Have you been watching too many movies about finance? Do you think you have a business that's ready and able to go public? Well, if you do, or if you don't, and you might, you're not going to want to miss this edition of the Inside B.S. Show. Hey now, I'm Dave Lorenzo. I'm the Godfather of Growth.

And today we are talking about what you need to know about going public and what you need to know about securities law. Now, I know what you're thinking. You're thinking, I'm an entrepreneur.

I'm a business owner. I'm doing $5 million, or I'm doing $15 million, or even if I'm doing $150 million in annual revenue, going public is the furthest thing from my mind. Here's the thing.

You may want to sell your business one day. And regardless of how you sell your business, you're going to want to check with somebody like our guest. Because if you're selling shares in your company, if you're not doing an asset sale, this is the guy you need to talk to.

Before we get into all of that, I need to bring in my favorite person, my absolute number one on my list of people to go to when I have a question, whether it's about the law, or about business, or about just deciding candidly what to eat for lunch, my business partner, Nikki G, Nicola Gellarmino. Hey, Nikki G, how are you today? Hi, Dave. I'm doing great.

I don't know so much about picking out your lunch, but those other items, I've got that covered. Oh, you know exactly. Listen, we are so in sync that you could, I guarantee if I asked you what you should pick out for me to eat lunch, you would pick it out.

Speaking of which, you are so into health and so into fitness. What is your go-to these days for your meal program? Because I was just with you two days ago, and you are the leanest and the most cut up I've ever seen you. So what are you doing these days? What's your program? Two things that have been most effective.

First, intermittent fasting. It took me a good 30 days or so to get used to that. It was a little lack of energy, lack of focus in the beginning, and it was really difficult to work out without eating.

But after that 30 days, that totally changed over. So that's huge. That reduced overall caloric intake.

And the second thing is meal prepping for the week. So we all know we're going to have those business lunches where we have to try to make healthy decisions. But if you prep your meals for the week, you already know, okay, I know exactly what I'm going to eat every day.

I have a set number of calories. It's amazing. Actually, I think for most people, it's game changing.

Yeah. So when I said that you could pick out my lunch, we have kind of the same eating schedule. When we travel together, I eat one meal, usually middle-ish of the day.

If we have to go out with a client or something, we'll eat later in the day. But are you doing low carbs as well? Or are you... Tell me. Yep.

Yep. Virtually no carbs. Yeah.

Yeah. And when you're working out, fasting, right? So you're fasting and working out while you... How did you get over that hurdle? Because that's the thing that I hear... Look, if I worked out, that's what I would be concerned about. But that's the thing I hear most people talk about, hey, their energy level, their concern for how they're going to get through their workouts.

Is it a problem only at the beginning? Or how did you get past that? There's a problem only at the beginning. So some people don't struggle as much as I did. I was used to having some type of snack before I worked out.

So I was used to the spike in the energy level from the snack. So I took at least 30 days. And I'll tell you what, I was grumpy in the beginning.

I felt like I lacked the energy, but there's a turnover. You just have to stay committed. Like a lot of things we do, you have to just make the commitment and keep going until you feel the difference.

Okay. So if you're joining us today, you're thinking to yourself, what is Dave and Nicola's conversation about intermittent fasting or workouts have to do with securities law and the potential sale of a business? And I'm going to tie it all together for you because I know Nicola is thinking right now, what the hell does this have to do with anything that we're talking about? Here's the thing. If you have a business and you are running your business and you have good habits and you have good legal hygiene, this conversation today is going to be refreshing for you.

And it's not going to leave you grumpy and it's not going to be difficult. But if you don't have good legal hygiene and then you want to sell to private equity, or you're going to do a stock sale to a strategic buyer, or you've got a $300 million business and you want to take it public, you're going to be pulling your hair out. It's going to be more than 30 days of grumpiness.

So Nicola, introduce us to our guests who can get us over that hurdle and get us into good habits from a legal standpoint that will lead to much easier transitions, whether you're fundraising or selling your business down the road. Before I introduce our guests, let me provide a brief disclaimer for our audience. So we will be talking about securities today with a lawyer.

This is all for informational purposes only. This is not legal advice, does not constitute legal advice, and there is no attorney-client relationship that will be formed through our discussion that has to happen through a signed written agreement with any attorney and certainly our guests, if that were to happen. It is my pleasure today to bring on our guest.

Our guest is James Dodrill. James owns his own law firm, which is the James G. Dodrill II PA Law Firm. He specializes in both private securities offerings and corporate transactional work, which we'll be getting into a lot today.

Jim, welcome to the show. Great. Thank you very much.

It's great to be here. And I loved hearing about your intermittent fasting of workouts. I actually do exactly the same thing.

And Dave, I'm actually specifically a believer in what you were saying, that good habits early in your personal and your professional life are what lead to success. So I'm really happy to be here today and talk to you about this. We're really excited to have you.

We have a lot of questions that we receive, questions that we have ourselves. So I want to really start from the basics because I think there's a lot of misconceptions out there, Jim. So what I want to start with is a lot of people hear the word security and immediately assume that means stock.

So let's just start from what is a security? Sure. Yeah. Thank you.

And that's a great starting point for us. As you're saying, many people just think about it as stock, but the definition of a security is much more expansive than that. At its most basic, it can go from there into promissory notes, loans, things like that.

Interest in a limited liability company, such as units or membership interest, sometimes they're referred to as, but it's even more expansive than that. There's a concept in securities laws, it's called the investment contract. And there was a case that came before the Securities Exchange Commission almost 80 years ago at this point, it was in 1946.

And that actually involved, it was based here in Florida, involved a company that was a farmer who was selling pieces of land that had orange groves on it. And people could come in and they could buy a piece of this land with an arrangement back to the farmer, that the farmer would continue to take care of it. And then he'd sell the oranges at the end of the season.

And then the owner would get part of the profits from those oranges. So it was split up between the two. So the SEC said that that was actually a sale of a security.

