Tag Archives: private placement before S-1

What is a Resale S-1 Registration Statement?

In a Resale S-1 Registration Statement, securities previously acquired privately are registered for resale to the general public.

Who are the Selling Shareholders in a Resale S-1?

In a typical example, investors in a company’s Private Placement (“PPM”) are told that their shares will be “registered for resale” at a later date.  In a Resale S-1, these investors are referred to as “Selling Shareholders”, and their names are listed in a table, along with the number of shares, and an explanatory note detailing the method and date of purchase.  The PPM Offering Documents, including a Subscription Agreement, are usually included in the Resale S-1 as Exhibits.

In another example, shares previously awarded to consultants, founders or employees for services can also be registered for sale in a Resale S-1.  The supporting documentation showing the origin and history of those shares would likewise be included as Exhibits.

All of this Selling Shareholder documentation is reviewed by the company’s PCAOB auditor so that the cost basis, and value of consideration is included in the audit.

What Makes a Resale S-1 Different?

The main difference in a Resale S-1 is when the Selling Shareholders sell their shares, they keep all of the money from the sale,  and the company does not receive any funds.   Even so, the company typically pays for the cost of the Resale S-1 Registration Statement, including the audit.

How Does a Company Benefit from a Resale S-1?

One way a company benefits from a Resale S-1 is by demonstrating to future PPM investors that the company keeps its promise to later register shares.   It also benefits the company by creating a “Float.”  The Float is the block of non-affiliate, free trading shares available to trade “on the market.”

In order to justify the expense of preparing a Resale S-1, a company will typically also register a certain number of new S-1 shares itself.  When the company sells these newly registered S-1 shares to the public, the company keeps those funds.

Private Placement followed by IPO and Resale S-1 Combination

One of the most common strategies for going public on the OTC Bulletin Board or OTC Markets via S-1 Initial Public Offering (“IPO”) is to file a new S-1 Registration Statement following a Private Placement Offering.  This S-1 registers both new shares for the company to sell, and also includes Selling Shareholders who bought stock in the Private Placement (“PPM”).

Many companies use the strategy of filing a quick PPM for friends and family before filing an S-1 Registration Statement as way of obtaining some of the 35 non-affiliate shareholders Market Makers are looking for prior to sponsoring the company for a ticker symbol under 15c211.  This also helps to defray some of the administrative costs associated with going public.

In order for this strategy to be effective, the PPM documents and consideration needs to be in order so that the company’s PCAOB auditor can efficiently include the Selling Shareholders into the S-1 audit.  An experienced OTC securities attorney can help companies do both a PPM and a Resale S-1 from start to finish.

Securities Attorney for Private Placements and S-1 Resale Registrations

Matt Stout is a securities attorney focused on taking companies public on the OTC Bulletin Board and OTC Markets.   When companies engage Matt Stout as securities counsel, the PPM to S-1 process is handled efficiently and all representation is under an agreed-upon flat fee, which includes responding to all SEC Comment Letters.

Companies interested in learning more about Private Placement Offerings and S-1 Registration Statements can contact Matheau J. W. Stout, Esq. for a no cost consultation at (410) 429-7076 or mstout@otclawyers.com.

Do I Need 35 Shareholders Before Filing an S-1 Registration Statement?

No.  There is no minimum shareholder requirement to file an S-1.  Many startup companies with just one founding shareholder file S-1 Registration Statements as the first step to go public. So only one shareholder is required, along with audited financial statements, in order to file the S-1.

When are the 35 Shareholders Needed to Go Public?

The 35 shareholder requirement only applies at the time of the Company’s 15(c)211 application for a FINRA trading symbol, which a Market Maker does not sponsor until all SEC comments are cleared, and after the S-1 is declared Effective by the SEC.

Should a Company Acquire 35 Shareholders via Private Placement or After the S-1 is Effective?

While it is true that many companies acquire these 35 shareholders via Private Placement Memorandum (“PPM”) before the S-1 is filed, it is just as common for companies to sell free trading S-1 shares to friends, family and to the public as soon as the S-1 is declared Effective, in order to meet FINRA’s 35 shareholder threshold.

In many cases, it might be easier for the company to sell the S-1 shares after the Effective Date, since they are free trading and the investors may perceive less of a risk than buying restricted shares in the same company through a Pre-S-1 PPM.

The key is that those 35 shareholders are not required until sometimes months after the S-1 process is started, since the Market Maker cannot even sponsor the Form 15(c)211 application for the FINRA trading symbol until the S-1 is declared Effective.

Should We Delay our S-1 to Do a Larger Private Placement?

With that timing in mind, it makes little sense for private companies to wait forever to file their S-1 under the guise of attempting to sell more shares in a PPM.  Instead, some savvy companies considering an IPO via S-1 Registration Statement will use a Private Placement only to attract some already interested friends and family investors as shareholders so that they do not delay their S-1 audit.

Doing so allows those PPM friends and family shareholders to be listed in the S-1 as “Selling Shareholders” but also allows the S-1 audit to be completed without wasting a lot of time.   Since the audit is typically the most time-consuming part of the S-1, the sooner the PCAOB audited financials are ready, the sooner the company can go public.

OTC Markets Securities Lawyer for Companies Going Public

Matheau J. W. Stout, Esq. is securities lawyer with a practice focused on taking microcap companies public on the OTB Bulletin Board and OTC Markets OTCQB.  Entrepreneurs with questions about taking a company public via S-1 can contact Matt Stout at (410) 429-7076 or mstout@otclawyers.com for a no-cost consultation.

 

 

 

Regulation D, Rule 506 Private Placement

What is the Difference Between 506(b) and 506(c)?

Rule 506(b) Private Placement

Under Rule 506(b), a company stays under the Section 4(a)(2) “safe harbor” exemption, only if the following requirements are met:

  1. No general solicitation or advertising is used to market the securities.
  2. The company can sell securities to an unlimited number of “accredited investors” and up to 35 non-accredited investors.
  3. The company must give non-accredited investors disclosure documents, which are similar to those used in registered offerings.  (The private placement documents will generally include at least an Offering Memorandum, Subscription Agreement and Investor Questionnaire.)
  4. The company must be available to answer questions by prospective investors.
  5. Financial statement requirements are the same as for Rule 505.

Rule 506(c) Private Placement

In contrast, under Rule 506(c), a company is permitted to advertise and solicit the general public.   However, the private offering under 506(c) can stay under the safe harbor of Section 4(a)(2) if:

  1. All investors are accredited investors.
  2. The company takes “reasonable steps” to verify that its investors are accredited.  This process can include reviewing tax returns W-2 forms, bank statements, brokerage statements, or credit reports.

In either case, companies considering raising capital under Rule 506 would benefit by having their documentation prepared by a qualified securities attorney.

Private Placement Before S-1 Registration Statement

This is especially important if the company is considering “going public” later and potentially registering these same private placement shares for resale in an S-1 Registration Statement.

Private Placement and S-1 Lawyer Matt Stout helps companies navigate the going public process from start to finish.  Matt Stout can answer questions about how to structure a private placement before filing an S-1 at (410) 429-7076 or mstout@otclawyers.com.