Let’s face it: taking other people’s money involves risks, especially the risk of getting sued down the road because things did not turn out as anticipated. How can entrepreneurs seeking to raise funds online protect themselves? Here are 6 best practices that can help you stay out of trouble. (Good sense forces me to include the following disclaimer: this is not legal advice. If you want legal advice, see tip number 6.)
1. Disclose everything meaningful to everybody.
Most online offerings rely on Rule 506 of the Securities Act to avoid full registration with the SEC. In most cases, Rule 506 does not have any specific disclosure requirements. However, this does not mean you should not create a thorough offering document explaining the investment opportunity, the terms of the investment, the team and its track record, key assumptions, risks, conflicts of interest, etc. And remember: every written statement is part of your disclosure package, so make sure that there are no contradictions when making additional disclosures. Finally, whatever you disclose should be accessible to every potential investor.
2. Be careful with that crystal ball.
On the one hand, you want to sell tickets to the show, so you want to create some hype. On the other hand, you don’t want unhappy customers once the show is over. Since it is commonplace to include projections for real estate investments, it is unrealistic to tell you not to do it. You should clearly identify predictions as such and make sure everyone knows the underlying assumptions. Also, be conservative: it is always better to overperform than to underperform. Finally, let your past experience and track record, rather than expected results, do the talking. As long as you are being truthful, no one can argue against hard facts.
3. Schedule those meetings and take attendance.
Schedule meetings and Q&A sessions with investors. Make sure you do a roll call. Document who attends and who doesn’t, as well as who asks questions and the answers you give, especially those in written or recorded form. Giving investors an opportunity to ask questions and perform a thorough due diligence is quintessential to a private placement.
4. Make sure you comply.
Use platforms and intermediaries that are compliant. There’s more than one way to skin a cat, so you can use full-fledged broker-dealers, as well as bulletin board (peer-to-peer) platforms, such as GroundBreaker. However, make sure everyone in the process is following the rules or the SEC could unwind your deal. Finally, keep in mind that there are many things to do, including filings, accreditation checks, etc. Make sure you understand what needs to be done and who is doing it.
5. Build a relationship.
Get comfortable with your investors. Make a point of meeting them. After all, they are your partners. And nobody wants to partner with the wrong guy.
6. Get a lawyer.
I cannot emphasize this enough. Your real estate lawyer will likely not be a securities lawyer. You need an experienced securities practitioner on your team to guide you throughout the process. It is a wise investment.