Elizabeth Holmes is infamous for creating Theranos, a blood testing startup who exaggerated claims about what her testing technology could and would do. She raised $945 million while selling a product that never worked.
She’s been sentenced to 11 years of prison plus three years of supervised release.
She was convicted on four counts of defrauding investors.
A person commits investment fraud or securities fraud when they use deceptive practices to sell a security. It can be charged at the federal level or at the state level. Federal charges are far more common than state charges.
This is, of course, a good opportunity for founders and CEOs to examine their own practices and to decide if they could expose themselves to criminal charges.
When does a sales pitch turn into fraud?
An investment sales pitch can turn into fraud when you start making untrue or inflated statements about your products. Any claims you make should be factual in every way. Resist the temptation to inflate important numbers like sales figures, or important facts, like research and test results.
Be sure you are reporting income sources accurately. Hire an auditor to help you clean house financially before you go looking for more money.
You must also avoid omitting material facts that could change the outcome of an investment’s decision, were it known. Make sure that investors know exactly what’s going on by your company and try to eliminate vague language that could be misinterpreted.
The prosecutor must prove that you intended to defraud your investors. If you are simply mistaken, it’s possible to defend you. But if you know that you’re making an inflated, exaggerated, or untrue claim, you could find yourself in trouble.
Start-Up Fraud is Tempting
There are so many venture capitalist firms willing to offer startups a great deal of money, and not all of them do their due diligence. The market is ripe for fraud, even rewards it until a person gets caught, and regulators are starting to sit up and take notice.
Business is complex, and it’s more than possible to make a mistake.
If you find yourself under investigation for startup fraud, don’t hesitate to call an experienced white-collar lawyer. We can help you take the careful next steps you may have to take to avoid Elizabeth Holmes’ fate.
You want to be remembered as a brilliant entrepreneur, not as someone who conned the public out of a great deal of money.