When a client starts talking about raising funds for an Internet startup by selling equity, it’s time for a reality check because of federal and state securities laws.
Quite simply, you can’t run around selling stock in your company without dotting a lot of legal i’s and crossing regulatory t’s. And you can’t pay commissions to your buddies for bringing investors to you.
Securities law is so complex that even most lawyers avoid it like the plague.
Which makes it all the more interesting that Texas Attorney General Ken Paxton has just been indicted by a grand jury on charges related to his alleged solicitation of investors for tech company Servergy, Inc. The three felony indictments accuse him of securities fraud and failing to register with the State of Texas to sell securities.
I don’t know if Attorney General Paxton violated the law. Some call the charges a political witch hunt. Others say he crossed the line.
Regardless of what did or did not happen, the important thing to learn from Paxton’s predicament is that you have to be extremely careful when raising funds for your tech startup. If you’re selling equity, get a securities lawyer on board to advise you before you even solicit investors.
For many entrepreneurs, the safer (and cheaper) course of action would be to do crowdfunding through sites like Kickstarter and IndieGoGo.
Disclosure: I dealt with Paxton’s office on an unrelated matter last year when he was a State Senator, and I voted for him when he ran for Texas Attorney General.