Investment Challenges... wishing to start with manufacturing FE OU technology
Date: Sunday, December 11, 2005 @ 18:23:15 GMT
Topic: Investors

Ken Rasmussen makes some very good comments to the NEC forum re securities law violations:

... Initially one would think there is a conspiracy by SEC (Securities Exchange Commission) and NASD (National Association of Securities Dealers) by which all investments are regulated in the United States. Allegedly to "protect" the small investor. But by government monitoring our every move, some liberties are lost. The end result is only very wealthy people can invest in high risk new companies without much regulation at all.

The benchmark to qualify for this is the term "accredited investor" having over $200,000 per year income PLUS over $1 million is personal assets, exclusive of car and home. So even if one was lucky where he bought his home 20 years ago for $30,000 that is now worth $1 million, he still does not qualify, nor would inheriting you uncle's Duesenberg.

So where are the loop holes? Somebody has to get around this for business to progress or we're all confined to poverty. Only letting the rich guys own new technology is insanely criminal.

The answers for start up corporations are in SEC regulation "D". With various sub chapter designations 501 through 508.
Read it and follow it to the letter or expect serious problems.

Briefly, so long as the stock is NEVER marketed publicly (Internet posting is public) and the total number of stock holders is kept to a low number, I forgot the exact number, but its something like 25, the executives of the start up corporation may solicit stock sales from friends, relatives and prior business contacts who are not accredited investors, but ALL and I mean ALL risks must be stated in the prospectus including the possibility of any kind of failure. The investor must totally realize that ALL start ups have a high failure risk. Whether or not the technology works as proposed is actually secondary. Alternative energy is littered with legends of great ideas that got sabotaged both by exterior and by interior forces. Both jealous competitors and business mismanagement from within can bring a great project to an abrupt stop. No investor should expect to see a dime back either as a dividend or resale ability for at least several years. Closed corporation stock can NEVER be advertised for sale anywhere. It can only be sold back to the original corporation or possibly another accredited investor. If the project succeeds, I know the founding officers would GLADLY buy your stock back.

Only a blind fool would say, "I have a great invention but don't know anything about business, so I'll just hand that part over to my attorney." Every inventor needs to have a close friend who understands basic business procedure and can read well enough to wade through the SEC form I posted above. Ignore this, and expect Uncle Sam to march in the last minute and take everything you have.

Red Flags to watch out for:
a.. Each state has its own securities laws. If you have an investor from outside the state you live and do business in, you need to either be registered in his state too, or have gone through the expensive and time consuming process of having a legitimate securities brokerage firm register and blue sky you as a public stock. Probably around $200,000 now to do that, but single state registration is a form you can do yourself with a small filing fee. Public versus private is another long debate I won't address here.

b.. Every corporation, public or private is accountable to its investor (s). So books must be kept and an annual report is required to your stock holders.

c.. Corporate taxes are a lengthy issue I don't want to address here other than to say anyone who tells you to go sub chapter "S" is an idiot you should NEVER listen to again.

d.. Incorporating in your own state is NOT a good idea unless you live in Nevada or Wyoming. Reasons for this are posted at the Nevada Secretary of State's website BUT once the corporation is established, it then MUST be additionally registered in the state you do live and do business in. This term is called "qualified foreign corporation," and must be done along with all the other business necessities.
e.. NEVER just let your attorney "do it." The fees will eat you alive and may still not be done right, unless he specializes in corporate law for start ups.

f.. ALWAYS qualify ANY prospective investor BEFORE you tell him anything. If he can't or won't answer (and document) your somewhat personal questions about his personal wealth, he very well could be somebody sent to you by your competition just to get you in trouble with securities violations. Tom Bearden addressed this eloquently in his OSEN/Disclosure Project interview. Well worth memorizing.

If all this seems intimidating, it may well be, but the only alternative is to run your business as either a sole proprietor or a partnership. Yuck. Both of those expose ALL of your business liabilities to YOU PERSONALLY AND EVERYTHING YOU OWN. And you are NEVER allowed to issue stock. You may only BORROW money and the lender then can take EVERYTHING you pledged as collateral if you can't meet his payment schedule. Bad idea.

There are some additional categories that essentially qualify similar to accredited investors although not by the terms I listed above. These are also fair game to obtain startup capital:

a.. Established mutual funds

b.. Anyone licensed with a Series 7 & 63 securities license, actively registered with NASD

c.. Other corporations (but there are limitations on this, so be careful there)

So it is well and good that the NEC qualify new technologies as viable or not, but this group doesn't dare ever use the term "good investment" or it just stepped into another profession, that of investment advisor and massive government regulation I don't think we really want to get involved with. Qualified investors from the list above will naturally gravitate to our work, which in turn will create the much needed investor pool our inventors need to meet.


Ken Rasmussen

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