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 post 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. Prior to a public offering, a company will often raise money through smaller, private offerings. In our previous post, we discussed the exemption from registration provided by Rule 504 of Regulation D under the 1933 Act, which allows a company to raise up to $1 million per offering.
In this post, we discuss Rule 505 of Regulation D, the second of the three main private offering exemptions from 1933 Act registration. Rule 505 allows a company to raise up to $5 million dollars per offering, but is subject to more requirements and conditions than an offering under Rule 504.
Who may use Rule 505?
Rule 505 is available to any company except one subject to a “bad boy” disqualification. A “bad boy” disqualification prohibits certain companies from using Rule 505 that are sponsored, managed or otherwise related to a person or persons that, among other potential things, have been convicted or found guilty of, or have been enjoined from, violating certain laws in connection with raising money or selling securities. This disqualification seeks to prevent abuse of the relatively unregulated (when compared to a registered offering) private offering exemption under Rule 505.
What conditions must be met in relying on Rule 505?
An offering under Rule 505 is subject to a greater number of federally imposed requirements, and may still be subject to state law requirements. A company seeking to offer securities under Rule 505 should consult an attorney familiar with federal law and the law of the state in which the offers will be made to ensure compliance with applicable law. Because state laws can vary to a great extent, we will mainly deal with the federal requirements. Compliance with the federal requirements may satisfy state law in certain cases, provided that the company issuing securities makes the notice and other filings required in many states.
The federal restrictions on a Rule 505 offering include (i) a limitation on the total amount that can be raised, (ii) a limit on the number of purchasers who do not constitute “accredited investors”, and (iii) a limitation on the manner in which the offer and sale may be made.
Limitation on total amount raised. As noted above, a company can raise up to $5 million dollars in a single Rule 505 offering. A company may conduct more than one Rule 505 offering, but must ensure that sufficient time has passed (usually 6 months to a year) between offerings. If offerings are too closely related or held too close in time, a state agency or the Securities and Exchange Commission (the “SEC”) might “integrate” the two offerings, treating them as a single offering. Such integration could cause the company to exceed the $5 million limitation or fail to satisfy other requirements.
Number of purchasers. A company selling securities under Rule 505 is limited to 35 purchasers that are not “accredited investors” in a single offering. An accredited investor, generally, is defined to mean:
(1) a person (a) whose individual net worth, or joint net worth with that person's spouse, at the time of his purchase exceeds $1,000,000 (excluding the value of his or her primary residence), or (b) 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; or
(2) a company or other entity with assets exceeding $5 million.
The recently passed financial reform bill requires that the SEC review the definition of accredited investor in the coming year and every four years thereafter. As a result, this definition may change, and likely will be revised to require a higher net worth or income for individuals seeking to qualify as accredited investors.
If a company sells securities to non-accredited investors, it must provide those investors with a voluminous amount of financial and non-financial information about the company and the offering. As a result, many companies limit their offerings to accredited investors, for which the Rule does not specify any specific information delivery requirements.
Manner of offer. An offering under Rule 505, like certain offerings under Rule 504, cannot be made through any means of “general solicitation” or “general advertising.” A Rule 505 offer is exempt from registration under the 1933 Act because it is a private offering, and general publication of the offer and mass public advertising is incompatible with the private offering exemption. The SEC does not generally discuss what specific conduct constitutes general solicitation or general advertising, but it would include any mass mailing, cold calling, public seminars, newspaper, television or radio advertisements, among other things. Usually, Rule 505 offerings are made to sophisticated investors with whom the company or its officers have a prior business or other relationship, or to persons located by the company by a broker or referral agent, which normally must be a registered broker-dealer.
Can investors sell the securities purchased pursuant to a Rule 505 offering?
Generally, securities purchased in a private placement are subject to restrictions or limitations on resale. Resale provisions are available for investors to sell their shares, but such resales are subject to conditions. A company should restrict the ability of investors to resell its securities without the consent of the company in the documents governing the securities’ terms, given that improper resales can cause the company to lose the ability to rely on Rule 505 (or any private offering exemption) and create significant liability for the company. A company offering securities under Rule 505 should also inform purchasers about the restrictions on resale and the possibility that the investment may be illiquid for a long period of time.
