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Business Credit Articles and Resources

How to Bring Investors into Your Business

By Garrett Sutton, Esq. & Gerri Detweiler

How do you bring investors into your business? Not the sympathetic Mom and Dad kind of investors — those who love you anyway — but rather the hard-nosed, serious investors who expect quite a lot.

As the author of the book Million Dollar Women, about women entrepreneurs who have created multimillion dollar companies, Julia Pimsleur shares three lessons with other entrepreneurs trying to raise money:

1. Take Risks.

“Women sometimes have a tendency to play it safe, but to raise money you need to embrace the risk involved and move forward despite the fear. No one can know for sure whether their business will be a success,” she says. “I may not have all the answers but I know not to be intimidated about that.” Men can benefit from that advice, too!

2. Know Your Numbers.

“You should have a firm grasp of the key parts of your company’s finances,” she insists. “It wasn’t the part I loved best but getting comfortable with talking about margins, COGs and EBIDTA has helped me tremendously.”

3. Treat Investors as Partners.

In her first two years in business, Julia sent her investors full 10-page reports each quarter. “Keep people interested and informed and they may become bigger investors,” she says.

What About Securities Laws?

The securities laws, as they are called, are known to sophisticated investors. They know that you have to discuss risk factors (problems the company may face in the future) and that you can’t make promises as to performance (otherwise you may be held to those promises).

Your friends and family may be just as likely to not understand the requirements of the securities laws. They will ask: “Why are you scaring potential investors away by overly drawing attention to all these risks? And why aren’t you writing about how well you are going to do for everyone?”

Because you can’t, you will tell them. The securities laws say not to, and you’ll get in trouble if you do.

The securities laws are very strict about disclosure. You’ve got to allow a potential investor to make an informed decision. So you’ve got to tell them everything—the good, the bad and the ugly.

You will tell them up front what the risks are of investing in the company. As well, you can’t get their hopes up by making wild promises about glorious returns. That may never happen, and you know it.

So you’ll tell them the truth; that you will do your best but can make no guarantees. In this light the securities laws make sense: A federal requirement to give people the information they need to make a reasoned decision.

Over time, however, the securities laws got so restrictive that they prevented the formation of capital. For an economy to grow and succeed, new companies need to be able to acquire new monies to pursue new opportunities. When the securities laws severely restrict the flow of information on such opportunities the result is that capital formation and job creation suffer.

To alleviate the problem, Congress passed the JOBS Act in the spring of 2012. The intent is to open up the securities laws to allow for greater investment in new and development
phase companies. (For more information on this read Chapter 15 on Crowdfunding from by book “Finance Your Own Business” and this Crowdfunding article updated with recent changes.)

With the advent and implementation of these new securities laws, many more companies will be financing with equity. That is, they will be bringing money into the company by selling stock (or shares) in the company.

You may find yourself in a position to invest in one of these companies. What lies ahead will help you as both a business owner raising money for your company and as well as an investor looking into opportunities with other companies.

For greater insight into professional investors read our book, “Finance Your Own Business” and these related articles on Angel Investors and Venture Capitalists and crowdfunding.

Finance Your Own Business Book01.29

Protect Yourself from CPN Number Scams

by Scott Cooper

There are countless services in the marketplace that aim to protect and improve your credit. While many of them can be helpful, some can be dangerous. One of the dangerous, but popular services being offered are credit privacy numbers. These are also known as credit profile numbers or CPNs.

What are CPNs?

CPNs are nine-digit identifying numbers, which promoters claim can be used in place of a social security number in certain situations. Credit repair companies cite the 1974 U.S. Privacy Act’s provision allowing an individual to withhold their social security number when a federal law does not require that they provide it.[1]

While these companies use this statute to justify CPNs, there is no law explicitly allowing their use. Companies offering CPNs claim that they are a fast and simple way to repair your credit, secure new lines of credit and protect your identity. Regardless of what these companies may promise, the Social Security Administration classifies CPNs as a form of social security number misuse, and warns consumers that they are illegal.[2]

Can CPNs clear your credit history?

By no means will a CPN give you a clean slate if you have bad credit. If you are trying to escape bad credit by using a CPN, creditors can still find your credit history through your name or address history.

Your social security number isn’t the only piece of information creditors will use to identify you. While you are not legally obliged to provide your social security number when applying for credit, the creditor is also not required to grant your request for credit.  A creditor can deny your application if you chose to withhold your social security number, or provide a CPN. Additionally, you are still legally responsible for all debts incurred prior to obtaining a CPN as well as all debts incurred on your CPN.

Controversies over CPNs

The rules surrounding CPNs reside in a legal grey area. The U.S. Privacy Act states that an individual cannot be mandated to provide their private social security number, and the FBI claims that CPNs can be used for some credit reporting purposes in accordance with federal law.[3]  On the other hand, the Social Security Administration claims CPNs are illegal. Regardless of what the FBI or Social Security Administration say about CPNs, the industry is ripe with scams.

