There are a number of rules governing how U.S. companies raise money.
These rules are not intended to slow down entrepreneurs but to create a market environment that is credible and conducive for entrepreneurs to attract capital.
While there are a number of rules that could be relevant to your situation (a corporate attorney can best advise you), your education about fundraising should start with an understanding of "accredited investor" qualifications.
In general, under the Securities Act of 1933, entrepreneurs who seek to sell stock in a business should register the securities with the Securities and Exchange Commission, plus comply with other, often complex federal and state regulations. Although that may seem daunting to a startup company such as yours, the SEC provides some exceptions. One of the ways to bypass some regulatory requirements is by soliciting wealthy accredited investors, also known as "qualified investors."
Regulation D of the 1933 Securities Exchange Act defines accredited investors as individuals who have a net worth of $1 million or income of at least $200,000 in the two years before investment. For couples, the prior income requirement is $300,000. The SEC notes that income requirements are met only if there is a reasonable expectation that income levels will be maintained in the future.
Accredited investors also can include banks, insurance companies, small business investment companies and corporations, charitable organizations or partnerships with assets exceeding $5 million.
The thinking behind the financial means test is the presumption that wealthy investors are sophisticated about the risks associated with privately held company investments and can "afford" to lose the entire investment.
Granted, families of more modest means invest in startup restaurants, retail establishments and service companies all the time without meeting accredited investor tests. They can without attracting regulatory attention because companies are generally permitted to raise money from up to 35 nonaccredited investors, plus an unlimited number of accredited investors. Still, the SEC does require that companies reject nonaccredited investors who are not financially sophisticated and don't understand the risks associated with the investment.
I believe that successful entrepreneurs have good judgment. They make decisions with care and turn away from seemingly easy solutions that compromise management's integrity.
If you do accept money from any other investor, for that matter, you have an obligation to protect their investments. That starts with being brutally honest with yourself in determining how much money it will really take to get your company to the safer ground of cash flow break-even. This way, you can develop a funding plan that best matches this reality.
Too often, first-time entrepreneurs make the mistake of raising too little money to be viable. They purposely minimize dollar requirements to investors to present a better, though not entirely truthful, story. Ultimately, this kind of live-for-today approach causes investors to lose money and entrepreneurs to lose their beloved companies. Honesty matters.
