Small businesses can avoid expense of stock offering

Every business has a need for additional capital, whether to launch a new product, to build a new facility or to expand markets internationally.

As the owner of a small- to medium-sized business, you can look to various resources for your needed capital family and friends, the Small Business Administration or even a traditional commercial lender.

Many businesses consider another way to finance growth a stock or debt offering.

Larger companies issue securities such as stock in a registered offering. The problem with offering stock when you are the owner of a small business is the considerable expense of filing the registration statement with the Securities and Exchange Commission, or SEC.

But there are ways to avoid the costly registration process by taking advantage of the exemptions offered in Regulation D, a series of rules adopted by the SEC. Regulation D includes eight rules, numbered 501 through 508.

The first three rules (501, 502 and 503) provide definitions, general conditions and filing instructions for the exemptions. The next three rules (504, 505 and 506) outline the specifics of the exemptions, and the final two rules (507 and 508) provide information on disqualifications and deviations from Regulation D.

Regulation D exemptions. Rule 504 is the simplest to understand and has the fewest restrictions. It applies to smaller offerings up to $1 million and covers companies other than reporting or investment companies.

There are no limits on the number of purchasers, no affirmative disclosure obligations, general solicitation or advertising limitations, and no restrictions on the resale of the securities.

Rule 505 exemptions are a little tougher to meet. Rule 505 requires a maximum total offering price below $5 million, with no more than 35 purchasers (not counting accredited investors usually those with more than $1 million net worth or an annual income of at least $200,000.)

Under Rule 505, the resale of the securities is restricted, solicitation and advertising are prohibited and the issuer has significant disclosure obligations when the securities are offered to non-accredited investors.

Rule 506 exemptions are the toughest. Under 506 there are no limitations on the maximum total offering price, but, like 505, you may have no more than 35 purchasers (not counting accredited investors). There are also significant disclosure obligations.

Something unique to 506 is the "sophistication standards" that require investors to have the investment knowledge and experience to make sophisticated investment decisions.

As in Rule 505, the resale of the securities is restricted, and solicitation and advertising are prohibited.

Under, the right set of circumstances Regulation D can save your company time and money when offering securities, but always keep in mind a couple of key issues:

One, these are sophisticated and complicated regulations with plenty of nuances that can't be covered in a single article, so consult with your attorney before you make the leap.

Two, exemption through Regulation D does not exempt you from the general state and federal antifraud provisions, so, don't lie or in any way mislead potential investors.

Additional information for this article supplied by Dennis Knoer.

(Randell D. Wallace is an attorney and the managing member of the Springfield office of Lathrop & Gage LC.)

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