You’ve studied your market, identified your audience, assembled your team, and have an idea you are passionate about. Only one thing stands between you and making your start-up a reality… money. Enter stage right: the complex (and often daunting) universe of early stage funding.

See our 3 tips for startups raising capital through equity crowdfunding.

The financial markets are complex and arming yourself with information is critical to the success of your business, as well as keeping you and your company out of trouble. The stakes are extremely high in the securities business – running afoul of the law can result in serious financial repercussions and could potentially have a devastating impact on your brand. In almost two decades of experience in financial services compliance, I have seen far too many founders rely on the advice of misinformed friends or personal intuition only to find themselves in an expensive battle with a regulator such as the Securities and Exchange Commission (SEC), Financial Industry Regulatory Authority (FINRA) or State securities offices. Here are a few tips to help you approach capitalization with confidence and hopefully come out the other side with focus that is unfettered by legal mistakes.

  • Know the Rules. Like most things in life (sports, work, even marriages) there are rules that must be followed when you are raising money. Fortunately, those rules are improving in what is and is not allowed when it comes to connecting small business with capital. The JOBS Act has spawned an entirely new framework under which you can pitch your ideas to people who may be interested in investing. However, these rules are not as simple as you might hope. Take some time and research the various regulations that are available, such as Regulation D, Regulation A+, Regulation S and, most recently, Regulation CF. A colleague at FlashFunders recently wrote a short piece that covers Reg D here.

It is imperative to know that the regulations outlined here are “exemptions” from registration as a security, which is an expensive, time consuming and sometimes burdensome process. If you do not operate within the spirit and letter of the rules, you run the risk of “blowing your exemption”… which can result in being charged with the sale of an unregistered security. Yes, that is a crime and it is punishable by fines and potentially imprisonment. Get to know the rules, take them seriously and don’t assume that small offerings will fly under the radar.

  • Choose the Right Partners. Despite how you may feel at times and contrary to the title of this piece, you will be working with others during your raise. There are many service providers and cottage industries that can help entrepreneurs lay a course to successful funding. As with anything you’ve encountered in business, some can add value and some can send you afield of your goals. Your decisions can mean the difference between closing your round and closing your company.

One thing I suggest you keep at the top of your mind is that the more a partner is regulated, the better. This may seem counterintuitive at first, but in finance the regulators create accountability for firms to do the right thing for the investing public. When you seek out a financial commitment from a prospective investor, knowing that your funding partner’s interests are aligned affects how productive and meaningful that relationship will be. Your most important partner, a funding mechanism, takes many forms: Angel Groups, Introducers, Broker/Dealers, Venture Capitalists, Investment Advisors and so on. As you get to know these various channels, ask them questions like:

  • Do you have reporting requirements with a government or independent entity?
  • Are your activities regulated? If so, by whom?
  • Do you have a Compliance program?
  • Are there investor protection protocols that you are bound to abide by?

Firms that are subject to oversight are often better educated on the rules and might offer more reliable advice as to structure and content of a proposed round. This extends to any partner you pursue, whether that’s a funding option, legal counsel, consultants or administrative services provider. Choose wisely and you can leverage your partners to develop a solid understanding of your needs, build a vision of what your end-game looks like and have a clear path to get there.

  • Embrace transparency. Trust is foundational in any relationship. Trust sets the tone in family, on teams, with government – it defines almost all links in our daily lives. It is built through honesty and transparency and, when violated, it leads to an abrupt and often hostile end in most cases. You will be asking partners to risk their brand, investors to risk their capital and employees to risk themselves – respect those sacrifices by presenting things in a fair and balanced way and by being authentic in your dealings. You may be asked to disclose things that are uncomfortable or don’t frame a circumstance or situation to your benefit; but do so with the knowledge that the other party is entering into a relationship with their eyes wide open.

Set expectations appropriately, act with integrity and be proactive in communication – it will always serve you well, regardless of the performance of your ideas.

Taking an idea and making it a reality is an exhilarating process, so approach your raise with the same enthusiasm and curiosity as you have for your business. Challenges and failures certainly lie ahead, but raising capital will be an important and exciting part of your story. Best of luck!

Sign up for our newsletter to get updates on investor crowdfunding news and the ability to access startup investment opportunities.


Leave a Reply

Your email address will not be published. Required fields are marked *