The answer is yes. The strategy is not only possible but also gaining in popularity around the country. Here’s what private stock issuers and shareholders alike will need to know.
Private Versus Public
By definition, a private company is one owned by its founders, its management or an aggregation of private investors. A public company, on the other hand, belongs at least in part to the shareholders who have purchased its stock on the open exchanges subsequent to that company’s initial public offering.
A private company can in some instances issue shares to its employees as part of a motivational compensation scheme. It just won’t be selling them on the U.S. Stock Exchange. Nevertheless, this is one area in which the Securities and Exchange Commission does hold sway. Whether public or private, any company that offers stock will need to heed its strident voice.
Issuing Private Stock
The issuance of private stock amounts to a type of equity financing. The investors who purchase your shares will thereby become part owners of your business, and they will remain as such for as long as they own the stock. However, you will retain far more control this way than you would by going public. That’s because private offerings can limit the number of possible shareholders. That puts them in contrast with initial public offerings that often draw investors by the hundreds if not the thousands. As another advantage, you can normally prepare your private offering quickly and inexpensively with rarely a need to register with the SEC.
You can choose from one of three forms in which to offer your private stock. The options include the:
- Private placement offering. This common arrangement does impose stringent restrictions concerning the maximum amount you can raise in this manner along with the greatest number of permissible investors and the accreditation requirements of each.
- Limited partnership offering. This form’s very name describes the sole type of business organization for which it exists. Needless to say, S and C corporations need not apply.
- Small corporate offering. This format allows the business to advertise its available shares while neither restricting the maximum number of investors nor mandating their proper accreditation.
Private Company Stock Options
Any private company can offer its employees the right to purchase a specified number of shares of company stock at lower-than-market prices. Before implementing a stock option plan, however, the small business owner might want to consider the pros and cons.
The company that issues stock options will reap the benefit of rewarding or incentivizing its employees while bearing no expense up front. On the minus side, however, the inherent difficulty of properly valuing any private company’s stock could cause difficulty on the accounting end. In addition, the employee who chooses to exercise his options will automatically become part owner of the company.
Selling Private Company Stock
The unlisted status of private holdings on the stock exchange can present a problem to investors who wish to sell their shares. Some privately held companies grease the wheels in this regard by offering buyback programs. Many are also able to provide would-be sellers with leads regarding investors who may have shown an interest in buying shares of the company or increasing their current holdings.
Once the seller of private stock has located a buyer, he or she must ensure that the sale complies with SEC regulations. Failure to do so could eventuate in penalties at the civil, administrative or criminal levels. Odgers Law can advise you in this regard.
Odgers Law Group and Your Private Stock
Any private business desirous of selling shares to investors will need to consult a business attorney with experience in drawing up and filing the appropriate paperwork. At Odgers Law Group, we will see to it that your sale of private stock adheres to all legal requirements insisted upon by the SEC. Don’t leave your private business up to chance. Call Odgers Law today at 858-869-1114.