Skyline photo of Manhattan, NY
Pedestrians and bicyclist crossing Brooklyn bridge
everyday people crossing at intersection in NYC
street scene of NYC with bicycle delivery person in foreground
NY Skyline at dusk
June 4, 2015

Legal News

June 4, 2015

Attracting Investment for the Amateur Entrepreneur Part I


With access to information and the ability to share resources at an all time high, it seems easier than ever for anyone with an idea and a plan to create her own business. Amateur entrepreneurs across the country are finding new ways to attract capital and technology for developing their ideas in ways that are evolving the modern economy and changing how business is conducted. Still, for many of these new business owners, their first “seed” money comes from friends, family, and other casual investors, and they may not be aware of the state and federal laws and regulations that apply to such seemingly informal transactions.

For any transaction in which a business is accepting money as an investment, there are registration requirements and other restrictions imposed by both the Securities Exchange Commission (SEC) and state law. There are even actions that a business owner must take before even offering securities or other equity in exchange for capital, and a failure to comply with federal and state requirements could leave the uninformed entrepreneur inadvertently facing charges as serious as security fraud.

Of course, with the right planning and guidance, there should be nothing for the entrepreneur to fear, and she should be able to attract the investments she needs to start and grow her business.

This article is the first in a series intended to provide the amateur entrepreneur with a general idea of how to form a business, accept investment capital at various stages of growth, and ultimately sell the company and distribute the profits if that should be the desired outcome. The articles will focus primarily on business owners whose initial investments will come from friends in family and who are operating in New York, but the general principals covered will be useful to anyone looking to start a business in most states. While each article should give the amateur entrepreneur a solid understanding what steps she will need to take, it is not intended to provide legal advice and anyone seeking investment in her business is strongly encouraged to speak to an attorney before taking any action.

So, let’s start from the beginning. You have an idea you want to turn into a business, you are confidant you can get friends and family to invest, and you are wondering what you should do. Here is what we suggest, using New York State as an example:

Step 1: Incorporate Your Business

Before you can do anything, you need to officially create your business. Pick a name (make sure it is available), the entity type, and the state in which you are incorporating. While the scope of this article is not intended to cover step-by-step how to incorporate, for its purposes, New York entrepreneurs seeking to sell shares in exchange for investment funds should file as a corporation. This can be done online by filing with the New York Department of State.  

Step 2: Initial Corporate Formalities

After your corporation is established, there are formalities you must follow in order to operate the business and have shares of stock to sell to investors. These include, but are not limited to, appointing at least one director of the corporation, creating the corporation’s bylaws, opening a bank account in the corporation’s name, holding an organizational meeting, and issuing stock certificates to the initial owners of the corporation. While there is no legal requirement that you have a lawyer prepare any of the documents necessary for carrying out any of these steps, because they create enforceable rights and responsibilities, it is always encouraged that you consult with an attorney prior to executing any legal documents.

Step 3: Applying for Securities Registration Exemption

Once your business is operational and you have shares of stock to sell to investors, which are classified as corporate securities, you need to register your securities with the SEC or file for an exemption. Small business owners seeking investment from friends and family should consider filing for exemption from the registration requirements of federal law (Securities Act of 1933) under Regulation D, rule 504 and under their local state law.

Regulation D, rule 504 allows a corporation to receive up to $1 million from investors over a 12-month period. The advantage of applying under Rule 504 is that the investors are not required to be accredited. An accredited investor, as the term applies to individuals, is defined as someone (a) whose individual net worth, or joint net worth with his or her spouse, is over $1 million; or (b) who had an income of over $200,000 or a joint income over $300,000 in the two most recent years and who has a reasonable expectation of reaching the same level in the current year. Many amateur entrepreneurs are not fortunate enough to have such wealthy friends and family, Rule 504 provides a welcome exemption.

One limitation of Rule 504 as compared to some other exemptions is that it requires that all such non-accredited investors be preexisting contacts of the business owner issuing the stock and that no general solicitation is therefore permitted. This is likely not an obstacle for amateur entrepreneurs in that they typically are seeking investment from friends and family, but it is important to note that they should not also seek to advertise or solicit generally and to people they do not already know.

Additionally, under Rule 504, issuers of stock are still subject to their state registration requirements. It is essential that when applying for a federal exemption under Rule 504 that business owners check and comply with their state laws. In New York, issuers of stock can apply for an exemption to registration with the Attorney General if the securities are to be sold in a limited offering to no more than forty people. Note carefully: the language of the New York Statute limits the number of offerings, so it is not enough that you issue stock to fewer than forty people; you can only offer the shares to that many.

Finally, while awaiting approval from Attorney General, making offers is prohibited. New York entrepreneurs should abstain from making any offer, even to friends and family, until they have received official approval of the exemption from the Attorney General.

Step 4: Issuing the Securities (Stock)

Now that your corporation has been formed and formalized, and your securities exemption has been approved both federally and on a state level, your corporation is now free to sell the shares of stock to investors. Naturally, your internal, corporate documents must have been duly executed in a manner authorizing the type and quantity of stock you wish to sell, particularly your bylaws and your articles of incorporation.

The two main types of stock are common and preferred. Common stock is what most people think of when they imagine stock: it is a security that represents ownership in a corporation that comes with certain rights, powers, and duties, including certain voting rights. Preferred stock gives the owner a priority when it comes to being paid and can also come with a higher dividend, but it does not typically come with voting rights and the return on investment is fixed, so there is no share in the overall sale price of the business.

Typically for this first “seed” round, amateur entrepreneur wish to issue preferred, non-participating stock to their friends and family, with the option to convert them to common, participating shares. This offers the amateur investor a more secure investment in the short-term, and offers the entrepreneur’s friends and family a greater reward should the venture turn lucrative. In exchange, the entrepreneur is getting investment money she might not otherwise have received, particularly with low to no interest, and she can retain control over the operations of the business. The overall goal at this stage is to give friends and family back the percentage they put in, hopefully when the business has grown and everyone makes a profit.

The next article in this series will discussed more nuanced forms of investment that may take place at subsequent stages, when the business is up and running, proven to be a viable concept, and is seeking an additional capital injection.


The time is truly ripe for amateur entrepreneurs to take advantage of the current climate and start their own businesses, but they must take steps to ensure that they are in compliance with all applicable federal and state laws, particularly those that govern the sale of securities. In particular, those looking to start and grow a business should not ask for seed investment money until they are properly setup and have received registration exemption approval from the federal and state governments.

There are many, detailed steps to follow along the way, and while retaining an attorney is not a requirement, it is highly recommended that you have a legal expert guide you along the way. The information contained in this article is not intended to be legal advice and there are certain parts of the overall process discussed above that were not included, so this should not be used as a step-by-step guide either. Overall, Working with an attorney who not only knows what she is doing not only will make the process go faster, but it will give you the peace of mind that you are doing everything you are supposed to be doing.

back to news

Disclaimer: Nothing on this website is or should be construed as legal advice. An attorney-client relationship does not exist with our firm unless a signed retainer agreement is executed, and we do not offer legal advice through this site or any of the content located on it. For legal advice for your particular circumstances, please contact us directly.