You have a great idea, which your business experience and instincts tell you can be wildly successful with some good marketing. Your main problem? You are short of money. You don’t want to borrow the money, nor do you dare ask your spouse to put up your home for collateral. Your solution is to raise enough money from other people to finance the venture.

You know a lot of people, and they know a lot of people. So you think you can raise the funds from your personal network of friends, business acquaintances and relatives. You know you could get a better return for Aunt Tilly’s retirement money if she could only be convinced to invest it in your venture. You have absolute confidence in your idea, assurance of its success, and you aren’t going to need many investors to get started. So, getting this money shouldn’t be a big deal and certainly shouldn’t require some stuffed-shirt lawyer to document this to death, right? After all, what’s so complicated about raising money and selling a few people a piece of a sure-fire business idea?

You are now venturing into the minefield of securities laws. You step wrong, and you blow yourself up. Your eternal optimism has helped in your other business successes. And many times you’ve accomplished your goals without crossing every “t” and dotting every “i”. But unbridled optimism and lack of a map through the securities minefield can definitely be harmful to your financial health. For your investors’ protection, as well as your own, you need to step very carefully. Raising money like this involves far-reaching and highly complex federal and state laws and regulations. It also involves great potential risk for you.

Compliance with securities laws involves two principal considerations: first, whether you have to register or file with any governmental entity; and, second, what disclosure you must make. Some people wrongly assume that you don’t have to worry about anything if you raise money from just a few people. That’s wrong. The number and type of investors may not require a formal filing or registration, but you still have a disclosure requirement. What does that mean? Principally, it means that you can’t make any misstatement or any omission of a material fact which would limit the potential investor’s ability to make an informed decision whether to purchase or invest in your business.

Translated, that means you tell a potential investor everything, both good and bad, that you would want to know if you were going to write a check from your life savings. And you can’t wait for the investor to ask. If there’s something the proposed investors should know, you must tell them up front.

In deciding how much money you need to raise, you would typically formulate a budget, then add on any unanticipated expenses. Likewise, the money you’re raising can include money for accounting and legal fees to ensure securities law compliance. Part of the money, then, the investors are putting up is used to pay for the very protection both you and they need. So why not do it right?

There are other practical reasons you want to comply with the law. First, you don’t want to be in violation of the law.    Second, you don’t want to bring an unhappy or uninformed investor into your business who will become a constant worry or irritation for you. Third, don’t forget that securities violations can in many cases result in criminal prosecution. Finally, even if your actions are well-meaning and are not criminal, you can be faced with civil liability in favor of someone who can prove you violated the law when you got that person involved. This, the risk of civil liability, is the most common exposure you could face and could go far beyond hurting your business. Regardless of your company structure, you’re not protected from personal liability if you have knowledge or reasonable basis to know of the facts that prompted the securities law claim. If you think Plaintiffs’ attorneys may want to sniff around your business, they will be ecstatic if you hand them a slam-dunk securities claim against both you and the company.

In raising money from other people, it’s good advice to follow the old Fram oil filter commercial. You may remember: the mechanic standing over the smoking automobile engine holding up an oil filter and saying, “You can pay me now or you can pay me later.” Pay now and pay a professional who can structure the arrangement to comply with law and help you sleep better at night. As is true in any business activity, but particularly involving securities laws, if you’re going to do it, you need to do it right. If you’re not going to do it right, don’t do it.