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Funding My Business by selling shares on the Internet

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Dear Business Guy,

I want to open a Restaurant and need around $150,000.  I have talked to my bank, but that did not go well.  They will only fund me with a home equity loan.  I was thinking about making my business a corporation and selling off 49% of the company with shares on the internet–EBAY.  How do I get started?

Well, that sounds like a good plan.  But because of federal regulations, once you start selling shares in your company over the internet you are regulated by the Securities and Exchange Commission (SEC).  This is very costly and time consuming.  So most small businesses choose not to go this rout.  You will have to hire attorneys and accounting experts to get approval with the SEC.  Also, your company is so small it will not be able list (be bought and sold on) an exchange.   Exchanges such as the New York Stock Exchange have their own requirements.  The ability to buy and sell in a short period of time, called liquidity, is important to potential investors.   There are also restrictions on how you can solicit investors.

What you may have heard about is the CrowdFunding program promoted by former Senator Scott Brown and was passed in the JOBS Act..  This would make it possible for you to raise money by selling off stakes in your business.  But as of the writing of this article, the SEC has not set down the regulations for this option.  For a discussion of this topic and a list of potential “crowdfunding portals” see this page on OCBusinessStartup.com 

Another option is borrowing money from sites like  lendingclub.com and prosper.com.  These sites let you borrow money for your money from a group of lenders.  They vet their borrowers for credit history.

Although this topic is outside our scope of knowledge, you have a few opportunities that you can look into.  If you have a few investors who believe in your business, you can for a partnership.  You can structure it so that you are the Master Partner so that you do not loose control of your business.  The key is to write up a partnership agreement rather than doing things on a handshake.  That way everyone knows what they are expected to contribute and what happens if the business goes South.  Along these same lines, you should consider forming an LLC or Type S corporation.  And you may want to consider incorporating in Nevada.  For a brief discussion of how to organize your business, see this page http://startup.ocbusinessstartup.com/wp/organizing-your-business/   You may also want to check out the books highlighted on that page at your local library.

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