2010-07-14 | Raising Capital the Right Way

The topic of hiring unlicensed brokers to source or raise capital has been surrounded by much debate. Often times you hear of the "grey" area of fund raising, followed by justification after justification from the unlicensed broker about how their tactics make them 'legal'. This article is being written with the intent to prove to business owners simply, and accurately that there is nothing debatable about unlicensed fund raising; in fact it's down right illegal.

Raising capital, especially for start up businesses has never been easy. Stories of money falling from the heavens during better economic times are simply not true. The strategy development and marketing of any deal takes a great deal of expertise and a lot of hard work. And guess what? It's even harder in this current economic climate.

Difficult or not, you need to be education about the rules regarding capital raising. In plain English I will say, if you do not follows these rules you can be risking the livelihood of your entire company. This applies to every one of us. Owners of small and large businesses alike are held to the same requirements, make no mistake about this.

Real World Examples

Often times clients start their fund raising journey with established trusted advisors, Attorneys and Accountants, after all they know your business and have a high level of credibility. Your Attorney may have a great Rolodex of wealthy individuals that he could connect you with. And better yet he has agreed to only take a pay if those connections invest in your company.

Why is this wrong? Even though your Attorney did not actively sell your project (a security) to anyone he is still being paid only if that security is being sold. Transactions like this require a license

Maybe you would like to leverage that great in house sales team you have and opt to deploy your top guns to sell your investment opportunity to other industry contacts. They are on the payroll, but are being offered a large bonus if the deal closes.

Why is this wrong? Since your sales force is internal shouldn't this be ok? Your sales teams are not registered agents of your company, only the principals are in most cases. Couple this with the fact that you are again paying an unlicensed finder a fee only if and when the sale of a security takes place makes it plainly illegal.

You find an unlicensed agent who states that by hiring him as your interim CFO/CEO that he then can act legally as an agent of the company and sell the project to an interested party. He agrees to only be paid if funding is secured and may also represent a few other companies in a similar capacity while working on your project.

Why is this wrong? Since the broker is now an agent of your company cant he sell the project as he sees fit? The problem here is that he is still being compensated only if and when your project gets funded. Before you ever get a check from an investor they will go deep due diligence on your company, far beyond your business plan and financials. When this is being done the investor will no doubt find that the CFO/CEO you hired raises money for a living, has no operational value, intends to leave when the company is funded and is only focused on the funding aspect of the company's business. Any savvy firm investing in a project will know right then and there that the risk that they are buying into a company that could be found to be in violation of the law just went through the roof.

If you are serious about growing your business you need to own these regulations 100%. This means working only with licensed brokers plain and simple. The good news is there are plenty of qualified licensed brokers waiting to help you with your project. Not all of these brokers charge huge upfront fees, with long exclusive contracts. I know of a few great firms off hand that have no retainer non exclusive structures just like your unlicensed broker has, the difference is your changes of getting funding are much greater and when you have that money no will ask for it back.

How bad can it be?

I hear the argument all the time " well so and so used this unlicensed guy and no one seemed to care". It's amazing that a high level professional would make such an argument. I am sure there are bank robbers and murders that get away with their crimes, but do we go out and rob and kill? Of course not.

Case studies prove that businesses that choose to use unlicensed brokers have a significantly higher rate of failure. It must be understood that the business of being paid for raising capital is something that the government has taken a serious interest in regulating.

The business of getting paid commissions for introducing investors to companies is something that our government has taken a keen interest in regulating.

If regulators determine that your company paid an unlicensed broker/finer to solicit or even connect investors they can and do force companies to offer investors the right to un do the deal. This means you may be required to give back your investment capital even if you have spent funds on your project. It may not be jail, but it can destroy your professional reputation and damage your company beyond repair. Try getting another investor after going though that.

How can my employees raise money legally?

It all comes down to who they are and how they are paid. Make SURE that:

• The employee is not currently under investigation by the SEC or any other appropriate body.

• The employee is not paid any performance based commission or finders fee.

• The employee isn't solely hired for the purpose of raising money.

• The employee was not a registered broker in the last year

• The employee doesn't participate in more than one securities offering per year.

How can my Finder/Broker raise money legally?

Finders can avoid licensing only if:

• They only introduce investors to the company with our supporting or engaging in any negotiations

• They are not recommending any company's securities to be bought by prospective investors

• They have a compensation structure BASED ON A FLAT FEE ONLY regardless of the success of the project.
  
  

In no way is this information intended to dissuade business owners from seeking investment capital, on the contrary I want to encourage each and everyone of you to pursue whatever means necessary to achieve your business goals, just make sure you and your company are protected by following the law.