With companies offering CPN packages costing up to $3,500, it is important to stay vigilant against promoters who would harm you for their personal gain.

How to identify a fraudulent CPN practice

A company promising to fix your bad credit through a CPN is the first sign of a deceptive practice. The Federal Trade Commission identifies a number of signs that indicate a credit repair scam[4]:

  • Insist on payment before they do any work on your behalf
  • Tell you not to contact the credit reporting companies directly
  • Tell you to dispute information in your credit report that you know is accurate
  • Tell you to give false information on your application for credit or a loan
  • Don’t explain your legal rights when they tell you what they can do for you

Is Using a CPN Illegal?

Companies selling these numbers claim that CPNs are issued by the Social Security Office, so I decided to put this to the test. I called my local Social Security Office, and after speaking to representatives I was told they do not provide CPN applications. Many of these companies will insist that what they are providing is legal, but oftentimes they are selling stolen social security numbers. In some instances they are taken from children or people who are deceased. By using a fraudulent CPN you could unknowingly be committing a federal crime that is punishable by up to 30 years in prison. Additionally, using any number, including a CPN, as a replacement to a social security number is another federal crime punishable by up to 5 years in prison.

Prison Time From CPNs

If you haven’t been scared away from CPNs yet, consider the case of David Day. In 2013, 18 people, including Day, were arrested for taking part in a social security fraud scheme involving CPNs. The providers of the fraudulent numbers as well as people who had purchased them were among those arrested. These people used their CPN numbers to get a variety of loans and credit lines. Day, who was both a user and seller of CPNs, was sentenced to over 7 years in federal prison.[5] This case makes clear that the federal government does not take social security fraud lightly.

Avoiding Fraud

The best way to avoid scammers and jail time is to simply avoid CPNs altogether. The entire CPN industry operates within a grey area of the law. The best way to ensure that you are not getting a fake or illegal product is to seek other credit remedies. On their website, the Federal Trade Commission provides a number of verified resources for consumers seeking help with credit and debt relief.[6] Credit repair companies have no magic solution to fix bad credit that you can’t do yourself.  Only time and good financial behavior can improve your credit profile.

abc of getting out of debt 60

For more steps on how to improve your credit, read Garrett Sutton’s book ABC’s of Getting Out of Debt.







Scam Proof Your Assets 3d graphics 65Or, for more information on how to protect yourself from scams, read Garrett Sutton’s book Scam-Proof Your Assets.

Scott Cooper is a political studies major at Colby-Sawyer College in New London, New Hampshire. He wrote this article while a legal intern at Sutton Law Center.

[1] 5 USC 552a

[2] Office of the Inspector General. “Field Hearing on Social Security Numbers and Child Identity Theft. 2001.

[3] Federal Bureau of Investigation. “2008 Mortgage Fraud Report”. 2008.

[4] Federal Trade Commission. “Credit Repair Scams”.

[5] “Indianapolis man sentenced in identity theft scheme”. The United States District Attorney’s Office: Southern District of Indiana. Nov 25, 2015.


What are Angel Investors and Venture Capitalists?

By Garrett Sutton, Esq. & Gerri Detweiler

Angel investors and venture capitalists (VCs) both provide early funding. The similarities end there. VCs, being nicknamed “vulture capitalists,” are some tough birds. They have to be. They take on risks where even angels fear to tread.

The differences between Angel investors and VCs can be clarified in this example conversation. Three friends were meeting in a coffee house frequented by entrepreneurs and investors. Aubrey had made some money on two difficult but rewarding startups and was now looking to invest her own money into new companies run by others. Victor was a hard charging venture capitalist with a large VC firm. Edgar was an entrepreneur working on a new startup.

“I like what I see,” said Victor, the VC, starting right in. “We can begin the due diligence process next month to fully investigate the feasibility.”

“And that takes how long?” said Edgar.

Victor replied, “At least six months. We’ve got to check everything out.”

“Our angels can decide in two meetings,” said Aubrey.

“That’s more like it!” said Edgar. “We’ve got to be ahead of the market. Waiting six months doesn’t work for our plan.”

“But we can bring the money you need to the table,” said Victor. “I see you needing at least $3 million to fund this.”

“No, $3 million builds the company,” said Aubrey. “That’s for later. You need $300,000 to build the product. And you need to do that now. Our angels clearly see that.”

“Well, we don’t do such small amounts,” said Victor. “It costs us almost that much to do our due diligence research on you.”

“If I went with your VC firm,” Edgar asked, “what else would you need?”

Victor said, “A seat on the board of directors and control over future funding rounds. We will have several industry experts working alongside your management. It is all detailed in
our 90 page deal memorandum.”

Aubrey smiled, “Is that all?”

Edgar laughed. “What do angels need?”

