Companies fund expansion, acquisitions, operations, and other plans in a variety of ways, including using current income generated by their businesses, calling for additional contributions from existing owners, borrowing from owners, banks, or other lending sources, or selling securities to existing or new investors. This article focuses on a common and beneficial method of raising capital–the private securities offering. Private securities offerings provide capital raising options to private and public companies of all sizes and in all industries, but may prove particularly useful for companies operating in the cannabidiol (“CBD”) and hemp industries.
Generally, a private offering of securities takes place when a private or publicly traded company conducts an offering to sell its equity, which may consist of shares of common or preferred stock of a corporation, units or membership interests of a limited liability company, or limited partnership interests of a limited partnership, without registering the offering or sale of those equity interests with the Securities and Exchange Commission (“SEC”). The main goal of a private securities offering, specifically when selling only equity of the company, is to raise capital to fund operations, expansion, or acquisitions of additional companies or business assets, without increasing a company’s debt.
As the hemp and CBD industries continue to grow in North Carolina and throughout the rest of the country, many startups and pre-existing hemp and CBD companies may be in need of capital to facilitate their respective business plans and goals, and expand their business operations. The availability of traditional banking and financial services has been slow to develop for the hemp and CBD industry. A private offering of a company’s securities may be the ideal way for a newly formed company to obtain an influx of startup capital in order to fund current operations until the company is able to generate revenue in an amount that is sufficient to fund future operations, growth, and expansion.
In addition, existing hemp and CBD companies may benefit from a private offering of securities even after operations have begun, due to the fact that current revenue may not be sufficient to cover operating expenses, or the company may not yet be positioned to either become a publicly traded entity or be acquired by a larger operating business. With respect to existing, operating hemp and CBD companies, the proceeds from a private securities offering may provide the necessary capital to fund additional growth and expansion, as well as the acquisition of smaller companies or business assets. Private offerings of securities are a tool available to help businesses to obtain capital in the absence of traditional bank loans and lines of credit.
In order for a company to offer or sell its securities to investors, the securities must either be federally registered with the SEC or be exempt from registration. While there are several available exemptions from federal registration, the most common federal exemption used for private offerings of securities is Regulation D, Rule 506 of the Securities Act of 1933. This exemption allows for flexibility in structuring the offering of a company’s securities, but may require various disclosures to be made to investors.
For example, depending on the size of the offering, the financial condition and sophistication of the investors, and the manner in which potential investors are solicited to make an investment, it may be necessary to prepare a private placement memorandum, which is an offering statement that discloses information regarding the company that is important to investors when making an investment decision. Examples of disclosures required as part of a private placement memorandum include, but are not limited to, the company’s business plan and operations, description of the management team, risk factors associated with an investment in the company, and a use of proceeds list, which informs investors of the use and purpose of their investment funds.
It is important to note that each state has its own securities laws (often referred to as “blue sky laws”) that must be followed whenever securities are offered or sold in the state. One of the reasons that use of the federal Rule 506 exemption is so popular is that, if you satisfy the requirements of Rule 506, you also are exempt from registration requirements under state blue sky laws. While Rule 506 allows for an exemption from registration for the offer or sale of a company’s securities, there are required notice filings that must be made with the SEC, as well as potential blue sky filings that must be made with the states in which the securities are sold.
Prior to conducting a private offering of securities, there are several additional factors that a company should consider. It is important for a company’s management group to determine the percentage of overall equity that they intend to sell in exchange for the amount of offering proceeds the company needs to receive in order to pursue its business objectives, as the amount of equity sold to investors may have an impact on the ability of the management team to retain voting control of the company.
In addition, it is important to carefully calculate the offering price of the securities as it relates to the overall value of the company or current industry trends, in order to generate enough investor interest to complete the offering. Finally, a company’s management group should also consider if they are able to secure a sufficient amount of investors on their own to complete the offering, or if they will need to use public solicitation, or obtain the assistance of a licensed broker. Due to the various regulatory issues inherent in a private securities offering, it is important to consult an attorney before beginning any offer or sale of securities.
Ward and Smith’s Securities and Hemp Law attorneys are actively helping individuals and businesses navigate the complex and rapidly changing state and federal regulations governing the hemp and securities industries.
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For further information regarding the issues described above, please contact Ken Bart.
This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.