Small business offerings up to $1,000,000.
There is simplified way to raise small amounts of money by selling shares, in your private company, those shares should be $1.00 or more. This can be accomplished for a private company without going public. We call this “a small company offering registration”
With this offering you’re able to raise up to $1,000,000 in any 12 months. This is accomplished through direct advertising to the public. There’s no requirement that an investor must be accredited or even sophisticated. And there is no limit to how much he or she can invest.
In short, your auto mechanic, neighbor, shoe salesman, gardener, plumber and even members of your church are all potential investors.
This offering was designed to minimize costs for a small business wishing to raise capital through a securities offering. Accordingly, the securities commission uses a more relaxed standard in reviewing these offerings. All that is required, is this document that qualifies as the prospectus to solicit investors.
There is no requirement to register this offering with the Securities and Exchange Commission (SEC) as it falls under an exemption. This offering is simplified and can be advertised, and sold direct to the public, either through commissioned selling agents or sell the securities to the public yourselves through classified ads or other means of mass solicitation, such as the internet. Investors are not limited as to number or type, nor is there any restriction on the amount that may be sold to any one person.
The only securities agency that must authorize this offering circular, are from those states in which you choose to raise money from.
Just as the SEC may, examiners from the State Securities Division can comment on the disclosure provided and request different or more detailed disclosure, equivalent to an SEC comment letter.
There may be an unlimited number of promotional shares. However, those in excess of 60% of the shares to be outstanding after the offering must be escrowed for a certain period of time, usually four years, or until the company satisfies other release provisions in the escrow agreement. In lieu of an escrow, the company may enter into a lock-in agreement that does not involve the expense of a third-party escrow agent. Shares held in escrow or lock-in are still outstanding and may be voted by their owners to retain control. All dividends and other distributions upon securities held in escrow, and any substitute securities or property received upon any merger or reorganization, must also be placed in escrow.
Sample promotional shares escrow agreements and model promotional shares lock-in agreement are available.
The registration is designed to be exempt from federal registration through the SEC, for offerings of securities of non-publicly-held companies. It permits a company to sell its securities by advertising or other means of general solicitation and does not impose resale restrictions on the securities if the offering is registered at a state level. Currently, the SEC does not review these offerings.
Selling the Offering
The overwhelming majority of offerings are sold directly by the company. These offerings are frequently called "self-underwritten" offerings or "direct public offerings" (DPOs). Commissioned selling agents or finders may also be used. Mass solicitation may be used, including public meetings, advertisements, and the internet. Any type of investor may purchase any amount in the offering.
A selling agent or finder engaged in the business of selling securities must be registered as a Broker-Dealer with the Securities Division. Individuals receiving commissions or other compensation for selling securities in the offering must be registered as securities salespersons and have passed appropriate examinations.
Nonetheless, if the corporation is selling the securities directly without paying commissions, officers and directors of the company may become registered to sell the offering without taking any examinations. In that instance, registration is accomplished by filing a completed Form U-4 salesperson application and paying the required $40 licensing fee.
Proceeds of the offering must be placed in an impound with an independent bank or similar institution until the minimum amount necessary for the company to achieve its stated objectives is raised. The company may raise additional funds so long as their anticipated use is clearly disclosed.
Types of Companies
All American and Canadian corporations and LLCs may raise money using this offering, with certain exceptions. Specifically, this type of offering may not be used:
To register securities for resale on behalf of anyone other than the issuer itself; Nor by partnerships; Nor by companies in the business of petroleum exploration or production, mining, or in other extractive industries; Nor By holding companies, portfolio companies, issuers with complex capital structures, commodity pools, equipment leasing programs, or real estate programs; Nor By "blind pool" offerings (for which the specific business or properties cannot be described);
However, for a business or business expansion this offering would be appropriate.
