How Can a Business Sell Shares of Itself to the Public?

Accounting regulations

When a company sells shares of itself, it is generally considered that the company is going public. The first shares are the initial public offering (IPO). Going public usually requires the company to adhere to Securities and Exchange Commission guidelines due to the Securities Act of 1933 and the Securities Exchange Act of 1934.

Registering for a Public Offering

Companies need to register with the SEC before going public. This entails filing a prospectus about the company. The prospectus contains important facts about the company. The basic registration form is Form S-1. Other forms are available for more specific offerings, such as raising $10 million through securities.

Intrastate Offering

If management offers the company only intrastate--within a single state--there is no requirement to register with the SEC. Intrastate requires that the company is incorporated in the state where it performs most or all of its business and offers stock only to people in that state.

Private Offering

Private offerings are also exempt from SEC registration. A private offering occurs when selling stock to investors with a high level of knowledge to know the risks of the investment, according to the SEC. The investors must also receive a prospectus and an agreement not to sell any shares they buy to the public.

Regulations A and D

Regulation A allows no registration for offerings less than $5 million in any 12-month period. Regulation D has three sections: 504, 505 and 506.

504 allows an exemption for selling less than $1,000,000 of stock in a 12-month period.

505 allows an exemption for selling less than $5,000,000 of stock in a 12-month period, only to knowledgeable investors, and not to more than 35 people.

506 provides a section to allow more companies to sell stock as long as the company keeps investors properly informed.

Accredited Investor

Sales of company shares to investors with a high level of knowledge to know the risks of the investment totaling less than $5 million are exempt from SEC registration.

Employee Benefit Plans

Stock sales to employees are exempt from SEC registration.

References

• SEC: Q&A--Small Business and the SEC
• Investopedia: Going Public
• Investopedia: Prospectus