Why you need to be honest when looking for investors

Investing always comes with some risk. That is the counterbalance to the benefits investing can provide if things go well. Yet, as someone looking for investment from others, you have a duty to help potential investors understand that risk.

You are the person with the inside knowledge of your company, and the law requires you to share that. If you hide things or misrepresent them, you could face charges of fraud.

Complying with SEC rules

The Securities and Exchange Commission (SEC) is the body in charge of setting the guidelines as to what information listed companies must disclose to investors. It is also in charge of checking companies comply. If you do not understand these guidelines, it is best to get legal help to do so before proceeding to seek investment.

Examples of what you must disclose include:

• Financial data: Be honest. Do not be tempted to make the books seem better than they are.
• An analysis of strengths, weaknesses, threats and opportunities: An investor needs to know how solid their investment would be.
• Any significant changes on the horizon: Imagine investing in Apple only to discover that Tim Cook handed in his notice the week before.
• Any ongoing or impending legal action involving the company: Intellectual property disputes, problems with the environmental agencies, and customer lawsuits are some of the possible actions that could affect prospects.

There is a lot of information to prepare before seeking investment, and it is easy to overlook something or decide it is too insignificant to mention. An investor who does well might not care, but if things do not go as well as they hoped, you may find yourself needing to defend your actions. Legal guidance can help.