As we noted in our previous post on raising capital, this post is intended only as a basic summary of the rules governing the sale of securities, and is not legal advice. A company considering raising capital through the sale of securities must contact an attorney to seek guidance. The federal and state securities laws can create enormous liability for improperly conducted offerings, even in the absence of any fraudulent intent on the part of the offeror. The applicable laws and regulations are complicated and often seem arbitrary, so the guidance and assistance of a professional is extremely important.
On Saturday, September 25, 2010, Rick Bell, Chairman and CEO of Harvard Business Services, Inc. spoke at the Second Annual HOLA! Awards in Sussex County, Delaware. Rick was presenting the Harvard Business Services Entrepreneur of the Year Award to the winner selected by local online voters.
Kevin Andrade, Creator of the HOLA! Awards, formed his company through Harvard Business Services, Inc. and has produced a weekly talk show on WGMD in Delaware for the past six years, which focuses on matters important to the local Latino community. The show mixes Spanish and English and has made a big contribution to the Hispanic community.
In 2009, Andrade organized the first HOLA! Awards Gala, which recognizes Community Service and Entrepreneurial Success by persons in the local Hispanic community. Harvard Business Services has been in support of the awards since the beginning and this year the award was named the “Harvard Business Services Entrepreneur of the Year Award”.
Andrade recently acquired an AM radio station, which he is dedicated to developing into a 24/7 community-oriented Latino station called Maxima 900.
Ramiro Herrera was the winner of the award this year. Herrera came to the United States twenty years ago as a field worker. He began working in a restaurant and got his U.S. Citizenship before he decided to buy a restaurant of his own, which he called La Tonalteca. Today he owns 10 La Tonaltecas in Delaware and is working on opening another in January 2011.
Harvard Business Services, Inc. is proud of our supportive relationship with the local Latino community. Heather Garza, Harvard’s Director of Hispanic Communications, has helped many Spanish-speaking clients form LLCs and get started on the road to success. HBS publishes a free booklet, “The Insider’s Guide, WhatYyou Need to Know Before, During and After Forming a Business Entity” in Spanish as well as English.
Read the full text of Rick Bell’s speech below:
Thank you Kevin for producing this awesome evening.
Next year I think YOU should receive this award.
Thank you everyone for attending this fantastic event. Your support for this event is important and greatly appreciated.
At Harvard Business Services, we form Delaware companies for entrepreneurs all across the country and all around the world. This year, we’ll form more than 6,000 new Delaware companies for our clients, some of whom are right here in this room.
I’d like to introduce you all to Heather Garza, Harvard’s Director of Spanish Language Communications. Thanks to Heather we have formed strong bonds with the Latino community here in Sussex County and we’re very proud of our reputation for serving all of you with dignity and respect.
I believe that the most important freedom we enjoy here in this great country is the freedom to start a business of your own.
Individuals who start businesses contribute to our community in many ways. They provide the consumers with a goods and services and they provide many of our neighbors with jobs. They keep the economy going in good times and rough times, and they face stiff competition every single day.
New entrepreneurs soon learn that you have to be good, and fast, and efficient at what you do in order to compete.
To be successful you have to promote your business, win new customers continually, please your returning customers and treat them special, all while you juggle the many roles you have to play to be successful.
It takes a vision to be successful, and continually focusing on the vision, even when others around you tell you that you’re trying the impossible.
Entrepreneurs are driven by a calling from within, nobody demands as much of a successful business owner as himself, or herself.
Entrepreneurs take risks, they make mistakes, they learn as they go and they get better at what they do every year. Why? Because they have to. Small business owners are often called “self-employed”, but we know that’s a myth. Business owners know what it is to make a payroll every week. They work for their employees. Business owners know how demanding the public can be, they work for their customers. Business Owners pay taxes. They contribute to society. They work for the community. You can call them “self-Employed” but owners of small businesses work for all of us.
Tonight we honor Latino entrepreneurs in our community who have already proven to be successful. We acknowledge that their community and their County and their State has respect for their dedication, hard work and accomplishments.
Every one of the nominees already makes a major contribution to the economy of our county and our state. Every one of our nominees tonight deserves this award…..but only one will receive it. You voted, and your choice will now be heard.
And the 2010 Most Respected Latino Entrepreneur is Ramiro Herrera!
Pictured in the photo (Left to Right): Paulise Bell, Rick Bell, Ramiro Herrera and his business partner.
