The Truth About Getting Help Raising Capital

Bryan Howe
March 26, 2010 by

Can you help me raise money?

In short, define “help?” Will we give you a list of investors? Sure.

Will we make introductions to any of the private equity firms who have reached out to us for our best work over the years? If it fits. Will we pitch your business plan for you to people we do and don’t know?

Absolutely not.

In the last 6 months there has been a growing trend for business plan companies to promise some form of capital raising services. The thought goes, if they offer more than just the business planning engagement, they can secure more clients by touting how much they will help you post-planning. And you might think, “This will be really helpful to have the same company write my plan AND help me get funding.” EXERCISE EXTREME CAUTION.

For a company to TRULY represent you or present your business plan for funding, there are a number of legal requirements:

First and foremost, they must be a registered broker dealer. (Ask if they are, and listen carefully to what you hear.)

Second, any security being offered must be registered or meet the criteria for an exemption from registration in each investor’s state, as well as your company’s home state. Now, many “capital raising consultants” will tell you they can sidestep this legal obligation by tacking on the caveat, “This is not an offering of a security.” This claim is laughable and naive. It doesn’t matter what YOU call it, it’s what the SEC calls it. For instance, you can call it “constructive receipting,” but if the IRS calls it “tax evasion,” guess who wins? If you are essentially asking someone to invest in something and they are expecting profits derived from the efforts of others, you are offering a security. Whether it be debt (e.g., promissory note), equity (e.g., stock or LLC interest), an “investment contract” (which has been construed very broadly), or any other type of reciprocal transaction, the fact remains: if someone is investing money in your company with the expectation of profits derived from the efforts of others, it’s a security and it must be registered or satisfy a federal exemption from registration.

So that’s the law, what’s the reality? The reality is, people send around business plans with ROI calculations, investment propositions, and the like all the time. 99 times out of 100, nothing bad happens. However, if 1 time you accept investment and later the business goes south, you may be held responsible for anything your UNLICENSED business plan/funding consultant said. If they were licensed, they would likely have errors and omissions insurance, but your typical unlicensed representative will NOT, leaving you very vulnerable to legal trouble for anything they said.

In summary, DO NOT engage with an unlicensed company that says they will “show your plan around” or that they “have investors to share your plan with.” You may be personally liable for what they say or present. Since start-ups by their very nature have high failure rates, it’s likely your investors will scrutinize anything they perceive they were promised. Looking to recap any money they lost, lawsuits may fly if they feel deceived. At least if you pitched the plan yourself, you know what was said and not said, and you have some protection as a founder/shareholder in the company. But bringing in an unlicensed gun is just setting yourself up for an SEC mess you don’t want.

3 thoughts on “The Truth About Getting Help Raising Capital”

  1. Yes you are 100% correct only licensed broker/dealers can raise capital and received success-baes compensation. Just because an unlicensed money finer get away with it does not make it legal. It just means they have not been caught. Yet. Why do you think they have security laws.

  2. Your article is interesting. Actually, should be very careful when you invest in a company or business. Although you are only a shareholder in it, it should still inquire about the situation of the company from time to time.

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