Entreprenuers Are Often Sued For Fraud Because Of Misleading Investment Offerings--How To Avoid It
Unscrupulous individuals have always been willing to use deceptive tactics to improve their bottom line. Bernard Madoff wasn’t the first or the last big time crook. When business deals go bad claims of fraud and deceit are sometimes included in breach of contract actions. This is often the case in disputes between partners or business co-owners.
Many entreprenuers inadvertently find themselves to be defendants in fraud actions brought by disgruntled investors. Invariably these fraud lawsuits could have been avoided had the business entreprenuer consulted with a lawyer in preparing his investment offerings. By being too cheap to pay for a proper contract,the entreprenuers face potentially disasterous fraud lawsuits that usually allege the entreprenuer mislead the other party as to the facts upon which the investor based his decision to invest.
Often the entreprenuer will use partnership language indicating that he or she and the potential investor willeachinvest X amount of dollars,when what the entreprenuer means is that he has already invested what he considers X amount of dollars (or a different amount plus his efforts or sweat equity) and the entreprenuer is willing to sell an interest in the venture for X amount of dollars. The key to avoiding fraud lawsuits is to be transparent and honest about what you are offering. It’s perfectly fine to say,“Look I have worked my butt off to get this restaurant going. I designed it and caused it to be built. I have equipped it and I am running it. And I think a 25% stake in it is worth X dollars and that’s what I am willing to sell."
The language of the agreement has to be geniune,or the results can be catastrophic for the entreprenuer. Taking the example above let’s suppose the entreprenuer writes his own partnership agreement (or buys one on the internet–same thing–they both stink) stating he will invest X and the investor will invest X. The investor gives his money to the entreprenuer and sometime later a dispute arises.
Instead of simply be contract action or an accounting action* the investor can claim he was duped into the investment and that he wouldn’t have invested had he known the entreprenuer did not simultaneously invest the same amount. A fraud action exposes the entreprenuer to potential punitive damages which could result in the investor getting all his money back plus more,maybe A LOT more.
The moral is it’s better to consult with an attorney before you offer an investment opportunity to potential investors and your agreement must be honest.
*(An accounting action refers to an action,usually brought in equity ,to secure a formal statement of account from one partner to others in order to obtain a judicial determination of the rights of the parties in a shared asset. If one partner feels another has been diverting funds or otherwise cheating him or her,he or she may bring an action for an accounting and ask for the appointment of a temporary receiver. 1 Am. Jur. 2d,Accounting §44. )