“A few hours of your time. We don’t want a seat on your board and we’re not going to put experts into your company. We don’t want to build a company. Let the VCs do that later.
We just want to prove that the product is viable.”

Edgar said, “And the legal documents…”

“Are a few pages,” said Aubrey quickly. “There is nothing complex about this.”

“Yes there is,” said Victor.

“Not really,” said Aubrey. “We’ll get Edgar what he really needs, a reasonable amount of money to prove up the product. We take no seat on the board, don’t require control of later
rounds and don’t build companies like you VCs do. We just get the idea off the ground.”

“I get it,” said Edgar. “We’ll start with Aubrey’s angels. When the product takes hold, we’ll build the company with Victor’s VCs. Thanks.”

And that briefly identifies the basic differences between angels and VCs. Small investments vs. large amounts of capital. Quick decisions vs. lengthy due diligence. Hands off approach vs. board seats and control. Simple terms vs. complex legal documents.

Each has their place in the economic ecosystem. If your product is proven, angels may not be the right choice as they aren’t as well funded or experienced (or even interested) in
building strong company platforms. And know that you can have angels participating in VC rounds and VCs acting as angels in early rounds. Just be careful that the VC in the angel round doesn’t act like a VC. When you want flexibility and they are headed towards formality, control problems can arise.

It has been reported that it took only $1 million to come up with Facebook’s operating system. It took many millions more to build the company, its systems and its talent pool. Angels can give a product life. VCs are the Seabees, akin to the U.S. Navy Construction Battalion (CBs or Seabees) they build whole enterprise infrastructures on the fly while under fire. It can be useful to have both teams on your side.

Finance Your Own Business Book01.29Both angels and VCs will investigate a potential candidate for funding the process. Known as due diligence, this can be cursory or comprehensive depending on the firm. A due diligence checklist of items to be considered is found in Appendix A of our book, Finance Your Own Business.

5 Step Checklist to Picking a Successful Business Name

Could a business name affect your personal liability, business credit or even your ability to run your business at all. The answer to all the above is, “yes.” Read on to determine if your business name sets you up for success, or trouble down the road.

1. Is the Name Available in All States You Do Business In?

You cannot use the name of a corporation, LLC or LP that is already in use and registered with the state. If you’re going to organize in one state and qualify to do business in another state, the name should be available in both states. A corporate name should not be confused with a trade name or trademark.

2. Is the Name Trademark Clear?

Just because you can incorporate under the name ‘Coca Cola, Inc.’ in your home state doesn’t mean you could use the name in your trade or business. There is a big company in Atlanta that would put an end to that (and would be well within their rights to do so). So while you may be able to incorporate using one name, you will not automatically be protected in using your corporate name as a trade name, unless you file for trademark protection. See if someone has already trademarked it by doing a search at, the website for the U.S. Patent and Trademark Office. You don’t want to use a name that someone could (rightfully) demand you stop using because it infringes on their existing trademark. We also offer a free report on this issue, “Winning with Trademarks.”

3. Will the Name Affect Your Business Credit

Please choose your business name carefully! In our experience there are certain types of names that should be avoided for business credit building purposes. These include names like
XXX Holdings, XXX Mortgage, XXX Properties, XXX Real Estate, and the like. (It is not the X’s we care about but the words Holdings, Mortgage, Properties and Real Estate.) That industry is considered a high risk industry and with certain types of business credit, you are judged by the company you keep.

4. Using Your Own Name is a Poor Exit Strategy

Please try not to choose your own name as the name of your business, either, unless you really don’t care about growing your business to a point where you can cash out. Paul Newman
and Martha Stewart aside, owner named businesses can sound less professional. Which sounds more established: Kevin’s Landscaping, or Leisure Landscapes?

And if you do decide to sell the business do you want a new owner potentially dragging your good name through the mud? Take some time to think through your business name
and bounce it off some other businesspeople and potential clients. Run it through several search engines.

You don’t want to be stuck with a name you may later outgrow. A good name with an established reputation and clientele, trademark protection and domain names, is truly a
business asset.

5. Don’t Forget to Add These Letters to Your Biz Name

It is important to provide the public with notice that your business is a corporation, LLC or LP. To that end, you’ll use Inc., LLC, or LP, for example, on your letterhead as well as on all of your brochures, contracts, checks, cards, and the like. This is sometimes referred to as giving “corporate notice.” If you are incorporated but sign your contracts as ‘Joe Jones’ instead of ‘Joe Jones, President of XYZ, Inc.’ someone could assert they thought they were doing business with you personally (unlimited liability) instead of with a corporation (limited liability). Provide corporate notice wherever you can.

Courts Strike Down Another IRA Investment Scheme

We’ve warned you about risky investments using retirement monies. We’ve said the courts would come down on them.

But the latest case, combined with new Department of Labor regulations, should have scheme promoters thinking about leaving the country to avoid litigation and prosecution.

