How Can a New Company Sell Stocks?

Selling stock provides an alternative to bank loans when raising capital.

Companies in need of capital to fund operations often look to sell shares in business versus taking out a bank loan. Some investors even prefer to own shares of stock in the company and participate in the potential upside of the business rather than earn fixed principal and interest payments. Selling stock in your business, however, can be complex from procedural and regulatory standpoints.

Initial Public Offering

While an initial public offering -- or IPO -- is the most talked-about way of selling stock in a business, it may also be the most costly. In an IPO, the company or issuer files a registration statement with the Securities and Exchange Commission, the SEC, to allow for sale of stock to the general public. This is a lengthy statement requiring a great deal of legal and administrative costs to produce and get cleared by the SEC. In a typical IPO, the company engages an underwriter to aid with the distribution and sale of the shares. In some cases, the underwriter guarantees the placement or sale of stock on behalf of the company.

Direct Public Offering

A direct public offering -- or DPO -- is similar to an IPO where shares of stock are sold to the public. However, in most DPOs, the buyers of the shares are often customers, friends and family of the business, though the shares can be sold to anyone who meets requirements set forth by the state. To conduct a DPO, a business must get its offering documents cleared by the state's securities department. The rules and conditions vary greatly from state to state, but there are often restrictions placed on how much money can be raised and the manner in which the sale of stock is promoted. Companies often sell stock directly or may engage a commissioned agent of the issuer to assist on a best-efforts basis.

Private Placement

Many start-up companies turn to a private placement as the preferred choice for a first round of financing. In a private placement, the company sells shares of stock to sophisticated or accredited investors. These investors meet certain income, asset and investment experience criteria as set forth by the SEC. A brief registration statement is required to be filed with the SEC or the state securities department, but the information presented in this disclosure is far less than what is included in a public offering prospectus. Companies conducting private placements will often turn to a smaller number of investors and require minimum amount of investment to participate.

Employee Stock Ownership Plan

Companies looking to raise capital by selling stock can also turn to an employee stock ownership plan or ESOP. In an ESOP, the company makes shares available for sale to its employees. An ESOP can provide a mechanism for a company to sell stock in exchange for funds, but it can also be a value-added benefit to employees. Through an ESOP, committed employees can participate in the overall success of the company by owning shares in the business.

References

• The ESOP Association: How Do ESOPs Work?
• SEC Law: Introduction to Private Placements
• Business Finance: Direct Public Offering
• : IPO Initial Public Offerings: IPO - Pros and Cons