In business, are you adding value? Not just value in your product or service, and not just value in the company, although both of those are important. What I am referring to is adding value to the relationship itself. Adding value to the relationship means that every time you interact with the customer, that customer gets a feeling that you care, and knows that you will do everything you can do to help them. Eventually that feeling turns into loyalty and if they ever need anything else, they are coming to you. Every time you come in contact with someone you have an opportunity. Whether it is over the phone, in person, or even an email. You will either add value or devalue the relationship. In most businesses, this is important because you typically will speak with the same client many times. I think it should be everyone’s goal to add value to the relationship each and every time. It will impact the service you provide because when you make a conscious effort in each customer encounter to strengthen that relationship with the customer, it shows. They may have a question, they may have a problem, or they may be calling to place an order, but when you add value and strengthen that relationship, by letting them know that you care, they get off the phone feeling better about you, and better about your company. Remember, there is nothing more important to your bottom line than repeat customers and referrals.
Everyday at work we have a chance to truly strengthen our relationships with others. Albert Einstein said “Try not to become a man of success, but rather try to become a man of value." Are you adding value?
Watching your business grow can be both exciting and scary. Transitioning from a one-man or -woman who to hiring employees requires a huge leap of faith. Business News Daily's article, "Hiring Your First Employee" is filled with smart, helpful tips. Below is an excerpt.
Hiring your first employee can sometimes seem daunting. And if it doesn’t, you aren’t doing it right.
One of the biggest mistakes entrepreneurs make is thinking that they can simply go to someone they know, such as a friend or a family member, pay them something, and that would be it. But while we may have fond memories of family-owned local shops, most businesses can’t work that way.
Here are some things you must know before you hire your first employee:
Besides filing the relevant forms with the Internal Revenue Service, there’s making sure that someone is legally able to work in the U.S. It starts with the I-9 form. Once that is filled out you keep it – it’s for USCIS (U.S. Citizenship and Immigration Services) officials to look at if they need to, and you have to keep it for at least four years. (It must be on file for three years after hiring someone and at least year after they leave, whichever is later).
There are a number of verification services – in fact, if your business is a government contractor you’re required to use them. The USCIS has a program called E-Verify, which makes the whole process easier.
Fines can be heavy – knowingly hiring someone not authorized to work can cost you up to $3,200 for a first offense. Giving that summer job to the nice exchange student from Finland probably isn’t worth it.
Choosing the name of your domain can be a difficult task. Maybe you want it to match the name of your entity, but it is not available. Or maybe you want something completely different but you don’t know where to start. There are so many choices and options out there and at the same time there are already countless names taken by someone else. So what do you do?
Brainstorm! Yes, take the time to write down different ideas. What is the purpose of your website? What are some key words that describe the purpose of the website? Who do you want to visit the website? So, now you have a list of words and ideas. To get even more creative use your thesaurus. This is one of the best tools to have! A good tip to remember – Try to keep the domain name as short, descriptive, and memorable as possible.
When you feel that you have a good idea of the domain name(s) you would like to have then it is time to check on the availability. An easy site to use is GoDaddy. There is a place to do a domain search right on their home page. Simply type the domain name and then choose the TLD (Top Level Domain) you are looking for and cross your fingers. Don’t give up if the name is not available. GoDaddy will give you helpful suggestions that are available. And don’t be afraid to think out of the box. Sometimes even adding a hyphen (-) between two words will make all of the difference in the world. Also, you can think about changing the TLD to something other than .com.
Not sure which type of TLD to choose? Here is a helpful guide to some of the most popular:
.com – The com stands for commercial. This is the most popular domain ending and it is open to the public, which makes the availability slightly more difficult than with other endings.
.net – The net stands for network. This is slightly less popular than .com, but a good option. Also open to the public.
.biz – The biz stands for business. This ending is open to the public, but may be challenged later if it does not belong to a corresponding business entity.
.info – The info stands for information. This is open to the public without restrictions.
.org – The org stands for organization. This is open to the public, but typically used by non-profit organizations.
.edu – The edu stands for education. This domain is limited to accredited post-secondary institutions.
.co – The co stands for company or corporation. This is open to the public. This is not necessarily a top level domain, but GoDaddy gives this as a suggestion.
Even though .com is the most popular, you do not need to feel limited if your name is not available under the .com. It may help to try a different ending. To see other endings, to check a domain name, or to host your site, visit www.godaddy.com.