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How to Use Legal Counsel When Raising Capital

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Iris K. Linder
Foster Swift Business & Corporate Law Report
Spring 2011

There are significant legal restrictions on how you can solicit investors.  Federal and state securities laws require that any stock, limited liability company membership interest, note, or similar investment that you sell to raise capital for your business must be either registered with the Securities and Exchange Commission and the state or exempt from registration.  There are limitations on how you can solicit investors and who may invest if you are relying on an exemption from registration.  So your first step before talking to prospective investors should be to meet with your legal counsel to learn the rules of the game.

To make the best use of your time with your legal counsel, however, you need to do your homework on how you will identify prospective investors.  In most cases, lawyers who specialize in the securities laws or venture capital do not have direct access to investors who will be interested in investing in your company.  So before meeting with your lawyer, you should develop preliminary answers to the following:

How much money do you need to raise, and what will you use it for?  Do you have a good story?

How will investors make money?  How will they exit the investment?  Can you demonstrate that they may make a decent profit if all goes according to plan?

Is your company the type of business that may be attractive to venture capital investors, e.g. potential for rapid growth and high investment return with experienced management team?  If so, have you researched whether there are any venture capital funds that specialize in your industry and geographic region and obtained information on their investment criteria? 

Does your community have a local angel investor group?  Have you researched their investment criteria?  Would your company fall within the range of what they are looking for?

Do you have a group of friends and family who may be interested in supporting your business and who also have the financial means to help you out?

Is there a regional licensed broker-dealer who might be interested in helping you raise capital?

In our experience, your hardest job will be identifying the source of the investment dollars you need to raise.  Your lawyer will work with you to determine which direction is most appropriate for your business.  However, the task of locating investors falls on your shoulders.

Once you have settled on the source of investors, your legal team will work with you to prepare the appropriate paperwork in compliance with the law.  In the case of investment by a venture capital fund or an angel investment group, this will probably include a Stock Purchase Agreement or Convertible Note Purchase Agreement.  In the case of a friends and family offering or an offering sold by a broker-dealer, your lawyers will probably prepare a Private Placement Memorandum and Subscription Agreement.  Foster Swift has eight attorneys with significant experience crafting Private Placement Memoranda and other investment tools designed to meet the individual goals of our clients.  We would be delighted to help you through the process.

Go to https://michiganvca.org/ to start your search for Michigan based venture capital funds.