And in this case, what was determined is that the standard is, there's a few things, if there's money that's being given to someone for the efforts of somebody else, I'm just speaking in layman's terms here, obviously, for someone else to help turn that into something that may potentially be a profit or return on the money. So basically, you're giving money to someone else, and they're going to do something. And you're going to hope that you make some profit, some money on that.

That's called an investment contract. And it's been interpreted many times over the last 79 years now, since that case came out, involving everything from vending machines and pay phones on up. So fractional interest in art, even.

So a lot of very expansive areas. So you know what I'm thinking, because we live here in South Florida, you're driving down the street, and when it's mango season, you see a lot of people on the side of the road selling mangoes that definitely came from the trees of people's yards, maybe selling securities. Just kidding.

But I think that's such a great example, because we're not thinking about a scenario like the one you just described. And there's so many ways where you might be dealing in securities and not even realizing it, which is the biggest problem. Exactly.

It also pops up here in South Florida, there is a lot in real estate matters. So let's say you're raising $5 million for a real estate project to buy a building or do something else. You can have people who are coming in and buying a fractional part of that.

That's a securities transaction. People come to me constantly, and they ask me, hey, listen, I'm just going to raise money from friends and family. Even if you're going to go public someday, there's a round called the friends and family round, right? So I'm just raising money from friends and family, Jim, literally around the Thanksgiving table.

I'm telling them about this new business I'm starting. They're going to write me a check. Do I need a securities lawyer for that? Yeah.

I've never heard that question before, but it comes up all the time. And it is one of the most common misconceptions in this area, because backing up, and anytime there's this type of transaction, right? Those that I mentioned, where there's money that's changing hands, and you're hoping or expecting you're going to make something back from it. That has to be done one of two ways.

It either has to be done through registration with the SEC, like in an IPO, which we'll, I'm sure, touch on here in a bit, or it has to meet a certain set of rules that are called exemptions from registration. And depending upon how that's done, there are different types of rules you hit on, but there's nothing in the law that says that just because it's your friends and family, you're getting the money from, that you can ignore the rest of the law. You still have to comply with all of it.

So Jim, let's do this. High level, what would be your advice to business owners when you're considering, do I need a securities attorney? Sure. Again, I like to come into companies, and my clients are everything from pre-revenue startups up through businesses over $100 million in annual revenue.

But I enjoy coming in early on and helping make sure the foundation's done properly. I like for people to think about the end at the beginning. What is the goal in starting a business? What are the possible exit strategies? Is it being acquired by a synergistic buyer in your industry? Is it a private equity transaction? Is it an IPO? Each of these may be appropriate for different types of businesses at different points in their life cycle potentially.

But it's important to be thinking about that even at the beginning when you're getting your foundational documents. All the time I have people, in fact, it happened last week. So I have a new client who was just referred to me, and they came in and they've raised some money in the past from some people.

And so they have a half dozen shareholders. And they're looking at bringing some more money and doing some other transactions. But they had just formed their company online through one of these services where you whatever pay X amount and they crank out Oracle Incorporation for you in about 13 seconds.

Well, the company was formed with only 1,000 shares of stock and just said, stock. This company had supposedly sold different types of stock to people for a number of years and had sold a significant number of much more than the amount that they were legally authorized to do. And no one had ever stopped to think about, well, do we even have the capability of doing this? And legally, everything that they had done after those first 1,000 shares was not legally authorized.

So they had actually violated both state corporate law, basic corporate law. They had violated federal and state securities laws with it. So I'm in the process now of cleaning this up.

And you have to amend their documents. And they're going to have to go back to the individuals who invested with them and talk to them about the mistake that happened to give those people the right to either ask for their money back, it's called the right of rescission, or to reaffirm their investment once they actually have the legal ability of really doing these deals. So you need to think about all these things early on and get the proper foundation in place to do these kinds of transactions.

You are speaking our language, Jim, because as you know, we talk a lot about planning for the future when you are starting your business. And when you plan for the end in mind, it is the best way to position yourself to have a successful business, to not have to go back and undo everything the way that you're doing it now, because we didn't do it right on the front end. So I appreciate you mentioning that.

We're going to come back and explore some of those topics in a little more detail. But I think we ought to get into your background. We ought to tell our audience kind of like, how did you even get here to be providing this source of authority for all of us? So let me start with, you know, obviously, you graduate from law school, and you go off to work at one of the largest firms in the world in New York City.

Let's start there, because that's kind of like the dream for most students graduating from law school. Sure, and it's funny. And my kids are, you know, 20 and 23 now, but they kind of joke that I've had at least three very successful careers at this point.

And I kind of look at it as all one seamless continuity. But yes, I, you know, back in a little bit, I was on Wall Street before law school doing mergers and acquisitions, and had studied business management psychology in undergrad. But after law school, like you mentioned, went up to New York, and was practicing at a firm called Latham & Watkins.

They are one of the largest and most prestigious firms in the world. And there I was, I was doing securities offerings and merger and acquisition work. But I, you know, I come from a small town in Ohio, it's about 1300 people, 16,000 in the whole county, and come from a family of entrepreneurs.

And I knew I'd never stay in Manhattan long term. I had no desire to raise a family there. I had no desire to be the guy commuting on the train an hour each way.

And, you know, going through the mid 90s, Wall Street was roaring. And, you know, I started thinking about, you know, maybe I'll do my own deal, maybe I'll do something different than just be one attorney in a firm of a couple thousand. And so I was, you know, networking with people and brainstorming and looking at a lot of different things.

And through a very weird series of events that sounds a little bit like a joke, because it involves an amateur golf champion, two bulldogs, and a European car magazine. But through this, like very weird series of events, I learned about a company in England that at that time was Europe's largest golf equipment and apparel manufacturing company. And I cold called them.

It was a Wednesday. And I called and I got somebody from the marketing department on the phone. And I said, I'd like to speak to somebody about bringing your brand to the United States.

