Raising Capital the Right Way

The urgent care market has exploded in growth over the past few years. An urgent care business’s success depends largely on its ability to grow through acquisitions and the development of new centers staking claim to the dwindling green space. Entrepreneurs are looking for capital, and investors are looking for experienced entrepreneurs. Finders, brokers and other individuals acting as unregistered financial intermediaries are looking for both.

When most entrepreneurs and physicians hear the word securities, they conjure up images of Wall Street and publicly traded companies. They understand that Facebook’s stock and bonds are securities and that special laws apply to securities, but many do not realize that those same laws apply to their privately held urgent care business, as well as other healthcare entities raising capital or taking on investors.

As healthcare entrepreneurs and investors have come to understand, “ignorance of the law excuses no one.”  Recently a late stage start up, Neogenix Oncology was forced to file for bankruptcy because of their capital raising activities. Neogenix Oncology paid fees to third party unregistered finders for locating investors or buyers, which created financial liabilities from potential rescission rights for the buyers. Closer to home, ER Urgent Care Management, Inc mailed letters soliciting and obtaining investments in their company. Many civil suites, judgments and governmental enforcement actions for securities fraud followed.

These are just a few of the many pitfalls that an entrepreneur faces when raising capital. Enthusiastic entrepreneurs jump right into the money-making process and are unaware of certain legalities that they must follow. To help entrepreneurs out, Russell Weigel, a securities attorney, put together a book detailing the risks associated with raising capital.

“Part of the idea behind writing Capital for Keeps was to encapsulate my experiences and my knowledge, and give it back to the business community,” Weigel says.

During and after the great recession in 2008, Weigel noticed that displaced professionals and business people needed to find ways to make money. Many of them entered the entrepreneurial space, hoping to turn a profit. However, these new startup businesses needed capital, and the capital raising process is highly regulated. Thus, a large number of people unfamiliar with how the regulatory landscape works exposed themselves to its dangers.

“I saw that people entering into the entrepreneur space hadn’t been trained properly, and they were exposing themselves to the regulated securities regime,” Weigel says. “My book is basically a warning: If you don’t raise capital in a legally compliant manner, your financing effort can result in substantial personal loss.”

Entrepreneurs interested in joining the urgent care market face challenges with raising capital. Bank loans are hard to secure, and risk capital investors expect high growth and rapid exits. Raising capital through securities offerings is a popular option, but complicated securities regulations place severe limits on who can invest.

“All transactions must be registered at both the state and federal level, unless the entity seeking the investment funds can establish that the funding transaction is exempt from registration,” Weigel says.

Registration is a time consuming and expensive process. It must include a company’s financial statements and disclosure of all material facts of the offering and the business, and involves approval by the Securities and Exchange Commission (SEC) and/or approval by each state’s securities commission where each investor resides, in addition to expensive legal fees.

Much of the hassle of registration can be avoided by conducting and operating under a transactional exemption from registration. However, you must carefully assess whether or not the proposed financing transaction can be exempted from registration. If the solicitation for, and acceptance of, funds is not executed in a compliant manner, then you are selling unregistered, non-exempt, securities, which is illegal. This is where most entrepreneurs get into trouble. In the state system, people have been incarcerated for selling unregistered securities or for selling securities by an unregistered person, even when there is no allegation of fraudulent misconduct.

Incarceration is not the only penalty for illegally raising capital. Consequences vary depending on the type of plaintiff: a government regulator, a federal or state criminal prosecutor or an investor. When the plaintiff is a regulator, the consequences often involve civil money penalties, rescission of the offering (return of funds received with statutory interest), and may include injunctive orders, officer and director bars, and bars from participation in offerings of penny stock. When facing a prosecutor, restitution and incarceration, as well as fines and forfeitures, are the usual consequences. When facing an investor, rescission of the investment or a class action for damages is usual. All of these scenarios involve claims of individual liability of the executives or entrepreneurs involved because the corporate veil does not protect against such claims. Collateral consequences can be more damaging, depending on your perspective.

“These kinds of suits most often involve claims of misrepresentation and fraud. In our internet era, such lawsuits often get publicized, and can harm someone’s reputation,” Weigel says. “The potential for professional damage or reputation damage is often higher than the money risk because internet publicity is hard to escape and will remain published indefinitely.”

Weigel says that entrepreneurs raising capital often have a false sense of comfort because they haven’t heard of someone getting in trouble for doing it incorrectly.

“A lot of people think that prosecution only happens to those that are really bad, and/or engage in egregious misconduct,” Weigel says. “State securities laws enable an investor or a state regulator to establish a fraud claim based on negligent behavior alone, and that claim can lead to criminal prosecution using the same standard of negligence. This is probably the most shocking thing for entrepreneurs who are raising capital to grasp – the possibility that negligent behavior can be criminalized.”

While securities laws are hard to navigate, Weigel does not want this to discourage entrepreneurs. He says that for the general welfare of this country, entrepreneurship is necessary.

“We have to have people raising capital for their businesses, taking risks, and having those businesses succeed,” Weigel says. “Regulators tend to be overzealous in the protection of investors, losing site of the fact that there has to be a balance. Companies have to be able to raise capital; not everyone can start up, grow organically, and not need any outside funding.”

The group of entrepreneurs that entered into business in the last five years didn’t have the luxury of bank lending to finance them. The only choice was to seek investors willing to risk their venture capital in startup enterprises. If you go to a bank, a bank transaction would be straightforward. With that opportunity not available, you really have to go and seek money from the public. Many people are starting to do that unknowing of the regulatory risks that they’re exposing themselves to. The lack of bank financing has made the investment market the only option. That’s a dangerous situation for someone who’s not savvy in this area.

Weigel says that most entrepreneurs don’t know what to look for when assessing their own risks, and that nobody has told them the risks they they’re exposing themselves to if they do it incorrectly. That’s why it’s important to completely understand the legalities of securities laws when raising capital, as well as who can raise capital and how they can raise it. Books like Weigel’s Capital for Keeps can help keep entrepreneurs on the right track and avoid lawsuits.

Capital for Keeps is available online at CapitalForKeeps.com and will be available at Amazon.com and all major book retailers as of January 20, 2015. Russell Weigel also welcomes any questions. You can contact him at info@investmentattorneys.com or through the website InvestmentAttorneys.com.


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