August 2, 2007

Raising Capital: Do You Need An Attorney, An Accountant, And A Banker?

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Here's an important question about raising capital that I hear from clients…

Who is involved – or needs to get involved – in the process of obtaining seed capital? Does one need an attorney, an accountant, and a banker? Who are the players in this?

It’s always a good idea to have an attorney involved in this process. But when you are raising capital, you don’t call your regular, run-of-the-mill attorney. In the U.S., raising capital into a business falls under securities law. All of the issues related to the raising of capital are under the control of the Securities and Exchange Commission (SEC).

Most capital raised for small companies is raised under an exemption – an exception to the rules. The rules grew out of the Stock Market crash of 1929 and the Depression which followed. Before the Stock Market crash, individual investors were throwing their money into investments of all kinds, and the Stock Market swelled to historic proportions.

When it crashed – which it did because so many of the deals were questionable – millions of working people who had invested were left broke. That was the real story behind the Depression – investors in companies of all kinds were wiped out. To make things worse, they didn’t have the sophisticated pension programs and health care programs that we have now.

As a result, the federal government stepped in and said, “If we have to step in and clean up the mess that businesses are creating when they dupe people out of their money, then we’re going to make laws to prevent businesses from duping people.”

As a result, a whole breed of attorneys and accountants came into being. Almost the entire accounting profession arose out of the steps Congress took to protect investors, because once the Securities and Exchange Commission (SEC) promulgated all of the regulations required by the new laws, companies had to have audited financial statements.

This gave rise to the big accounting firms. And law firms also had to expand their practices to address the new laws and regulations.

When raising capital for your business, I would advise that you have a securities attorney look at your documents, even though such attorneys are specialists and they aren’t cheap. In addition, accountants need to be involved if your plan involves projections, as most plans do. Bankers aren’t typically involved at this point, though a financial intermediary – sometimes called an investment banker – who brokers capital may be involved. The financial intermediary will either try to raise equity capital or debt capital. These people usually work for a retainer and a fee.

Those are some of the players who tend to get involved. Although it’s always a good idea to have an attorney or a CPA, many times little companies just forego that step and take their chances. My suggestion is that you get professional assistance when raising capital and you don't go it alone.

About Joel G. Block

Often dubbed a "Growth Architect" by his clients, Joel Block advises companies on explosive growth strategies by driving revenue and sales. Well known in the capital markets, Joel is a successful entrepreneur, speaker and advisor. Would you like to get a private phone consultation with Joel? Visit www.joelblock.com/capital for details.

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