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Third Party Investments

Many small business owners will want to raise capital by issuing shares or LLC ownership interests to friends and family, and occasionally to angel investors and venture capitalists.

If the proposed investor is sophisticated, the investor will probably submit an investment contract of some kind, in which case the clinic’s job will be to review it or to refer the client to an attorney specializing in such transactions. The latter will be a relatively expensive course of action for the client, but since the client is looking for an influx of cash into the business, it should be prepared to pay at the market rate for whatever professional advice may be needed.

On the other hand, if the proposed investor is a family member or friend without investment experience and sophistication or legal representation, the clinic may be required to evaluate the transaction and draft the required documentation.

The threshold issues in any such case is whether an equity interest in the business is a “security” and whether offering it to a third parties must be registered with the U.S. Securities and Exchange Commission or securities commissioners in the states in which offers are made. In most cases, the clinic will find that the offering is “exempt” from registration, but it is important that this be determined with a high degree of certitude or the transaction may be revocable at the investor’s option (typically when the business fails) and the clinic may be faced with a malpractice claim. In fact, there are transactional clinics that simply decline to advise clients on what might be construed to be a “public offering”.

It is beyond the scope of this Web site to provide definitive information regarding federal and state securities laws. However, the student-drafted materials collected at Investors, may be helpful in understanding the issues involved, and demonstrate how they might be communicated to a client.

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