The newest case is Thiessen vs. Commissioner (of the IRS.) The Tax Court decided the matter on March 29, 2016. James and Judith Thiessen were told by a promoter that they could use their Kroger grocery chain retirement plan monies to buy a metal fabrication shop. The case’s outcome was a disaster for the Thiessens.

A “Colorado CPA” (although the court identified him by name we will use quotation marks for the “professional”) advised the couple to roll their Kroger retirement accounts into self-directed IRAs.

The “Colorado CPA” formed a Colorado C corporation and directed the Thiessens to use their self-directed IRA’s to invest in the new C corporation. In 2003, James transferred $384,000 and Judith transferred $47,000 to buy shares in the new corporation. The “Colorado CPA” confidently told the Thiessens that the IRA rules allowed for them to invest in the shares of the C corporation.

To start the transaction the Thiessens placed a down payment of $60,000 into escrow. The money came from their personal bank account. To complete the financing the Thiessens provided a $200,000 promissory note to the seller, which they personally guaranteed.

It wasn’t until 2010 that the IRS learned of the facts of the transaction. By depositing non-retirement monies into the deal and personally guaranteeing the note the Thiessens engaged in a prohibited transaction. A prohibited transaction doesn’t sound good, and it isn’t.

Mixing your personal and retirement assets is prohibited. The IRS can treat such a transaction as an early (and penalized) withdrawal. They did so here. The IRS demanded $180,000 as a penalty. The Thiessens fought the assessment.

The Tax Court agreed with the IRS. They stated that the Thiessens exercised discretionary control over their IRA monies. The investment into a C corporation was not acceptable when the corporation was acquiring assets for the Thiessens’ use. Investing in Apple stock, for example, was acceptable. But investing in an apple farm you managed was not allowed. The metal shop the Thiessens operated was not a passive, public stock investment.

Importantly, the Tax Court cited the 2013 case of Peek vs. Commissioner in which two unrelated taxpayers did the same type of transaction. Incredibly, the Tax Court specifically pointed out that the Peek transaction was put forth by the same “Colorado CPA” who advised the Thiessens!

Bigger Issues Ahead for Scheme Promoters

I wonder how many other clients of the “Colorado CPA” are now not sleeping at night? Is the IRS looking into transactions that he – and other promoters – have put unsuspecting people into?

All the penalties to be gained from checkbook IRAs amounts to easy money for the IRS. (A recent article in the Journal of Accountancy estimated over half of all self-directed IRA accounts are not in legal compliance.) Will there be class action lawsuits against such promoters as penalized tax payers realize they have been hoodwinked by those with a careless disregard for the law, or no knowledge of the law at all?

The Department of Labor has just put out new regulations requiring those who provide investment advice on IRA transactions to follow a fiduciary standard. This means they must act in the clients’ (and not their own) best interests.

The financial industry is up in arms about these new rules. (“Act in my clients’ best interests!?! There is no way I can possibly do that!”) I will tell you that as an attorney I am held to a fiduciary standard, and it is not hard at all. It actually makes things much easier. There are no questions about it. The client comes first.

But these IRA promoters are in for a rude awakening. Even if they are not licensed, or have no specialized training (which many do not), the new rules apply to them. If someone makes a recommendation or gives advice for direct or indirect compensation on IRA plans and rollovers they are held to the higher fiduciary standard.

Many promoters previously gave no advice on the complexities of the transaction and the frequent need for tax filings with the IRS. But, the days of ‘ignorance is bliss’ are over. Promoters can no longer say they were just providing education and ideas on IRAs. If they take any sort of fee (and they do), they must provide comprehensive impartial advice that is best for the client.

Impartial advice would be to stay away from risky retirement schemes.

Learn How to Fund Your Start-Up

For more information on the good and bad ways to fund your business and investments please see my new book, co-authored with credit expert Gerri Detweiler, entitled Finance Your Own Business.

Two Surprising Sources of Small Business Loans: Life Insurance Policies & Credit Unions

Entrepreneurs are typically resourceful when it comes to finding ways to pay the bills or finance growth, but these two sources of small business loans are often overlooked.

Borrowing Against Life Insurance Policies

If you have a life insurance policy with cash value (whole or universal life), borrowing against it should be easy. There is no credit check, the loan generally doesn’t have to be repaid (with caveats below), and the interest rate is usually low.

But there are a couple of possible pitfalls. One is that borrowing against the policy will reduce the benefit to your heirs if you die before the loan is paid back. Make sure you still have enough life insurance. If needed, supplement with a term policy.

The other drawback is that interest will be charged, and if you don’t pay it back, there could be serious consequences. You can instruct the insurer to pay the interest from dividends or from the remaining cash value of your policy, but you may not realize how high the balance has risen. If there is not enough cash value or dividends to cover the loan, your policy could lapse.

