My Transfer Agent

Type of Private Offerings

Most issuances of equity securities must be registered with the Securities and Exchange Commission. Registration documents include detailed disclosure, historical financial statements, and third party audits that take time to assemble. The process requires many hours of assistance by attorneys and accountants, and the SEC review can last from 20 to 60 days. Registration alone can cost you thousands of dollars even before the offering makes any money.

A private placement, however, is exempt from federal registration. Exemptions have always been available under the Securities Act of 1933 (the Act), but the original exemption provisions (contained in sections 3(b) and 4(2) of the Act) were vague and, therefore, risky for business owners to invoke. In 1982, the SEC adopted Regulation D, which set forth objectives and quantifiable rules for exemptions from federal registration. Offerings exempt under these rules 504, 505 and 506 have become the most common cost and time saving methods for small and growing businesses to raise capital from private investors.

The best way to raise money is issuing stock in your private company. In most cases you should only issue 10% to 35% of your company (depending on the amount of capital sought) so that you retain the majority of the shares and the control of your company. The best two things about stock offerings are no loan payments and no risk of your personal assets, such as your home, car etc. By selling and issuing stock in your corporation, it can be almost like having a license to print money. Each stock certificate represents money (capital) to your business.

Rule 506--Provides an exemption for limited offers and sales without regard to the dollar amount of the offering. This exemption does not limit the number of accredited investors, but the number of non-accredited investors may not exceed 35 investors. (An accredited investor is any one investor with a certain net worth and or experience in the purchase of stocks.) All non-accredited purchasers, either alone or together with a designated representative must be sophisticated enough (i.e., have the knowledge and experience necessary) to evaluate the merits and risks of the investment. (An offering company typically determines the sophistication of its investors with a questionnaire subscription agreement.) Rule 506 requires detailed disclosure of relevant information to potential investors; the extent of disclosure depends on the dollar size of the offering.

Rule 505-Offerings may not exceed $5 million, less the total dollar amount of securities sold during the preceding 12 month period under Rule 504, Rule 505 or Section 3 of the act. This exemption limits the number of non-accredited investors to 35 but has no investor sophistication standards. Rule 505 requires disclosure similar to that required for Rule 506 offerings, under $7.5 million.

Rule 504-Offerings allow a business to raise a maximum of $1 million, less the total dollar amount of securities sold during the preceding 12 month period, under Rule 504, Rule 505 or Section 3 of the act. However, a business can raise only $500,000 by the sale of securities to persons residing in the states of Montana and Alaska, which have no disclosure laws applicable to the offering. For the states that do have disclosure laws, which are 48 out of the 50 states, a business can raise up to $1,000,000. Rule 504 has no prescribed disclosure requirements, no limit on the number of purchasers, and no investor sophistication standards. Rule 504 is the most commonly used Regulation D exemption. Offerings that are exempt under Rule 504 are relatively simple to prepare, which reduces cost and delay and can generally be underwritten by the offering company (the securities being sold by the company's own officers, directors and employees). Although Rule 504 has no prescribed disclosure requirements, you should always prepare and use an offering document for your protection. The exemptions from registration provided by Regulation D do not include exemptions from the anti-fraud or civil liability provisions of any of the federal or state securities laws. These provisions are broad and include civil and criminal penalties for the misstatement or omission of facts that are relevant to making a fully informed investment decision. If your company makes a Rule 504 offering without providing investors with an offering document, your company, its board, and its principals will be at an extreme disadvantage in defending themselves if your business is confronted with a securities fraud action.

A Rule 504 offering document does not require the detailed disclosure of a Rule 505 or 506 offering, but it should include the following information:

A description of the business being conducted and/or intended to be conducted along with the general development of the business during the preceding five years or as long as it has been operating, if the business is less than five years old.
A description of the principal products or services, their principal markets, and the methods of distribution.
A description and cost summary of any research and development activities during each of the last two fiscal years.
The number of full and part-time employees and their special qualifications.
A description of any special characteristics of the company's business or industry which may have a material impact on future financial performance. These may include existing or probable governmental regulations, dependence on one or a few major suppliers, unusual competitive industry conditions, etc.
Summaries of the principal factors that make the investment risky. These factors might include:

If there is a material disparity between the offering price of the securities and the effective cash cost to officers, directors, promoters and affiliates for shares acquired during the preceding three years, there should be a comparison of such prices.

The uses and allocation of the proceeds.

A brief description, including the location and character of the company's principal facilities and other important physical properties. If any are leased, include the basic lease terms such as length of lease, rent, renewal options, etc.
Relevant information regarding directors, officers and significant employees. (Include information such as ages, educational backgrounds and business experience, as well as any special information such as criminal convictions, bankruptcies, etc.)
The aggregate annual compensation of the three highest paid officers and directors, and the total for all officers and directors.
The security ownership of each officer and director, and the identity of each person owning 10 percent or more of the company's shares. (Include the ownership of outstanding warrants or options to purchase additional securities by any of these individuals.)
All significant transactions between the issuing company and any of its officers, directors or principal security holders within the previous two years or those presently contemplated.
A detailed description of the securities being offered. Include such matters as dividend rights, voting rights, liquidation rights, preemptive rights, conversion rights, redemption provisions, sinking fund provisions, liability for further calls or assessments, restrictions against sale or transfer of the securities, etc.
A description of how the securities are being sold, the purchase price commissions percentage, if any, the minimum number of securities that must be sold for the placement to be effective, etc.
Financial statements that conform to Generally Accepted Accounting Principals.

It is necessary to provide accurate and complete information to prospective investors in order to eliminate potential liability. The exact scope of these disclosures will vary depending on your business and the transaction. In most cases, there is a market for your company's securities, and a Reg. D Series Offering, Limited Partnership Offering, or a U-7 Offering can make sense. Most security offerings will require costly preparation and involve financial risk for your business, but a Rule 504 Private Placement, Limited Partnership, or U-7 can reduce costs and risks while enabling your company to obtain the growth capital it needs.