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The Right Disclosures Attract Investors

Updated: Aug 17, 2020

Taking someone's money into your company in exchange for a promise of future value is a highly regulated activity, largely because business owners often exaggerate the details. They stretch stories about their experience, expertise, product development, intellectual property protections, cash flow projections, market research, direct or indirect competition, applicable regulatory frameworks, etc., to look better to investors. They'll even lie about how they plan to use the money, and they often change course mid-project due to some "unforeseen obstacle" that would have been foreseen had they done their research. Maybe they do it maliciously, or because they are simply over-optimistic about their own capabilities. Nonetheless, these material misrepresentations often burn through investor cash, requiring business owners to ask for more which dilutes earlier investors.

Much of this unfortunate drama could be avoided if business owners would simply disclose early on all of the factors impacting their chance of business success. Rather, they often hold back because if investors knew the truth about their incompetence, they wouldn’t invest. If someone is asking you to invest in their business whether for stock, a promissory note, a convertible note, a SAFE or SAFT agreement, in exchange for profits, revenue, royalties, tokens, cryptocurrencies or some other future value, you should ask several questions. If the business cannot or does not want to answer your questions, it’s because they are unprepared, or the answer is unfavorable. Either way, you absolutely should not give them your money. If you are a business owner seeking investment and you cannot or don’t want to answer these questions, you should not ask for money. Instead, do the homework, research the business and then request investment. When you are prepared, it shows, and investors will be lining up to back you.


Understanding that some businesses may have unique circumstances requiring additional considerations beyond the below list, the general disclosures all businesses must make before taking an investor’s money include the following:

1.     Businesses seeking investment must provide access to all of the company’s governing documents, material contracts, financial statements and capitalization table, even if an NDA is first required to be sign before providing access to these documents.

2.     Description of your business which includes the general development of the business, its subsidiaries and its predecessors during the past several years, including whether there have been any bankruptcy or receivership, reclassifications, mergers or consolidations, or the acquisition or disposition of any material assets, or material changes in the business model.

3.     Description of the company’s material assets, including the identification of segments as reported in the company’s financial statements.

4.     Any pending or threatened legal proceedings.

5.     Thorough presentation of the company’s capitalization table with respect to clearly explaining the investor’s expectation of return in light of other claims to profits or revenues, as applicable.

6.     Thorough description of the securities being offered and whether and to what extent such securities are dilutable.

7.     All financial information for the company’s past five years of operation or, since the date of operation if the company has been operating for less than five years.

8.     A description of how the investor’s funds will be used and whether these funds will achieve profitability or whether additional rounds of investment are likely.

9.     Market risk inclusive of disclosure about direct and indirect market competition. Do not state that you are the only company in the world who is doing this because there is absolutely at least some kind of indirect competition, even if it is only remotely connected. Failure to conduct adequate research in an effort to rely on ignorance as your defense is legally insufficient.

10.  Identify and describe the company’s directors, executive officers, promoters and control persons. Compensation in excess of $100,000 annually should also be disclosed.

11.  Describe any transactions occurring between the company and persons related to any director or officer including any child, stepchild, parent, stepparent, spouse, sibling, in-law and any other person other than a tenant or employee that is sharing the household of such director, officer or nominee for such position.

12.  Describe any transactions where there is a conflict of interest, even if the conflict has been duly noticed and waived by the board or shareholder vote.

13.  If any of the securities sold are coming from existing shareholders and certain information in this regard.

14.  If the securities are to be sold through an underwriter or a broker-dealer, such relationship must be disclosed as well as the terms of compensation.

15.  Whether and to what extent named experts and legal counsel may also hold securities in the company.

16.  Itemization of expenses of issuance and distribution including, for as far as practicable, registration fees, federal taxes, state taxes and fees, trustees’ and transfer agents’ fees, costs of legal, accounting, and engineering.

17.  Disclosure of the regulations impacting your business and how you intend to comply.

All too often entrepreneurs jump into a new business without first having done their homework on their industry, compliance, changes in applicable technology, or associated costs. While entrepreneurs can be more "do-ers" than researchers, the most successful are industry experts with a long-term vision to plot their course today to navigate industry shifts and regulatory changes tomorrow. While I understand and respect that slowing down, reading and researching all aspects of your industry may cause headaches (and I mean that literally), I assure you that this exercise in due diligence is well worth it. When you demonstrate competency by having done your homework as exemplified in your disclosures, investors can be assured of your competency to lead them to profitability.

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