This woman said, well, it just so happens, this weekend is the European PGA trade show. If you're serious, come over and you know, I'll set up a meeting basically calling my bluff. She's like, you know, who's this guy calling from New York saying he wants to take us to the United States.

So the next day on Thursday, I told my secretary, I won't be in tomorrow. You know, somehow I forgot to tell her I was jumping the pond, but I went to JFK that night and I flew to England. I flew directly to Birmingham and I spent the weekend with this management team at the trade show and learned it was a family owned business, kind of dysfunctional that had aspirations about going to the U.S. market.

So I came back and went to the managing partner of the office of my law firm and said, I need to take a leave of absence. Effectively, I never went back, but over a period of about six months, I put together a deal and acquired their intellectual property rights for North America and Japan. So I actually left the practice of law in New York and moved here to Florida to start a golf company.

I came down here, financed out of pocket with a friend of mine for about a year and a half. Ultimately, you know, we raised about $10 million for the company on our own, grew it to sales in 17 states. And then in 1999, so it was very, it was a quick, it was a quick process.

It literally was, was, you know, about three years when we started the company to this. We took the company public in an underwritten IPO. So the IPO was at a great premium to where my investors had invested.

Everybody did well. I made a lot of friends. And, you know, as I, as I looked at, at, you know, things at that point, I thought we had a lot of really, you know, good market acceptance, but anyone who's a golfer might recognize that timeline that Tiger Woods had come on the scene.

And we, we were beneficiaries of that certainly, but the marketing dollars were just skyrocketing. And, and I saw that kind of getting to any kind of, you know, full long-term market position security was going to be an uphill slug. So I wrestled about that a little bit.

And simultaneously the company in England approached us and wanted to buy the rights to the golf business back. So, so I essentially, I sold the golf operations back to the company in England, brought another management and phased myself out over a period of about nine months, which took me to literally to right at 25 years ago, January of 2000, at which point I resigned from all my positions as an officer and director and walked out the door. I then, you know, it's 33 turning 34 that summer, you know, looking forward, I was getting married a little bit, actually tomorrow's my 25th wedding anniversary.

So my, my wife and I were planning our wedding at that point and, and trying to figure out what we want our lives to look like. And as I looked at my process as an entrepreneur, I saw that we had a lot of the same needs that the fortune 500 companies, you know, type clients did when I was working in New York, but it was different. You know, there weren't as many zeros on the deals.

So like in our, in, in my IPO, I couldn't afford to hire me. You know, I couldn't go back to my law firm in New York because the cost was disproportionate to my deal size. So I said, there must be a lot of great companies that either don't want to, or can't pay the big firm rates people and, and, you know, younger and or smaller companies with sophisticated needs.

So I said, that's going to be my niche. That's going to be my, my, you know, it's my reason for being. So for the last 25 years, I have focused on that.

And I've developed, I'm a solo practitioner. I do 100% of work myself and I've developed a global practice of clients, you know, in all sorts of industries where I come in and help form the entities and do operating groups, shareholders, things like that. And, but then the real focus and the value add comes in, as we've been talking about the finance transactions, private placements, friends and family around private equity, venture capital and IPOs, as well as mergers and acquisitions.

So I know that's, that's my long winded elevator pitch, if you will. But, you know, hopefully that gives people, it probably gives them a little more information than they wanted, but, you know, I think it's helpful, hopefully. Yeah, absolutely.

First of all, wow. Like this is quite a story. So when I heard it before, I thought like, this is an unusual path for especially a lawyer.

So you are not, you are not the typical lawyer who works with a big firm and that's it. You're, you're staying there until you're being made partner. You just decide one day, you know what, it's time to be an entrepreneur.

And I really appreciate that because of what you do now, you already had your own experience being an entrepreneur, taking a company public, selling the company back to another company and having your own exit, which I think really provides unique value and perspective to the clients that you serve. One question I have is like, when looking back, are you like, wow, was this, I mean, is this a crazy decision or looking back and you're like, this made sense. I really thought this through.

Yeah, it's interesting. No one's actually ever asked me that, but you know, I, I've been a blessed individual and I've kind of seen my entire career is just, you know, stepping stones and progressing what I think is pretty naturally, you know, again, you know, I grew up in a, in an entrepreneurial household, you know, I grew up with that mindset of, of being involved in a business and, you know, and, you know, neither my father, my, my grandfather, my mother who turns 80 in November still works every day, you know, nobody ever had a guaranteed paycheck. So, so, you know, coming in to, to this and having, you know, an understanding of business realities, even before, you know, I started my actual business was, was very important.

And, you know, and, and again, I, I kind of look at it as like, so the kids look at it as three distinct things. I, I just look at it as stepping stones. I think it, you know, it all works together.

And I, I look at business and the laws of continuum and, you know, with, with, with every client, I come in some place a little different on that line. You know, some people ask for, you know, me to be more involved in a business standpoint and, and, you know, helping them outside of just corporate structuring type things. And some want me to stay more within, within that.

But, but always, I think the fact that I've, I've sat in their shoes, you know, I'm not someone who's just drafted paperwork for the last three plus decades, you know, as a benefit that all my clients get to, get to draw on. Absolutely. Jim, I didn't appreciate that we shared that background of being from an entrepreneurial family.

I mean, I'm third, I'm a third generation entrepreneur. Although it took me a lot longer to take that leap than it did for you. I stuck in and, you know, worked in the practice of law for a decade before I opened my firm and then moved over to this business to this day, which is, you know, true entrepreneurship here.

So Dave, let me turn it over to you. We're talking with Jim Dodrill. He's a securities and corporate transactional attorney here on the Inside BS show.

Jim, you mentioned the company that you ran was an IPO and it was in the $10 million range. Talk to our folks who are listening and watching about the size of a company and an IPO, because we hear initial public offering, we think big company. Talk to us about who's too small, what, what conditions have to exist for an IPO to take place.

