Rules to use when you are raising money in a private placement or IPO - By: John Lux

If you are going public, making an initial public offering with an IPO or a reverse merger, or perhaps raising money with a private placement memorandum, or writing a stock offering of any kind, you may be surprised to find just how useful this article will be.

This is written to provide the benefit of what I have learned over the years. It does not have all the answers but you may be surprised to find some very valuable and usable answers here.

Rule 1. Make money for the investors. I have never seen anyone get sued bu an investor for making money.

However, everyone believes they are going to make money for the investors and everyone, like it or not, runs into unforeseen difficulties. Therefore, you had better follow all the other rules to protect yourself.

First, when in doubt, disclose it. If you are wondering, if you find yourself conflicted about disclosing something, you had better disclose it.

You must also search far and wide for any risks that might be there and disclose them all. A good drill to improve your business is to take apart your business aspect by aspect and see what would happen if the worst happened. You can then see clearly what your risks are. Find things that went wrong for others. Try to find the unexpected. The recent financial crisis shows us that there were many high paid managers, sophisticated Wall Street executives, who did not anticipate their risks. Their companies would be better off if they had seen what was coming. Real disaster stories usually start with the following words: “Nobody had ever seen anything like this happen before, but ……….”

Second, make a document for everything. Take each assertion you make in your offering document and prove it true by having a document to back it up.

Third, reduce everything to a writing. When you take a corporate action, whether it is the board of directors, shareholders, corporate officers, a contact with a customer, employee or suppler, if it is important, make a written record of it.

Fourth, keep these records in a safe place. Then make duplicate copies and keep them in a safe place. You never know what disaster – be it a hurricane, terrorist attack, or worse, a disgruntled ex-employee covering his crimes – might befall you. The only thing that will save your butt is having those files where nobody can mess with them. Having more than two copies is recommended.

Fifth, take all this paper and make files out of it, pdf files will do nicely, and keep the files electronically so they are easy to copy and send it to large investors for due diligence and in the event of litigation. Put them into a directory on your hard drive nicely organized so they are easy to search and easy to access. Back all this up and keep the backup(s) in a separate and safe place.

Sixth, when you see something that might a legal issue, get a legal opinion to justify your actions. Paper the file so you can show what you did and why you did it. Resolve issues as they come up.

Seventh, do not just strictly comply with the rules, be more ethical than the rules. Now this may shock you, but the securities regulators have been known to change the rules mid-stream and never to make them less strict. If you have been riding the ragged edge of aggressive compliance with the rules, you may soon find that the ground has been cut out from under you. The entire history of securities regulation has been for more and more regulations with tighter and tighter standards. Do not get caught out in the cold. Go beyond the rules.

Remember, the securities laws are what we used to call in law school a “Gotcha.” A Gotcha is a set of rules that are so vague and complex that nobody can comply with them. This allows the securities regulators to have broad discretion to prosecute crooks. So when they see something they don’t like, they can swoop down on it and yell “Gotcha!”

Finally, here is a good rule of thumb. Just pretend that your intended investor is in the room with you. What would he think if he knew all that you know? How would he react to what you are doing and saying? If you were the investor, is this how would you like to be treated? Having this imaginary person looking over your shoulder all the time is a good guide. In fact, you can pretend that there is a plaintiff’s attorney, a judge and 12 jurors right there with you!

Now you can look forward to finding yourself have the cool confidence of an angel with four aces and after having raised your money, look back on this article and your carefully created documents as being the start of it all. It is good to be able to sleep at night, isn’t it? So be sure to get the best advisors on your team. I trust that these rules will be of use to you as they have been to me.

About the Author

The author, John Lux, has been an OTC market maker in new issues, shells and other companies, a security analyst, an investment banker, and attorney. He is a principal in several venture companies and private equity funds. Go to his website at http://www.asklux.com or contact him at Lux.investor @ gmail.com

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