Issuing Private Stock in Your Company

Issuing private stock is a time-tested way to raise money for your business. Private stock offerings are a form of equity financing; the investors who buy the private shares acquire an ownership stake in your company. You give up sole ownership of the company in exchange for capital needed to grow your company. Later on, you can pay these investors back and reacquire their equity stakes, or they might remain as part owners until the business is sold and reap a portion of the sale profits.

Private stock placements are attractive to many business owners because they offer more control than if the owners sold stock to the general public through an initial public offering. IPOs sell stock to hundreds or thousands of investors, while a private offering usually limits the number of stockholders.

Public stock offerings also require extensive public disclosure filings and adherence to Securities and Exchange Commission rules. Most private stock offerings do not need to be registered with the SEC and can be prepared fairly quickly and at a modest cost. If your business isn't a likely candidate for a bank loan, a private stock offering can be a good alternative means of securing the money you need.

The first step in preparing for a private stock offering is to obtain an independent business valuation. Many firms specialize in this service; ask other business owners in your area for a referral to a reputable business valuation company. Consider hiring a second firm to value your business so you can compare the values and arrive at a final determination. For more on valuations, see .

Once you know your company’s market value, you can determine the value of a private share. Commonly, a business owner decides to sell only part of the company's value in the private stock offering, retaining a majority ownership stake, which allows the owner to continue making day-to-day decisions independently.

Next, you'll need to decide on the form of your private stock offering. There are three types: private placement (also known as Regulation D), limited partnership offerings, and small corporate offering registration. Each comes with its own unique set of paperwork:

• Private placement: This is the most commonly used method of private-stock issuance and requires businesses to file under one of three Regulation D rules. For instance, under Rule 504, you are limited to raising less than $1 million. You'll also need to follow rules about how many individual investors you can have in the offering, as well as how many investors must be accredited. Accredited investors are experienced investors with more than $1 million in net worth or more than $200,000 in annual income.
• Limited partnership: This form of private stock offering is designed for companies that are organized as limited partnerships; C and S chapter companies cannot use this method. This is a common format for private stock offerings undertaken by real estate developers seeking to raise money for construction.
• Small corporate: Some businesses prefer this format, as it allows private stock to be sold to an unlimited number of investors, who can be accredited or not. One advantage of this option is that the company is permitted to advertise for investors, providing a useful marketing tool for finding buyers for the shares.

Whatever form of private stock offering you decide on, consult an attorney experienced in drawing up private-offering paperwork. Make sure you correctly file all required paperwork and conduct your stock sale in accordance with securities law.

Business reporter Carol Tice contributes to several national and regional business publications.