ban will allow companies to experience greater growth, raise money and hire workers.

Although there are a multitude of benefits expected from the revocation of investment advertising restrictions, there are a number of increased risks and challenges that both business owners and investors must be cognizant of. These include:

  • The new rules will allow organizations seeking investors to advertise to anyone. Only “accredited” investors, though, will be allowed to actually invest. Accreditation will be determined by individuals’ net worth and/or income, but will not take into account individuals’ home values and other factors.

  • Some states are adopting their own rules to protect investors. (North Carolina, for example, is working to pass a law that requires investors to sign an affidavit stating that they are aware that investing is high-risk and that they may lose their investment.) What may be legal in one state may not be legal in another.

  • Organizations that are associated with “bad actors” such as felons will not be allowed to advertise for investment. There is confusion, however, regarding the exact meaning of “associated with” and “bad actors”. Until these terms are fully defined, unintentional illegal activity could occur.

  • An increase in investment activity will likely lead to an increase in fraud.

To minimize the risk of illegal activity and fraud, consult a business law attorney prior to advertising or accepting investments under the new laws. An attorney can work to ensure that your organization follows all applicable laws when advertising and accepting investment dollars. An attorney can also assist investors by ensuring that organizations seeking investments have provided accurate information regarding finances and business plans.

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