Academic journal article Journal of Small Business Management

Raising Equity Capital Though Limited Offerings: Criteria for Choice of Exemptions

Academic journal article Journal of Small Business Management

Raising Equity Capital Though Limited Offerings: Criteria for Choice of Exemptions

Article excerpt


The primary source of capital for most start-up and development stage companies is equity capital raised through limited stock offerings that are exempt from expensive federal and state registration requirements. Effective planning for an exempt stock offering requires that the financial needs of a business be coordinated with the legal requirements for exemption. Federal and state regulations control the maximum dollar amount of securities that can be sold in an exempt offering, the number of investors to whom such offerings may be sold, and required minimum intervals between offerings.

The purpose of this article is to provide criteria for planning exempt stock offerings which will clarify the relationships between financial and legal requirements for exempt offerings. The legal concepts which govern exempt offerings are outlined and the key requirements for available exemptions from registration are identified. Planning guidelines provide criteria to be used in coordinating (a) the timing and size of offerings with the stagewise development of a venture, and (b) the resulting financial requirements with the regulatory framework for exemption.



Under both federal and state law, all securities must be registered before they can be sold to investors, or else must be sold under an exemption from registration requirements. Federal securities law requires a registration statement to be filed with the Securities and Exchange Commission prior to any "public" offering of a security. The registration statement contains detailed information about the operations, finances, and management of the company issuing the securities, and is scrutinized by the SEC before the offering may be sold.

The registration process is time consuming, usually requiring eight months or more for preparation of the registration statements and the SEC review. A registered offering is also expensive, typically costing $150,000 or more in legal, accounting, and printing fees, even for a small public offering, with no assurance that the offering will subsequently be able to be sold. Nor are public offerings feasible for most new ventures until the development process has been completed and the business has begun to produce significant revenues.

Exempt Offerings and

Requirements for Exemption

Offerings of securities which do not involve a "public" offering or which take place entirely within one state are exempted under federal regulations from the requirement to register. Exempt offerings, also called "limited offerings" or "private placements," are sold directly to investors by the issuing company, without any general solicitation or advertising. There are currently seven different federal exemptions from registration: "General" Exemptions

1. Section 4 (2)[15 U.S.C [SEC' 77d (2)(1976), as amended.]

2. Section 4 (6)[15 U.S.C [SEC] 77d (6)(1976), as amended.] "Safeharbor" Exemptions (Regulation D)

3. Rule 504 [17 C.F.R. [SEC] 230.504]

4. Rule 505 [17 C.F.R. [SEC] 230.505]

5. Rule 506 [17 C.F.R. [SEC] 230.506] "Intrastate Offering" Exemptions

6. Section 3 (a)(11)[15 U.S.C. [SEC] 77c (a)(11)(1976), as amended.]

7. Rule 147[17 C.F.R. [SEC] 230.147]

The two general exemptions from registration do not provide explicit standards for compliance. As a result, offerings based on one of the general exemptions can involve some uncertainty as to whether the offering is in fact exempt from registration in the event of a subsequent shareholder suit or SEC enforcement action. These uncertainties are largely eliminated by Regulation D, which provides three different exemptions with explicit requirements for compliance. Regulation D will "safeharbor" an offering from any liability for failure to register if the specific requirements for exemption have been complied with. …

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