I recently held a virtual training and asked participants to submit their top questions about raising funding from investors, and I got a lot of great questions! I wanted to share answers to some of the most commonly asked questions:
Can I talk to potential investors before I deal with the legal compliance part?
No! A lot of business owners don’t realize it, but talking to someone about investing in your company is a highly regulated activity and you MUST deal with state and federal legal compliance before you offer an investment opportunity to anyone. If you inadvertently break the law governing how you can talk to investors, you will create a potential liability that could affect your business’ success in the future. The good news is that there are many legal compliance options available to fit your situation. Just be sure you know your compliance strategy before offering an investment to anyone.
How do I decide between a public offering and a private offering?
There are two general categories of legal compliance strategies: 1) strategies that allow you to publicly advertise the fact that you are raising money and 2) strategies that require you to keep your investment conversations private.
My clients and I have done both, and I have to say that I am partial to public offerings. I believe it is much easier to find investors when you can shout from the rooftops that you are raising money! Plus, with public offerings you can generally set the minimum investment rather low (e.g. $1,000 or less) so that investing is accessible to far more people. With private offerings, you generally are allowed to have fewer investors, so you have to limit yourself to potential investors that can afford larger amounts.
Whether you do a public or private offering, you will need to do a lot of outreach and have lots of conversations with potential investors. When you can publicly advertise your offering and the minimum investment is relatively low, it is much easier to find the right investors and have them say “yes”.
So, why doesn’t everyone do public offerings? The main reason is that public offerings generally require more extensive up-front legal compliance because the law assumes they are riskier for the investing public.