Issuing Stock

For many startup companies, issuing stock is a pivotal process in raising capital to fuel growth, expand operations, and innovate in their respective markets. Understanding the legal and procedural framework of issuing stock is essential for entrepreneurs aiming to navigate the complexities of corporate finance and growth effectively.

Definition of Stock Issuance

Issuing stock is the process by which a startup or other company allocates shares of its equity to investors or other stakeholders in exchange for capital. These shares represent partial ownership in the company and can come in various forms, including common and preferred stock.

Legal Considerations

Before issuing stock, a prospective issuers (e.g., a startup) must take steps to comply with both federal and state securities laws. At the federal level, the Securities Act of 1933 mandates that all securities offered to the public must be registered with the Securities and Exchange Commission (SEC) unless an exemption applies. Startups and other new companies often use private placements under Regulation D for issuing stock. “Reg D,” as the regulation is often referred to, allows companies to raise capital from specific types of investors without requiring the extensive process of registration, subject to certain requirements being met with respect to how the offering and issuance are conducted. (We’ll dive deeper into the ins and outs of Reg D private placements in a separate Insight.) On top of the federal regulation, each state may have its own set of securities laws, often referred to as “blue sky” laws, which regulate the offering and sale of securities to investors in that state. Understanding which blue sky laws–and, equally importantly, which exemptions–may apply to a given issuance is critical, and startups and other issuing companies are strongly encouraged to engage competent legal counsel when issuing stock. 

The Process of Issuing Stock

1. Planning & Engagement: The first step of any major business project is–or at least it should be–coming up with a plan. This means gathering stakeholders, discussing the need for the action (e.g., issuing stock / selling equity), and identifying and engaging appropriate advisors, such as attorneys, investment bankers, etc.
2. Corporate Authorization: Next, the issuer’s board of directors must approve the issuance of stock, including the number of shares to be issued and the price per share. This decision is often documented in a specific board resolution drafted by counsel. 
3. Preparing an Offering Memorandum: For startups and other early stage companies raising capital via issuing stock, sales to private investors are overwhelmingly likely. For these issuances, the company or its financial advisers typically prepares a detailed offering memorandum or private placement memorandum (PPM). The PPM outlines the terms of the offering, the associated risks, the company’s business model, and its financials, thereby serving as a critical disclosure tool to inform potential investors of the nature of the prospective investment.
4. Securing State and Federal Compliance: For registration-exempt offerings such as Reg D private placements, the appropriate forms–such as “Form D”–must be filed with the US Securities and Exchange Commission (SEC) and applicable corresponding state authorities, as necessary. These forms notify regulators of the exempt offering and provide essential details about the company and the offering.
5. Finding Investors: The company can then proceed to secure investors, which might involve pitching to venture capital firms, angel investors, or participating in funding rounds managed by investment banks or brokers.
6. Issuance and Shareholder Agreements: Upon agreeing to terms with investors, transactions occur. The issuer takes in capital and shares are formally issued. This process involves updating the company’s share registry / capitalization table, and issuing stock certificates (or electronic stock certificates) to the new stockholders, if applicable. Stockholders’ agreements may also executed.

Conclusion

Issuing stock is a core mechanism for startups and other companies to secure the necessary capital for development and expansion. Despite the relative brevity of this summary article, however, the process is often complex, arduous and involved. Prospective issuers are strongly encouraged to consult with competent legal counsel and other professionals when issuing stock.