Raising capital for a business can be a daunting task, especially for those who are new to the world of capital raising.
But with some careful planning and professional advice, you’ll be able to attract investors and grow your company in no time!
It’s important to note that each state has different rules governing how companies raise money from their potential investors.
So if you’re looking into raising funds, make sure you understand what kinds of documents and disclosures must accompany your offer so that regulators can review it properly before giving approval.
To help get started on the right foot with your own fundraising efforts, here are six common mistakes people make when trying to obtain funding:
1. No business plan
The business plan is the roadmap for your business.
It’s a guide for you and your investors, who will be relying on you to make good decisions with their money.
Your business plan should include key elements like a market analysis, financial projections and marketing plan.
If you don’t have time or resources to write one yourself, there are plenty of templates available online that give you room to customize them however they fit best into your business model and goals.
2. Not well versed in the legalese of offering documents
Your offering document is one of the most important pieces of a well-executed capital raise.
Make sure you have a lawyer review your offering documents before they are filed with the SEC.
You don’t want to make any mistakes that could cost you time and money, or worse yet, put you at risk for an SEC investigation.
Not only do these documents need to be legally sound and compliant with federal securities laws, but they also need to be clear and easy for potential investors to understand if they are going to invest in your company or fund.
Steps towards creating an effective offering document include:
Understanding the legalese used in each type of offering document (typically referred as “offering documents”).
For example: A securities prospectus contains information about how your company plans on using money raised during a public securities sale;
An investor disclosure document describes risks associated with investing in private companies such as yours;
And finally an issuer registration statement includes details about how your business operates and information about who owns shares/equity in your company.
3. No budget for legal documents & professional services
There are a lot of things to consider when choosing a lawyer.
First, you’ll want to find a lawyer who is right for you and your business.
How many lawyers do they have in their firm?
If it’s just one person, they may not be able to dedicate the time or resources necessary to your project. The more attorneys on staff, the more support you will receive during the process.
What is their background?
If they don’t practice in your industry area (for example, real estate law for someone selling software), that could impact how much work they can do and even how useful their advice will be if something goes wrong down the road with your business structure or contracts.
An attorney who practices exclusively in one area will have built up years of experience working with businesses like yours before starting his or her own firm or joining another one — so look for someone who has been practicing since before 2000 if possible!
What type of education did he/she get?
Some firms specialize only in certain types of legal work; others offer broader services but at lower prices because most people won’t need all those extra options anyway (and may end up feeling overwhelmed by them).
4. Not registered to offer securities or failed to follow state rules
You should make sure your company is registered to offer securities in each state where it offers its securities.
If you’re raising money from investors in multiple states, this means you may need to register with each state’s regulatory authority and pay filing fees for each one.
If your company has already sold securities, be sure that is reflected in the SEC registration statement on Form S-1 or F-1 (depending on whether the offering was made before or after July 1, 2012).
Additionally, even if you are not selling securities directly to investors but rather through an intermediary such as a broker/dealer or funding portal (like our platform), those intermediaries are required by law to register as broker/dealers with FINRA as well as pass certain exams (Series 7 and 63) before they can work with you.
5. Targeting investors who cannot legally invest in your company
Often, entrepreneurs will be contacted by a potential investor who is not legally allowed to invest in the startup.
It’s important that you know what an accredited investor is, and why it matters.
Accredited investors are those who meet certain financial thresholds:
- Have an individual net worth of at least $1 million, excluding their primary residence
- Make more than $200K per year (or have a joint income with their spouse of such amount), for each of the last two years.
- If a natural person has any outstanding student loans, they cannot be included when determining net worth or income; if they are married they may include both spouses’ outstanding student loans as long as neither spouse has had a prior application approved under this rule.
6. Failing to disclose all material facts about the investment opportunity
What is a material fact?
A “material fact” is something that would have a significant impact on a potential investor’s decision to invest in your company.
For example, if you have previously raised capital from other investors, this may be considered material.
Or if your company has lost money in the past few years, that would also likely be considered material information.
What should I disclose?
When thinking about what you need to disclose when raising capital for your startup or small business, consider the following questions:
- Is there any information about me or my company that might make people uncomfortable? If so, what can I do to mitigate their concerns?
- Is there anything else I could do better or differently next time around?
If you want others to invest in your company, be prepared with a solid business plan and make sure you understand how to legally raise funds from them.
A good business plan will help investors determine whether it’s worth their time and money.
They may ask for more information than what is included in your presentation but they should at least have an idea of where the money will go and what it will be used for.
You also need to know how much capital (money) is needed for your project and how much risk there is involved with investing in your company.
Investors have different risk tolerances so it’s important to find out who is interested before pitching them on an investment opportunity that may not fit their needs or interests well enough for them to consider making an investment into your company at this point in time.
If someone says no right away then just move on because asking questions won’t change their mind if they aren’t interested enough yet anyway!
Raising capital is a challenging process, but it can be made much easier by following these tips.
The best way to raise capital is by being prepared and knowing what you’re doing.
