Is this legal or not?

DeafCeoDeafCeo Posts: 3subscriber
edited November 2006 in Startup Funding
Let said I want to raise $100,000 to launch a product line that has a projected revenue of $500,000 after one year in business.
However, if I am an incorporation I want to follow the law to a T.
I know at least 1,000 people that would invest $100 each.
The thing is the corporation is not on the NYSE.
I would have a lawyer stating that this is an investment that come with a risk.
However I do have good intention but on paper it looks like the infamous ponzzi scheme!
Do I need to register with the SEC if I were gonna to grant stakes/shares in the business?
The other problem that I am seeing with this is not being able to determine how to distribute the profit to the 1,000 intitals investors.Would it be the equalivent of owning a prefer share?
And that leads to the big questions ~ how do startup determine how much ROI an investor should get for his/her $$$$? Do they get residual income or what?
Because I remember during the dotcom boom. a lot of billionaires and millionaires were created because they gave out stocks but how you do that before the IPO?
Please don`t attack me - it has been in my head for a while on how to raise funds creatively but at the same time LEGALLY.

Comments

  • EricEric Posts: 8subscriber
    Your right, it does sound like a scheme.
    I`m sure your $1k from 1k people was a hypothetical scenario so I`ll disregard that. I don`t know anybody that really "knows" 1000 people. When you make outrageous claims, some will conclude that your plan is outrageous also. Make it realistic.
    No matter what your method is to raise funding. Somewhere, somehow, it has to be on paper and somehow directly connected to your gluteus maximus and the success of the business.
    As to the legality of not filing and offering "shares" in your company...  If not illegal, at the very least it`s unethical and shady.
    If it does look like a bad scheme, it`s up to you to explain to your potential investors exactly why it is anything but that.
    Can you get detailed in any way here with your plan?  
  • MNGrillGuyMNGrillGuy Posts: 2subscriber
    You bring up a lot of issues that are best answered by lawyers but I`ll give ya what i know.
    A corporation does not have to be public (NYSE), most are not.  Shares are purchased/distrubuted to private investors.
    There exist many securities laws pertaining to your situation.  For the most part it deals with "accredited" and "non-accredited" investors.  If selling shares to non-accredited investors you have to jump through many hoops.  You can not solicit the general public, you have to show prior acquiantence.
    Dont worry about profit distribution.  More often then not profits will be reinvested in the business, leading to increased share value.
    Investors will determine the ROI they need prior to making an investment.  80-100% year over year for seed money.
    Millionaires were created during the dot-com boom because they sold their interest (shares) of their company to other private investors, who then eventually took it public.
    You are describing a situaltion that is best funded by friends a family.  You don`t even need to be a corporation. 
    Good Luck!
      
  • DeafCeoDeafCeo Posts: 3subscriber

    Dont worry about profit distribution.  More often then not profits will be reinvested in the business, leading to increased share value.
    Investors will determine the ROI they need prior to making an investment.  80-100% year over year for seed money.
    Millionaires were created during the dot-com boom because they sold their interest (shares) of their company to other private investors, who then eventually took it public. 

    Hi there MNGrillGuy,
    Your reply brings up some interesting points and I have some questions for you.
    I understand you are referring to dividends being reinvested into the business?
    An investors can ask for 80% to 100% of NET INCOME??!?!?! What happens if the business lost money? I defintely would rather share a % of the net income with the company`s employees. I know for sure I would include a buyout clause of the investors because if that is why a lot of companies today can`t share the wealth because the company is only getting 20% of the income Then I am defintely in the wrong quadrant lol
    See this is what puzzles me - how does all these CEO/Founder of these companies determine how much shares they can get?
    Isn`t a share worthless in the beginning prior to the IPO?
    I mean I am still trying to figure out how Google`s CEO are billionaires and their stock at the last trading mark was $500 something PER share?!?!? And the wall street analyst are predicting it will crack the $600 mark. And I nearly fell out of my chair when I heard Mr. Buffet`s company is worth at least $100,000 PER SHARE!!! I was like wow!
    They did not teach me in business class on how to figure out shares/interest in a company.
    If they did, I sure there would be more millionaires/billionaires from the USA on the Forbes list.
    I know everyone has an exit stragerty. I would love to take the company public and sell my shares and buy myself either a NFL or NBA or a MLB team.
    My idol is Mark Cuban. I remember when broadcast.com was the site but I was unable to use it.
  • MNGrillGuyMNGrillGuy Posts: 2subscriber
    Many good questions.  I will try answer on Monday.  I`m off to happy hour!!!
  • DeafCeoDeafCeo Posts: 3subscriber

    Many good questions.  I will try answer on Monday.  I`m off to happy hour!!!

     
    Have a dirty martini for me!  Have a good weekend!
  • JWDJWD Posts: 0subscriber
    there are two ways to raise money legally under the securities laws.
    1) Public offering which requires public registration and costs around $150,000.
    2) Priviate offering under state exemptions. In a nut shell you are very limited to the number of investors in a priviate offering and 1000 people would would not comply unless they were all totally accrediated investors whih would be difficult at best. even under these circumstances you have to prepare a priviate offering memorandum giving full risk disclosure. For more info you can go to Amazon. com for some books on how to do public and priviate offerings.
    Good luch
     
  • MNGrillGuyMNGrillGuy Posts: 2subscriber
    Deafceo, when I mention that investors will require 80-100% return on their money year over year I am refering to return on their investment, not a % of NI.  Investors do not get "paid" out of NI.  I`ll give you an example.
    Let`s say you are trying to raise $1M in start-up capital.  You approach an investor with your business plan.  You are of average risk so the investor has this in mind for his required rate of return.
    Year 1: 100%
    Year 2:  80%
    Year 3:  60%
    Year 4:  40%
    He anticipates getting out at the end of year 4, selling the business to a large corporate entity.  So, he needs about $8M worth of value at the end of year 4.  Your business plan indicates NI of $1.1M in year 4.  This line of business sells at a PE of 12 or so.  The business is worth $13M (12 x 1.1).  So, the investor needs to own 8/13 (61%) of the business for it to be a fair investment for him.  So, his initial $1M investment will need to acquire 61% of your company. 
    For the most part, all deals are thought about this way.  Only the numbers change.   
     
  • DeafCeoDeafCeo Posts: 3subscriber

    Many good questions.  I will try answer on Monday.  I`m off to happy hour!!!

     
    hey MNGrillGuy... are u still at happy hour??   Would appericate an in-depth response when you get the chance.
  • MNGrillGuyMNGrillGuy Posts: 2subscriber
    Hey, soon enough I will be!  I responded awhile back, did you have questions about my response.  I thought I answered most of your questions.  Let me know if you want me to elaborate on anything.
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