Is It Illegal to Advertise for Investors?

NormNorm Posts: 3subscriber
edited May 2007 in Startup Funding
I just finished reading the book Guerilla Financing.  It`s a very good book but a bit old (1991).  In one section dedicated to angel investors, the author asserts that it is illegal to advertise for investors or silent partners and that it`s only legal to advertise for general active partners.
His suggested work around is to "consult" with your angel investors once a week or so...thus making them "general active partners," but in practice they`re really still silent partners.
Is this true? I see classified ads all over the Internet for investors. 

Comments

  • MNGrillGuyMNGrillGuy Posts: 2subscriber
  • robertjrobertj Tampa Bay, FloridaPosts: 0subscriber Member
    In general, the regulations (Regulation D being the most often used and cited)  that provide exemption to the SEC requirement for registration of securities before sales - do not allow for "general solicitation". Advertising would generally be considered a general solicitation - so yes it is illegal.
    The fact that many people do it anyway is a subject for a different discussion. If one is intending to build a long-lasting successful business - why one would build on a foundation of sand is beyond me.
     
     
  • NormNorm Posts: 3subscriber
    OK, then is the author of Guerilla Financing`s suggestion--to advertise for general active partners--legal? If yes, is that a viable idea?
  • NormNorm Posts: 3subscriber
    The fact that many people do it anyway is a subject for a different discussion. If one is intending to build a long-lasting successful business - why one would build on a foundation of sand is beyond me.
    All right, you`re going to force me to ask--what do you mean by "foundation of sand"?
  • robertjrobertj Tampa Bay, FloridaPosts: 0subscriber Member
    OK, then is the author of Guerilla Financing`s suggestion--to advertise for general active partners--legal? If yes, is that a viable idea?
    Whether it`s legal or not - why would you want to advertise for something if you really don`t want it? It`s unlikely that "passive" investors would respond to your ad.
  • robertjrobertj Tampa Bay, FloridaPosts: 0subscriber Member

    All right, you`re going to force me to ask--what do you mean by "foundation of sand"?

    Since the actions taken and methods used in getting a business started (especially related to acquiring capital) have long lasting impact- it`s important to do it "right" from the beginning. While cleaning up afterwords can be done - it`s way more expensive.
    In fact, a "poorly" structured early deal can turn away future capital. Hence the reference to building on a foundation of sand.
  • NormNorm Posts: 3subscriber
    Whether it`s legal or not - why would you want to advertise for something if you really don`t want it?
    Huh? Why wouldn`t I "really" want it? I want investors to invest in my idea.  They can be involved, kept aware, make suggestions, etc., but I want to be in control.  The pony up the cash--I deliver the results.  That`s the nature of an angel investor.
    I need to find ways to find said investors.  Looking for ideas, I`ve searched the Internet and read several books.  On the Internet I`ve seen hundreds of people advertising for investors.  I read Guerilla Financing and the author says it`s illegal.  So I ask myself, "OK, the book was written in 1991.  Maybe it`s not illegal anymore."
    If it`s illegal to advertise for investors, how else does one find them? Searching the Internet yields little.  Google returns a myriad of scam/junk sites that say, "Join for the low, low fee of $X and we`ll `match` you up with eager investors!" Yeah, sure you will.
    I would think there`s a nice, scam-free, free-of-charge forum somewhere where entrepreneurs can post their business ideas and potential investors can read them.  If one exists, I have yet to find it.  I`ve found plenty of forums that purport to be what I`m describing, but there`s no posts in them!
    Web articles on the subject are equally worthless.  They all cover the same basic things like, "What is an angel investor?" and "What do angel investors look for?" and "Is an angel investor right for you?" Just junk!  No real hard advice.
  • robertjrobertj Tampa Bay, FloridaPosts: 0subscriber Member
    I guess I wasn`t clear. All investors are not alike. If you say you want someone to be an active partner then try to shift them into being a passive investor - I doubt that they will respond well to that.
    Being a general active partner is different than being kept aware or making suggestions.
    Good luck.
  • cforellcforell Posts: 2subscriber
    How is it illegal to advertise for investors? All publicly traded companies are required to have an investor relations department and those departments recruit for investors all the time. Also privet startup that are looking for investors advertise all the time, They advertise for and host meeting in motels as well as publicly seek investors to start a new company. If all that is illegal how does practically every startup with no capital find investors?
  • robertjrobertj Tampa Bay, FloridaPosts: 0subscriber Member
    cforell,
    I`m not sure if you your "How can it be illegal to advertise for investors" - is a question or comment - so I`ll respond as if it was a question:
    1. The SEC regulations require that all securities which are to be sold - be registered -OR be exempt from that registration requirement
    2 Registering securities is a long and expensive process that is part of a public offering process. Hence the "public traded companies" have met this requirement and can make general solicitations.
    3. The limitation on "advertising" is imposed on most of the exempted transactions- usually called "private" offerings.
    4. The fact that many do it - doesn`t change the rules. 
     
  • robertjrobertj Tampa Bay, FloridaPosts: 0subscriber Member
    While the fine can be quite large - probably the two most significant "penalties" for not following the laws are:
    1. Rescission -  It`s not uncommon for the SEC or the State securities authority to issue an order of rescission, which basically means the company have to give everybody back the money they invested. Start-ups are usually not in a position to do that and in some situations the officers, directors and founders may be held personally responsible. (not a pleasant prospect)
    2. By far the most common "penalty" is that future capital may be even more difficult. Institutional investors and most "professional angels" will "avoid like the plague" any company who has not followed the regulations for prior capital acquisition. The risk to them is way to high. I`ve seen more than a few Million dollar deals stopped cold because of this. 
    If one is planning to build something beyond a "lifestyle" business - not following the laws and regulations is (as they say in Vegas) a bad bet.
     
  • robertjrobertj Tampa Bay, FloridaPosts: 0subscriber Member
    Just a couple of comments on your last-
    1. If by "become more creative" you mean find ways to get capital within the laws and regulations - then I agree. In fact there are 50+ ways to capitalize a company.
    2. While many entrepreneurs may think they have no way to raise capital -most of the one`s I`ve met also believe that "all they need is the money" and everything will be fine.
Sign In or Register to comment.