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| Step by Step- The Stock Offering Process
( a basic outline) |
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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 financial's 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 financial's, 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 financial's, 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 financial's 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 time frame”. 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.
Back to preparing a film package.
Books
on Going Public and other Industry Books
Also see:
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