There are two primary reasons why companies choose to issue stock. First, a business chooses to offer equity in its early stages in order to lure initial investors. Second, a business opts to issue stock when it hopes to acquire additional capital. It does so either by going public or simply by seeking additional investors because it believes the business will benefit from the growth opportunities associated with a larger investment pool. The procedures associated with stock distribution are relatively similar regardless of when shares are issued. However, certain stock distribution-related requirements vary by state and circumstance, so it is important to consult with an attorney before issuing stock in order to better ensure that your company remains in compliance throughout the process of stock distribution.
Making Stock-Related Determinations
A company’s articles of incorporation dictate how many stock shares may be issued by that company. If a business ultimately wants to issue more stock shares than the number allowed, the articles of incorporation must be amended. It is important to understand that the number authorized by the articles of incorporation represents a ceiling. This means that a company does not need to issue the maximum number of shares allowed.
In order to determine how many shares you wish to distribute at any given time, you must consider both the amount of capital you wish to raise and the strength you wish to give to each individual share. If a company distributes 100 shares of stock, each stock share will represent a one percent ownership in that company. If a company later has a stock distribution of 900 additional shares of stock, the ownership interest in both the original and subsequent stock shares will drop significantly. Although the capital raised in association with a broad ownership interest may be valuable, it is important to think long and hard about how strong of an ownership interest you wish for each stock share to represent.
The Stock Distribution Process
Once you have determined the value of each stock share and how many shares you intend to issue, it is time to look at any compliance requirements your company may be subject to during stock distribution periods. For example, you may need to speak with your attorney about whether you intend to issue common shares or preferred shares. Each class of shares results in differing consequences for the company and its shareholders and thus may be affected by different legal requirements. Both common shares and preferred shares can be issued and an attorney can help with this distribution according to the articles of incorporation.
In addition, you will likely need to work with your attorney in order to draft a stock subscription agreement, print shareholder certificates, complete all relevant transactions and properly report the number of stock shares you are distributing including the number of common shares and preferred shares. Reporting requirements vary by jurisdiction.
Legal and Financial Assistance Is Available
If you have questions related to initial or ongoing stock distribution, please consider contacting LawTrades. Our highly experienced team would be happy to help you successfully navigate the processes of fundraising and compliance during periods of stock distribution. Issuing shares of both preferred shares and common shares can be a complex process, but the LawTrades team is eager to aid your public or private company in achieving its stock-related goals.