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One of the largest hurdles which often prevents startups and small companies from achieving success, both in the short term and the long term, is the ability to raise capital. A business can have the best leadership team, the most innovative idea, and the best marketing; however, without capital, both initially and at varying stages of growth, the business will likely fail. Most small business founders do not realize that when a company is formed through the initial issuance(s) of equity interests, federal and state securities compliance is required. After formation, although the founders may “bootstrap” for as long as possible by loaning personal funds to the business or opening credit cards, many businesses come to the inevitable stage of contemplating whether to bring in outside investors to assist with growth.

What is a private placement and how can it assist a company with capital raising?From a federal securities compliance perspective, all securities offered in the U.S. must generally be registered with the Securities and Exchange Commission (the “SEC”) or must qualify for an exemption from the registration requirements. As previously stated, registering the offer and sale of securities with the SEC can be very expensive and time consuming. Most small companies lack the funds to pursue registration which means they must seek an offer and sale of securities which qualifies for an exemption from registration. In general, a private placement is an offering of unregistered securities to a limited pool of investors and is usually made pursuant to one of several exemptions from registration.

How does a company commence a private placement and what are the considerations management must take into consideration prior to commencement?Most state laws, which govern corporations and business entities, require approval by the board of directors of any issuance of equity securities. This means that prior to the commencement of a private placement, approval of the board of directors should be obtained. This can be done through either a duly called meeting of the board of directors or through unanimous written consent. In order for each director to comply with their fiduciary duties, prior to approval of any private placement, the board (with the assistance of legal counsel) should:

  • Conduct a thorough review of the company’s governing documents (such as the Articles of Incorporation and Bylaws) which apply to equity issuance's and private placements;

  • Consider the type of equity which will be offered and sold in the private placement (such as Common Stock, Preferred Stock, SAFEs, etc.);

  • Consider the terms of the private placement (such as duration, equity pricing, who will sell the securities, what percentage of the company management is willing to offer, etc.);

  • Determine the exemption from registration which will be used for the private placement; and

  • Prepare the offering documents which will be used in the private placement.

Due to the complexity of some of the issues pertaining to private placements, if management is considering commencing a private placement in the future, management should begin addressing some of the issues above with legal counsel long before the terms of the private placement are approved by the board. This will increase the likelihood of a successful private placement once it is offered. The decision whether to commence a private placement, including the preparation of required disclosures and federal and state compliance, can be complicated and difficult. Business Legal Advisors, LLC has over seven years of experience assisting companies with private placements from preparing for the private placement to the completion of a successful offering.

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