Capital Formation Simplified
25 Pages Posted: 24 Feb 2016 Last revised: 30 Nov 2016
Date Written: November 29, 2016
Abstract
Raising money for small businesses is not simple – either in the ultimate goal of finding investors or in the process of compliance with federal and state laws governing the offer and sale of securities. Thus, even a simplified discussion of capital formation, as this attempts to achieve, is replete with complex aspects. This paper discusses: the life-cycle of a small business, choice of entity, the letter of intent, the goal of the founders to retain control while also negotiating with investors for cash as equity or debt, the legal background of capital formation (including a discussion of federal and state laws), recent (2015) SEC guidance on "general solicitation" and establishing a "substantive, pre-existing relationship," a discussion of exemptions from registration under federal and Colorado law (including crowdfunding and general solicitation of accredited investors under Rule 506(c)), and the recent (2016) amendments to Rules 504 and 147 (effective in 2017), a discussion of finders and the registration requirement for broker-dealers applicable in this context.
This was prepared for a continuing legal education course intended for business and transactional lawyers without a significant amount of experience in the offer and sale of securities.
Keywords: securities, exemption, crowdfunding, broker-dealer, finders, letter of intent, capital formation
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