Use Capital Compliance to Protect Your Investors and Power Your Vision

Welcome to Your Business, Accelerated! Digitally remastered with AI, Your Business, Accelerated! is the go-to podcast for entrepreneurs ready to scale smart. Hosted by Attorney Shaune B. Arnold, it delivers strategic business insights, legal frameworks, and real-world solutions to help you operate with clarity and confidence. Get actionable guidance to protect, grow, and optimize your business…one smart move at a time.

What is capital compliance—and why should every entrepreneur care? In this illuminating episode, Attorney Shaune B. Arnold breaks it down with clarity and a jaw-dropping real-world reverse IPO story. Learn how to protect investors, navigate SEC rules, and raise capital the smart, legal, and innovative way. This is strategic growth, decoded. 

Transcript

Well, hello …once again, …my friend. And welcome to Your Business, Accelerated! I am your host. Attorney Shaune B Arnold, and I’m reminding you …as always …to maximize your competence to get the confidence you need to succeed.

Let me tell you what we're doing here on Your Business, Accelerated! We are surveying legal and business issues that will encounter as a successful entrepreneur. It is my hope and my passion to help you kick your boss to the curb.

That is why we are here, folks. Let me offer you one caveat, and that is that I am a California attorney. I do practice law here. I've done so for gosh 30 years. I believe I can be an amazing resource for your business.

Today, friends, I want to talk to you about capital compliance. Now, what do I mean by capital compliance? And what can you do with it?

Capital compliance is a term of art that is very descriptive. But the first time I heard it many years ago, when I was a new attorney, I wasn't quite sure what it meant. I just knew that it had to do with the Securities Exchange Commission. 

Many years ago, I joined a business community called CEOSpace. It happened quarterly at Lake Las Vegas in Nevada, just outside of Las Vegas in actually, Henderson, Nevada. A friend of mine put me up. She was arriving the following day, and she wanted to know about the capital compliance classes. 

Because she was putting me up, I really wanted to get that information for her. The night before the lecture I left work in Los Angeles at like five o'clock, got to Lake Las Vegas at about midnight. Now, about four months before this event, I had been in a terrible car accident, T-boned in an intersection at highway speed. I had just gotten out of bed from this horrible car accident about two weeks before going on this trip. When I woke up the next morning, I wasn't able to move. I had to spend the entire day in bed recovering from the drive to Vegas.

I was then frantic about finding out what capital compliance is and what it has to do with the SEC so I went to all the classes that I could find that week at CEO space that had anything to do with securities, investments or the SEC …anything that I could come in contact with.

I came across these classes that were talking about private placement memorandums. I knew all about private placement memorandums because I had been practicing business law and securities law at that point for several years. A private placement memorandum is basically a business plan on steroids. It has risk disclosure language and legal disclaimer language that passes muster with all the various blue sky laws of the states that you're going to be offering your securities in. The disclaimer language satisfies the SEC requirements for investment disclosures.

In this class, they spoke about how the purpose of the private placement memorandum is to substitute for the formal prospectus that you would have to draft and file and other documentation that you would have to file with the SEC if you were offering your securities to the public. 

I thought all of this rather redundant and I thought, okay, private placement memorandum, okay, get past that. I've got that in my computer. Get to being capital compliant. And then I went to other classes, and they talked about having a subscription agreement. A subscription agreement is a C.Y.A, …cover your assets …document that the business owner creates in conjunction with the private placement memorandum. 

I have several different kinds of Subscription Agreements in my computer, which include a questionnaire to have been completed by the investor stating that they make a certain amount of money and they're not giving the project their last dollar, that they are a sophisticated investor. In short, it contains a lot of the same risk disclosure language and legal disclaimer language that you'll find inside the PPM, and so it kind of dovetails with the PPM. 

I had all of those documents, and a complete understanding of how to use them. And then I heard the lecturer say, "If you have a private placement memorandum, and you have a subscription agreement that you give to your investors, you are capital compliant." 

