I think if you are doing a security offering, such as a private placement, reverse merger, or IPO, you may find the following little-known rules to be very helpful.
I am writing this to give you the knowledge of some costly and painful experience. You don’t have all the answers, but you might be surprised to find some very valuable and helpful answers here.
Rule 1. Make money for investors. I have never seen anyone sue a drunk investor for making money.
However, everyone believes that they are going to make money for investors and everyone, like it or not, runs into unforeseen difficulties. Therefore, it is better that you follow all the other rules to protect yourself.
First, when in doubt, disclose it. If you’re wondering, if you’re conflicted about disclosing something, you better disclose.
You should also search far and wide for risks that may exist and disclose them all. A good exercise to improve your business is to take your business apart aspect by aspect and see what would happen if the worst happened. Below you can clearly see 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 executives on Wall Street, who did not anticipate their risks. The companies run by these men would continue to exist if they had seen the risks. Real disaster stories usually begin with the following words: “No one has ever seen anything like this before, but…”
Second, make one document for everything. You need to take every line, every sentence, of your disclosure document and have a piece of paper to back up that claim and prove it’s true.
Third, reduce everything to writing. When you take a corporate action, whether it is the board of directors, shareholders, corporate officers, a contact with a customer, employee or supplier, if it is important, make a written record of it.
Fourth, put your files in a safe place from damage or loss. Then make duplicate copies and store them in a safe place. You never know what disaster, be it a hurricane, a terrorist attack, or worse, a disgruntled ex-employee covering up his crimes, could befall you. The only thing that will save your ass is having those files where no one can mess with them. It is recommended to have more than two copies.
Fifth, take all this paper and create files from it, PDFs will work just fine, and keep the files electronically so they’re easy to copy and send to big investors for due diligence and in case of litigation. Put them in a well-organized directory on your hard drive so they’re easy to find and easy to access. Save backups and store them in a safe place.
Sixth, when you see something that may have a legal problem, get a legal opinion to justify your actions. Put the file on paper so you can show what you did and why you did it. Solve problems as they arise.
Seventh, don’t just stick to the rules, be more ethical than the rules. Now this may surprise you, but securities regulators have been known to change the rules midway and never make them less stringent. If you’ve been riding the ragged edge of aggressive rule enforcement, you may soon find that the ground has been cut out from under you. The entire history of securities regulation has consisted of more and more regulations with ever stricter standards. Don’t get caught in the cold. Go beyond the rules.
Remember, securities laws are what we used to call in law school “Gotcha.” A Gotcha is a set of rules that are so vague and complex that no one can follow them. This allows securities regulators broad discretion in prosecuting offenders. So when they see something they don’t like, they can pounce on it and yell “Gotcha!”
Finally, here is a good rule of thumb. Just pretend your potential investor is in the room with you. What would he think if he knew everything you know? How would he react to what you are doing and saying? If you were the investor, is this how you would want to be treated? Having this imaginary person looking over your shoulder at all times is a good guide. In fact, you can pretend that there is a lawyer for the plaintiff, a judge, and 12 jurors right there with you.
Now you can expect to be met with the cool confidence of an angel with four aces and after you’ve raised your money, look back on this article and its carefully created documents as the start of it all. It’s nice to be able to sleep at night, isn’t it? So make sure you get the best advisers on your team. I trust these rules will be as useful to you as they have been to me.
