In the investor realm, there are institutional investors and non-institutional investors. Even though both investors are just that, the business relationships between the two do not follow the same structure. This is due to the nature of the differentiating securities [investment] laws. If you’re a business seeking investment capital, it is important to note institutional investors, generally have more input in regard to the business. Some of which may include budgets, fees, governing documents, agreements, etc.
What is an Institutional Investor?
In short, institutional investors are the big guys on the block that can pull in money quickly. They have an existing fund, that makes it easier for them to raise and produce funds quickly. They are organized as pension funds, mutual funds, money managers, insurance companies, investment banks, commercial trusts, endowment funds, hedge funds and hedge fund investors.
If an I.I. is making an investment in your business, you’ll generally find that the securities regulations involved are much easier to comply with on your end. That’s because the securities laws have been set up primarily to protect non-institutional investors.
How Do You Know If You’re Interacting with an Institutional Investor?
Generally, you’ll know if you are. However, assume you’re not dealing with an institutional investor. If you’re not sure, ask yourself, and the investor, some of these questions that might help you decide.
- Are they investing their personal funds? If they are, they are not an I.I.
- Are you negotiating the terms of your operating agreement, fees, loan documents and other operational agreements with them? If so, they’re much more likely to be an institutional investor. With most other investors you may or may not be negotiating general terms, but they’ll have much less input in the actual legal terms and provisions in your documents.
- Do they have a track record of funding multiple projects in the millions of dollars or more with the personal funds of thirds parties? If yes, then they are more than likely to be an institutional investor.
- Are you dealing with a parent company and not the entity that will be investing itself? This is a major I.I. indicator. Although run by parent companies, institutional investors, often create separate entities to invest in projects.
These are just a few things indications that could assist you in determining whether or not you are working with an institutional investor. Remember, you should always consult with an attorney before negotiating with an institutional investor. As you will need an attorney to help navigate you through the tricky and risky securities laws.
Why is it Important to Know When You’re Dealing with an Institutional Investor?
Most people will operate their businesses and never interact with an institutional investor. If you do have the opportunity to work with an institutional investor, you may find yourself with less risks, less costs and less hassle in the long run. However, since you will not be interacting with individual investors in the long-term, you may see more cost on the front end. It’s important to note that institutional investors do exercise more control, therefore, your management freedom will be more constrained.
If you’re getting involved with an institutional investor, or you’re generally looking to get involved with investors, our attorneys at Dodson Legal Group are here to assist you. Want assistance with your business investment needs? Book your FREE 1-hour virtual consultation.