Give us the background that you as a securities attorney look for when somebody comes to you and says, Hey Jim, I want to go public. Sure. Yeah, absolutely.

At the most basic, you know, any company can go public. It can, you know, there, there, you know, many, many, many examples of businesses that had zero revenues that have gone public over the years. You know, there are also the other, and obviously companies that had billions of dollars of revenue to go public.

You know, part of it depends upon what you're wanting to use the public markets for how you're going to structure it. You know, what, what you, what access do you have either directly or through like an investment banking or underwriter relationship with potential investors for the IPO, things like that. I mean, some, some public registrations are done to fulfill an obligation that's happened in a private financing, you know, so, so a company may have raised capital over a number of years privately from, you know, from many people and given them the, the commitment that within a certain period of time they will do that because as you may know, you know, when a company's private, there are not a lot of options for the stockholders to actually realize value from that and sell their ownership position.

So sometimes a company will do what's known as a self underwritten offering just for selling shareholders, where they'll, they'll do it in a way that gives those shareholders who have already invested in the past in the company, the ability of selling stock. It can also structure it in a way that allows the company on its own to advertise and bring in money to raise more capital. I actually, I have a relatively new client that's coming in and they're looking to do a $75 million raise in the public markets through what's known as regulation A plus.

That will give the company the ability of advertising on its own and, and using that to their, I'm not going to go, I can't go into the specifics on the, on the company right now, but, but it, you know, it will allow them to market directly to their target investors and to, you know, to, for those people to come in and invest in this entity and, and hopefully enjoy the upside of that, that investment. So, you know, the short answer is it's, it's not necessarily answered just by, by revenue, but it's about the situation as well as what the, what the usage is of, of that transaction. So what are some considerations that business owners should be thinking about if they're considering the idea of maybe we go public, whether it's now in the next few years or a lot of years from now? You know, the considerations overlap substantially, whether they're looking at selling the business to somebody else privately or going public.

And, you know, and a lot of it is about making sure that you're doing things the right way. You know, as you're talking about, you know, you're, I know you're both big proponents of that, you know, making sure that your foundation's in order, making sure you've complied with all the laws properly at each step, you know, by, by having, you know, a, a seasoned professional taking you through this step, you can make sure that each transaction happens in an orderly fashion and builds on one to the next to the next, because, you know, you're going to reach a point of, if a company keeps growing and you're either raising money privately or going to the public markets or having someone come in to buy you, there's ultimately going to be someone who's coming in with a sophisticated eye doing, who's going to do research on you, right? It's called due diligence, where they're going to come in and they're going to look at everything that's been done. They're going to see, see the certificate of incorporation, like I mentioned for this company that I, this new client of mine I'm working with and correcting the problems that they had.

They're going to look at all the times you raised money and how that was done and what the contracts were you used for that and did you do the proper filings at the federal and state level? And if you've done that properly all the, you know, all along the way, that helps your transactions move more smoothly. You don't have any kind of big issues that have to be dealt with. But if there's a problem, there's a couple of things that can happen.

You know, either they're going to just, you know, walk away potentially. They say this is, you know, too much to deal with. But, you know, if you violated the law, oftentimes you'll have to go back to the other parties, the other investors, for example, and give them the right to ask for their money back.

Again, it's called the right of rescission. You know, you may have steps you have to take at the federal and state level for making filings. You know, they're probably are going to be extra fees and penalties you may have to pay at that point as well.

So all this takes time, right? And one thing that I'm sure the two of you know as well as anybody, but time is what kills deals. So, you know, the longer it takes from when you, it's almost like fishing, right? When you get that fish on the line, if you've got to struggle with it for a long time, there's a chance it's going to get off the hook. But, you know, if you set that hook properly and you bring it in easily, then you can get to the finish line and get that fish to shore much more easily.

You know, in the security area, you know, when we're looking at the exit transaction, if you've done all those steps properly, you don't have those hiccups. You don't have to fight as much. You just can get the deal done and move forward.

And that's always one of my big, big goals is just making sure things are done in a way to efficiently get to that finish line. You got to get that fish in the boat and then hit it with a bat, Jim, right over the head. That's how you get it to stop flipping and flopping.

Okay. So here's a question that business owners are going to ask me. So I'm going to ask you, I go public at 15 million, 20 million in annual revenue and going public requires, especially if I do it with you, that I get everything in order, right? All my ducks are in a row.

We've gone through due diligence to make sure that we're going to do this transaction properly. Is it easier for me then if private equity wants to come and buy me or is it more complicated? Easier is a really interesting word for the question. I mean, in the law, in so many instances, the answer is it depends, you know, they, I mean, in the private equity world, there are, you know, many very sophisticated buyers, right, who are coming in and they can be very, you know, very ruthless to deal with at times.

They're certainly going to ask very pointed questions. They're going to push you very hard on your valuation, you know, in a lot of these areas. You know, so it has its own challenges.

An IPO, I mean, one thing for people to remember, an IPO doesn't necessarily mean that the business owner is fully exiting the company, right? It's kind of like a mini exit, if you will. It can give the business owner the ability of pulling some chips off the table, so to speak, bringing in some extra capital for the company to continue expanding, you know, things like that. So it would be, I don't know that I could say one is easier than the other.

They both have their own steps you have to go through and their own unique challenges, I guess. Okay. I want to pick up on the business owner.

So there are things that do change. So they may, they will still have a role in the company often, but the ownership and control is going to be different. It's particular control.

Let's talk about that because now we have shareholders involved once we go public. Right, correct. I mean, certainly in the IPO process, you have, you know, ongoing obligations to a new group.

You know, you're going to have additional shareholders coming in. You know, companies will have the requirement of filing quarterly and annual reports with the Securities Exchange Commission. That involves continually having their financial statements updated each quarter, having them audited annually.

So, you know, so there certainly are additional obligations that they have to take on at that point. There's a cost associated with that as well, obviously. So there are steps and in the private equity world, they likely aren't going to pick up all of those types of things.

