How to Properly Issue Shares for Your Company

Issuing shares allows companies to raise capital and distribute ownership, serving as a fundamental mechanism for funding operations, enabling expansion, or incentivizing employees. By issuing shares, a business can acquire necessary funds without incurring debt, providing flexibility in its financial structure. It also establishes a formal ownership framework, defining who holds a stake in the company and to what extent.

Understanding Share Capital and Classes

Share capital represents the money a company raises by selling shares to investors. This capital signifies ownership and is a foundational element of its financial structure, appearing as equity on the balance sheet. It provides the financial base for a company’s activities, supporting growth and operational needs without relying on loans.

Companies issue two main types of shares: common shares and preferred shares. Common shares grant voting rights, allowing shareholders to influence company decisions, such as electing the board of directors. Holders of common shares have a residual claim on the company’s assets and earnings, meaning they are paid after creditors and preferred shareholders in the event of liquidation.

Preferred shares, conversely, do not carry voting rights but offer preferential treatment. This often includes fixed dividend payments and a higher priority in receiving payouts during liquidation.

A company’s corporate documents, such as its Articles of Incorporation, specify the maximum number of shares it is legally permitted to issue, known as authorized shares. This figure provides flexibility for future issuances without requiring immediate amendments to the corporate charter. Issued shares are the portion of these authorized shares that have actually been sold or granted to shareholders. The number of issued shares cannot exceed the number of authorized shares.

Many shares also have a “par value,” which is a nominal value assigned to each share. This value is primarily for accounting purposes and is unrelated to the share’s market price. When shares are issued for more than their par value, the excess amount is recorded as additional paid-in capital. Some jurisdictions allow for shares to be issued without a par value.

Legal and Corporate Preparations for Issuance

Before shares can be legally issued, a company must undertake thorough legal and corporate preparations. This process begins with a careful review of the company’s foundational documents, such as the Articles of Incorporation and Bylaws. These documents outline the company’s authorized share capital, including the number and classes of shares it is permitted to issue. If the intended issuance exceeds the current authorized shares or requires new share classes, these documents must be amended, often requiring shareholder approval in addition to board approval.

Formal approvals from the company’s governing bodies are a subsequent step. The Board of Directors must pass resolutions authorizing the share issuance, detailing the number of shares, their class, the price, and the intended recipients. Depending on the company’s internal rules and the nature of the issuance, shareholder approval may also be necessary, particularly for significant changes to the company’s capital structure or for transactions involving existing shareholder rights. These resolutions serve as the legal basis for the issuance and must be documented.

Existing shareholder agreements can also influence the terms of a new share issuance. Provisions such as pre-emptive rights must be honored or waived. Rights of first refusal may dictate how shares can be transferred, while vesting schedules ensure that shares granted to employees are earned over time. Addressing these agreements helps prevent disputes.

Compliance with federal and state securities laws is important for any company issuing shares. The Securities Act of 1933 requires securities offerings to be registered with the U.S. Securities and Exchange Commission (SEC) unless an exemption applies. For private companies, common exemptions under Regulation D, such as Rule 506(b) and Rule 506(c), allow for capital raising without full SEC registration. These rules specify requirements for investors and solicitation.

In addition to federal regulations, companies must also comply with state “blue sky” laws, which are state-specific securities regulations. While certain federal exemptions, like those under Regulation D Rule 506, may preempt state registration requirements, companies still need to file notice filings with state securities regulators. These state filings involve submitting a notice of the offering and may include associated fees. Adhering to both federal and state securities laws is important to avoid legal penalties.

The Share Issuance Procedure

Once all legal and corporate preparations are complete, the actual procedure for issuing shares involves several steps. An important part of this process is formally recording the share issuance within the company’s corporate records. This includes drafting and signing board minutes or written consents that clearly document the resolution to issue the shares, including details like the number of shares, their class, the issue price, and the identities of the new shareholders. This documentation provides a record of the transaction.

Concurrently, entries must be made in the company’s stock ledger. This record tracks all share transactions and should include:
The shareholder’s name
Address
The number of shares issued
The class of shares
The date of issuance
The consideration received
Maintaining an accurate stock ledger is important for legal compliance and ownership clarity.

Following the recording, companies proceed with issuing share certificates or documenting electronic entries. While physical share certificates were common, electronic book-entry shares are now widely used. With electronic entries, ownership is recorded digitally in the company’s books or by a transfer agent. All 50 states recognize uncertificated shares as valid ownership.

Immediately after the issuance, the company’s capitalization (cap) table must be updated to reflect the new ownership structure. The cap table is a record of all outstanding equity, showing who owns what percentage of the company, including:
Common and preferred shares
Options
Warrants
An accurate cap table is important for managing equity and ensuring transparency.

Finally, any required post-issuance regulatory filings must be completed. For offerings relying on Regulation D exemptions, a Form D notice must be filed electronically with the SEC within 15 days of the first sale of securities. Additionally, state “blue sky” notices may be required. These state filings have their own deadlines and may involve filing fees. Completing these filings ensures ongoing compliance with securities regulations.