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Grow Your Own Biz

Grow Your Own Biz - Financing & Captial - Sale of Stock

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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.



An initial public offering (IPO) refers to a company's initial sale of securities to the general public. The key considerations for deciding whether to "go public" include company size, profitability, current stock market conditions, nature of industry, market share, experience of management, and future outlook for the business and industry. Generally, a company needs revenues of around $10 million and net income of $1 million to be considered an IPO candidate, and the company is limited to raising capital in amounts in excess of $10 million. Special circumstances, however, may allow a promising company to go public before it has actually generated revenue.


An IPO offers the advantage of raising capital for growth while increasing the liquidity of the corporation. The offering may also improve the ability to borrow in the future since lenders favorably view a lower debt-to-equity ratio. The disadvantages of public offerings include the possible loss of control, required disclosure of a wide array of business and personal information, and substantial costs. It is important to remember that quarterly performance is strictly monitored and can significantly affect stock price.


Fluctuations in the stock market make it obvious that there are certainly right and wrong times to go public. A company generally wants to sell their stock for as much per share as the market will bear. As reported by The Economist in April 2000, many companies were delaying or canceling their IPOs because the market had yet to bottom out. This may seem odd, since that would mean that their stocks would have to open at a lower price, thereby initially making less money. However, many of these companies are choosing to go public for the purpose of raising currency to acuire other companies, and in that system the value of the stock is less important than the fact that the price is rising.


Discussing your company's objectives with a professional will assist you in making the appropriate decisions. One such professional is the investment banking firm that underwrites the deal. A recent study by (which was reported on in the July 24, 2000 edition of Barron's in an article entitled "Not Created Equal" by Erin E. Arvedlund) noted that having the right underwriter might have an important impact on a newly public company's stock prices. They study found that when certain investment banking companies underwrote the IPO, the new companies' stock prices remained high while other new IPOs experienced dramatic decreases. The author hypothesized that the top investment banking companies attract the top new companies, or perhaps they are simply more effective at convincing investors to hang onto their stock. Whatever the reason, the company you choose should have a history of successfully assisting other companies through the IPO process.

Assistance with Filings


The Small Corporate Offering Registration (SCOR) was adopted by the North American Securities Administrators Association to standardize state filing requirements in conjunction with Regulation D, Section 504, security offerings. SCOR standardizes the state filing process with form U-7, the general registration form for corporations registering under state securities laws. Up to $1 million may be raised at a minimum offering price of one dollar per share. Prior to using form U-7, a company should contact the staff of the securities administrator of each state in which the offering is to be filed to review applicable substantive fairness standards. Please note that not all states have adopted the use of form U-7. The U-7 and issuer's manual may be located through the North American Securities Administrators Association's website,

Coordinated Equity Review Program

Thirty-eight states, including North Carolina, have joined an initiative to simplify stock sales for emerging companies with stock offerings from $5 to 20 million, representing a significant step forward in addressing one of the constraints to small business formation. Under the Coordinated Equity Review Program, companies with small public offerings no long have to go through a separate review and registration process in each state they intend to offer stock. Instead, participating states have adopted uniform standards that guide a coordinated review. This process is expected to stimulate interest from companies and brokers who have avoided multi-state offerings due to the costs involved.


Companies still have to send an application to each state in which they intend to offer stock for sale and send a copy to the Pennsylvania Securities Division that took over administration of the program in 1999 from the Arizona Corporation Commission. Companies applying to Pennsylvania to sell stock are not required to make a separate application for this program but rather should mention that they are seeking this review in the cover letter of their application. Since Pennsylvania is currently acting as the program coordinator, it designates two lead states to collect and consolidate comments from all states involved. Comments are returned to the company, and the lead states work with the company to resolve any issues.

Additional Information Resources:

Pennsylvania Securities Division
North American Securities Administrators Association

Investment Intermediaries - Investment Banking

Investment banking companies generally handle debt or equity private placements in excess of $1 million. Using an investment banking company for their access to a broad base of capital sources increases the probability of successfully obtaining financing. An investment banker serves as an intermediary to bring together those that need funding with those that have funds. Fees typically run from 5 to 8 percent of the gross proceeds. Some firms, such as Ostrander, Burch & Company, may serve as principals investing their own funds as well as filling the intermediary role.

Disclaimer: The information presented here is intended as a public service. Although efforts have been made to assure that the information is accurate and up-to-date, the user assumes all responsibility for the use of information provided. The sponsors of this web site expressly disclaim any liability for the information provided herein.

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