Jim, if an ESOP is involved, obviously the trustee will be involved in the process of going public. Let's think about it the other way. If, let's say there's an employee-owned company and they want to take a portion of the company and go public and have the ESOP buy shares in the company.

Is that two separate transactions? Because we get a lot of questions about ESOPs and we get a lot of questions about, you know, going public and that sort of thing. Give us the overview of how you've seen deals done where the ESOP participates or the ESOP is part of the exit. Give us the lay of the land related to ESOPs and going public or this type of transaction.

And Jim, when we talk about ESOPs here, I want you just to explain to us the ownership aspect of it. I realize you're not a tax attorney. We're not looking for tax guidance here.

Tell us how the ownership plays out related to an ESOP, whether an ESOP is part of purchasing shares or an ESOP is part of the exit process. They already own the shares. Sure.

Happy to do it, Dave. So, you know, when you're conducting a registration statement, filing a registration statement, conducting an offering with the SEC, there are, you know, a couple components to it that you can include. One is the component where the company is actually raising new capital and they're selling new shares into the market or into shareholders.

You can also include what's known as a selling shareholder component, where in that you could include the individual owners of the ESOP, the ESOP itself, the pre-existing investors in the company, no matter who they are. If you're using an underwriter as part of this process, the underwriter is going to put some guardrails around that and they're going to certainly not want all of the insiders to just start dumping their shares onto the market. But, you know, there's certainly the potential of negotiating for some liquidity for some of the insiders in that case.

Then as far as the purchasing side, you know, in an IPO, you know, it's a public offering. You're not restricting who can buy into it. So as long as the ESOP has authority internally for making a purchase like that, which I would think it would, then that shouldn't be an issue.

So let's talk about the process, Jim, because we've been talking about specifics associated with IPOs. Let's go back to the process. Like how long does it take and what does it look like when you're taking the company public? Sure.

So, and we've touched on a couple of things, but, you know, the first step in preparing for an IPO is obviously bringing in proper counsel. And that's more than just the right securities attorney. You have to have a certain type of CPA, someone who's PCAOB certified, which stands for Public Company Accounting Oversight Board.

So you have to have a specific type of CPA that comes in and they have to prepare audited financial statements for the company. So those financial statements are used along with information that I would pull together regarding the company, its operations, the management team, risks about the business, risks about the industry, a description of what you've done in the past, how many of the securities that you've sold in the past, all these types of deals that we've been talking about. All of this has to be disclosed in the registration statement that's filed.

So there's a time period of preparation for everything. And depending upon, you know, how organized the company is, where it's, you know, the status of its financial statements, things like that, that can take a few months, right? It's not something that's happening overnight, but there's a time period for that. We then file with the Securities Exchange Commission.

And in any kind of IPO, the initial public offering, you can bet that the SEC is going to review it. So anytime there is a filing, one of two things happens. Either the SEC will notify you within a few days that they're not going to review the documents, in which case you're basically off to the races immediately, which happens, you know, a lot in follow-up offerings after you've done that initial public offering.

But for the first one, you know, the odds are that they are not going to do it, but they're going to want to understand who this company is and make sure that you're properly disclosing what you need to to the markets. So the SEC will assign a team of their own attorneys and accountants to review the documentation. That team will come back within 30 days.

Typically, it's the afternoon of the 30th day, but they'll come back with a list of questions and comments. You know, there's, you know, specific, as I said, there's specific items we must disclose, items we have to tell about the business. You know, at its most basic, for example, regarding the management team, we're required to tell what their experience is and cover, you know, cover a minimum period of five years associated with that.

Well, let's say Dave is going to be, he's on the board of directors for a company that we're taking, that's being taken public. And in that disclosure, somehow we omit to say what he was doing during 2022. So, you know, so three years ago.

Someone at the SEC should see that omission in his biography, and they should come back and say, what was Dave doing? You know, and making sure that the answer isn't, oh, he was in jail for securities fraud, right? You know, so you have to make sure that you're hitting all those things. There's also a concept, and I use this not just for my SEC files for everything, but the filings have to be written in what's called plain English. You know, that sounds kind of intuitive, but historically, attorneys, I think, got kind of tied down in too much legalese.

And, you know, a number of years ago, the SEC changed this concept. They want everybody to be able to understand it. So I refer to it as the grandmother rule, and I use that for basically everything I'm doing.

I want the documents that I help prepare to be in a language that your grandmother can understand. And you kind of use that with the registration statement also. So you file that, they come back 30 days on it, and it may be, oh, paragraph two on page 17, it's, you know, it's too technical, and we need you to bring it down into plain English.

It could be something like that. So they'll have a laundry list of comments, you know, for the company. At that point, the company, its auditors, and I get together, we start going through them, and we start drafting responses and edits to the document.

So we will then file an amended registration statement with the SEC. They then come in and review the amendments, look at the changes we made, see do they answer the questions that were posed originally. They can come back and have follow-up questions, and the process just goes back and forth until we reach a point that they say, you've satisfied us, you've adequately answered the questions, and you can move forward with your offering.

This is a very complex process, and I want to make sure that folks appreciate this. So I'm curious if you've had companies come to you who hadn't started this process with an attorney who knows what it's going to look like, who anticipates those questions and knows best how to respond to them. Yeah, I end up having to correct, I hate to say it, but I don't want to call them mistakes, but correct issues that have arisen from other attorneys or entrepreneurs doing this on their own over the years.

As I said, online these days, many people can go and they can find examples of documents for a lot of different types of deals. Those are in, I don't think I've yet seen one where it fit the situation perfectly. So there's always this time of we have to go in and take a look at what's been done and correct it.

So yes, it happens on a regular basis that I have to come in and clean things up for people. So, but it's definitely easier to do it right the first time as opposed to have to recreate the wheel later. Oh, absolutely.

And Jim, I still see it all the time. Folks come to me, I recognize online forums that were used and you end up spending more time and money. And that's really why I wanted to highlight this with you, especially because I mean, this is securities law.

