Step by Step- The Stock Offering Process - Getting the money you need for your projects
Step One: Corporate Structure and Pre-Offering decision items: total authorized share capital: 30,000,000 to 50,000,000 total shares. Post-offering you still want to own and control 75% of your company, the investors thus owning 25% of the company post-offering. You may have both common and preferred stock for the total authorized share capital pool, however having only common shares will keep complexity to a minimum and streamline the offering process.
Return on Investment- Most investors that purchase private shares are seeking a return provided by an exit strategy of IPO within 2-4 years of purchase. If you are not planning or expecting the company to be bought out, then you will need to address the issue of paying a dividend return to investors at some point in time. We suggest that this dividend begin by at least year 2 if possible. The return is set by company’s management and the board of directors, according to the income generated by the company that year.
Now we must determine which offering program type meets your needs most accurately: Regulation D 504 ($1,000,000 and under in a 12 month period). This program is the cousin program to the SCOR U-7. We recommend the 504 for companies seeking an easier, less complex offering to implement. The 504 has no audited financials requirement. The disadvantages? In each state that you plan to sell securities you will need to check with the state compliance regulator to make sure the offering is in compliance. There is no regional review for the standard 504 program. Also State blue sky filings are typically straightforward in nature and do not require much time to complete.
Regulation D 506 (over $1,000,000) same as the 504 with the following difference: You may raise over $1,000,000 in a 12 month period with this offering. There is no principal cap to the amount you can raise. If you have 2 years of audited financials, or for early stage companies at least an audited balance sheet, then you may sell shares to a maximum of 35 non-accredited investors and an unlimited number of accredited investors. If you do not have audited financials, then you can only sell to accredited investors.
Accredited investors are individuals or joint net worth with that persons spouse at the time of purchase that exceeds $1,000,000 or has individual income in excess of $200,000 in each of the two most recent years or joint income with that persons spouse in excess of $300,000. The 506 program still requires you to check with each individual state regulators before selling shares to investors in their state-there is no regional review like the SCOR program.
SCOR U-7 Program ($1,000,000 and under) This is a sophisticated version of the standard Regulation D 504 offering. The maximum amount a company can raise in a 12 month period is $1,000,000. Audited financials are required for offerings over $500,000.
Business Plan- The company needs to have a well developed business plan to successfully implement the SEC programs. Also, always qualify any projections of company performance. Do not set hard timelines- always use an “anticipated timeframe”. Identify potential risk to investors- the key here is to identify and disclose these risks to the investor before they invest.
Step Two: Prepare the offering disclosure memorandum and subscription agreement. Disclosure documents basically describes the offering structure to the investor, discloses the potential risks to investors, discloses information about management, use of proceeds, and other important aspects of the IPO to investors. The subscription agreement is the contract between the investor and the company regarding the purchase of the shares.
Step Three: Set up Investment Escrow Account: Investment escrow accounts should be set up with a proper escrow agent- many people typically use an attorney for this purpose. This account will serve as the escrow for investment funds up until the company exceeds the minimum offering amount- at which time the proceeds in the escrow account will be drawn down into the company’s corporate operating account and be available for use. Some banks will act as escrow agents to help lower the cost of the offering expenses. You may want to interview some local banks.
Step Four:
Complete and file Form D compliance filing: The Form D filing is the only
compliance filing that is sent to the federal government broken down as follows:
Page 1- Name of offering, The Regulation D program being chosen, Type of filing=
new filing, Name of issuer, Address of Executive Offices, Address of Principal
Business Operations, Brief description of business, Type of Business
Organization, Actual or Estimated date of Incorporation, Jurisdiction of
Corporation, General instructions section- gives the address of the SEC offices
where we will be mailing five originally signed copies of the Form D document.
Page 2- Basic Identification Date, Information about the offering like have you
sold or intend to sell securities to non-accredited investors? Minimum accepted
investment from any one investor? Have you secured a Broker to sell your shares
or has the broker sold shares already? Page 3- offering price, number of
investors, Expenses and Use of Proceeds: 1. Type of security-preferred or common
stock, investors information-if sold shares prior to completing this filing,
Type of offering information- Have you sold securities in the past 12 months
using a Regulation D offering. Page
4- A statement of Expenses Transfer agent fee, Printing and Engraving, Legal,
Accounting, Engineering, Sales Commissions, Other Expenses and Adjusted gross
proceeds after expenses are taken. Page 5- Federal Signature: Print name of
Company, the person signing the Form D, and the title of the person signing.
State Signature- If any member of the company has been sanctioned for a
securities violation.
Step Five:
Review the rules and regulations concerning Regulation D offering.
Step Six: Marketing your offer: Use of brokerage firms, investment clubs and private investors.
Step Seven: The Sale. We have interested investors and they want to invest. First, we call the state regulator for the state the investor resides and check for any filing information that has to be completed with the State. The investor will sign the Subscription Agreement and send with check to the company. The company will deposit check in escrow account.
Commissions are not paid to brokers until after the offering breaks escrow. Have stock certificate printed (check with State for language that needs to be on the document). Most local printers have the ability to print a certificate. Should show Corporation Name and Share Amount they own. Maintain a registrar or accounting book on all investors show date purchased, the amount, contact information, keep sign Subscription Agreement in the investors file.
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