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Let's say you have exhausted your personal financial resources as a means of funding your fledgling business and you cannot get a loan. Or, assume you simply do not want your company to incur further debt. What other source of capital is available to your company?
With this challenge, you may wish to consider an equity offering -- an offering of ownership interest in your company. For example, if your business is organized as a corporation, you might consider an offering of shares of common stock in it. Such stock typically carries with it voting rights on matters put before the corporation's shareholders.
The following outlines a series of questions which you should ask in considering an equity offering. The answers will depend upon specific facts surrounding your company.
Before calling your friends and neighbors about a stock offering in your company, be aware that "stock" comes within the definition of a "security" under securities laws of Alaska and most other states, as well as federal law. For example, under Alaska law, a security includes an offer of shares of common stock, options to acquire that stock, limited partnership units and limited liability company interests.
These securities laws typically require registration of a securities offering prior to making the offering, with limited exceptions.
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In contemplating an equity offering, the company must consider numerous questions. Some of these questions might include:
There are a number of possible answers to these questions. Your task is to winnow out irrelevant information and identify answers which best fit you and your company's goals.
Let's consider a few possible action items for a successful offering:
If possible, the company should structure its offering to satisfy one of the securities registration exemptions available under federal law.
For example, the offering might be formulated to follow the federal "private offering" securities registration exemption. Advantages of this exemption are that the company may rely upon it without submission of the disclosure statement for review and may make offers in more than one state jurisdiction.
Be aware this exemption prohibits general solicitation, as described in federal regulations, in the company's efforts to seek investors. A further disadvantage of this exemption is that a violation of one of its significant terms can void the exemption for the company, placing it in violation of the registration requirements of federal law.
As an alternative, the company may wish to take advantage of a federal "intrastate offering" securities registration exemption. This exemption requires that all offers and sales are made to residents in one state. That state must be the one in which the company is organized and carries out a significant amount of its business.
An advantage of this exemption is that the company may rely upon it without submission of the disclosure statement for review. The exemption neither limits the amount of money raised nor prohibits general solicitation of investors.
A disadvantage of this exemption is that even one inadvertent offer of the security to a resident of another state voids the exemption, placing the company in violation of the registration requirements of federal law.
Regardless of the company's compliance with the federal private offering or intrastate offering registration exemption, it must separately comply with state securities registration laws in each state in which the offer is to be made, unless there is an available exemption and its provisions are satisfied.
In summary, a company may reach a point in its growth where increased capital needs present an opportunity to consider an equity offering. The prudent entrepreneur will consider carefully numerous questions about the proposed offering as a first step on the path to solving those capital needs. The second equally important step involves carefully fashioning answers to those questions before launching the offering.
Julius Brecht is managing shareholder and an attorney in private practice with the law firm of Wohlforth, Vassar, Johnson & Brecht in Anchorage. He may be reached via e-mail at jbrecht@wvjb.com. The content of this article was not prepared as, and must not be construed as, legal or investment advice to anyone.
Have you as a small business owner ever been faced with the challenge of not having sufficient capital for your business to grow at a rate which you believe is necessary for its success? Or, do you as an entrepreneur have an idea for a new product or service but not sufficient capital to develop it, let alone put it into production?
basic premise of securities law, which applies to your company's offering, is the disclosure of all material facts related to the transaction. This disclosure is typically made in writing through a disclosure statement. The specific required content for a statement may vary from state to state and between those jurisdictions and federal law. However, it typically includes terms of the offering and other material facts, such as price per share, risk factors for, and use of proceeds from, the offering.
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