So if you're doing the DIY forums for a partnership agreement or something of that nature, it's still a problem, but you're not dealing with a potential regulatory body that can say, you're not going to go public. So this might be a good time to say, what are the consequences? If you were doing this on your own, or you really messed something up because you didn't have counsel involved, what are some of those potential consequences at this stage? Oh, it can be big and there's business and then there's legal. So on the business side, like I may have mentioned, it takes time to correct these things.

So that can spook investors, it can spook the potential purchaser of the business as they're sitting around trying to wait for you to get this done. They can say, oh, you did X wrong, or you didn't have proper guidance for that. Why should I believe that there's not some other issue? And they just determine that it's not worth continuing to investigate and try to turn over every stone to figure out what else you did wrong.

From the regulatory standpoint, there can be fines, the SEC or the state can come in and say, you're not allowed to raise additional money for some period of time or ever. They put in civil penalties. There's a lot of different things that can come up and none of it's good.

I tell clients all the time, also they have to remember that if they've come in with problematic documents already or potentially problematic documents and they say, oh, can you just review what I've done? Or sometimes people come to me with an offering memo for a private offer and say, I've already prepared this, can you just take a quick look at it? Well, no, because the issue is a couple of issues. One, if I'm coming in and having to look at something just to see what's missing from a document and have to consider every sentence to see if there's, because sometimes even it's just a single word that's missing, that has tremendous ramifications. So going in and trying to just review and change somebody else's work can oftentimes take more time than creating it right from the start.

So Jim, for me, I hear constantly that business owners are intimidated by private equity. That doesn't bother me at all. It's a business deal.

We're negotiating with business people. What you do, candidly, scares the hell out of me because there are criminal penalties associated with doing it incorrectly. So explain to people why and I am going to use my own language.

I'm not attributing this language to you. Do not do this yourself. You are out of your freaking mind if you try to do this yourself.

Explain to people why I feel that way, Jim. No, exactly. I call this my sandbox.

I keep a very small sandbox and this is all I do. For more than three decades, I've been doing these kinds of transactions. I don't do wills and trusts.

I don't litigate things like that because it is so specialized and because the penalties to the company, the potential penalties to me also are severe. Anytime that I get involved in the transaction, there's potential liability for me to be associated with the transaction to prepare the documents to assist in it. Again, that can be everything from financial penalties to on my side of the table, if they determine that I've done things improperly, I could lose my license.

I kind of like having my license. You make sure it's done right. Jim, a question that I get all the time because Nicola and I interact with people who have capital to invest, a question I get all the time, this is separate and apart from an IPO now, is who can raise capital and who needs to be an accredited broker dealer.

Explain that process. I'm an average guy and I come across a friend of mine who invests in companies and he says to me while we're playing golf, Dave, if you find me somebody to invest in, I'll pay you a finder's fee immediately because I live in South Florida, my radar goes up and I'm like finder's fee, that sounds like something that might be shady. When is it shady? When is it not shady? Who can raise money? Who can't, Jim? Dave, that is a wonderful question.

That literally comes up all the time here in particular, like you were saying, for some reason in South Florida, I'm sure it comes up other places as well. Long story short, there is no legal concept of the finder. It's not permissible.

The only type of recipient of a commission is someone who's a registered broker dealer. I hear it all the time also, my buddy Joe, he raised money for something he got a commission for. It doesn't matter.

It's not just an individual also. The commission, if I have a company and I'm raising capital, I'm trying to raise capital and I want to go to somebody else to raise that capital. I need to be hiring a registered broker dealer.

That's a business that has specific licenses with the Financial Industry Regulatory Association and other areas that allow them to legally get that commission. It's not going to my buddy Joe. It's not going to somebody who used to work at a place like that who now does it on their own.

Those people, none of them have the proper licenses. It doesn't matter what you call it. Some people call it a consulting fee or there's the finder's fee.

We can come up with whatever euphemism we want, but it's not legal. That has direct legal issues for both the company as well as the person who's doing this because in Florida in particular, there's actually laws that invalidate the offering if you're doing that. So you've automatically violated the securities laws.

Then with that, to correct it, you have to go back and offer all of these investors the right to have their money back. That's part of the process of correcting this. So if the company doesn't have that money, the regulators are going to be coming and looking for somebody to pay that bill.

They can fine. There can be, again, civil and criminal penalties for the officers and directors of the company as part of this. They can be prohibited from raising a capital in the future.

The person who was the finder, the person who got the commission thinks they're staying on the golf course, like you're saying, because they just put an extra X dollars in their pocket. They're on the hook to repay them also. So it's bad for everybody.

And it does happen all the time. The example that I give because a lot of times people say, oh, again, my buddy Joe did this. He didn't have a problem.

What's the issue? I say, every day we're driving on I-95 and there's someone ripping down the road, right? And they're going there and they might be going 100. They might be doing whatever, X. They're definitely violating the law whether or not they get caught. If they get caught, there's big penalties and big ramifications.

If they didn't that time, they get lucky. But this is even worse because if they're speeding that one time and they stop, then it's kind of done at that point and no one later on is going to say, hey, such and such was speeding down the highway yesterday. In the securities area, that's staying out there.

And if you have any, the regulators learn about the issue, you have an investor who's disgruntled because they didn't make enough money on this and they report it somehow to a regulatory authority or the regulatory just starts checking on their own because you do have to do certain filings with these agencies and they learn of this, everything goes upside down. So it's definitely something you should never do. Yeah.

I talk about this a lot with business owners just because, and this is for anyone who would be doing something like this, just because you've done this a bunch of times and nothing happened does not mean it isn't going to. And here that risk is so high and the consequences are so high that it should never be worth that. So I really want to emphasize that because all it takes is one time.

And essentially what you're doing is engaging in the practice of securities without a license. So you will be brought before those authorities and you will have to speak to what you did and there will be consequences associated with that. Right.

