While many people are eager to put money into a startup business and the businesses are even more eager to get it, there is a labyrinth of laws controlling exactly how and from whom you can accept funds. Numerous stock frauds over the years have resulted in harsh criminal penalties for those who do not follow the laws.
The issuance of securities is subject to both federal and state securities laws. A security is stock in the company (common and preferred) and debt (notes, bonds, etc.). The laws covering securities are so broad that any instrument that represents an investment in an enterprise in which the investor is relying on the efforts of others for profit is considered a security. Even a promissory note has been held to be a security. Once an investment is determined to involve a security, strict rules apply. There can be criminal penalties and civil damages can be awarded to purchasers if the rules are not followed.
The rules are designed to protect people who put up money as an investment in a business. In the stock market crash in the 1930s, many people lost their life savings in swindles, and the government wants to be sure that it will not happen again. Unfortunately, the laws can also make it difficult to raise capital for many honest businesses.
The goal of the laws covering sales of securities is that investors be given full disclosure of the risks involved in an investment. To accomplish this, the law usually requires that the securities must either be registered with the federal Securities and Exchange Commission (SEC) or a similar state regulatory body, and that lengthy disclosure statements be compiled and distributed.
The law is complicated and strict compliance is required. You most likely would not be able to get through the registration process on your own and would need an attorney for advice.