Common Legal Mistakes In Capital Raising (And How To Prevent Them)

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by PPM LAWYERS
Common Legal Mistakes In Capital Raising (And How To Prevent Them)

Avoid these costly legal missteps when raising capital—and learn how to protect your deal before it’s too late.

Raising capital—whether for a real estate syndication, a startup venture, or a private investment fund—is a major milestone. But it’s also a legal minefield.

Too often, entrepreneurs and sponsors rush into pitching investors, distributing offering materials, or even collecting funds without understanding the legal boundaries. And the consequences? They can be catastrophic: SEC investigations, investor lawsuits, forced rescissions, or even the unraveling of your entire raise.

This post breaks down the most common legal mistakes in capital raising—and more importantly, how to avoid them. If you’re raising money (or planning to), this is a must-read before you make your next move.

1. Using General Solicitation Without An Exemption

One of the most frequent and dangerous missteps is using general solicitation—advertising your offering publicly—without qualifying for the right exemption.

What This Mistake Looks Like:

  • Posting about your investment deal on social media
  • Blasting emails to people you don’t have a prior relationship with
  • Pitching at public events without legal screening

Why It’s Risky:

Unless you’re filing under Rule 506(c) of Regulation D, general solicitation is not permitted. Most issuers mistakenly rely on Rule 506(b), which requires a pre-existing, substantive relationship with investors and prohibits public promotion.

How to Prevent It:

  • Choose your exemption carefully: If you want to advertise, stick to 506(c) and verify all investors are accredited.
  • Consult a securities attorney before marketing.
  • Build a legally compliant investor list through relationship-first strategies.

2. Skipping The Private Placement Memorandum (PPM)

Too many founders or real estate sponsors think they can raise money with just an operating agreement and pitch deck. Not so fast.

What This Mistake Looks Like:

  • No PPM or legal disclosures
  • Incomplete or informal documents
  • Verbal explanations instead of written risk factors

Why It’s Risky:

Without a PPM, you’re not giving investors proper disclosures. That opens you up to claims of misrepresentation or omissions under securities laws—even if you had good intentions.

How to Prevent It:

  • Use a PPM for any offering where you’re raising from passive investors, especially non-institutional ones.
  • Make sure your PPM clearly outlines the business plan, risks, use of proceeds, fees, and investor rights.
  • Work with a legal team that customizes the document to your specific deal—not a template.

3. Failing To File Form D With The SEC And States

Many issuers don’t realize that even when you’re exempt under Reg D, you still have to notify the SEC and states where your investors reside.

What This Mistake Looks Like:

  • No Form D filed with the SEC
  • No notice filings with state regulators (“Blue Sky” filings)
  • Filing late or omitting required jurisdictions

Why It’s Risky:

Failure to file Form D—or missing state deadlines—can jeopardize your exemption. It may also lead to penalties, investor complaints, or difficulty raising capital in the future.

How to Prevent It:

  • File Form D within 15 days of the first sale.
  • Track every state where investors are located and comply with their unique filing rules.
  • Hire legal counsel or compliance services to manage these filings on your behalf.

4. Improper Investor Verification

Under Rule 506(c), you must verify that each investor is accredited. It’s not enough to rely on self-certification.

What This Mistake Looks Like:

  • Accepting investor questionnaires without documentation
  • Failing to collect income statements or third-party verification
  • Confusing 506(b) and 506(c) rules

Why It’s Risky:

Improper verification can cause you to lose your 506(c) exemption—which means your offering was not compliant with securities laws. That can result in enforcement actions or rescission demands.

How to Prevent It:

  • Use a qualified third-party verification service or collect IRS forms, bank statements, or CPA letters.
  • Make sure your team understands the difference between 506(b) and 506(c).
  • Document everything in a secure investor file.

5. Offering Equity Without An Entity

This mistake is common among first-time fundraisers who promise a share of profits or equity—but haven’t yet formed a proper legal structure.

What This Mistake Looks Like:

  • Promising “10% ownership” without an LLC or fund entity
  • Accepting money in your personal name or business bank account
  • Delaying legal setup until after funds are received

Why It’s Risky:

You can’t legally sell a piece of something that doesn’t yet exist. Plus, mixing investor money with personal accounts may violate fiduciary duties and securities compliance.

How to Prevent It:

  • Form the correct entity (LLC, LP, etc.) before you raise a dime.
  • Set up proper operating or partnership agreements outlining ownership and terms.
  • Open a dedicated bank account for the raise.

6. Omitting Key Risk Disclosures

No investment is without risk—but if you don’t spell them out in writing, you’re putting a legal target on your back.

What This Mistake Looks Like:

  • Marketing only the upside of the deal
  • No risk factors included in your materials
  • Downplaying legal, operational, or market risks

Why It’s Risky:

Securities law requires full and fair disclosure. If an investor loses money and wasn’t warned of potential risks, they may claim fraud or misrepresentation.

How to Prevent It:

  • Include a Risk Factors section in your PPM or investor materials.
  • Be honest and comprehensive—cover everything from market volatility to sponsor experience.
  • Avoid hype language and focus on transparent communication.

Conclusion: Raise Capital The Right Way—Legally

The legal path to raising capital isn’t just about compliance—it’s about protecting your business, your investors, and your reputation.

Avoiding these common legal mistakes isn’t difficult, but it does require intentionality and the right legal strategy. Whether you’re launching your first real estate syndication or managing a complex investment fund, don’t leave your raise vulnerable to legal blowback.

Work with professionals who understand the rules—and help you use them to your advantage.

Book a Free Strategy Call to Get Your Legal Docs in Place