Even worse, you may find your owe taxes on the amount you borrowed—plus unpaid interest! Why? Because the insurer is giving you a loan with your insurance policy as collateral. (You aren’t really withdrawing the cash value of your policy; you are borrowing against it.) If you die and the proceeds cover the loan plus interest, your beneficiaries will receive anything that remains. But if the amount you owe (including interest) exceeds your cash value, or if you let the policy lapse or cancel it with a loan outstanding while you are still alive, you run into something called Cancellation of Indebtedness Income.

When you borrow money and don’t pay it back, the IRS considers that cancelled debt taxable income, and the total amount of “income” can include interest that accumulated, but was not repaid. So if you cancel the policy or let it lapse before you repay the loan, the IRS will expect you to include that amount in your income when you prepare your return. Forgiveness of debt is income.

To be safe, you’ll want to watch your policy closely. Make sure you are working with a knowledgeable agent who understands these risks, and consider paying the interest if failing to do so will put you at risk of owing taxes to the IRS.

Life insurance loans don’t show up on credit reports, however. In that sense, this can be an excellent way to borrow without affecting your credit scores.

Credit Union Loans

Credit unions may not be the first place you think of when you think of small business loans, but don’t overlook them.

Many credit unions make loans to small businesses in their community, and during the economic downturn, some were making loans to businesses that were being turned down by other financial institutions.

In addition, some credit unions offer smaller loans than some banks, and usually have very close ties to the communities in which they live and work. Some strive to lend to underserved or overlooked businesses. That makes credit unions one of the first places you may want to consider for a loan for your business.

Find out which credit unions you may be able to join at

For more information please see my book Finance Your Own Business: Get on the Financial Fast Track.

Finder’s Fees Now Allowed for Securities Offerings in Calif.

California Does Something Right!

Since I am so critical of California’s anti-business policies and bureaucracy, it is only fair that I notice and spread the word when they have gotten something exactly right.

So a tip of the hat to California’s legislature for passing Assembly Bill No. 667 and to Governor Jerry Brown for signing it into law. Raising money for entrepreneurs and real estate investors just got a whole lot easier in California.

Under most state laws you can’t pay a commission to someone for finding you an investor unless they are a licensed broker dealer. At the same time, most broker dealers (think Merrill Lynch or Charles Schwab) don’t want their broker’s putting investors into smaller deals. As a licensee you have all these fiduciary duties and obligations to comply with. There is too much risk investors will lose their money and blame the broker. The Charles Schwab’s of the world want no part of such aggravations. So you have this no man’s land where brokers have to be licensed to sell the deal, and because they are licensed they won’t sell the deal.

Enter California’s common sense legislation.

Within the securities world ecosphere there are people known as ‘finders’. They find money or deals and expect to be paid. If they raise $1,000,000 for your new company they want 10% (or $100,000) of what they raised. The problem is that, as mentioned, only licensed broker dealers can receive such commissions. Sometimes, with a wink and a nod, a finder will pretend to be an officer of the issuer (the company raising money) and will receive a ‘salary’ instead of a commission or they will provide ‘marketing services’ and receive an amount of money that is suspiciously close to the 10% commission, they would have received as a broker dealer.

Reason 1. “Finder” has been redefined

California’s law eliminated such machinations and gyrations. Section 25206.1 has been added to the California Corporations Code. It defines a “finder” as a natural person (not a company) who introduces accredited investors to an issuer who is seeking to raise up to $15 million in capital. An accredited investor is someone with over $1 million in net worth (exclusive of their personal residence) or one who makes over $200,000 a year (or $300,000 if they are married). So while the finder can’t introduce mom and pop investors, those aren’t the people the issuer wants to meet anyway. Even with the advent of equity crowdfunding, most offerings are geared towards accredited investors only.

Reason 2. The Finder’s role is clearly defined

The finder is limited in what they can do besides introducing the parties (which, if you are a finder, means less work for you). The finder can’t negotiate any of the terms, advise on the suitability of the offering, do any due diligence or handle any monies. In fact, the only disclosure a finder can make to a potential purchaser is the following:

  • The name, address and contact information of the issuer.
  • The name, type, price and aggregate amount of any securities being offered in the issuer transaction.
  • The issuer’s industry, location and years in business.

If that’s all you have to do then sign me up!

Reason 3. Get in the Game by Registering with the State

Actually, that is the first step: Signing up. Before engaging in any activities the finder must file a form with the California Corporations Commissioner. They want your name and address and a $300 fee.

Importantly, for each introduction the finder must obtain a written agreement signed by the finder, the issuer, and the person introduced or referred, disclosing the following:

  1. The type and amount of compensation that has been or will be paid to the finder in connection with the introduction or referral and the conditions for payment of the compensation.
  2. That the finder is not providing advice to the issuer or any person introduced or referred by the finder to an issuer as to the value of the securities or as to the advisability of investing in, purchasing or selling the securities.
  3. Whether the finder is also an owner, directly or indirectly, of the securities being offered or sold.
  4. Any actual and potential conflict of interest in connection with the finder’s activities related to the issuer transaction.
  5. That the parties to the agreement shall have the right to pursue any available remedies at law or otherwise for any breach of the agreement.
  6. That person being introduced is an accredited investor and that they knowingly consent to the compensation being paid to the finder.

