When You Can't Advertise for Investors

Some friends of ours have a privately owned company that developed and soft launched a Web site. We are trying to help them find investors and sell a small amount of shares in this company. Because it is a privately owned company, their attorney has told them we cannot advertise, even in investor magazines, or on investor sites on the Internet. Are there different ways besides using call lists of certified investors?

—K.F., Irvine, Calif.

Federal and state securities law prohibit "general solicitation" of investment offerings, unless the offerings are registered with the Securities & Exchange Commission and accompanied by a detailed prospectus. This is why you cannot advertise for investors.

Investment opportunities that are exempted from SEC registration include those made privately to "accredited" investors. These are individuals who have signed qualification documents and can prove their net worth is more than $1 million and annual income is $200,000 ($300,000 for a married couple) for at least the past two years. Typically, they are angel investors or participants in institutional investment groups, such as venture capital funds.

Appealing directly to angels and venture capitalists (BusinessWeek.com, 2/4/08) is probably your best strategy, though you must be careful not to cross the line into general solicitation on behalf of your friends' startup, says Richard Leisner, a securities lawyer at Trenam Kemker in Tampa. "If you engage in a transaction that you attempt to make exempt and you lose the exemption, the investors can demand their money back under federal and state law from you personally, even if you're not the entrepreneur," he says. If in doubt, talk to a securities lawyer familiar with early-stage investments, or advise your friends to work with a licensed securities broker.

Pitching angel investors is typically not easy, even when all the rules are followed scrupulously. Written proposals—rather than telephone calls—are the norm in the early-stage investment community, says Louis R. Dienes, an attorney specializing in securities law for emerging companies at Jeffer, Mangels, Butler & Marmaro in Los Angeles and a longtime angel investor himself. "These types of investors are often overwhelmed by the volume of written proposals that they receive, and getting past the gatekeepers and connecting with the senior people who make investment decisions can be a challenge," he says. "A direct introduction through a trusted advisor—such as a lawyer or accountant that the investors regularly do business with—can be a big help."

You should have an excellent business plan (BusinessWeek.com, 1/7/08) that you can send to potential investors, making sure it includes the phrase, "this is not a solicitation, only an informational memorandum," says Los Angeles investment banker Peter Cowen.

Some investor groups hold forums where entrepreneurs can present their business plans to angels. "You can also network at business events where consultants or other professionals are in attendance and can direct you to people they know who want to know about investment opportunities such as yours," says Janis Machala, of venture capital firm Paladin Partners in Kirkland, Wash.

Some additional resources: The Angel Capital Assn. publishes a directory that provides profiles of its member angel groups, what they invest in, and how to reach them. It also shares criteria for investment, Machala says. The contact information for U.S. venture capital funds can be found through the " There are also novel services that match startups and accredited investors, such as Active Capital," Dienes says. He recommends that you and your friends read The Art of the Start by Apple (AAPL) computer pioneer Guy Kawasaki for a thorough introduction to raising startup capital.

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