Any time you look outside your family members for funding (excluding obviously bank funding) you run the risk of breaching the Securities Act.  This may take the form of a debt security, or sale of part of the business by way of an offer of shares in exchange for cash or some other form of securities.  This leads to an analysis of who you may approach for funds and what limits are placed on that approach.  These are recorded as exceptions to the Securities Act.  Unwittingly, breaching the Securities Act can result in charges being laid against the issuer and promoters of the securities (usually the business proprietor seeking funding) and worst of all, a requirement to return investors funds.

Paradoxically, it will not be at the time of seeking funding or obtaining that funding from an investor (when they are enthused about your business) that any issue arises, it will be when something goes wrong and the investor wants his or her money back, that a complaint is laid under the Act!

What members of the public may be approached for funding without having to prepare a prospectus under the Securities Act? The exemptions include:

• Relatives or close business associates of the issuer.  Each potential investor must fall under either of those two classes.  A person who you may see down at the club would not be a ‘close’ business associate for instance;
• Persons whose principal business is the investment of money or who, in the course of and for the purposes of their business, habitually invest money.  An example would be the recent “Dragons Den” TV series, where entrepreneurs pitch for investment seed capital;
• Any other person selected otherwise than as a member of the public (very limited circumstances);
• A person who is required to pay a minimum subscription price of at least $500,000.00;
• Wealthy investors who have net assets of $2 million or more, or annual income of $200,000.00 or more (but needs to be certified by a chartered accountant as such);
• Experienced investors (but needs to be certified by an independent financial adviser).

At Currie lawyers we can assist you in navigating your way through the Securities Act and advise you of the best way to structure your business funding.  If a prospectus is required, we can facilitate its preparation in conjunction with your accountant.