Legal Considerations when investing in a Business 2 years ago

More people are diversifying their investment portfolios, but also more people are falling victim to scams–Schemes that present themselves as simple investments with assured returns and mislead many new investors.

When money is involved, it is important to do your due diligence, especially in trying times like this. Apart from the amount you are willing to invest, you must also consider the legal part of investing to avoid falling for fraud.

Here are legal considerations you should look into before investing:

Corporate Information and Ownership 

When dealing with a business, you should ensure that the business is registered. If it claims to be a legally registered business, then you should be able to find out who owns the company, how they started, and what shares they have–make sure they have the suitable license to operate and to sell whatever investments they claim. Ask for their Articles of Incorporation (AOI) and General Information Sheet (GIS). 

Founders Agreements 

Not all companies have founders or shareholders’ agreements, but, in case they do, look into each founder's contribution to the organization and what agreements they have made. Note that you are investing in a company which means you will be entering a business founded by others. You would want to ensure that the people you're dealing with have something to do with the business you're investing in to avoid fraud.

Tax Liabilities 

One thing in common between investors is that they want to grow their money and help other companies grow, as well. However, that wouldn’t be possible if a company is chained to several liabilities. Before investing, check if your money will be solely used to pay up those liabilities and how they can guarantee the return after settling those liabilities. Ask for their Income Tax Return (ITR), Tax Clearance, and you confirm if they have received a Letter of Authority (LOA).

Intellectual Property Ownership 

Scammers would pretend to be a legitimate business and assert ownership of patents, trademarks, or product licenses. However, if you are uncertain about those claims, you can consult a legal consultant who may evaluate the claims' validity well. In this way, you can avoid getting involved in a business with fraudulent claims that can make you lose a lot of money. You ask for a copy of their Certificate of Registration from the Intellectual Property Office (IPO)

Material Contracts 

The business operations represent the business, and so as the investors who contribute financially to make those operations happen. Before investing a significant amount, carefully review the company's material contracts to ensure they are what they claim to be. If anything goes wrong, you might lose a lot of money, even as an investor. Examples of material contracts would be investment documents, client agreements, partner agreements, supplier contracts, and other documentation.

Debts

Understanding how to read financial statements is an important skill any investor should possess. No matter how promising a company's financial statements, if it is backed with debts, those numbers are good for nothing. Make sure you do not miss the following:

• Shareholder Advances

• Convertible Notes

• Loan Agreements

• Promissory Note

• Other Bank financing.
   

Investing in a business does not require a legal background or a legal team. But it is always better to have people to ask when it comes to important matters that involve money. 

You may read about Different types of fraud for more information and reach out to our legal experts to avoid falling for fraud.