Fundraising Compliance Made Simple: Understanding the Rules for Privately Held Companies

For privately held companies, raising capital through fundraising is a critical step in achieving growth, expanding operations, and realizing long-term objectives. However, this process is not without its challenges and complexities. In this article, we will explore the key factors that impact a privately held company's efforts to raise funds and the rules surrounding compensating individuals to assist with fundraising efforts.

Factors Affecting a Privately Held Company's Fundraising Efforts

Regulatory Compliance: Fundraising as a privately held company falls under a robust regulatory framework designed to protect investors and ensure fair and transparent practices. Companies must adhere to securities laws and regulations, which can vary depending on the type of investors targeted and the exemptions utilized.

Accredited vs. Non-Accredited Investors: Understanding the distinction between accredited and non-accredited investors is crucial in structuring fundraising strategies. Accredited investors meet specific financial criteria and provide more flexibility in fundraising options, while fundraising from non-accredited investors may require additional regulatory compliance and disclosure.

Valuation and Attractiveness: The company's valuation plays a vital role in fundraising efforts. A well-defined and reasonable valuation not only attracts potential investors but also determines the equity offered in exchange for their investment.

Investor Confidence: Building investor confidence is paramount to successful fundraising. Companies need to provide transparent and accurate information about their financial health, market positioning, growth prospects, and risk management strategies to instill trust among potential investors.

Networking and Connections: Access to an extensive network and connections in the financial industry can significantly influence the fundraising process. Companies with strong relationships may find it easier to secure capital from experienced investors and institutions.

Rules for Compensating an Individual to Assist with Fundraising

Regulation D, Rule 506(b) and Rule 506(c): These are two popular exemptions under Regulation D that allow privately held companies to raise capital from accredited investors without having to register the securities with the Securities and Exchange Commission (SEC).

Compensating Intermediaries: Under Rule 506(b), companies can engage third-party intermediaries, such as broker-dealers or fundraising consultants, to assist in the fundraising process. These intermediaries can receive compensation, such as fees or commissions, for their services.

Fiduciary Responsibilities: Intermediaries acting on behalf of the company have fiduciary responsibilities to potential investors. They must act in the best interests of both the company and the investors, ensuring all relevant information is disclosed accurately.

Due Diligence: Before engaging any intermediary, companies must conduct thorough due diligence to ensure the individual or firm is reputable, licensed (if required), and has a track record of compliance with securities laws.

Regulation D, Rule 506(c) and General Solicitation: Under Rule 506(c), companies can engage in general solicitation and advertise the fundraising opportunity. However, all investors must be verified as accredited investors, and there is no room for non-accredited investors in this exemption.

Raising capital through fundraising is a significant undertaking for privately held companies. It requires a comprehensive understanding of securities regulations, compliance obligations, and investor dynamics. By diligently adhering to the rules and regulations surrounding fundraising, companies can ensure that their efforts are legally sound, protecting both their interests and those of potential investors.

When compensating individuals to assist with fundraising, it is crucial to select reputable professionals who prioritize investor protection and regulatory compliance. Thorough due diligence and adherence to fiduciary responsibilities are essential to maintain investor trust and safeguard the company's reputation.

Navigating the fundraising landscape can be complex, and as legal advisors, we recommend seeking guidance from experienced securities attorneys and financial experts to ensure a smooth and successful fundraising journey for your privately held company.