Advertising for Private Money

[Jeff Barnes]

As investors we are always hindered by how to get the money. Well, the SEC made it a little bit easier...sort of. We can now solicit accredited investors for private offerings, but the remaining rules of Regulation D still remain intact. Here is a recent blog post I wrote to help investors navigate the waters when it comes to investing. It would be good for real estate investors trying to raise money to review as well:

The IRS just recently passed a rule that will lift the ban on general solicitation for private investment deals. Avoiding general solicitation scams is going to be a very important part of investing in the near future. This ruling is going to be a huge boon for a lot of people and companies trying to raise money for their private offerings. The ruling states

Considering that the private markets raised over $905 Billion in 2010 without any general solicitation allowances, it is likely that we will see an even greater amount raised through private offerings going forward. With that in mind, it will be very important for investors (mainly accredited investors) to be weary of the solicitations they might receive for investment funds.

Here are some basic guidelines that one should use whenever evaluating whether or not an investment is sound or not:

1. What is the company's legal structure?
Have the owners or issuers properly prepared all the documentation to form the company from the start, or are they just trying to get money "and then" they will form the company? Big red flag if the company is not a corporation or LLC of some sort. As an investor you want as little exposure to liability as possible.

2. How much has the company raised so far?
Are you the first person they've approached, or have they been successful in raising money already? You don't want to be the first person on the bandwagon and then find out no one else wants to join. You are then left holding the reins of a wagon about to come off the wheels most likely.

3. Have the owners put any skin in the game?
Whenever you want to invest in something, you want to know that the people who are trying to raise the money are serious enough about the idea that they are going to put their own capital at stake. Don't just take their word for it, either. Double check the financial statements and records that a CPA or other qualified adviser prepared! Again, don't be fooled by pretty charts, graphs, and financial statements if they haven't been verified.

4. What is the market, who are the customers, what is the competition, etc. etc.?
In other words, is their idea even viable, and have they done enough research to persuade you that they know what they're doing? Have they done their due diligence so much that you can't ask a question they can't quickly answer, or...

5. Are they issuers honest and forthright if they don't have a good answer?
If you ask the owner a question that it is apparent they don't have an answer to, are they trying to BS their way through the question, or are they honest and tell you they'll get back to you with an answer? You need to be assured that the people you are about to give your money to is upfront and honest to begin with, otherwise you'll just be handing over the money without hopes of ever getting it back, let alone a good return.

6. Can you afford to lose everything you put into the offer?
If the answer is even "maybe", then just turn them down because you don't want that maybe to turn into a definite "Oh Crap! Now what?!?" You need to seriously consider the possibility that you could lose every red cent you put into the deal because it is a real possibility. Enormous companies fail every day (Enron, Lehman Brothers, Woolworths, etc.), and smaller startups can fail even faster, so just be prepared to lose everything. If you don't, then great, but know that it could happen.

7. Do all the documents check out?
Did the issuer get an attorney to create everything, or are you looking at the back of a napkin for the legaleze? If the person asking for a wad of cash doesn't put forth the effort to get everything squared away on the front end, how are they going to be doing on the back end when your capital is in play?

8. Do you feel comfortable with the deal in general?
All of these questions you need to ask boil down to one quick and dirty reality check- does your gut give the okay? Seriously! Sleep on the idea a few nights, go over everything you've been presented, and do your homework as well. In the end, your subconscious will tell you what the right answer is.

Remember, even veteran investors lose a lot of the time on new ventures. Venture capitalists only expect a 10% chance of their investment going big, and maybe another 20-30% chance of making money, let alone breaking even. This means there is still a better than 50% chance of losing everything, and that is for people trained to spot great deals.

Don't be fooled by the next shiny object that comes along just because it's wrapped in a good package. The SEC is limiting general solicitation in new deals to accredited investors for a reason- they think the loss of their capital won't be as painful as it would be to your non-accredited investor. However, that doesn't mean it won't sting if you lose, so be sure to do your homework and start avoiding general solicitation scams today!