How to Issue Stock for a Private Company

Issuing stock is a fundamental mechanism for private companies to secure financial resources or provide equity compensation. It involves creating and distributing ownership stakes to investors or employees, allowing a business to obtain capital for growth, operations, or strategic initiatives without incurring debt. It also aligns interests, letting key individuals share directly in the company’s future success.

Understanding Stock Fundamentals

Companies use common and preferred stock. Common stock grants voting rights and a residual claim on assets after creditors and preferred stockholders are paid. Dividends are not guaranteed, declared at the board’s discretion.

Preferred stock usually offers no voting rights but provides advantages like preferential treatment in dividends and liquidation proceeds. Dividends are often fixed and paid before common stockholders. In liquidation, preferred stockholders receive capital back first.

A company’s corporate charter specifies authorized shares: the maximum stock it can legally issue. Issued shares refer to the portion of authorized stock actually distributed and held by shareholders.

Par value is a nominal dollar amount assigned to each share during authorization. While many jurisdictions permit shares without par value or with a very low par value (e.g., $0.001 per share), it impacts how equity is recorded on the balance sheet, separating par value from additional paid-in capital.

Internal Corporate Preparations

Before issuing stock, a private company’s board must formally authorize the action via resolution. This official record specifies issuance details: exact number of shares, stock class (e.g., common, Series A preferred), and consideration received (cash, property, services, or other assets). The resolution should also identify intended recipients and offer terms, such as share price or vesting schedule. Documenting this board approval ensures legal compliance and provides a clear internal record.

Depending on the company’s corporate charter and state laws, shareholder approval may be a prerequisite for certain stock issuances. This is true if the issuance would exceed authorized shares, create a new stock class, or significantly dilute existing shareholders. Companies must review their Articles of Incorporation and Bylaws to determine if shareholder consent is necessary.

If existing corporate documents do not permit the intended stock issuance, amendments are required. Amending the Articles of Incorporation typically involves board approval, shareholder approval, and filing with the appropriate state authority, like the Secretary of State. This process ensures the company has legal capacity to issue the desired shares.

Navigating Regulatory Requirements

All U.S. stock issuances are subject to federal and state securities laws. The Securities Act of 1933 mandates that any offer or sale of securities must either be registered with the U.S. Securities and Exchange Commission (SEC) or qualify for an exemption. For most private companies, full SEC registration is impractical due to complexities and costs.

Private companies typically rely on specific registration exemptions to issue stock legally. Regulation D is a common federal exemption for private placements. Rule 506(b) permits companies to raise unlimited capital from unlimited “accredited investors” and up to 35 “non-accredited investors,” with no general solicitation or advertising.

Accredited investors include individuals with a net worth exceeding $1 million (excluding primary residence) or an annual income over $200,000 (or $300,000 for married couples) for the past two years. Non-accredited investors, if included, must be sophisticated enough to evaluate the investment’s merits and risks.

Alternatively, Rule 506(c) under Regulation D allows general solicitation and advertising, but sales can only be made to accredited investors. Companies relying on Rule 506(c) must verify purchasers’ accredited status. Both Rule 506(b) and 506(c) require companies to file a Form D with the SEC within 15 days after the first sale of securities.

Regulation A is another federal exemption, allowing smaller companies to raise capital through a limited public offering. It has two tiers: Tier 1 permits offerings up to $20 million in a 12-month period, while Tier 2 allows offerings up to $75 million. Tier 2 requires audited financial statements and ongoing reporting, but preempts state securities laws, simplifying multi-state offerings.

In parallel with federal requirements, companies must also comply with state securities laws, known as “Blue Sky” laws. Even with a federal exemption like Rule 506 of Regulation D, state laws often still require notice filings and fee payments. Requirements vary by state, but typically involve submitting copies of the federal Form D or a state-specific notice form.

Executing the Stock Issuance

After internal preparations and understanding regulatory pathways, the company proceeds with stock issuance. This begins by offering stock to prospective investors or recipients. Each signs a subscription or stock purchase agreement, legally binding them to purchase shares at an agreed-upon price or for designated consideration.

These agreements detail stock purchase terms and any specific rights or restrictions. Upon receiving consideration, the company formally issues the stock. For physical shares, a stock certificate is prepared, signed by authorized officers, and delivered to the new shareholder.

Many companies now use electronic or book-entry systems instead of physical certificates, recording ownership digitally. Regardless of the format, the company’s stock ledger (capitalization table) must be updated immediately to reflect new ownership. This record tracks all issued shares, identifying each shareholder, their share count, issuance date, and stock type.

Accurate and timely updates to the capitalization table maintain clear ownership records and proper corporate governance. Following issuance, the company must also fulfill any required post-issuance filings with state authorities, such as amending articles of incorporation or filing annual reports.

For federal exemptions like Regulation D, the company must file Form D with the SEC within 15 days of the first sale of securities. Completing these steps accurately and promptly finalizes the stock issuance process and establishes the new ownership structure.