As the markets and the economy recovers, we start to see more requests for assistance in capital raises, either for investments in hedge funds, private equity groups, or in issuers through private placements.
On occasion, we are contacted by business people who are interested in raising capital, but who want to do so without paying a fee to a brokerage firm, and who believe they can raise sufficient funds on their own, using their existing contacts.
The securities laws do in fact permit such an offering - a properly documented and structured Regulation D offering can be conducted by the officers and directors of the issuer. The question is not whether it is permitted, but rather, should it be done.
The process can be time consuming, and loaded with potential pitfalls and securities law violations. While the SEC has tried to make the capital raising process easier for small businesses, there has not been much success in practice. The simple fact is that business owners are business people, not securities sales people. They do not have the knowledge or business acumen to enable them to successfully, and legally, sell securities.
Additional issues arise in the structure of the offering. Many entrepreneurs learn that they were unable to raise sufficient capital, that they spent far too much time on the offering rather than operating their business, and, adding insult to injury, that the amount that they intended to raise was not enough to address their business needs.
For more detail on those issues, Professor William K. Sjostrom has published an excellent paper on the topic, Direct Private Placements, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2442522.
Penny wise, pound foolish? If you are looking to take on investors, hire a securities lawyer to assist you in the process, and retain an experienced broker-dealer to conduct the offering for you. You can concentrate on running your company, and your professionals can run your offering.
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Introduction to Private Placements
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Questions? Comments? Considering a private placement? Call me to see how we can help - 212-509-6544 or send me an email - mja@sallahlaw.com
