The Weekly Briefing
A READER WRITE-IN Q & A; WITH RESPONSES FROM BRUCE DOBB
Question: I have 10 business associates who would like to invest in a new Internet business I’m about to launch. I need to raise about $250,000 initially and will match that amount with cash from my corporation. Can you suggest how I might structure the investment from my associates, and tell me whether I need to register with the Securities and Exchange Commission and do a public offering or is there a less expensive alternative?
Answer: The counsel of a good securities lawyer is always required before structuring a transaction with investors for new ventures. Besides the Securities Act of l933 (which is administered by the SEC), there are California State “Blue Sky” laws (regulated by the Department of Corporations) that must be complied with.
In general, if you are trying to structure a small financing effort that involves 35 or fewer investors, SEC Regulation D governs private placements placed with:
– Officers or other insiders of the issuer.
– Financial institutions or other investors that do not need SEC protection.
– Accredited investors (with a net worth of $1 million or more or annual income of $200,000 or more in each of the last two years).
The federal rules start to change if the offering crosses any state line, is conducted by mail or uses the services of an outside agent to sell the placement. I recommend that you stay within California and act as your own salesman until the time arises when you need to go to outsiders to raise funds.
One of the most common vehicles used for new ventures is the limited partnership. This vehicle allows the venture to pass income, gains, losses, deductions and credits directly through to investors. The general partner must own at least 1 percent of the partnership’s assets and has unlimited liability for all aspects of the partnership’s operation. General partners assemble the investors’ capital, select assets for investment and actively manage the business.
Limited partners have a basic obligation to provide capital but take on no liability outside of their capital “at risk” and their pro-rata share of any recourse debt the partnership assumes.
They receive returns as justified by the partnership’s business, vote on the admission of a new general partner, vote on the sale or refinancing of partnership property and have other rights defined in the partnership agreement. But they are not involved in day-to-day management decisions.
A limited partnership can have a corporate general partner, but this is something that will need to be structured by a lawyer. The main idea is that there are affordable, efficient means of raising money for a new venture if you follow the rules. You’ve done the toughest part already: identifying investors who believe in your business plan.
Got a question?
Please write to Editor, The Weekly Briefing, Los Angeles Business Journal, 5700 Wilshire Blvd., Suite 170, Los Angeles, CA 90036. Or e-mail us at [email protected]. Bruce Dobb is the chief credit officer for the Valley Economic Development Center’s revolving loan fund. His column appears alternate weeks.
