Business Plans and Private Securities
A business plan is not a legal document. It does not have the necessary subscription agreement, securities disclosures, and other risk disclosures that are needed in order to act as an investment contract. One of the key differentiating factors between a business plan and an investment contract is that the investment contract must be produced by an attorney. Although there are some businesses out there that are able to develop what is called a private placement memorandum – this is a very specific type of legal contract that should only be drafted by an attorney that has substantial experience with securities laws. Almost every state as well as the federal government – through the securities and exchange commission – has extensive rules and regulations as to what constitutes a security and what disclosures must be made to a private investment source such as an investor. Additionally, there are instances where only certain types of investors – commonly
called accredited investors – are able to make a man investment into a small business were related startup.
These protections are put in place so that only the most qualified and most sophisticated investors can understand the risks associated with this type of investing. Most importantly, it is imperative that the accredited investor declare themselves to be so in order to avoid any type of issue where an entrepreneur is raising capital through individuals who do not meet this qualification. A qualified securities attorney can walk an entrepreneur for all the ins and outs of developing documentation that is specific for raising capital from private investors.
At the time of this writing, and accredited investor is an individual that has a net worth of $1 million or more or predict makes an income greater than $200,000 per year and anticipates that they will do so in the coming future. Among married couples, this minimum income increases to $300,000 per year. Corporations, trusts, and other nonhuman entities are generally required to have $5 million in assets before they are able to invest in specific types of private securities funded businesses.
However, there are constantly changing regulations and laws that relate to how an entrepreneur can raise capital and from which type of investors. As such, it is imperative that the entrepreneur work with an attorney before engaging in any capital raising activities. Additionally, only a highly qualified attorney can make an appropriate determination as to whether or not a private placement memorandum is going to be required for any type of capital raising activity.
Not all start businesses that are looking to raise capital from private investors are required to have a private placement memorandum. As such, these types of deals are typically involved when the capital raising occurs from one investor, a venture capital firm, a private equity group, or through a bank. These entities and very wealthy individuals are exempt from the laws that pertain to. Again, it is definitely going to be in your best interest to still have legal counsel on hand especially given that there's going to be a significant negotiation. Where there is a determination of what percentage of the equity of the business is going to management versus private investors. There are also going to be bylaws and other legal instruments are going to be implemented in order to develop this type of business. As such, business plans are not considered to be an offering for private securities because they do not have the appropriate disclosures were other
accoutrements that are normally associated with a private placement memorandum. This is going to be one of the ongoing things that we discussed throughout this website given that many entrepreneurs are often looking to raise capital from private sources rather than approaching a bank for a loan.