Missouri Real Estate Lawyer

Raising capital from friends and family typically involves the sale of securities. Securities are regulated by federal and state laws. Business owners must be aware of these laws.

Definitions

An issuer is defined by Missouri law as a person who issues or proposes to issue a security. This is typically one or more of the business owners. A security can be either an equity or debt instrument. Equity instruments typically include stock, membership interests in a limited liability company, partnership interests in a partnership, options, warrants, Simple Agreements For Equity (SAFE), profit sharing agreements, and investment contracts. Debt instruments typically include promissory notes, debentures, and bonds.

Friends and Family

In Missouri, businesses must register their securities before they can offer them for sale. Registering securities is a long and expensive process. A business can qualify for an exemption from registration under certain circumstances. Missouri’s friends and family law is one such exemption.

Under this exemption, issuers can sell securities in Missouri to up to 25 investors during any 12-month period. However, there are several restrictions to this exemption. First, the issuer may not generally solicit investors or advertise the offer. Second, the issuer may not pay another person, other than a licensed broker or licensed agent, to sell the securities. Third, the issuer must reasonably believe that all of the purchasers in this state are purchasing for investment and not to resell the securities. Fourth, the issuer may sell, or offer to sell, the securities only to family members of the issuer or to individuals with whom the issuer has a “substantive preexisting relationship”. Missouri laws and regulations do not define who qualifies as a family member, nor do they define a “substantive preexisting relationship”.

Additionally, Missouri’s Secretary of State suggests that the issuer disclose to investors all of the material facts related to the investment. The Secretary suggests disclosing these material facts to investors in a written offering document or prospectus. This is excellent advice that should be followed by all issuers selling securities to friends and family.

Intrastate Transactions

All communications with friends and family about investing must occur strictly within Missouri. This includes phone calls, emails, and mailings. Federal laws will spring into effect as soon as one of these communications crosses Missouri’s state line.  The issuer will then lose its exemption, which could result in a cease and desist order, fines, and even prosecution.

Take-Away

Missouri allows businesses to raise investment funds from up to 25 friends and family members in Missouri, during any 12-month period. Although not required, the state strongly urges issuers to provide a prospectus to each investor. The prospectus should describe the company, its officers and their backgrounds, the securities offered for sale, the material risks to investing in the company, and how the proceeds will be used.

Additionally, companies should provide financial statements prepared by a CPA, if they have an operating history, and a pro forma of projected future performance. In short, even small private companies seeking to raise funds from friends and family should act, as much as possible, like a large public company. This means that that the officers should comply with all related securities laws, communicate clearly, and be fully transparent.

Michael Sewell, JD, MBA has litigated more than 100 lawsuits in federal, state, administrative, and municipal courts since 2005, involving real estate, business, and personal disputes. He also advises companies about raising private capital.

Please contact Michael Sewell for an initial consultation at no charge. (314) 942-3232 | michael@sewelllaw.net.

This article is for general informational purposes only. This information is not intended as legal advice. You should consult an attorney regarding how this information might apply to your specific circumstances.

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