Restaurant Law Blog

Monday, October 1, 2012

Before You Solicit Investors For Your Restaurant, Read This

Restaurant operators frequently come to me with their original operating agreement asking me to amend it to include one or more new investors that they have brought on-board (i.e. actually obtained money from and promised a membership interest to). I immediately cringe. Bringing in an investor is not always as simple as owners would like to believe. You are offering a security interest in your business which may need to be registered with the Securities and Exchange Commission. Keep in mind that all securities transactions, even your small transaction, are subject to the antifraud provisions of the federal securities laws. In other words both you and your company can be held responsible for any false or misleading statements, whether oral or written. The government enforces federal securities laws through criminal, civil and administrative proceedings and jilted investors can enforce these protections through private lawsuits and obtain a full refund of their investment plus interest.

Some transactions are exempt, meaning that you need not register it with the SEC. Two common exemptions include:

Intrastate Offering Exemption – Exemption to facilitate the financing of local a business. To qualify for the intrastate offering exemption, your company must: (a) be incorporated in the state where you are offering the securities; (b) carry out a significant amount of its business in that state; and (c) make offers and sales only to residents of that state. It is difficult for your company to rely on the intrastate exemption unless you know the purchasers and the sale is directly negotiated with them.

Private Offering Exemption – Exemption where there is no public offering. In this case, your investor must: (a) have enough knowledge and experience to evaluate the risks and merits of the investment (the "sophisticated investor"), or be able to bear the investment's economic risk; (b have access to the type of information normally provided in a prospectus; and (c) agree not to resell or distribute the securities to the public. The caveat is that you may not use any form of public solicitation or general advertising in connection with the offering.

Even if you make a private sale where there are no specific disclosure delivery requirements, you should take care to provide sufficient information to investors to avoid violating the antifraud provisions of the securities laws. This means that any information you provide to investors must be free from false or misleading statements. Similarly, you should not exclude any information if the omission makes what you do provide to investors false or misleading.

 


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