Types of Investors

Foreign investors

Corporations, limited liability companies and partnerships can have foreign investors as , or partners. Before raising money from foreign investors, however, be aware of the following issues:

  • Potential tax issue. If the company is a Subchapter "S" corporation (read about what type of entity to create), it cannot have shareholders that are non-resident aliens. Therefore, raising money from a foreign investor that lives (or later moves) outside the US will result in the company losing its status as a Subchapter "S" corporation (the result will be that the company will be taxed as a Subchapter "C" corporation from that point forward).
  • US and Foreign Securities Laws. Any time a company sells securities in a financing, it must comply with applicable securities laws. In the US, most private companies try to limit their investors to those that qualify as “” (read more about accredited investors). When raising money from foreign investors, the company can take advantage of a US federal securities law exemption called Regulation S that does require the foreign investors to be “.” There are other requirements of Regulation S, some of which are somewhat complicated. However, it may present a viable for your company when raising money from foreign investors even if they are not accredited. On the other hand, the sale must also comply with the securities laws of the foreign country in which the securities are being sold. Depending on the countries involved, this may involve disclosure and/or filing requirements, which can be expensive or time-consuming.
  • Prohibited Investors. If your company is seeking to raise capital outside the US, it needs to do extra on any prospective foreign investors because US laws prohibit transactions with these countries or people sanctioned by the US government. Seek introductions to foreign investors through trusted advisors or regulated organizations with an extensive network of contacts, such as investment banks. The company still needs to conduct its own , but using referral sources that can be trusted can help reduce the risk of running afoul of these laws.