The finder must keep all these notices for a period of five years.

Reason 4. Registration Protects the Issuer as Well

The issuer should make certain the finder is signed up with the state and exempt from needing a broker dealer license. If the person really isn’t a finder, the investor can sue the issuer for a rescission. This means the investor can rescind their investment and get back all of the money they put in, plus interest, from the issuer. The finder may be nowhere to be found, putting the issuer at risk not only for the money they received but the commission they paid out, too. Issuers must be cautious.

But aside from such concerns, the freedom to be able to pay a finders’ fee to a finder is a positive development. More money will be raised and more jobs will be created. California actually did something right.

For more information on ways to raise money for your business consider reading my new book, co-authored with Gerri Detweiler, Finance Your Own Business.

Learn How to Get on the Fast Track to Financing

Finance Your Own Business Book01.29Our book Finance Your Own Business: Get On The Financing Fast Track details the power of business credit, how to get an SBA loan, the secrets of micro lenders, the benefits of crowdfunding and more.


About the Authors

Garrett Sutton, Esq., author of Start Your own Corporation, Run Your Own Corporation, Loopholes of Real Estate, The ABC’s of Getting Out of Debt, Writing Winning Business Plans and Buying and Selling a Business in the Rich Dad Advisors series, is an attorney with over twenty-five years experience in assisting individuals and businesses to determine their appropriate corporate structure, limit their liability, protect their assets and advance their financial, personal and credit success goals.

Gerri Detweiler is the author of four books, including the Ultimate Credit Handbook (named one of the top five personal finance books of the year when it was released), and a media favorite quoted in publications like USA Today, The Wall Street Journal and featured on The Today Show and CNN. A credit educator since 1987, she’s served on credit reporting agency Experian’s Consumer Advisory Council twice.

SEC Finally Releases New Crowdfunding Rules

What the heck is crowdfunding? And why has the Securities and Exchange Commission (“SEC”), the government’s stock market watchdog, been so cautious about it all? Three years after the SEC was directed to come up with new crowdfunding rules, they finally delivered.

As to the first question:

Crowdfunding is derived from crowdsourcing. Wikipedia, the free encyclopedia, is an example of crowdsourcing, where the small editorial contributions from many people are leveraged into a bigger whole, a massive compendium of information. When you add money to the concept, you have crowdfunding.

There are three key players in a crowdfunding effort. First, you have the project initiator, the entrepreneurs who put forth the venture. Of course, you have the crowd, who will (hopefully) fund the project. And then you have the internet Funding Portal, which brings the two parties together.

With the passage of the Jumpstart Our Business Startups, or JOBS Act, in the spring of 2012, Congress sought to open up capital formation from smaller investors through crowdfunding. They directed the SEC to come up with new rules within a year to make the raising start up monies easier for new businesses.

Gerri Detweiler and I put the release of our book, Finance Your Own Business, on hold for a year waiting for these important new rules. The SEC, being a slow, deliberative and political agency, took their own sweet time. We could wait no longer to publish the book. Of course, in the same week the books were printed the rules were released. What else is new?

What is new with crowdfunding are some opportunities for small and new businesses to raise money beginning in the spring of 2016. Let’s answer the key questions…

What is the biggest change?

Smaller investors can now invest. Previously, only accredited investors (those with $200,000 a year incomes or a $1,000,000 net worth) could participate in a crowdfunding offering. Now, those with an annual income or net worth of less than $100,000 can invest up to 5% the lesser of their income or net worth per year, or $2,000 if that is greater. Those with higher incomes and net worth can invest up to 10% of the lesser of income or net worth. At the upper end, investors can only place a total of $100,000 in all crowdfunding offerings each year.

Even with these limits, a whole new market has just opened up.

Can I advertise the offering?

Yes. Prior to the JOBS Act, you could not use any form of public solicitation to advertise your offering. Now, for debt or equity fundings not exceeding $1 million, you can use emails, Facebook, and the like to promote your offering. Before you had to be rich and in the know. Now you just need to be on the internet. Let that sink in for a moment. (Does the word ‘caution’ come to mind?)

How do investors receive the information?

You direct them to a web based Funding Portal such as Crowdfunder, Seedinvest, AngelList or EarlyShares. There are many other Funding Portals, and more to come. Investors review your offering at one of these sites and decide. Know that you can list your offering on only one site. And know, too, that the Funding Portals are allowed to take equity in your business at the same rate as everyone else for the services they render. This may lower your out of pocket costs.

What information must be disclosed?

