Presented by: Tabitha Creighton, CEO and Co-founder

How to issue a security – the essentials

Pt.2 in the Securities Primer Series

As a reminder…

• A security is…a legal interest in some element of the

business that has potential future value for the purchaser

that can be sold in some form

• Examples: note, stock, treasury stock, security future,

security-based swap, bond, debenture, evidence of

indebtedness, certificate of interest(Taken from the Securities Act of 1933)

Private vs. Public Companies

• All businesses begin as “private”

– Private businesses are ones which DO NOT have a class of

securities that is registered with the Securities and Exchange

Commission which are widely held or traded on a national

securities exchange.

• They become public when they issue a class of securities

that are registered for wide holding or trading on a

national securities exchange.

Who can issue a security?

• Businesses can issue any type of security which is

relevant to their structure and purpose

• Examples:

– A sole proprietorship could issue a debt security but not sell

shares

– A government could issue treasury bills but not sell warrants for

future equity

– A corporation could sell shares but not issue currency

How does a company issue a security?

1. Decides what kind of security to offer

2. Decides to issue publicly or privately

3. Creates required documentation and filings

4. Issues security and raises funds

What kind of security?

• Leaving aside more complex security types, there are two

basic categories

– Debt

• Borrow money and commit to repay with interest

• There are varieties of debt: e.g. Debentures, Bonds, Promissory Notes

– Equity

• Sell portions of the company (typically shares, could be partnership

interest)

Debt vs. Equity….which to choose?

Business Considerations

• Structure of business

• Shared business ownership

• Impact of debt repayments on

cash-flow

• Cost of issuing shares,

debentures, promissory note or

bond

• Appeal to potential investors

Considerations for Investor Appeal

• Type of return (regular cash-flows

vs. single pay-out)

• Liquidity of investment (how easy to

re-sell)

• Amount of participation in business

• Investment goals

• Risk tolerance

• Securitization

• No single answer• Considerations for businesses and appeal for investors include:

Public or Private issue?

• Public issues are:

– VERY costly (+$1M)

– Highly regulated

– Only for very large capital raises (generally hundreds of millions of dollars or more)

• Private issues are:

– Less visible to potential investors*

– Much less costly

– Less regulated

– Suitable for smaller capital raises

More about Private Issues

• Private issues are straight-forward

– Most can be done using a type of Regulatory exemption offered

by the Securities and Exchange Commission

– This is GOOD because it reduces the amount of paperwork and

regulatory filing required for the business

– MOST private issues though, mean you raise money privately

• (e.g. you can’t advertise for investors)

But what about “crowd-funding”?

• The Jumpstart Our Business Start-Ups Act (JOBS Act)

enabled the SEC to amend their rules on privately issued

securities

• A NEW exemption (commonly known as 506c) was

introduced allowing “public solicitation” of private

securities

• IF your investors will be ACCREDITED

A little about Accredited Investors

• (Either a person or business)

• If a person then broadly speaking, s/he must earn $200k+

for the last two years and expect to earn as much this

year OR)

• Be part of a household that has earned $300k+ in that

same time period OR

• Be part of household with a net worth greater than $1M

(excluding their house)

More about the Private Issue regulatory exemptions

Exemption Type* 505 506b 506c

Must File Form D Yes Yes Yes

Allows companies to decide what information to give to accredited investors.

No No No

Restricted Securities Yes Yes Yes

General Solicitation No No Yes

Accredited Investors Unlimited Unlimited Unlimited

Non-accredited Investors

Up to 35 Up to 35 None

Requires non-accredited investor "sophistication"

No Yes n/a

Limit (per 12 months) $5 million None None

There are many other types of exemptions. 506b exemptions account for 99% of all private exempt security issues today. We show the 505 and 506c exemptions for comparative purposes.

What kind of information must be provided to investors?

• At a minimum, an audited Balance Sheet

• Realistically, you’ll want to provide as much comparative

financial information as you can

– Financial statements, and that includes Statement of Cash Flow

– Financial ratios (e.g. A/R Turnover, Debt Service Ratio, Debt/Equity

Ratio)

– Purpose of investment and plan for use

– Collateral or personal guarantees (although this can become

complex, so again, check with your accountant and lawyer)

One essential thing you’ll need to do…

• Make SURE you get your CIK number

– The process isn’t hard, but it does take a couple of days to get

your number

• You’ll need it to do your Form D filing

What does a business have to file?

• Federal level

– Form D via an online form on the SEC website

– You can see a sample here:

https://www.sec.gov/about/forms/formd.pdf

• State level

– Each state has their own filings and fees

– You need to file in each state from which you have an investor

What happens next?

• You find investors

– (either through your direct connections, or IF (and only if) you’re using the 506c exemption) you can use general solicitation)

– InvestNextDoor can help you with either a private or public solicitation <shameless plug>

• Once you complete your offering, then you receive your investment

• Don’t forget to meet your investor commitments! (issue stock, repay debt)

Still have questions?

• You can…

– Ask you lawyer or accountant if they pertain to your specific

situation

– Reach out to me for general questions (I’ll redirect you if I can

answer them) – tabithacreighton@investnextdoor.com or

@tabcreighton

– Stay tuned for the next in our series on private securities!

And remember…

Issue local, invest local, and prosper more!

www.investnextdoor.com