There’s nothing more relaxing than a long drive right? The stereo’s bumping, you’ve got your bouncing baby startup strapped tightly in the car seat in the back, and you’re looking for ice cream, because your startup is about to startup some major crying without ice cream. If you speed, you’ll get to it faster. If you jump the curb and cut through someone’s lawn you might get to it even faster. But all of that is illegal and dangerous. Do it even once and there’s a chance you could suffer a calamitous outcome, and above all, you’d be putting your precious baby startup in jeopardy. The same applies to private company financings. You’ve GOT to know and adhere to the “rules of the road” or all of the work you’ve done up to this point could be for not.
The rules for most private company financings are found under the Securities Exchange Commission’s (SEC) “Rule 506,” which dictates how individuals and startups must conduct themselves when seeking investment funds by selling securities (a share of stock, a convertible note, etc.). Running afoul of these rules can not only prevent you from raising the funds that you need, it could subject your personal assets to exposure (no corporate liability shield will be there to protect you), and in the worst case scenario, subject you to civil and criminal penalties. So, these rules can’t be taken lightly.
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