by Julius J. Brecht*
For the Anchorage Journal Commerce

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?

Let's say you have exhausted your personal financial resources as a means of funding your fledgling business and you cannot get a loan, e.g., because of lack of unencumbered collateral or lack of financial history. 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, i.e., an offering of ownership interests in your company. For example, where 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. Those exceptions take the form of one or more exemptions which may apply to the offering. Some of them are "self executing," requiring no further act on behalf of the issuer-company in the way of notice or filing with the state or federal government. Others require a filing by the issuer-company to become effective.

A 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, e.g., price per share, risk factors for, and use of proceeds from, the offering.

In contemplating an equity offering, the company must consider numerous questions. They may be characterized generally as who? what? where? when? how? how much? and why? More specifically, some of these questions might include, to whom should the offer be made? What form should the offer take? Where should the offer be made, i.e., should it be limited to the community in which your business operates, or the entire state and beyond?

When should the offer be made, e.g., at the end of the company's fiscal year so that you have financial statements for the full year, or at another date in anticipation of a need for the capital to fund timely projects of the company? How does the company intend to proceed with the offering? How much capital does the company need to raise? Why are persons presently holding controlling interests in the company wiling to dilute that control through the offering? Has the company considered expanding its debt to raise necessary capital?

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. Some of the answers will, in turn, lead to further questions in need of answers based upon those goals.

Let's consider a few possible answers:

• Fashion a plan of action for your offering – What are the realities of the marketplace in which your company competes? How large must the equity offering be to facilitate your company's successful competition in that marketplace? What should be the company's offering price per share?
• Establish your business plan – Set forth a path for successfully building value in your company.
• Prepare your disclosure statement – Make sure you disclose all material facts relating to the offering.
• Qualify your disclosure statement and the offer made through it – Either register the offering under state and federal law or rely upon, and comply with, identified registration exemptions in those jurisdictions.
• Make your offer – Should your offering be public or private? Your answer will be critical in determining the path to follow in complying with state and federal securities law.

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, e.g., the general solicitation prohibition, 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. While there may, in a given state, be a state registration exemption corresponding to the federal private offering exemption, an offering in reliance on the federal intrastate offering exemption is, in most states, treated as an event requiring registration prior to making the offering.

*Mr. Brecht is managing shareholder and an attorney in private practice with the law firm of Wohlforth, Vassar, Johnson & Brecht, A Professional Corporation, with offices in Anchorage, Alaska. Mr. Brecht's concentration of practice is in state and federal securities law, and corporate and financial law. The content of this article was not prepared as, and must not be construed as, legal or investment advice to anyone. He may be reached via email at jbrecht@wvjb.com.

Printer Friendly View
Add To Favorites