I sat there for a minute thinking, it can't be that easy. And then it dawned on me, yes, yes, yes. It can be that easy. It can be that simple. I was trying to make it difficult, and it just wasn't that hard. Capital Compliance is all about not running afoul of the SEC. 

Capital compliance is about making sure that if you are approaching investors that you don't know that you have documentation in place that's going to satisfy the SEC that you are offering your securities within certain guidelines, and so ultimately, it's a protection for investors to say that the SEC has not looked at your securities in any way, but that you have made certain risk disclosures and that you have made certain legal disclaimers that are required by the SEC in order to make that private placement legal and ethical. 

So, that is being capital compliant. Now, what you do with that? What does that mean? What does it mean that you're capital compliant? 

Well, I'd like to tell you about a client of mine, who I'll call Jack. Jack was thinking outside the box with respect to how to actually deal in the marketplace with his securities, and I thought it was just so clever that I'd like to share it with you, because many of my clients asked me over the years how they can best bring investors into their companies, and as a threshold matter, I have this capital compliance conversation with them and make sure that they understand the importance of following the SEC registration exemption guidelines for approaching investors and offering those investors stocks or membership interest or other securities in a business.

The SEC regulations do allow for a very small amount of carefully considered creative financing in the public offering space, and this creative financing opportunity recently presented itself to my client. It worked wonders for my client, Jack.

Jack is the owner of a small, privately held information technology firm, and so I'm going to tell you what Jack did with his securities. You see, Jack had been struggling for some time, looking for an investor, and he was looking for the investor to infuse as much capital as he could get into his business to help him complete the development of some new innovative technology. 

The challenge that Jack was having was that his company was an unknown entity in the marketplace so that the banks would not give him loans, and individual investors didn't want to take that chance either.

Jack eventually met a potential investor with a deep pocket at a networking event, and he came to me to help him figure out a way to do business with this investor. I'm going to tell you what I showed Jack.

Jack, the potential investor, and I sat down with an underwriter, and we devised what's called a reverse IPO. Now, what is a reverse IPO? In this particular situation, Jack's young, vibrant company that held innovative technology was going to merge with a publicly traded technology company that formerly enjoyed a stellar reputation in the marketplace, but which had been swept overboard during the dot com bust of the late 1990s.

That company went from being heavily traded on the New York Stock Exchange during the dot com boom to being nearly barely traded on the over the counter markets, commonly known as a penny stock. The security, traded on the Pink Sheets.

Jack sold his company, new technology and all, to a newly formed corporation. The ailing public company that we had found for him did the same. The new corporation was then infused with the investor’s cash and cash from a bevy of additional investors, and in this way, life was breathed into the newly resulting company. 

The two existing companies then each ceased to exist entirely. The investors purchased blocks of stock in the new corporation for significantly less money than the public would later pay. 

The underwriter then guided the release of the newly formed company into the marketplace with an initial public offering. And this caused yet another wave of capital to pour into the new company from the public. They now had plenty of capital to complete the development of Jack's newest technology, and everyone's stocks increased significantly in value. 

After a statutorily required amount of time passed, the initial investors were able to sell a small amount of their stocks. Their securities eventually realized a substantial profit. The bringing creation of a cohesive deal that protects investors is the beauty of capital compliance.

Ladies and gentlemen, I want to thank you for joining me today on this week’s episode of Your Business, Accelerated! I’m attorney Shaune B. Arnold. I invite you to follow me on Facebook, LinkedIn and Twitter X. In all of those places, I’m known as S.H.A.U.N.E dot Arnold, like the former Governator.

In the meantime, and in between time, I am, …as always, reminding you to MAXIMIZE your COMPETENCE to get the CONFIDENCE YOU NEED to succeed. 

I’ll see you right back here next week, on Your Business, Accelerated! Bye-bye, friends.