How to Sell Stock to Raise Money for a New Business
Common stock is the tool that was created for the task of raising capital to finance the growth of companies. Capital raises take place first through private placement sales to investors who fund startup companies, and later through initial public offerings (IPOs) that issue a company's stock to trade on the public markets. An explanation of the process will help you to avoid surprises when you're ready to go public.
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Instructions
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Analyze how much money you will need to raise so you can decide what kind of offering format you will use. Contact a Securities abd Exchange Commission (SEC) attorney or your local Small Business Administration (SBA) or Service Corps of Retired Executives (SCORE) office for advice. Comply with all SEC requirements; a mistake during your first capital raise can result in serious and expensive problems should you wish to issue an IPO.
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Write a business plan to be used with your private placement memorandum (PPM), accredited investor questionnaire and subscription agreement. These documents make up your private placement offering package.
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Hire an attorney or private placement service to write or check your private placement documents and manage the record keeping. Ask how to approach potential investors without violating any SEC rules or regulations.
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Apply to present to an angel investor group. Most conduct an entrepreneurs' boot camp where they advise you on what appeals to investors and critique your presentation pitch.
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Approach your friends and family to see if they would be interested in buying your private placement stock. If you have employees, they are also eligible to invest, but you must be very careful not to coerce them into investing. You do not have to worry about whether true friends and family are accredited investors, which makes this a good way to practice the pitch you would give to angel investors and venture capitalists.
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Tips & Warnings
Carefully read the SEC information on Regulation D offerings. You will have a choice between 504, 505, and 506 offerings. You will most likely use Reg. D 505 for your offering, but you should know the differences among all three. Call the SEC Division of Corporate Finance (see Resource #2) and ask any questions you have. It is always wise to get comfortable dealing with the SEC. Also contact the North American Securities Administrators Association (NASAA) for information on who to contact in your state government to learn how to comply with your state securities regulations.
Before you start the process of raising capital through the private sale of stock in your company, make sure you have your financial books in order and audited. You may wish to start working with a PCAOB (Public Company Accounting Oversight Board)-certified audit firm so you can get experience preparing for an audit process required by angel investors and venture capital funds.
