What You Need to Know About Investors When Franchising a Business
When working with clients to establish and launch their franchise system‚ the issue of existing and potential future “investors” frequently comes up. That is‚ I am either advised that my client already has investors who purchased stock in his or her existing company or that he or she would like to sell a minority interest of stock in the franchise company that we are about to form. I certainly understand that certain clients may wish to raise additional capital to cover expenses and investments associated with establishing a franchise system. However‚ to raise capital and sell stock in your business‚ you must be aware that‚ in most instances‚ your stock sale (even though you may be a small start-up franchisor with a few investors comprised of family and friends) will subject you to various federal and state securities laws and regulations. Consider that‚ many times‚ the sale of stock in your franchise company will require that you issue and disclose information contained in a prospectus / disclosure document to be delivered to your prospective investors. A securities prospectus is similar to a Franchise Disclosure Document in that the prospectus is designed to contain specified information to inform prospective investors about the business they may invest in and the risks associated with such investment.
Although I am a franchise lawyer and not a securities lawyer‚ the issue of stock sales comes up often and‚ as such‚ it is important that you be aware of the following general points / overview:
When selling to an “accredited investor” (assuming other criteria are met) there are no mandated disclosure obligations. However‚ when selling to “sophisticated investors” there are disclosure obligations. Under this exemption / safe harbor‚ registration of your equity offering is not required. Assuming that the potential investors are not “accredited investors” but qualify as “sophisticated investors”‚ the following criteria must be established under safe harbor Rule 506:
“Franchising your business” is all about building a system that will grow and develop over time. Part of that growth will require a stable shareholder base and at the initial franchise inception stage it is critical that you comply with applicable securities laws before you sell any stock in your company. Otherwise‚ you will be subjecting yourself to unnecessary future exposure and instability that may be caused by minority shareholders. Before you sell stock‚ speak to your attorney and establish a clear plan – including a stock offering prospectus‚ if necessary – to ensure that you sell stock properly.
Category: Start a Franchise
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