Top 10 Mistakes in Getting Private Investors

One of the most common and most effective means of financing a new business venture is by raising money from private investors. Generally, securities laws require that potential investors in these private offerings receive a private placement memorandum (PPM) describing the proposed venture and detailing the terms of their potential investment which protects the entrepreneur/owner. Below is a list of the top ten mistakes entrepreneurs make with respect to PPMs:

1) FAILING TO USE A PPM ALTOGETHER – The biggest mistake an entrepreneur can make is not thinking a PPM is required. Failing to issue a PPM can violate federal and state laws and can create significant legal exposure for the entrepreneur from claims brought by investors.

2) PROVIDING INACCURATE INFORMATION – Simply issuing a PPM to potential investors does not fulfill your obligations. That PPM must be thorough and accurate to ensure that those potential investors fully understand their opportunity by way of a full disclosure.

3) FAILING TO MAKE NECESSARY DISCLOSURES – One of the most important aspects of a PPM is the disclosure of risks the business will face. Potential investors must be aware of the factors that could cause the business to fail.

4) NOT USING AN ATTORNEY – A PPM is a complex document that should not be drafted without the assistance of an attorney experienced in private placements. The costs of defending yourself in litigation against an unhappy investor will far outweigh the legal fees you will save in not hiring an attorney to assist with the PPM.

5) USING A TEMPLATE – Aside from hiring an attorney, do not make the mistake of using a template you find online for your PPM. Every deal is different and therefore requires a customized PPM.

6) NOT FILING THE NECESSARY REGISTRATIONS – PPMs are used in offerings that are exempt from the complex registration requirements that apply to public offerings. Failing to file the necessary and much simpler private placement registrations is a violation of federal and state law.

7) FUNDRAISING THROUGH PUBLIC ADVERTISEMENTS – To qualify for these exemptions, the offering must be private. Any public advertisement of the offering could make the offering “public” in the eyes of the federal government, in which case such exemptions would not be available.

8) FAILING TO UPDATE A PPM TO REFLECT CHANGES IN INVESTMENT TERMS – The terms of an offering will very often change during the course of the offering period. To ensure that all potential investors have the most accurate and up-to-date information, updated PPMs reflecting changed terms should be issued to anyone who previously received a PPM.

9) NOT TRACKING THE PPMS YOU HAVE ISSUED – So that you can make sure that all necessary parties receive the necessary updates to your PPM, and so you are aware of everyone who has been given the opportunity to invest in your business, it is important to keep track of everyone who has received a PPM.

10) NOT TRACKING ACCREDITED VERSUS UNACCREDITED INVESTORS – Securities laws classify investors as accredited or unaccredited depending on their financial circumstances, among other factors. Registration exemptions available to private offerings limit the number of unaccredited investors who can participate in an offering. To ensure compliance with this limitation, you must keep track of the unaccredited investors who intend to invest, if unaccredited investors are permitted at all.