Mistake #5: Violating Securities Laws

This is the fifth and last post in a series on common costly legal mistakes made by founders of early-stage companies. Read the previous posts here: Mistake #1, Mistake #2, Mistake #3, Mistake #4.

Offering and selling securities is highly regulated. So when raising capital, you need to comply with the rules. Sometimes this may seem a little overkill for a brand-new , but believe me, it is important. Federal and state securities law violations can create liabilities (fines, penalties and worse). As painful as it may be (e.g., you might not be able to take money from your uncle if he isn’t accredited), compliance also makes good business sense. Why? Because failing to comply can limit the company’s ability to raise capital in the future.

One common violation happens when a company hires individuals or entities to make introductions to potential investors. Unless the third party is a registered -, these arrangements typically violate the securities laws, which results in potential liabilities and may give purchasers of securities the right to rescind the transaction in the future. Entrepreneurs should consult legal counsel to determine whether a particular fundraising arrangement raises these issues.


I hope this series helps—I enjoyed writing it. The key takeaway is this: when starting a new venture, avoid common mistakes and don’t cut corners. Setting up a company correctly at the outset is much less costly than fixing mistakes later, some of which cannot be fixed at all.