State and federal securities laws provide entrepreneurs with another set of formidable hurdles in the private equity markets. "Even though there are rarely registrations with state and federal regulators," says Yankowitz, "that doesn't mean there aren't securities laws that apply."
There are several state and federal laws that prohibit solicitation or promotion of a deal. The sum total of these rules seems to be that you cannot do much to promote your deal, except by talking and meeting with people you know or people you are referred to by people you know. Even if you hire a brokerage firm to do your bidding for you, there are several laws restricting who they can contact and how they can do it. The important point is to recognize these laws exist and to be aware of them (or pay for informed legal counsel) before you start selling.
Then there's the SEC's Regulation D, which governs the private placement of securities. According to Yankowitz, under Regulation D, companies can raise money with an unlimited number of accredited investors-those with net worths in excess of $1 million or annual incomes of more than $200,000. But for companies selling to nonaccredited investors-those who do not meet the income or net worth benchmark-there is a limit of no more than 35 investors. "If you bring more than this number of investors into your deal, you run the risk of the feds coming down on you," says Yankowitz.
Don't let the regulators get you down, though. It's their job to make things look tough. The fact of the matter is, private deals get done every day. By some standards, the private capital market is one of the largest in the U.S.-consisting of billions of dollars that get poured into emerging enterprises every year.
"Just be careful out there," says Yankowitz. "It can be dangerous."