Legal Question in Securities Law in California

Issuing Stock

My brother and I incorporated a new business 5 years ago by authorizing $5m shares, and issuing (split evenly) $2m to each of us. Now the business is doing well and we want to issue the remainder of the authroized shares to us and some employees. Can we still issue them at the .001 price per share that we had initially authorized them at or does it have to be based on a new valuation?

Your assistance is appreciated, and please send info about your firm as we are looking for lawyers to handle our matters moving forward.


Asked on 9/08/07, 2:01 pm

2 Answers from Attorneys

Bryan Whipple Bryan R. R. Whipple, Attorney at Law

Re: Issuing Stock

If the only persons concerned with the fairness of the price were your brother and you, it would probably not make any difference how you priced the shares, since you are both insiders. By the way, the share limitation in your Articles of Incorporation is probably, but not necessarily, expressed in number of shares rather than dollar amount!

Since you are planning also to issue shares to employees, who although they may know a lot about the business are definetly not insiders in the sense the two founders are, a host of additional issues crop up.

The fairness of the price is only one of these issues. Although pricing or valuing them at the original (low) amount per share doesn't seem to be unfair to anyone (except the founders), kicking the price way up would be highly questionable.

A bigger issue is whether some kind of disclosure is required, and what needs to be disclosed. You probably don't need a full-blown prospectus, but if you are issuing stock for consideration, the securities laws kick in and you need to be reminded that there are three kinds of securities sales: registered, exempt and illegal. You don't want to be in the third category and almost certainly don't need to register, so it boils down to finding an exemption that works. There are six or eight exemption-from-registration patterns that handle both California and Federal concerns and are fairly easy to accommodate with a simple disclosure document and maybe not requiring audited financials.

Nevertheless, what you are proposing to do is a regulated transaction under both state and Federal securities laws, and you will subject the company and yourselves to possible civil and criminal penalties if you do not register, or adhere to an exemption from registration, of the securities and the offering. The cornerstone of most exemptions is disclosure, along with limiting the size of the issuance (in dollars), the number of persons to whom the stock is offered, the method of publicity, sophistication of the issuees, and so forth.

You might look for further information via Google under the heading "Regulation D" or "small stock offerings" or "issuing stock to employees" etc., but take my word for it, this needs to be done carefully and with research ahead of time.

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Answered on 9/08/07, 10:31 pm
Jillian Sidoti The Law Office of Jillian Sidoti

Re: Issuing Stock

Is this publically traded (like on Pink Sheets?) I am assuming no. You should be fine with pricing them with whatever you would like as long as it is not over priced. Obviously, the price you are stating is not over.

I do a lot of PPM's, Reg D's, SB-2's, etc. Let me know if you need any assistance.

Jillian

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Answered on 9/10/07, 9:52 am


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