Financing Your Small Business

HOW TO…Sell Securities in a Private Placement

□ Prepare a private placement memorandum with appropriate appendices and a subscription agreement.

□ File a Form D with the SEC and then file with each state in which a pur­chaser lives.

□ Filing fees may be charged in any of the states, and they may require a U-2—consent to service of process—be filed.

Limitations on Resale of Securities. Securities purchased in a pri­vate placement offering are restricted securities. They cannot be freely transferred or resold. A restrictive legend should be included in the PPM and on the actual certificate for the shares being purchased that states:

The securities represented hereby have not been registered under the Securities Act of 1933, as amended (the Act) and may not be offered, sold, or otherwise hypothecated unless and until registered under the Act; or in the opinion of counsel, in form and substance satisfactory to the issuer of these securities, such offer, sale or transfer, pledge, or hypothecation is in compliance with the Act.

Under Rule 144, a one-year holding period is the minimum required period for resale of restricted securities subject to certain volume restric­tions. After two years, the security may be traded without limitation unless you are an officer, director, or more then 5% shareholder. In that case, you continue to be subject to the volume restrictions of Rule 144 until you no longer occupy any of those positions for more than ninety days. This infor­mation is relatively useless to shareholders of nonpublic companies, since there is no market for their securities anyway. The restrictions of Rule 144 only apply to brokerage trades of securities (sales in the public markets). You can sell or transfer restricted securities in a private (nonbrokered) trans­action as long as there is a private sale exemption available.

The issuer must take reasonable steps to inform investors that they are purchasing restricted securities, that they are acquiring the securities for their own purposes, and that they are not buying the securities with the intention of reselling or transferring them. Normally, the investor makes these representations in the subscription documents or in the investor letter.

Financing Your Small Business

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