When an Angel Investor Appears, Consult with Your Attorney

Consult with Your Attorney

Angel Investors are very popular with startups. Angel investors are private, typically very wealthy individuals who provide startups with much needed capital. While startups get the funding they need, that funding does not come without its own price. Typically, angel investors will provide startups with financing in exchange for some form of convertible debt or equity ownership in the startup.

An angel’s investment in a startup is a business transaction. Like any business transaction, it is imperative that the terms of the transaction are memorialized in writing. Naturally, given the importance of said transactions, startups receiving angel investor money should always seek the legal advice and counsel of skilled and experienced attorneys who can draft fair and favorable agreements to protect the interests of the startup and its’ founders.

Securities Laws Play an Important Role in Angel Investing

The investment in a startup is a business transaction that will be subject to both federal and state securities laws. This occurs because an investor is essentially buying ownership, often in the form of shares or debt, in the startup itself while the startup is offering to sell a security (shares) in the startup in exchange for the funding. Federal and state laws require that all securities be appropriately registered unless the security falls within one of the many complex exemptions.

While startups are often run by innovative and intelligent founders, many of those individuals lack experience with the registration and sale of securities at the state and federal levels. Skilled attorneys that understand the complexities and nuances of both investment and securities laws can provide greater insight and help to ensure that the startup and the initial investor are in compliance with all applicable securities laws.

Attorneys Navigate the Complexities of Laws Regulating Business Investments

The sale of securities is regulated by the Securities Act of 1933. The Act requires that the sale of stock/securities be either licensed with the U.S. Securities Exchange Commission—also known as the SEC.  The startup’s sale of securities may fall within a registration exemption, as changes to the original Securities Act of 1933 have provided more defined registration exemptions. However, these exemptions remain very complex and all elements must be met for a startup to qualify for the exemption.  The securities do not need to be registered if they meet an applicable federal exemption.  Attorneys can more easily identify said exemptions in your specific case.  While the federal government engages in most of the regulation and monitoring of the sale of securities, business are also required to comply with state laws on the sale of securities. These laws can be even more strict and require additional information than federal securities laws.

Trained and skilled attorneys help startups comply with securities laws. Startups should provide their attorneys with notice of their intent to sell securities, as well as a detailed business plan. Attorneys will use this information and work with the startup in order to prepare the necessary offering documents that are required to be given to an angel investor (or any investor for that manner) prior to any offering and investment.

A startup’s failure to comply with strict and complex securities laws can have serious consequences. Startups that do not comply may face legal actions by both the government and their investor. For example, failing to register securities can result in fines assessed against the startup. Failing to provide well-prepared and appropriate offering documents can lead an angel investor to bring a cause of action against the startup; as a result, the startup could lose its investment, property, and/or fold.

Contact Startup Company Counsel Today to Schedule Your Consultation

Startups approached by potential Angel Investors should always seek the advice of an attorney. The skilled and knowledgeable attorneys at Startup Company Counsel can work with your startup to ensure full compliance with all state and federal laws. More importantly, Startup Company Counsel will work with you to ensure protection of your business interests. You can schedule a consultation with one of our experienced business lawyers by calling our office at (408) 441-7555.

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