THE COSTLY MISTAKE FOUNDERS MAKE BEFORE THEY EVEN TALK TO A LAWYER
Consultants and advisors are often deeply involved in a company's growth story well before legal counsel enters the picture. That order of operations makes sense in most cases. What tends to cause problems is not the sequence itself, but what happens in between, when a founder moves ahead and structures a raise before anyone with securities law experience has looked at it.
This article is written for consultants and advisors who work with companies raising capital or scaling, and it is meant as general education, not advice about any specific client, deal, or engagement. Nothing in this article should be read as legal advice, and it does not create an attorney-client relationship between the reader, any client of the reader, and Kaelus Law, PLLC. Every company's facts are different, and legal counsel should be engaged directly to evaluate a specific situation.
THE PATTERN THAT SHOWS UP AGAIN AND AGAIN
Founders are resourceful, and that is generally a strength. It becomes a liability in one specific place, when a founder uses a template, a founder friend's documents, or a generic form found online to structure a SAFE, a convertible note, or a Reg CF offering, and only brings in counsel once investors are already involved or money has changed hands.
By that point, the choices already made, which exemption was relied on, whether required filings were made, how investor verification was handled, are often difficult and sometimes expensive to unwind. The mistake is rarely the founder's judgment. It is the timing.
THREE VERSIONS OF THIS MISTAKE CONSULTANTS SEE MOST OFTEN
1. The wrong exemption for the raise.
Different exemptions, such as Rule 506(b), Rule 506(c), and Regulation Crowdfunding, carry different requirements around investor eligibility, general solicitation, and disclosure. A founder who picks an exemption based on what a template happens to reference, rather than what actually fits the company's investor base and fundraising approach, can end up out of compliance without realizing it until later.
2. Filings that were assumed to be optional.
Certain filings, such as a Form D notice or applicable state blue sky notices, are tied to specific exemptions and specific timelines. Founders relying on templates or informal guidance sometimes assume these steps are optional or can be handled later. In many cases they cannot, and missing a deadline can affect the exemption's availability.
3. Investor verification handled informally.
For raises that require confirming an investor's accredited status, the method of verification matters as much as the outcome. Founders sometimes treat this as a formality, collecting a signed statement and moving on, without realizing that certain exemptions require a more substantive verification process.
WHY THIS COSTS MORE LATER THAN IT WOULD HAVE COST EARLY
None of these issues are unusual, and none of them reflect poorly on the founder. What makes them costly is that they are generally cheaper and easier to fix before a raise is underway than after documents are signed or investors are already in. A conversation with counsel at the outset is typically far less expensive than restructuring a completed raise, addressing a compliance gap after the fact, or explaining a documentation issue to investors mid process.
WHERE THE CONSULTANT CAN MAKE THE DIFFERENCE
Consultants are often the first person a founder tells about a plan to raise capital, sometimes before the founder has decided on a structure at all. That position creates a natural opportunity, not to give legal advice, but to encourage a founder to loop in counsel before documents are drafted or investors are approached, rather than after.
This is generally a low friction suggestion for a consultant to make, and it tends to protect both the client relationship and the consultant's own credibility, since problems that surface later in a raise are rarely attributed to timing. They are usually attributed to whoever was advising the founder at the time.
Consultants who work regularly with companies raising capital may also find it useful to have a direct relationship with a securities focused firm, so that a quick early conversation is easy to arrange when a client first raises the idea of a raise. This is a separate topic from the general considerations above, and one worth a direct conversation if it is relevant to your practice.
FREQUENTLY ASKED QUESTIONS
1. What is the most common legal mistake founders make when raising capital.
Structuring a raise, such as a SAFE, convertible note, or Reg CF offering, using a template or informal guidance before involving counsel who can confirm the exemption and structure actually fit the company's specific facts.
2. Why does the exemption chosen for a raise matter.
Different exemptions carry different requirements around investor eligibility, solicitation, and disclosure. Relying on the wrong exemption can affect whether the offering was properly exempt from registration in the first place.
3. What is a Form D filing and when is it required.
A Form D is a notice filing associated with certain Regulation D offerings. Filing deadlines and requirements depend on the exemption relied upon, and missing a deadline can raise compliance concerns.
4. What are blue sky filings.
Blue sky filings refer to state level securities notice requirements that can apply in addition to federal exemptions. Requirements vary by state and by exemption.
5. What does accredited investor verification actually require.
Requirements vary by exemption. Some rely on self certification, while others require more substantive documentation or a third party verification process. The correct approach depends on which exemption the offering relies on.
6. When should a founder talk to a securities attorney about raising capital.
Generally, before a fundraising structure is chosen or documents are drafted, rather than after investors are already involved.
7. Can a founder fix a compliance mistake after a raise has already started.
In some cases, yes, though the fix is often more time consuming and costly than addressing the issue would have been at the outset. The available options depend on the specific facts and the exemption involved.
8. Is a SAFE or a convertible note automatically compliant with securities law.
No. The instrument itself does not determine compliance. The offering still needs to rely on a valid exemption and satisfy any associated requirements.
9. How can a consultant help a founder avoid these mistakes without giving legal advice.
By encouraging the founder to involve legal counsel early, before a structure is chosen or investors are approached, rather than evaluating the legal questions directly.
10. What should a consultant do if a client has already started a raise without legal counsel.
Encourage the client to involve counsel as soon as possible so any issues can be identified and addressed while they are still manageable, rather than waiting until later in the process.
This article is provided for general informational purposes only and does not constitute legal, financial, or investment advice, and does not create an attorney-client relationship between the reader, any client of the reader, or Kaelus Law. Every company's circumstances are different, and consultants and advisors should recommend that clients consult qualified legal counsel directly before making capital-raising or financing decisions. Attorneys at Kaelus Law are licensed to practice law in certain jurisdictions within the United States and this content is not intended to constitute advertising or solicitation in jurisdictions where such content would not comply with applicable rules.
Kaelus Law
Precision. Alignment. Resolution.
Contact us at 833-900-7890 or info@kaeluslaw.com for more information.