The strict rules on disclosure still apply. You must be candid about everything in your offering. Not only is this the law but it is the right thing to do. You must give your investors all the information they need to make a reasoned investment decision. For more information on preparing an investment document, see Finance Your Own Business.

In terms of financial information the SEC thankfully dropped the requirement of a full (and expensive!) financial audit for new issuers. If raising $100,000 or more only CPA reviewed financials are needed, with even lesser financials required for lesser raises.

Certain disclosures must also be made directly to the SEC. Be sure to work with a knowledgeable securities attorney when venturing into this area.

What if my company doesn’t raise the full amount?

Then you don’t get to keep any of it. So if you think you can raise $500,000 but $1 million is a stretch go with the smaller amount. If you don’t reach your goal then you will have to refund the investors their money and all of your printing, legal and accounting costs are your responsibility. Not only have you not raised any money but you are out of pocket for the expenses of trying to raise the money. Be prudent.

Another important consideration is that investors can change their mind up to 48 hours prior to closing. Your whole offering could be blown if one or two people back out at the end. Consider exceeding your target raise (which is permitted) so as to have a cushion at closing.

Can I sell my shares?

Not anytime soon. Like regular private placement offerings, shares must be held by the investor for at least one year. Even after a year there most likely will not be a very liquid market for the shares. That day fully arrives when the company registers with the SEC to be publically traded. Still, liquidity aside, to help a friend, to create new jobs or just to have fun rolling the dice, crowdfunding gives everyone a chance.

What else do I need to know?

“You need to be careful,” says Dave Archer, a co-founder of the Reno Angels and the president and CEO of NCET, Nevada’s technology organization. “When you raise crowdfunding money you now have a fiduciary duty to your investors. You must act in their best interest at all times.” Archer cautions that this is new and unchartered territory. “Be sure and do your homework and know exactly what you are getting into before proceeding.” Again, the counsel of a knowledgeable securities attorney will also be extremely important as you move forward.

The SEC took its sweet time developing the rules because there are lots of issues to consider here. Stock promoters and swindlers have always taken advantage of the investing public. Despite the best efforts of the regulators, this will happen again, now on a website near you. But you’ve got to weigh (as the SEC finally did) the inevitable downsides against the significant crowdfunding benefits of capital formation and job creation.

Will the next Google arise from an equity crowdfunding effort? Who can know? But if it does, I sure hope I am in it.

Learn How to Fund Your Start-Up

For more information on the good and bad ways to fund your business and investments please see my new book, co-authored with credit expert Gerri Detweiler, entitled Finance Your Own Business.

Business Credit Cards: What You Should Know Before Signing Up

Let’s say you need help financing your new business. You’ve put $10,000 of your own money in, and maybe your parents added another $5,000 – yet you find that it still won’t be enough. You run the numbers, and discover you need another $5,000 to pay for this and that over the next three months before your customers can float the business.

What to do?

A bank loan could take some time to obtain, but you need financing now. What’s another option? Many people turn to a business credit card.

A 2014 survey of small business owners by the Federal Reserve Banks of New York, Atlanta, Cleveland and Philadelphia found that credit cards were the third most popular type of funding, with 19% citing it as a primary source of funding.

Business credit cards can allow you to rack up serious travel or cash-back rewards, and they can give you fast access to credit when you really need it. But like riding a horse, with fast and rewarding comes the need to pull in the reins. You’ve got to be in control.

They’re a Different Animal

Sure, a business credit card looks just like a personal one, and you can swipe (or now “dip”) it like one. But when it comes to federal protections they can be quite different. Things like protection from universal default, interest rate increases at any time and for no reason, and floating due dates don’t apply to business cards like they do to personal ones. Though, some business credit card issuers have extended some of these protections to the cards they offer to their cardholders.

So unless you are confident you won’t carry a balance on your card, and will be organized enough to always pay on time, you’ll want to make sure you read the fine print.

You May Be Stuck With the Tab

What happens if you give a card to an employee and they use it to take a trip to Vegas? You may be out of luck. Charges made by an employee who was authorized to use the card may not be considered fraudulent. Just take a look at the fine print on Visa’s Zero Liability policy: “Financial institutions may exclude from the Zero Liability policy a transaction made by a person authorized to transact business on the account and/or a transaction made by a cardholder that exceeds the authority given by the account owner.”

This isn’t all that different from personal credit cards, where you can be held responsible for charges if you give your kid the card to use and they spend more than you told them they could spend. But business owners who don’t keep close tabs on what their employees spend on these cards could be in for an expensive surprise.

There May Be More at Risk Than You Know

Because corporate credit cards are relatively easy to get if you have good credit, it can be easy to overspend. After all, there is no banker asking you why you want to borrow, or how you plan to spend the money. That’s not necessarily a bad thing; it can give you a lot of flexibility, after all. As I talk about in my book Finance Your Own Business, most of these cards require a personal guarantee, which means if your business runs into tough times and defaults, the issuer can go after your personal funds or certain assets to try to collect.

