Legal Question in Investment Law in Illinois

Investment in Project in return for profit

My friend has an IT company and now he has developped a website which will make money through membership payments and advertising. A former client believes in the website and has offered to invest 150,000 in it in exchange for 5% of the profits.

He does not want to be a partner, my friend does not want him to be a partner. He is ok with losing the money if the project fails. It is not a joint venture.

What kind of legal relationship is this if they want to draft an agreement? There are no stocks, so is he an investor? Is he lender? But he doesn't want his money back...

I'm stumped. You would think this is a common situation (maybe not?) but I can't find information anywhere.

Thank you!


Asked on 10/23/08, 2:09 am

1 Answer from Attorneys
Adam S. Tracy Securities Compliance Group Ltd

Re: Investment in Project in return for profit

Thank you for your question.

He would be an investor. This is actually a very common situation. In theory, if he does not want to be paid back over time, his investment should take the form of "equity" - eg, stock, units, etc.

The key to protecting yourself in this transaction is to be mindful and (a) federal/state securities laws; and (b) protecting yourself against liability in case something goes wrong. While he seems to not be so concerned about his money and want to take a backseat in terms of management, that can, and often does, change. Thus, in order to meet these two requirements, you may be best served by predicating the investment upon a well-written investment agreement between the two of. The agreement would ideally state that person x is giving person y $150,000 in exchange for z shares/units (5%) of the company, subject to the following terms and conditions - a,b,c,d, etc.

Please let me know if you have any further questions, as there are some nuances to something like this. You can reach me via email: [email protected]

Thanks

Adam Tracy

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Answered on 10/25/08, 6:09 pm


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