Tim Gillis, Attorney at Law, of Jacksonville law firm GILLIS WAY & CAMPBELL was recently interviewed for his knowledge and experience on raising money for business. Learn important information and tips from options for raising money for your business and business investor basics.

Q:  What are some options for raising money for my business?

Gillis:  When raising money for your business you have a few options, each of which has their own pros and cons. For example, you can borrow the money and incur debt, or you can sell someone an interest in your company and bring them in as an investor.  With debt, you are typically looking at a bank, or an alternative financing arrangement with someone who, for example, factors receivables for a private investor if you cannot get bank financing. That, of course, will be a much higher rate of interest then if you otherwise qualify for a bank loan.  The bank or private investor usually will expect the owner to have a personal guarantee and also give them a security interest in the assets of the business.  With a personal guarantee, if things go bad, things go very bad for the individual owner.  On the equity side, the investor coming in is sharing the risk with you.  At the same time, you are giving up a little bit of control of your business, and the compliance and disclosure rules are very risky for people who do not know what they are doing.

Q:  What are the basics of bringing an investor into my business

Gillis:  Basically, when you bring an investor into your business, you are doing a securities offering.  It does not matter how large or small it is, you are selling them an equity interest in the business.  They are going to be a co-investor with you as a partner, a shareholder, or a member in your LLC.  First and foremost, you have to remember that you must comply with the securities regulations.  The default rule is that every offering of securities has to be registered with the SEC.  We are very fortunate in that there are a lot of exemptions that are available and commonly used.

Q:  What is an accredited investor and how do I find one?

Gillis:  The basic definition of an accredited investor, when we are talking about individuals, is an individual who makes at least $200,000 and has expectations to continue that level of income, or together with his or her spouse makes at least $300,000 a year and expects to continue that level of income, or they have a net worth of at least $1 million, not including any equity in their primary residence.  They are not rich per se, but they are affluent.  Finding them is a bit of a trick.  Your best bet is someone you already know.  You want to avoid a public offering so you need to avoid public advertising unless you are going to fall under a very specific exemption, which is permitted under some circumstances.  But generally speaking, it is people you know.  Otherwise, you will want to engage someone who is a registered broker dealer, who can actually help you raise money.  What you want to avoid, generally speaking, is an unregistered finder who is not a registered broker dealer.  That can get you in trouble with the SEC

Q:  What is a private placement memorandum?

Gillis:  A private placement memorandum is a document, usually prepared in conjunction with your accountant and your attorney, that serves two purposes, (1) a disclosure document and (2) a sales document.  From my perspective, the most important thing that you can put in your private placement memorandum is a list of risk factors very specific to your business.  It should be anything that a potential investor would need to know, or would want to consider before making the investment.

It is really important that anything which is material to the business be disclosed to the potential investor.  Similarly, it is very important that you do not say anything that is false or misleading.  If you do, you are looking at personal liability if they sue you.  If the investment goes poorly, they probably will sue you.  On the sales side, you probably have projected income and other types of projections.  You need to be very careful to make certain that those are actually based on something in reality.  You do not want to use unsubstantiated, unsupportable projections.  That is a good way to make a false or misleading statement to an investor and get in trouble down the road.

You are also going to want to make sure that all the required federal and state disclosures are in your private placement memorandum.  For example, include statements such as “This offering has not been registered with the SEC” or “There is no public market place for this offering.”  In Florida, particularly, there is a disclosure that needs to be made so investors know that they have the right to get their money back after a certain limited number of days.  You need to make this disclosure in writing.  I have seen a lot of litigation where this disclosure is left out of the disclosure document and years down the road, the investor seeks to get their money back based solely on the failure to disclose the Florida right to rescind.

Q:  What is the most common exemption used for a securities offering?

Gillis:  There are several exemptions available, but by far the most widely used is Rule 506 of Regulation D.  Essentially, that is your private placement of securities.  There are two versions of it now — a public Rule 506, and a private Rule 506.  You have to be very careful to comply with the rules specific to both of them.  Generally speaking, if you limit your investors to accredited investors, you are going to be safer than if you allow non-accredited investors to invest in your company.

If you have additional questions about raising money for your business or would like to schedule a consultation with Tim Gillis, Attorney at Law , please contact us online or by phone at (904) 647-6476.