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Finance - Seeding a New Business. The Real Deal!
Jun 1, 2001
If you are financing a company in the early stages, read on.
Simply put, by far and away the majority of successful ventures financed themselves from friends, family and their own sources during those early months. Outside "investment" provided only a small percentage of the initial seed.
Sometimes there is a good reason for this. Slow growth companies, whether in the service, distribution or manufacturing sectors, may make good business but they do not make good investments for venture capitalists.
Not so well known is that many venture capitalists look at the amount of money raised from "family and friends" as one of the ways to separate the deals they will consider from those that they will not.
If this sounds like your situation, read on if you want to stay clear of a prosecution by securities regulators when raising your initial seed capital.
The manner in which you raise capital must comply with the local securities regulations governing the raising of capital. You must satisfy the legal requirements of the jurisdiction in which your company resides, and the rules in the jurisdiction where your investor resides. Prosecutions for illegal fund raising are becoming more common.
In British Columbia, the general requirement of an expensive and complicated prospectus is modified by several exemptions. One of these exemptions is where the initial investors are not be members of the public, which is taken to mean that they must be either family or close business associates of a director or senior officer of the company. The contract by which you raise your initial capital is commonly referred to as a subscription agreement for the purchase of shares, and contains legal representations to this effect.
There are other exemptions that are more difficult and expensive to implement, and they are typically used after the initial seed financing.
Regulatory compliance is not difficult or expensive at the early stages. So, please do yourself a favour. Do not create a serious future problem for yourself and your company by unnecessarily cutting corners in the early stages of financing your new business.
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