To raise funds for a business, corporations can opt to issue stock to shareholders. The shares issued are each proportionate to the amount of the company’s total net worth and represent the amount of money shareholders have invested in the corporation.
A number of important steps should be taken during this process, as there are legal compliance issues that arise when issuing stock. Shareholders also need to be considered, since shareholders carry certain rights through an ownership stake in the corporation, including the right to vote, the right to inspect corporate books and dividend entitlements.
Following these steps and guidelines will ensure a successful stock issue within your corporation.
1. Board of Directors Approval
The Board of Directors is typically either the initial owner(s) or is appointed by the initial owner(s). The board will first need to approve of the offer to issue stock and will then make agreements for sale before filing the appropriate documents. The board can accomplish this through written, unanimous consent or resolve the matter at a board meeting.
2. Shareholder Approval
Shareholder approval may also be needed since shareholders have an ownership stake in the corporation. This will be outlined in the Articles of Incorporation, the document that sets forth the legal formation of the company. If the Articles of Incorporation will be amended, a majority vote from the shareholders is necessary to continue.
3. Determine How Much Stock the Corporation Is Authorized to Issue
These numbers are determined by the Articles of Incorporation. Remember that it’s not the number of shares you are required to give out, but the number of shares you are able to give out. New corporations can opt to hold back so that more shares can be sold at a later date for future capital. There is no minimum amount of shares that must be issued.
4. Determine the Value of Stock
Each share is worth a proportionate value of the company’s net worth. The shares can be marked with a par amount establishing the minimum amount for which the shares can be purchased from the corporation. The other option is to have a no par amount, which gives no set price for the purchase of each share and offers flexibility on offering higher prices for future sales. With this option, the directors then have the opportunity to change the price of stocks each time they offer them.
5. Decide the Number and Price of Shares to Issue
Once you determine how much stock you are authorized to issue and the value of each stock, you must decide the appropriate number of shares to issue and at what price. This is potentially one of the most important factors when issuing stock and generally depends on the size of the corporation. Small companies may choose to allocate shares based on contributions shareholders are making to the business.
The original owner or largest contributor will likely want to have controlling (51%) interest in the company. The dilution that new shares may cause to existing shareholders should also be reviewed and found acceptable.
6. Determine Class of Shares
Corporations generally choose between offering common or preferred stocks. Preferred shareholders typically have certain preferences over common shareholders, such as receiving a higher dividend and receiving a higher proportion of votes. Common shares are typically issued more often, however, with shareholders receiving one vote per share.
7. Review Compliance with State and Federal Securities Law and Complete Appropriate Filings
You can then make required filings with the appropriate administrators; the deadline is typically within 15 days of the sale.
Find more information on what laws your corporation must comply with through Nolo’s Corporation FAQs.
8. Prepare Appropriate Documents
At this time, you need to draft the necessary documents, including a Shareholder Agreement. This is also known as a buyout agreement and covers issues regarding stock ownership, such as the departure of shareholders, transfer of stock and buying out other shareholders.
A Stock Subscription Agreement should also be drafted, which includes the share price, number of shares purchased and transaction details.
The following are links to templates and examples of appropriate documents:
9. Review How the Issuance Affects Future Financings
It is advisable for the company to review the stock offering to ensure that the issuance will not restrict the ability of the corporation to issue more stock in the future.
10. Stock Certificates and Stock Ledger
Finally, after the sale, signed Stock Certificates should be issued to shareholders. Each certificate should be dated and numbered. Then each certificate should be recorded in the Stock Ledger with the shareholder name, date, amount paid and any other necessary information.