Seeking the Best Returns
The primary purpose of putting any capital at risk in a business investment is to get the best possible return. The art and science of investment centers on the proper assessment of the risk in any particular deal. Evaluating risk involves many factors, some unique to the specific deal and others to the market in general.
One factor that is always essential to establishing risk in business is assessing the legal and compliance issues involved. Each investment presents specific legal issues for consideration in the due diligence process. It is also necessary for any investment to provide appropriate documentation for tax filings at the end of each year. Below is a brief discussion of several areas of special concern for investors from the legal perspective.
Securities and the Stock Market
If the investment involves the securities of a public business, there are very specific laws involved. The investment acts of the 1930s created the Securities and Exchange Commission and empowered it to enforce these laws. The SEC regulates the sale of both public and private securities, the stock in individual companies.
The first issue for everyone investing in the stock market is wariness of any tips from a friend or associate. This is especially the case if the information is supposedly not public. The first goal of the SEC is to provide a level playing field for all investors. The SEC aggressively pursues any hint of insider trading and imposes very heavy penalties. Avoid this trap on any securities investment.
When investing in a smaller private company, all investments require the development of a private placement memorandum. This is a document that explains that an investment is being offered under an exemption from registration of the shares involved. The company must also determine if an investor qualifies as an accredited or non-accredited investor. Each investor completes a detailed subscription agreement to prove their status. Avoid any investment offered without these documents.
Partnerships and Private Investments
Traditional corporations and Limited Liability Companies exist to give protection for investors and management. The first thing for any investor to understand is that if there is a problem with a company in which he has an investment, lawyers will attempt to pierce the corporate veil, as they say. This means an attempt to strip away the protection of the corporate entity. Therefore, it is important to make sure that managers of the company keep the legal entity in good standing with the state that holds its charter. Maintenance of all corporate minutes and records is also a necessity for proper legal protection.
Investing in partnerships represents an entirely different set of legal issues and potential liabilities. Partnerships usually have both general and limited partners. The general partners accept exposure to the liabilities of the partnership, both real and contingent. For personal protection, it may be wise to serve as a limited partner, limiting your involvement to the capital invested.
Offshore and International Investing
Many people have the wrong perception about legalities of offshore accounts and business investments. These are legal in most cases; full disclosure is the key issue involved. Individual tax returns have an area that requires disclosure of all foreign accounts and investments. Properly reporting these issues keep the investor in full compliance with the law. It is worth noting, however, that significant offshore investments can increase possibility of an audit.
Most investors face the opportunity to cut a few corners on certain business investments, although this is seldom advisable from a legal, financial, and ethical perspective. One must test the incremental additional return being offered against the significant potential losses. The balance of those factors always dictates prudence for the practical business investor.
Andrew Deen writes in the field of law. In this article, he offers legal advise to investing individuals and aims to encourage further study with masters of law.