Why Capital Raising Lawyers Hire Private Investigators

Why Capital Raising Lawyers Hire Private Investigators

Capital raising lawyers (also known as securities or fundraising lawyers) advise companies, startups, funds, or issuers on raising funds through private placements, venture capital, private equity, crowdfunding, or other equity/debt offerings under regulations like the Corporations Act 2001 and ASIC guidelines in Australia. While their primary role is drafting documents (e.g., private placement memorandums, subscription agreements), ensuring compliance, and structuring deals, they occasionally hire private investigators (PIs)—licensed under state laws (e.g., NSW Security Industry Act)—for enhanced due diligence in high-risk or complex transactions. This is less routine than in litigation-heavy areas but critical to mitigate fraud risks, protect clients, and avoid regulatory issues.

Here are the most common reasons capital raising lawyers hire PIs:

• Conducting Investigative Due Diligence on Investors or Parties In private placements or venture deals, lawyers may verify accredited/sophisticated investor status beyond self-certification. PIs perform background checks to uncover undisclosed issues like prior fraud, litigation history, or regulatory violations that could expose the issuer to liability.
• Assessing Risks in High-Risk Investments or Funds For clients raising capital in speculative ventures (e.g., startups, crypto, or emerging markets), PIs investigate potential red flags, such as hidden conflicts, suspicious backgrounds of founders/promoters, or Ponzi-like schemes, helping lawyers advise on disclosures or deal abandonment.
• Verifying Representations in Fundraising Documents PIs trace claims about company assets, partnerships, or financials when suspicions arise, ensuring accurate private placement memorandums (PPMs) and reducing securities fraud risks.
• Background Checks on Key Individuals In venture capital or private equity contexts, PIs vet founders, executives, or co-investors for integrity, criminal history, or past misconduct to inform term sheets or investor protections.
• Investigating Potential Fraud or Misrepresentation If irregularities emerge during fundraising (e.g., exaggerated valuations or hidden liabilities), PIs gather evidence to support withdrawal, renegotiation, or reporting to ASIC.
• Supporting Compliance in Cross-Border or Complex Raises For international investors or offshore elements, PIs trace beneficial owners or verify anti-money laundering (AML) details beyond standard checks.

This practice is more common for investor-side lawyers or in contentious raises, where standard legal/financial due diligence (often by accountants) isn't sufficient for "investigative" depth. PIs provide discreet, admissible insights that help avoid post-deal disputes or SEC/ASIC scrutiny. Costs vary but are justified in high-value deals to safeguard compliance and client interests. Ethical PIs ensure privacy law adherence. While not everyday, it's a strategic tool in risk-averse fundraising.