We learned in an earlier article that if any interest is a security, then you must find an applicable state(s) and federal exemptions. State(s) may be plural because you must consider the state securities laws of each state that the potential owners reside. If you can't find applicable exemptions, you must register the security with either the state and or federal regimes, which is a very expensive ordeal. Also, failure to register a security without meeting an applicable exemption may result in state and federal criminal charges, civil fines, rescission of the investment years later, etc.. Usually no owner cares if the investment is working out; but, if the investment goes south, the Plaintiff lawyers emerge.
In short, federal law and state laws prohibit making solicitations or offers to buy or sell securities unless the securities are registered, without meeting applicable exemptions. In layman's terms, this means you cannot publicly advertise for investors! Not even something as simple as, "I'm thinking about starting an investment group" on a social media post.
If you still want to attempt to raise outside capital, you have to do it without advertising or you have to meet applicable exemptions. Typically, most LLCs and LPs of small businesses are formed under "private offering" exemptions, i.e., those sales that occur without any public advertising. In reality it's more complex than that; but, it's a good abstraction for the lay person to remember. There are exemptions based on the geographical residences of owners, the amount of money raised, the number of investors, the net worth of the investors, the sophistication and knowledge of the investors, and exactly how the investors are put in touch with you.
If you can meet one or more of these exemptions from registration, you're good to go. If not, you need to restructure the deal to meet one or more exemptions because registration can cost tens of thousands in professional fees and months of time.
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