Sale of Stock

Securities Offerings

SMALL PRIVATE PLACEMENT

The issues of equity securities usually must be registered with the Securities and Exchange Commission. Registration documents include detailed disclosure, historical financial statements, and third-party audits. This can be a costly process. A private placement, however, is exempt from federal registration. A private placement under Regulation D of the security code can minimize costs and delays while giving a business access to equity capital.

Rule 504 is the most commonly used Regulation D exemption. Under Rule 504, the SEC exempts companies that are raising up to $1 million from most of the SEC registration and reporting rules that govern larger stock sales. The only restriction is that the company must not raise more than $1 million over a 12-month period before or after the offering. Somewhat more restrictive requirements for Regulation D exemptions are outlined under Rules 505 and 506 for larger offerings that include non-accredited investors. Rule 504 itself has no prescribed disclosure requirements, no limit on the number of purchasers, and no investor sophistication standards. If the company adheres to the above limits, it can advertise and sell to any number of people. Some states require additional filings and impose further restrictions. Examine regulations on a state-by-state basis where you anticipate the securities will be sold. It is important to remember that 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.

Although the 504 offering seems tailor-made for entrepreneurs, even simplified stock offerings carry a cost. These offerings are designed to be conducted without the use of an investment banker, but there still are costs associated with marketing the stock offering. The company must either sell the security offering itself or engage the assistance of a licensed brokerage firm. Handling the administration for the first time may lead to unanticipated delays in putting out the issue. Additionally, this method is not for all small companies considering stock offerings. If the company is growing quickly, it may be able to raise more capital by waiting for a traditional IPO.