For those seeking capital from investors, it’s important that every conversation with venture capitalists stay rooted in solid truths. You may not remember every statement you made to them, but if their investment fails to pay out, they will remember each time you misspoke.
Following is some more pertinent information about avoiding any honest mistakes that could be manipulated into fraud charges.
Avoid misleading conversations
Both federal and state securities laws are designed so that investors are given complete and accurate information before they ever invest in a business proposal. One can mislead without outright lying, for example, by not pointing out the risk factors associated with the investment.
Disclose all risks
Investors should do their own due diligence, of course, but they deserve to be presented with truthful statements about profits and losses and not seduced with rosy projections that can never match up to the results.
Use restraint in your language
Making comments like, “This is a great way to double your money,” can definitely come back to bite you. While all investors want to make money, not all investments turn a profit. Comments that paint too rosy a picture are problematic if litigation arises.
Common pitfalls to avoid
It’s easy to get overexcited about an investment’s potential. After all, this idea has been your baby for a long time before you got the funds to take it to the next level. You want to create a level of excitement in investors without crossing the line about future pay-offs.
Why the stakes are so high
Depending on your industry, those accused of misleading their investors can face justice through civil litigation and/or regulatory fines. In some especially egregious cases, criminal charges could even arise.
Founders and company executives could potentially face personal liability, thus affecting the company’s ability to fundraise for future capital. That’s not a good look for any CEO or business executive. To avoid these problems and any future legal disputes, make sure that you run any pitches past your legal counsel to identify any risky language that could misconstrue your message to investors.