The HBS Blog offers insight on Delaware corporations and LLCs as well as information about entrepreneurship, start-ups and general business topics.
As we noted in our previous posts on raising capital, under federal law, any offer of securities must either be registered under the Securities Act of 1933 (the “1933 Act”) or qualify for an exemption from registration. A registered offering under the 1933 Act is extremely time consuming and expensive, and generally occurs only once a company is thoroughly established and has gone through various levels of venture-stage and mezzanine financing.
In this post, we discuss Rule 506 of Regulation D, the last and most versatile of the three main private offering “safe harbors” from 1933 Act registration. Rule 506 allows a company to raise an unlimited amount through the sale of either debt or equity, but imposes requirements on the type of persons that may invest and the manner in which the solicitation of investments may be made.
Accredited Investors. A company may raise funds from an unlimited number of accredited investors. An accredited investor is generally defined to include:
(1) a person whose individual net worth, or joint net worth with that person’s spouse at the time of his or her investment exceeds $1,000,000;
(2) a person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year;
(3) an entity (such as a partnership, limited liability company, corporation or trust) with more than $5 million in total assets; and
(4) an entity in which all of the owners are accredited investors.
For purposes of calculating net worth, a potential investor must exclude the value of his or her primary residence.
Non-Accredited Investors. A company may also raise funds under Rule 506 from up to 35 non-accredited investors. These non-accredited investors, however, must have sufficient knowledge and experience in financial and business matters, on their own or in conjunction with a representative, such that the company reasonably believes the investors are capable of evaluating the merits and risks of the prospective investment.
Limitation on Manner of Offering
As was the case with other types of private offerings, such as Rule 504 and 505, capital raised in a Rule 506 offering cannot be raised through any “general solicitation” or “general advertising.” This means that a company cannot seek investors through public media, such as newspaper or magazine advertisements, television or radio advertisements or other public communications. The best way to avoid general solicitation is to solicit investors with whom the company or its personnel have pre-existing relationships, such as personal or prior business relationships, or to employ a registered broker-dealer to link the company with pre-qualified individuals.
Each investment made pursuant to a Rule 506 offering must be reported to the Securities and Exchange Commission on Form D within 15 days of the investment. A copy of the Form D is also generally required to be sent to the securities regulator of the state in which the investor resides or is domiciled. The Form D is a very brief filing.
As we have noted in previous posts on capital raising, you should consult with an attorney prior to seeking investors. The rules governing capital raising are complex and involve both state and federal regulations.
You know what they always say...fake it 'till you make it! This New York Times article "A Small Business Made to Seem Bigger" offers some unique and helpful tools and resources for small businesses. Below is an excerpt:
People who run a business alone often want it to appear bigger than it really is — as if it has teams of employees and unlimited resources. This is now more possible than ever thanks to some tools that so-called solopreneurs and other small businesses have at their disposal, giving them the reach and capabilities of far bigger companies.
Last year, Logan Hale, founder of YourLittleFilm, which is based in suburban Los Angeles and creates custom short films, was a sponsor of the children’s dance tour Baby Loves Disco, staffing a booth at a series of Southern California events. The promotion was so successful that he wound up with 400 leads, and a problem. “I don’t have time for that kind of follow-up,” he said. Instead, Mr. Hale used Batchbook, customer relationship management software for small business. Although he had to enter the leads, Batchbook integrated with MailChimp, a Web-based e-mail marketing platform that automatically generated and sent a follow-up e-mail to every lead. Batchbook then kept track of the responses. “I had a 10 percent response rate, which is great for e-mail,” said Mr. Hale. “From those, I’ve already had six jobs.”
Although technology like that can be a game-changer, David S. Garland, a business owner who is author of Smarter, Faster, Cheaper (Wiley, 2010), cautions it can also become overwhelming. Tools, he said, should be “simple, functional and really help the business.” Here are some of the tools and strategies he, Mr. Hale and others use to emulate — and compete against — much bigger companies.
On Tuesday April 5, 2011, the Senate voted overwhelmingly to repeal a provision of last year's Health Care Act that would have required small businesses to submit a Form 1099 for every vendor that received payments of $600 or more a year. Democrats and Republicans agreed that the new reporting requirement would be too expensive and time-consuming, and the repeal passed by a vote of 87-12.
The Wall Street Journal covered the repeal in detail in the article "U.S. Senate Passes Tax Reporting Repeal."
Check out these 10 things the best leaders believe. Pulled from the book, 50 Lessons for Leading For Those With Little Time For Reading.
"Leadership is reading between the lines while others only skim the pages."
"Leadership is more about questions than answers."
"Leadership is passing the ball when you want to take the shot."
"Leadership is making time when there is no time."
"Leadership is not a matter of position."
"Leadership is recognizing that conflict can be creative."
"Leadership is validated only by others."
"Leadership is knowing that even heroes are human."
"Leadership is believing in others as much as yourself."
"Leadership is passionate pursuit of purpose."
While assisting clients with changing their Registered Agent service to Harvard Business Services, Inc., we sometimes hear stories about what our competitors are charging. Recently, a business owner told me he has been paying a Registered Agent payment of $250 a year for the last three years and has not known about it. It seems that somewhere along the line, the cost of his Registered Agent payment was raised and he was not notified. So year after year, his secretary paid the bill on time, as instructed, and no red flag ever jumped out at him. It wasn't until he ran an inventory of all his business expenses that this exorbinant cost was finally revealed. Unfortunately, this is a common occurence in the business formation world. There are some companies in the Registered Agent business that raise their fees every year. They take for granted the fact that as a business person, you are very busy and do not always notice if fees are raised. We will not name any names, but there are so many companies that raise their Registered Agent fees, and there are many business owners that do not realize it until they have wasted precious financial resources.
This is why Harvard Business Services, Inc. takes pride in our $50 per year guaranteed Registered Agent Service. As long as your company remains in good standing, your Registered Agent payment will not go up. If you're wondering why we charge such a low fee, the answer is we have been doing this since 1981--we have the Registered Agent business down to a science and we do not feel we should charge any more money. Clients appreciate the fact that we can tell them, honestly, what their Registed Agent payment will be next year, and what it will be 10 years from now.
No. In order to change the Registered Agent for an existing Delaware corporation or LLC, the state of Delaware charges a filing fee of $50 to file the Certificate of Change of Registered Agent and Registered Office. Harvard Business Services, Inc. can prepare and file this form for you, for the low cost of $50; plus, we'll give you your first year's Registered Agent Fee for only $39. Thus the total cost to change your Registered Agent will be only $89 per corporation or LLC. Thereafter, your annual Registered Agent Fee will be only $50 per company; just think of the money you can save by changing your Registered Agent to Harvard Business Services, Inc.
Follow ths link in order to change your Registered Agent to Harvard Business Services, Inc. It's quick and easy.
You can also watch a video reviewing the steps to changing Registered Agents.
As always, feel free to call us 1-800-345-CORP with any questions you may have.