“How a Corporation Issues Additional Shares”[i]
A corporation will most likely decide to issue additional shares of stock in order to raise additional capital. The benefit of raising additional capital is obvious—more capital for the corporation to use in order to grow.
The main potential downside of issuing more shares in order to raise capital is a dilution of the shares already issued, and the effect that may have on the shareholders. When a company decides to issue additional shares it is effectively creating more of the company to own, which means that those who already own a part of the company will own a smaller percentage once the new shares are issued. The actual impact that this will have on the shareholders varies depending on the specifics of the deal, but could include a loss of voting control, a decrease in earnings, a decrease of the value of the stock, and a decrease in one’s ownership percentage. For these reasons, it is essential to have an experienced securities attorney work with you to help you decide whether issuing additional shares of stock is the right decision.
How much money?
Once you have decided to issue more shares the first step is to ask yourself how much capital you would like to raise. Pretty simple.
How many shares can you issue?
Next you need to determine how many shares you are authorized to issue. This will be determined by your company’s charter; if it is a Nevada corporation then that would be your Articles of Incorporation. Typically, a public company will initially authorize a very high number of shares that can then be issued over time whenever the company needs to raise capital. This reserve determines how many shares can be issued to investors, employees, etc. It is also possible, if there aren’t enough authorized shares left over, for the Board of Directors to alter the charter to allow for the authorization and subsequent issuance of more shares.[ii] This can be difficult, however, since it may require shareholder approval, and shareholders may be opposed to allowing more shares to be issued which would result in a dilution of their shares (discussed above). Once you know how many shares you can issue, you need to determine how many you should issue.
How many shares will you issue?
This question will generally be answered by the situation itself. You simply take the amount of capital you would like to raise and divide that amount by the value of a share. So, for example, if you want to raise $1 million, and you determine the stock you will issue has a value of $100 per share, you would need to issue 10,000 shares. The value you give your stock can be influenced by a number of factors, including the type of stock, the current value of your other shares, the rights connected to these shares, etc. Discussing these factors with an attorney (like one from the Bradshaw Law Group) can help you determine which experienced professionals can help you price your new shares.
Which type of share will you issue?
There are two main types of shares of stock: preferred and common. Preferred shareholders do not have the right to vote on company decisions, but they are the first shareholders to get paid if there is a sale of company assets or a liquidation (i.e., liquidation preference). Common shareholders do have the right to vote on certain company decisions, but they get don’t get paid until after the preferred shareholders. Deciding which class of stock you want to issue depends on which rights you would like the new shareholders to have.[iii] It is helpful to consult with a securities attorney in order to determine which type of stock you should issue, as you and the other shareholders will be affected by the new shareholders’ rights.
In order to protect investors, the federal and state governments have adopted laws that regulate those selling stocks and other securities. Unless you qualify under one of the many exemptions, you must register with both the federal and state government.[iv] And even if you do qualify for an exemption there are still a number of rules you must follow.[v] Under the federal securities laws there are exemptions for a number of situations[vi], some of them require that all investors in the offering are accredited (meaning they are an organization with at least $5 million in net worth, or an individual with at least $1 million in net worth).[vii] Each state has its own exemptions, with those in Nevada being found under Nevada Revised Statutes 90.520, 90.530, and 90.540, with each of these sections containing many potential exceptions.[viii] The laws and regulations governing securities transactions are, to put it simply, complicated.
In order to more easily navigate the intertwined web of federal and state regulations, and to help keep yourself from making a potentially costly mistake, you should consult with an experienced securities attorney to ensure you are not only compliant with all applicable regulations, but also that you have taken into account any applicable exemptions as well.
Write the Stock Purchase Agreement
Once you have determined whether you can issue more shares, how many shares to issue, how much the shares are worth, which type (or types) of shares to issue, and when you are compliant with all applicable laws and regulations it is time to write up the deal. A Stock Purchase Agreement (“SPA”) will establish all the details of the sale of stock, from the definitions to the purchase price to indemnification between the parties[ix]. It is essential that you have an experienced securities attorney either draft the SPA or, at the very least, review the SPA you intend to use. There are many resources available online to help draft an SPA; unfortunately, these resources cannot take into account the specifics of your situation, and without the assistance of an attorney it is possible, and fairly likely, that you could unknowingly make a mistake or miss an important detail.
Issue the Shares
Once you have a Stock Purchase Agreement prepared, and investors ready to buy your shares, you simply exchange the amount of shares (formalized on stock certificates) for the corresponding amount of money.
[v] Constance E. Bagley and Craig E. Dauchy, The Entrepreneur’s Guide to Business Law 158 (3d ed. 2008).
[vi]17 C.F.R. §230.504-506, available at http://www.ecfr.gov/cgi-bin/retrieveECFR?gp=&SID=8edfd12967d69c024485029d968ee737&mc=true&n=pt17.3.230&r=PART&ty=HTML#se17.3.230_1504.
[vii] 17 C.F.R. §230.501(a), available at http://www.ecfr.gov/cgi-bin/retrieveECFR?gp=&SID=8edfd12967d69c024485029d968ee737&r=SECTION&n=17y22.214.171.124.126.96.36.199.