Disqualification: If the company, any of the company's management, or 10% or greater stockholders, have had certain regulatory problems in the past;
By any type of company whose securities are subject to registration with a governmental agency other than the Securities and Exchange Commission or a state securities regulator. (For example, the securities of banks and other financial institutions are regulated by separate agencies);
By public companies that report to the SEC under Sections 12 or 15(d) of the Securities Exchange Act of 1934.
Unless the Administrator determines that it is not necessary under the circumstances that the disqualification under this section be applied, application for registrations shall be denied if the issuer, any of its officers, directors, ten percent or greater stockholders, promoters, or selling agents or, any officer, director or partner of any selling agent:
has filed an application for registration which is subject to a currently effective stop order entered pursuant to any state or provincial securities laws within five years prior to the filing of the registration statement;
has been convicted, within five years prior to the filing of the current application for registration, of any felony involving fraud or deceit, including, but not limited to, forgery, embezzlement, obtaining money under false pretenses, larceny, or conspiracy to defraud;
is currently subject to any state or provincial administrative enforcement order or judgment entered by that state’s or province’s securities administrator within five years prior to the filing of the current application for registration;
is subject to any state or provincial administrative enforcement order or judgment in which fraud or deceit, including, but not limited to, making untrue statements of material facts and omitting to state material facts, was found, and the order or judgment was entered within five years prior to the filing of the current application for registration;
is subject to any state or provincial administrative enforcement order or judgment which prohibits, denies, or revokes the use of any exemption from registration in connection with the offer, purchase, or sale of securities;
is currently subject to any order, judgment, or decree of any court of competent jurisdiction that temporarily, preliminary, or permanently restrains or enjoins such party from engaging in or continuing any conduct or practice in connection with the purchase or sale of any security, or involving the making of any false filing with the state, entered within five years prior to the filing of the registration statement; or
has violated the law of a foreign jurisdiction governing or regulating any aspect of the business of securities or banking or, within the past five years, has been the subject of an action of a securities regulator of a foreign jurisdiction denying, revoking, or suspending the right to engage in the business of securities as a broker-dealer, agent, or investment adviser or is the subject of an action of any securities exchange or self-regulatory organization operating under the authority of the securities regulator of a foreign jurisdiction suspending or expelling such person from membership in such exchange or self-regulatory organization.
However, Disqualification can be waived by the jurisdiction that created the basis for Disqualification.
Types of Securities allowed:
The offering may be used to register common or preferred stock (including convertible preferred) and options, warrants, or rights, and membership interests in an LLC.
If the company can show it will be able to meet debt service based on current earnings, the offering may be used to register debt securities, including convertible debt.
Offering Size and Price
Up to $1 million may be raised in each 12-month period. In calculating this limit, sales in all jurisdictions must be included together with any other securities sold under SEC Rules, or in violation of the registration provisions of federal securities laws.
The offering price must be at least $1 per share (for LLCs, $1.00 per unit of interest), and the company may not split its stock or declare stock dividends for 2 years following effectiveness of the registration, except with the permission of the Securities Administrator or in connection with a subsequent registered public offering.
Securities sold in this offering are freely transferable. Thus, these offerings are a form of early-stage venture financing, raising funds from investors solicited by means of advertising or other general solicitation, which, if appropriate, may be followed at a later stage by a more conventional public offering that would result in the development of a public trading market for the company's securities.
Financial statements for the company's last fiscal year must be attached. Financial statements must be prepared in accordance with generally accepted accounting principles (GAAP), complete with appropriate footnote disclosure. They need not be reviewed or audited by an accountant, though audited statements are strongly encouraged, especially if the company lacks qualified accounting knowledge. They also provide added comfort to prospective investors. Further, if you are planning to sell the offering in other states, you will need to comply with their requirements which often include reviewed or audited financial statements.
A Coordinated Review - is a review program available for companies that intend to conduct an offering in more than one state. This program streamlines the review process for the company, since the review of the offering is coordinated among the states in which the company desires to register. A lead review state is appointed to coordinate the review and a single comment letter is generated for all the states participating in the review. The company must work with only one state to resolve any registration issues, rather than having to deal with each individual state in which the issuer desires to register.