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April 18, 2023

Fundraising Compliance and Risk Management FAQs

Here are answers to some frequently asked questions about fundraising compliance and risk management for early-stage companies.


Q1. When a company raises money from investors, is it considered a sale of securities?  

A1. Yes.  Early stage raises commonly utilize legal vehicles such as SAFEs, convertible promissory notes, private placement memoranda and preferred stock purchase agreements. All of these vehicles are securities.


Q2. What drives compliance in the sale of securities?

A2. Federal securities laws, federal tax laws, state securities laws, state corporate law, federal and state court opinions, as well as regulatory opinions.


Q3. What are the possible consequences if a company sells securities without being compliant with securities laws?

A3. Unwinding of investments, civil damages, civil penalties, criminal fines or jail time.


Risk Management

Q4. When a company sells securities, what drives risk management?  

A4. Compliance with securities laws plus: a) due diligence by investors; b) desire to avoid litigation between founders, companies and service providers, companies and investors, and founders and investors; c) preserving existing and potential customer relationships; and d) desire to avoid loss of reputation and market opportunities.


Q5. What are the risks if a company doesn’t provide information or documents to investors in due diligence?

A5. A lawsuit by investors if material facts were withheld, plus the possibility of federal or state regulators filing lawsuits as well.


Q6. What are the consequences for a company if its founders or the company itself is a party to litigation?

A6. Funding may cease, attorneys’ fees, potential damages if the company loses the litigation, general negative market sentiment potential that might interfere with new or existing customer relationships.


Fundraising Activity

Q7. What type of company activity should trigger a compliance and/or risk assessment?

A7. The sale by the company of any securities; the granting of stock or options to service providers (eg pursuant to an EIP); any agreements between the founders, investors, service providers and the company related to equity; IP ownership or transfers of any kind; any company activity requiring the consent of the board of directors or shareholders; any agreements that create duties and/or responsibilities on the part of the company.


Q8. What responsibility does a company have to make sure its investors are accredited?

A8. If a company is raising capital from accredited investors, an accredited investor letter may be used so that the investors self-certify their accredited status.


Q9. How do the federal and state exempt filing requirements differ?

A9. The SEC does not charge a fee to file a Form D but most of the states do.  While those fees differ, the form itself is the same for each filing.


Q10. Can an Equity Incentive Plan pool of shares out of which a company give restricted stock and options be unlimited?

A10. No.  In order totake advantage of the Rule 701 exemption, a company may give out no more than15% of its authorized and issued shares.


Q11. Is it the company’s responsibility to file an 83belection for service providers, including employees, when it gives out restricted stock pursuant to vesting schedule?

A11. No.  It is the service providers responsibility to file the election within 30 days of receiving the grant.


DIY Considerations

Q12. What are the risks of using Startup Platforms (ie monthly subscription services) that will generate documents for your fundraising transaction?

A12. Typically, these services are short on good advice for founders.  Such platforms often try to shoe-horn every deal into a few types. Not all funding transactions are the same.  In fact, just about all of them are slightly different based not only on the details of the current raise but of prior and future raises.  It’s important for founders to have a solid understanding of how their current cap table looks and the dilutions scenarios for the current and future rounds before finalizing the terms of an offering.  Startup Platforms aren’t great at taking a wholistic approach to fundraising transactions because most are based on a cookie-cutter model. This can lead to mistakes, like loss of voting control too early due to premature dilution.


Q13. Are all Simple Agreements for Future Equity (SAFEs)the same, whether a founder gets them from a Startup Platform or a Law Firm for free?

A13. No.  While the concept of a convertible security without a term or interest rate is common to all SAFEs, there are a number of terms that can differ, including whether the conversion calculation is “pre-money” or “post-money” and how many convertible securities issuances are outstanding.  Such varying terms can mean the difference between being able to get VC funding or not, especially if the VC is not able to retain a majority of preferred shares in a Series A.


Q14. What are the risks of using a cap table management service?

A14. While there are a number of reputable services that do a fine job of keeping track of your cap table, most fall short when it comes to modeling dilution scenarios for founders, especially when the modeling needs to include option grants and warrants that have not yet vested, as well as multiple rounds of convertible securities with differing terms.  The result is inaccurate modeling, which can lead to miscalculated dilution, as well as wrong investor share calculations.  Worst case, investors sue the company for misrepresentation with respect to their ownership interests if they have been shown versions of a cap table where they own more shares than is actually the case.  In addition, the cost of some of the cap table services can be high, especially when a company has many investors making up each round.


Q15. Do Incubators and Accelerators take care of all of a co-hort company’s legal and compliance needs when the company is going through such a program?

A15. While many such programs have lots of resources available to founders, the legal and compliance needs of a company are often glossed over or not addressed properly. Time with program-affiliated attorneys is usually limited and other staff are often not experts in all of the legal and compliance issues founders need to tackle when planning and executing a round.  Companies often still need significant legal and compliance help after they have left these programs.


Afissio helps founders plan for and close private funding rounds, from pre-seed to Series A.  For more information about the legal and compliance aspects of fundraising, please email us at

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