So despite these potential drawbacks, why would you choose a business card over a personal one? There’s a very good reason: These cards can allow you to keep your business and personal credit separate. Most of these cards are not reported on your personal credit reports unless you fall behind or default, though at least one major issuer reports all business credit card activity on the owner’s personal credit reports. (You can see how business credit is potentially affecting your personal credit by getting your free credit report summary on Nav.) This means that if you need to make a large purchase, use your card heavily to earn rewards, or carry a balance from time to time, that activity won’t hurt your personal credit scores. Which is good, because you really should be able to live outside your business.

Learn How to Fund Your Start-Up

For more information on the good and bad ways to fund your business and investments please see my new book, co-authored with credit expert Gerri Detweiler, entitled Finance Your Own Business.

Know the Hazards of Personal Guarantees

A couple that I’ll call Jake and Marcia purchased a coffee shop. The business was really Marcia’s dream, not his, but she was persistent and he reluctantly agreed to try to help out.

Things went badly from the start and within less than 18 months they were forced to shut it down. But that wasn’t the worst of it. Because they had obtained a loan that required a personal guarantee to purchase the business, they were facing the possibility of losing the home where they raised their children. Needless to say, their relationship was also quickly going south, with Jake accusing his wife of putting their entire future at risk.

What is a personal guarantee and what does it mean? And what about your personal credit? Does it affect that, too? As a corporate attorney working with small-business owners all over the world, I’ve heard a lot of questions, misconceptions — and some horror stories, like Jake and Marcia’s — about how personal guarantees work.

Basically, a personal guarantee allows a lender to try to collect from what you own personally if you default on a loan and your business is unable to repay it. It allows a lender to reach beyond the income and assets of the business to collect if necessary.

Should You or Shouldn’t You?

The newer your business, the more likely it is you will be required to provide a personal guarantee. It provides additional protection for the lender, and if your business doesn’t have a strong track record, it’s no surprise the lender will insist on one.

Entrepreneurs are often optimistic and willing to do whatever it takes to get the funding they need. But if you are going to sign a PG, make sure you fully understand the risks. If you have a spouse or partner, they need to be on board as well. (Sometimes they may be required to sign the loan documents, too, especially in community property states or where equity in jointly held property serves as collateral.)

If all goes well, and you pay the loan back, then there’s no problem. But if you run into financial difficulties, you need to understand that the lender may try to get repaid through your personal bank accounts or other assets (to the extent allowed by law).

Keep in mind that what types of property are available to creditors who get a judgment depends on state law. A few states prohibit wage garnishment for most types of debts, and others have strong homestead laws that may protect equity in a home (Texas and Florida are two examples).

Is Your Credit at Risk?

Signing a personal guarantee doesn’t automatically impact your personal credit. With the exception of some business credit cards, most loans made to a business are not typically reported on the owner’s personal credit reports — unless he or she doesn’t pay the loan back and it goes to collections. A personal guarantee doesn’t usually change that. But if you sign a personal guarantee and you don’t repay the loan, it’s likely it will wind up on your credit as a collection account, or even a judgment, and will hurt your credit scores.

This is one of many good reasons to regularly check your credit reports and credit scores. You can get a free annual credit report from each of the major credit reporting agencies once a year through You can also get your credit scores for free from many sources, including, to watch for important changes. Creditera offers a free business and personal credit score summary and score. No credit card required.

One way to avoid personal guarantees is to build strong business credit ratings, which I explain in my new book, Finance Your Own Business, and to demonstrate to the lender that your business can support the loan through sales and revenue. These guarantees may be negotiable. If you’re not there yet, tread carefully and borrow as little as possible. The less you borrow, the less is at risk if things don’t work out.

Learn More About Business Lines of Credit

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Our upcoming book Finance Your Own Business: Get On The Financing Fast Track details the power of business credit, how to get an SBA loan, the secrets of micro lenders, the benefits of crowdfunding and more.

Fill out the form on this page and we will let you know when the new book is released and offer early bird discounts. Plus you’ll get a free guide today – The Levels of Business Credit. (And don’t worry: we know you’re busy so we won’t flood you with email.)

About the Authors

Garrett Sutton, Esq., author of Start Your own Corporation, Run Your Own Corporation, Loopholes of Real Estate, The ABC’s of Getting Out of Debt, Writing Winning Business Plans and Buying and Selling a Business in the Rich Dad Advisors series, is an attorney with over twenty-five years experience in assisting individuals and businesses to determine their appropriate corporate structure, limit their liability, protect their assets and advance their financial, personal and credit success goals.

Gerri Detweiler is the author of four books, including the Ultimate Credit Handbook (named one of the top five personal finance books of the year when it was released), and a media favorite quoted in publications like USA Today, The Wall Street Journal and featured on The Today Show and CNN. A credit educator since 1987, she’s served on credit reporting agency Experian’s Consumer Advisory Council twice.