I once had a conversation with a lawyer where we discussed how to advise a client on raising capital. When you raise money for your company--for example by selling shares or debt in your company--you must comply with the securities laws. This can be at the state level, the federal level, or both. Under the securities laws, you have to register your offering with the SEC, which costs a lot of money or you can use an exemption, which is a lot less expensive.
The most popular exemption is used to raise money from accredited investors only. These are people who make at least $200,000 per year as a single person or $300,000 per year as a couple or have $1 million in assets, not including their homes. The fellow attorney I spoke to believed that it was the only way to raise money. I told him that I had advised my client of his options to raise money from non-accredited investors and he questioned me as though he had misheard.
I again reiterated that I had indeed advised my client on his options for raising money from non-accredited investors because it was in line with his capital raising goals, which was to raise money from a small group of friends and family that were non-accredited. My conversation partner then informed me that his clients avoid non-accredited investors because professional investors don’t like dealing with them.
While this may make good business sense for some companies, others, because of the nature of their business may not be attractive to professional investors. If raising money from investors is off the table, these companies are left with bootstrapping, getting a bank loan, or borrowing money from friends and family--which, by the way, securities laws still must be considered.
Bootstrapping is limiting because you are limited to your own funds and the funds that can be generated by your company. Getting a bank loan isn’t easy for early-stage companies and often must be personally guaranteed, putting the founder of a company at risk if the company can’t pay back the loan. Finally, if your friends and family don’t have money, they won’t be able to give you any.
However, if you know the securities laws, you can raise capital creatively. In fact, last month, an article was published in the New York Times published an article that stated that some companies are now rejecting venture capital (VC) money and raising money their own way.
Three ways of raising money that allow you to raise money from non-accredited investors include:
Rule 504, which allows you to raise up to $5 million from accredited and non-accredited investors;
Regulation Crowdfunding that allows you to raise up to $1.07 million through a regulated website, including a funding portal; and
If you are raising money solely from California residents, you can apply for a permit in California, called a California Qualification by Permit, which would allow you to raise an unlimited amount of money.
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