Can I Advertise to Attract Investors?

Many entrepreneurs will, at one time or another, think about using advertising to find investors for their private company. But according to the U.S. Securities Act of 1933, you would likely be breaking the law. There is a reason you don't see the Wall Street Journal or Business Week filled with ads proclaiming great private investment opportunities.

Unless you have explicit permission from the SEC, it is illegal to publicly solicit (e.g. ask anyone you can) for investment in a private company. While these laws are based in the United States, similar laws apply to Canada as well.

Does that mean I cannot ask people to invest in my company? You can, if you follow the rules -- specifically Regulation D of the Securities Act. Also known as "Reg D," it exempts certain offerings of equity (i.e. asking someone to invest in a private company) from many of the requirements imposed on public companies. Reg D is intended to allow investments in companies that cannot afford the cost of, or are not ready for, a public offering (IPO). While companies using a Reg D exemption do not have to register their securities and usually do not have to file reports with the SEC, you must file what’s known as a "Form D" after first selling securities.

So if you can't just ask anyone on the street to invest, who can you ask? The most useful answer is "accredited investors". In simplified non-legal terms, accredited investors are people with money to spare (i.e. could afford a total loss of their investment) and are very aware of the investment risks of your company. You can also offer shares to directors, executives or partners of the company, and to certain types of banks, broker dealers and private business development companies.

To protect yourself and your business, do your homework and read up on the fine details of Regulation D. Most states have their own additional regulations, so check the laws in your local jurisdiction. And it wouldn't hurt to contact a lawyer knowledgeable in securities regulations as well.

Finally, be careful with "post your business plan online" services. If the Internet site allows anyone -- not just accredited investors -- to view your investment pitch, you are publicly soliciting and could be open to legal trouble down the road. Stick to Internet sites that require individuals to declare themselves as accredited before they can view your investment information online, sites such as Genesis Exchange.