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What legal documents do I need to raise capital? And when do I need them?

To raise capital, you need some form of legal document in place to specify your intentions and protect the interests of your investors. Most private securities offerings require at least a Business Plan. Others can require a Private Placement Memorandum or a Registration Statement and Prospectus. The type of document you need will depend on exactly how you are trying to raise capital and what investors will be entitled to.

Why is a business plan not enough?

If you are selling a portion of your company or making a debt offering to individual investors for your business or idea – even if you’re trying to raise as little as $25,000 – the act may constitute an “Illegal Sale of a Security”. Your efforts to raise capital may be subject to federal and state securities laws, which, if you don’t follow them precisely, could mean you have to give money back to your investors interest, injunctive relief, and even fines and penalties. Worse still, you could face criminal prosecution. A well-prepared business plan explains how you are going to make money. But a business plan cannot practically and legally accommodate your investors’ money. While a business plan is enough to explain how money is going to be spent and how money is to be made, it offers no practical or legal support to protect investors’ money.