That's precisely right, Nicky. And like I said, that hangs out there. It's not like just because the deal's done, you're okay.

So years can go by and someone has issues with it. It's exactly the kind of thing a really smart lawyer is going to look for and is going to find if their client wants to unwind the deal. It is exactly the kind of thing that a lawyer is going to find.

I promise you, I've worked with lawyers long enough to tell you a really smart lawyer will find this. I actually found that for a client. I mean, I represent people who are putting money to work in deals also and do the review of their contracts, investigations.

And I actually found that situation for a client a couple of years ago. And the company had used an unlicensed finder for this and ultimately we went to the regulators with it. But you actually then have an obligation as a member of the bar, if you see that, you have an obligation then to report it, correct? Right.

I just had something else that we sort of touched on it in our discussion about, you know, if you don't do things right and can get picked up along the way, especially in due diligence, I wanted to ask about that in the M&A context because not just in an IPO context, but in the M&A context, if you were out and you were raising capital and you didn't do things in the up and up and something gets revealed during the M&A due diligence process, that could be a problem for you as well. Right, Tim? Absolutely. It's the same ramification.

You know, the buyer is going to say, you know, we want you to correct this because they don't want to come in and pick up, you know, potential liability hanging over them. It can lead to them being nervous about other problems and you know, mistakes that you've made along the way. And, you know, and again, it's, you know, that time it takes to correct these, you know, puts the deal in jeopardy.

So, you know, time kills deals. So, you know, you may end up losing that buyer. Okay, Jim, let's stay on the shady side of the street now and talk about one of my favorite over beers discussion topics.

And that is stock sale versus asset sale, business broker, protection letter. Who can sell a business? Give us the straight scoop here from the standpoint of who's going to jail and who's not going to jail. Asset sale versus stock sale.

You got a business broker and buyer seller, one wants an asset sale, one wants a stock sale. Business broker doesn't have a series 63 or a series seven license. What's the deal with this? So, yeah, well, first thing I'll say is I'm going to make sure my clients are not the ones going to jail.

So, you know, and nor am I, because I always, I always say whenever I wake up in the morning, I like knowing already where I'm going to bed that night. I don't want surprises in my life or for my clients. But, you know, you know, the, in an asset sale, it's a little, it's a little more simple, but in stock sales is where the issues come in.

And, you know, there are, you know, as you were saying, there are business brokers who are licensed in that area. They can come in and they help in these processes and they, they can, you know, list things and such like that. You know, if you, if someone does have a proper license with that, an entity has the proper license with that, they do have the ability to, instead of selling the assets of the business, sell the stock of the entire business or the, and when I say stock, that's referring to a corporation, but it's the same situation if it's a limited liability company for the interest in that as well.

But they have the ability of selling all of that because the law has determined that functionally it's the same as selling the underlying assets. They cannot, however, come in and say, okay, I'm going to, you know, raise a million dollars for 10% of your business and sell that off. And I want a commission on that.

So at the end of the day, it all gets down to who's getting paid for something. You know, if someone's getting paid for, you know, for raising capital in some way, they have to be licensed. And that's, you know, and that's, you know, through the sale of the whole entity or the sell apart of the entity and it's different licenses apply in the different situations.

So if the business broker sells 66% of the business to private equity, the owner retains that third and it's done as a stock sale, they're okay because it was the entire business involved in the transaction. Is that? Well, not necessarily, you know, so, you know, with that, I mean, and there are, there are, you know, structural considerations that you'd have to get into with that, you know, but if, but, you know, because they're oftentimes in those transactions, you know, there there's hold back where there's, there's, there's a seller participation in the transaction where it may be structured that, that it's documented that the seller's actually receiving purchase for the entire business. And then they're rolling back into that, that deal, a certain amount of money in the going forward business.

That's a different situation than saying, oh, I'm just going to sell off a certain percentage of the business, less than whole. So, so the, the, the technical structure of these deals is very important. David gets back to what you're saying.

You know, these, these are, you know, these are complicated questions and, and you have to make sure that, that they're structured properly, that the language reflects what, what has to happen legally. Documentation is, is structured to reflect what needs to happen to, to make sure that this is done properly. All right.

So here's where the nuance comes in then. So the broker brings the buyer to the table and let's say it's done where it would have been a securities transaction. The broker thinks, hey, the only exposure is to me, not necessarily getting paid my fee.

From what you said earlier, are there implications where the whole deal can be unwound if that happens? How does, what, what, what happens there? You know, again, it depends, you know, for if someone has purchased an entire company and, you know, unwinding that is, is a much bigger process, obviously. And that's, that's, you know, I don't know that I've, I don't believe I've seen that ever in a time where it comes from paying an improper fee to, you know, to a, to a finder, to use that term still. However, the seller could still be exposed to liabilities and fines and penalties and such for, you know, again, for, for making that deal improperly.

But it's, it would probably, I mean, for the deal to be unwound, the buyer would probably have to be, have to be unhappy somehow with the transaction and come in and say that there'd been some sort of fraud that had been, had been committed. That potentially could be shown through, you know, if, if a broker's coming in and using high pressure tactics and making representations that aren't, aren't correct about the company, things like that. So, so I'm not going to say it's impossible, but, but that would certainly be the extreme example.

But coming to you and getting an opinion from you in some ways would protect me if I'm involved in that. It protects me from potentially, as long as I follow your advice, it protects me from some sort of implication if, you know, we're following the law, correct? Certainly. Yeah.

That's, I mean, my, my job is to come in and make sure the law is being complied with and, and structure the deal properly. When we're dealing with private securities, Jim, they're not, they're not required to register with the SEC. So we're not really dealing with the SEC, but there are certainly laws and regulations that apply to those.

So kind of give us a high level overview of what that is so we can make that distinction for the audience between private and public securities. Sure. Sure.

You know, as I was saying, anytime there's an issuance of a security, it has to happen either through the registration IPO process, or it has to meet within one of various sets of rules. They're called exemptions from registration. And depending upon various factors, you have to pick a certain rule, a different rule.

