Who Can You Hire to Raise Money for Your Business?March 11, 2021
Picture it. Your company needs to raise capital. You need to go beyond your network. You need help. Where do you go? To whom do you turn?
A murky marketplace for raising money.
There are lots of people who claim that they can or will raise money for you. Some of them are reputable. Some of them might even be good.
Many will claim to have raised money for others or have great databases. Many of the “less-than-respected” fundraisers even have fancy websites and marketing material. It is hard to figure out who can help and who will simply create trouble for you and your company.
Most importantly, it is hard to figure out who you can legally engage to sell your company’s security.
Is the money I am raising the sale of a Security?
If you accept the money with an expectation that the person who gave you the money will get it back with a profit — then it is a security. If you are raising money from multiple people, then it is security. Collecting money from numerous people to support your business through any means other than earned revenue or a donation is probably a security.
Selling securities is a regulated industry.
Raising money is a Regulated Industry.
Congress has passed laws that govern who can offer, buy, and sell private securities. The Securities and Exchange Commission (SEC) enforces those rules on the Federal level.
If you are not a public company, you must qualify for an exemption from Registration to offer security to potential investors. There are Federal exemptions and State exemptions. Depending on your exemption, you will be required to provide specific information and restrict who you can offer and sell securities.
One of the rules you will need to follow is who you hire to help you raise funds.
Top 3 list of who can raise capital for you
Here is a shortlist of the top three groups of people who can raise capital for you:
Members of your team:
You can sell your own house. But if you sell someone else’s house, you need to be a Realtor—the same thing with securities. You can sell your securities. You need to follow the rules about what you are selling and to whom you are selling — but you can legally sell your security—the other principals in your company (Board, Executives).
The principals can not be paid “transaction-based” compensation (see below), but they can be paid their salary.
A FINRA licensed broker:
The Financial Industry Regulatory Authority (FINRA) is the self-regulating organization that the SEC recognizes for licensing and registering the individuals and organizations legally able to sell securities in the United States. FINRA members are the only ones who can be paid a transaction-based fee (see below).
There are a host of rules that FINRA members follow to protect the company and investors. Think of FINRA like the Bar Association for lawyers or the Medical Board for a doctor. Would you hire a lawyer that wasn’t part of the Bar? Or a doctor that didn’t have a medical license?
While choosing a FINRA member is no guarantee of a good relationship or a successful experience — at least you know the person you are using is trained, and there is oversight if something goes wrong. FINRA also has an unusual designation for licensed crowdfunding intermediaries who can legally sell “crowdfund” securities to unaccredited investors.
You can legally engage a Finder to help you raise capital in many states. A qualified finder can be paid a small transaction-based fee (see below). The activities of a finder are minimal. They can only make a referral. They cannot be involved in the sales process. They cannot provide the prospective investors a pitch, documents, or even an overview of the investment. They can make a referral. A Finder can also not be “in the business” of being a finder. Think less than 3 per year. In some states, a Finder must be registered to be eligible to receive a transaction-based fee. (see below). Note, that the SEC has issued proposed regulations that would permit the payment of transaction-based compensation to finders who effectuate a transaction in securities. These are not in effect as of the time of the writing of this piece.
If you are hiring someone to help you raise the capital, they should fit into one of these three categories — especially if you pay them a transaction-based fee.
What is a transaction-based fee?
A transaction fee is any fee that is paid contingent on the success of the transaction; sometimes called a performance-based fee or a success fee. A transaction-based fee is not only a commission. The commission is a transaction-based fee, but a bonus payable upon funding is also a transaction-based fee. Incurring payable expenses after funding and then not-paid if funding didn’t happen was a transaction-based fee. Only a licensed or registered individual can be paid by you for performance or success by flat rate or commission.
What are the Dos and Don’ts of hiring a Fundraising “Consultant”?
There are lots of fundraising consultants. And a lot of them can help you get your project ready, fund ready, or raise ready. Lawyers can write Private Placement Memorandums. Accountants can prepare financials. Auditing firms can do external audits. Appraisal firms can develop valuation reports.
Use consultants. Avoid consultants that are general “fundraising consultants” that do not provide a defined deliverable. Make sure you are paying them for the deliverable. Do not make their compensation transaction-based.
What are some of the risks of raising funds?
Illegally paying an unlicensed broker for selling your security can put your company and its raise at risk. You are subject to fines and a “rescission.” A rescission would mean paying all the investors back. Is that likely? No. But it is a risk.
Enforcement is generally triggered by investor complaints. Investor complaints are usually triggered by problems. Problems are typically caused by things not going the way you expected. When things are not going as expected, lawyers representing your investors will start to review all of the documents to find something wrong so that blame can be identified. If they find it, they have a better chance of recovering their client’s money. Having illegally paid an unlicensed or unregistered “fundraiser” provides them an easy hook.
If things go well, you may be looking to raise more money. When you do raise more, you may engage an investment firm. They will do a deep-dive “due diligence” on all aspects of your company. If they uncover that you engaged in an illegal transaction, they may require risk mitigation which could be costly.
How do I make sure I’m raising funds in the right way?
If you are hiring a FINRA licensed Broker, you can check their registration at brokercheck.com.
If you are hiring a non-FINRA licensed person, they are probably telling you they do it all the time, it has never been a problem, or that their lawyer said it was okay. They may even have a contract all written up that they say is “compliant.”
Ask them for an opinion letter from their attorney stating that they are legally able to receive compensation under the proposed contract in light of Section 15 of the Securities Exchange Act of 1934.
What’s the Bottom Line for Raising Funds, You can do it right.
GLO provides every Premium member access to the “Invest.withGLO” platform, making it faster and easier for you and your other principals to sell your security. As a member, you have access to free and discounted services to support you in your raise. Go to dev.withglo.com/capital to start the process.
Article author, Joseph Barisonzi
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