They apply in different situations. That can, that can depend upon things such as, you know, who the investors are that you're going to bring in. Is it one institution or are you looking to raise money from a lot of individuals? What is the financial status of those people? There's a concept in the securities laws called the accredited investor.

And I'll just speak about individuals. That's an easier thing for people to kind of get their head around. But, but the, an accredited investor for an individual is someone who has in excess of a $1 million net worth, excluding the value in their principal residence, or they have $200,000 in annual income for each of the past two years and a reasonable expectation of that continuing, or $300,000 during that, those periods with their spouse.

If everyone, everyone who's investing in your deal meets that criteria, then that sets you down on, on, you know, one certain set of paths and one certain set of rules as a potential. If even a single person does not meet that, and this comes up a lot of times, circling back to something we talked about, your friends and family offerings. You know, oftentimes you're, you know, if you're bringing in your aunt, she may not necessarily meet that definition, right? So if you're, if you're bringing in even a single person who does not meet that definition, that puts you on a different path.

You also have to think about how are you finding these investors? Are you dealing only with people who you have, and this is a key concept, a pre-existing substantive relationship with. People who you knew before you started looking for money. People who you have a, not so it's pre-existing, but it's also substantive.

You know a lot about them. You, you have the basis to understand and believe that they're going to meet that financial criteria. If you're, if you're, again, if you're not going to just be using those people you have that relationship with, and you're going to do what's known as a general solicitation.

Advertise, talk to people, you know, external, go out and find people, new people after you've started the offering. You know, that potentially gets into different criteria and different requirements. So at the start of all these transactions, I have to sit down with the client and we have to walk through what's the process? How, how do you intend to go about raising this capital? What are your sources of capital? Do you know enough? You want to raise $100 million? Do you know people who are going to give you $100 million? Are you going to have to, have to go and advertise for it? You know, all of those factors play into determining which of these rules we have to use.

And then when we determine which rule we're using, that tells us what the documentation requirements are and what has, and what they have to do. So Jim, obviously folks who are listening to this should be thinking, I must engage a securities attorney before I'm going to raise capital, given that you could be going down all these different paths and different requirements that you have to meet. What is the ideal time they should be considering hiring a securities lawyer? I really believe it's, it's when you're starting the business as early on as possible.

I mean, certainly well before you start the process of raising the money. You know, again, you, you have to make sure that your documents allow you to do what you want to do, that they're done in a way that gives flexibility. You know, you, you know, for example, you, there are certain, there may be certain rights or restrictions that you want to put on all of your shareholders, you know, and, and again, with the goal of down the road and either the MNA or IPO or private equity or whatever is making that run more smoothly.

You know, for example, you can include something that's known as drag along rights that you require everybody who invests to agree to. So with that, that would say, for example, that if, you know, the owners of more than 60% of the business, if the founding owner on their own decides that they want to sell the deal and they have a transaction that they want to sell it, they can drag all the other owners into it and force them to accept it. That, that prevents the scenario where, you know, you get a deal and, you know, the company gets a deal and, and, you know, maybe everybody who's an investor and shareholder, except for one thinks it's a great deal.

And that person causes trouble and they're holding up. And, and, you know, depending on the type of structure of the transaction, you may need everybody's approval. So, you know, all of these things play into, to streamlining the process and making that exit seamless.

Yeah, absolutely. I'm glad you mentioned that because those scenarios happen and it's much more difficult to deal with that when you're so far down the road. But if you had planned early and that was already in those early documents, you have those rights secured.

Correct. That's, that underscores why we need to be engaging our security attorneys early. And, you know, I think you've kind of now brought us full circle on plan from the beginning, right? So plan with the exit in mind, what you may end up doing down the road, whether it is taking that company public through an IPO or it's a mergers and acquisitions transaction.

It's thinking about that from the beginning and setting the right foundation so that we avoid the setback. We avoid potential missteps as much as we can. Obviously, we can't avoid everything and minimize all risks, but we can do a great job of doing the majority of it and best positioning you for not having problems down the road when we're building that strong foundation in the beginning.

Exactly. Well said. All righty, folks, you heard it here.

Those of you who are on the shady side of the street, I am going to reference this interview every time you try and twist my arm and get me to do something I will never do. So thank you, Jim Dodrill. In all seriousness, this has been an eye-opening experience.

You know, folks, it is so much better, so much easier for you to pay Jim whatever he wants up front to check things out in advance than for you to pay Jim on the back end, and then Jim has to get potentially somebody who's a criminal law expert involved in getting you out of the mess you create for yourself because this area of the law is nuanced, it's specialized, and it's designed to protect everyone. Whenever you protect everyone, there are a lot of complicated issues at play. So Jim, if people want to reach out to you, what is the best way for them to get a hold of you, to look at something in advance, to help them set up a company when they're getting started, or if somebody comes to them and they have a complex transaction that involves publicly traded shares, what is the best way for people to get a hold of you? Sure.

Well, my email address is cleverly named jimdodrill.com, so that's very simple. Or my website, rather. My email is jim at jimdodrill.com, so those are the best ones.

So I wasn't the most creative at that point in my life when I set that up, I guess. But I kind of like to keep things simple in that regard. They can go to the website, again, jimdodrill.com. My phone number is on that.

That's very simple and straightforward. All right. Fantastic.

Thank you so much, Jim. Again, folks, if you're thinking about a transaction, whether it's now or 20 years into the future, you want to get things set up correctly, it's very easy to reach out to Jim. We're putting all of his contact information down in the show notes.

Jim, we are incredibly grateful that you took the time to join us today. Thank you so much. It's been my pleasure.

I appreciate that. Thank you. All righty, folks, that'll do it for another edition of the Inside BS Show.

My name is Dave Lorenzo. I'm the Godfather of Growth, and she is Nikki G. Thanks for joining us, folks. We hope you make a great living and live a great life.