Closely-held companies may limit ownership in the corporation to key investors and management contributors. Deciding to offer the company's securities to a larger spectrum of investors requires careful planning. When private investors want to liquidate holdings by selling shares, they must do so in accordance with the Securities & Exchange Commission's Regulation SHO.
The first step to selling securities in the company requires a discussion with an SEC-conversant lawyer. Principals of the closely-held company should discuss why they want to offer or sell securities now. Arranging an offering requires a strategy, and your attorney is key to completing all required steps of the process. Federal and state securities' regulators are part of the process: the company must register the plan to sell securities with the state in which the company operates. If the company operates in multiple states, your attorney oversees the necessary paperwork. A preliminary prospectus is an important document in the filing process. In some situations, the company may be exempt from registration requirements. Discuss your company's exemption status before proceeding with other (potentially expensive) filing steps. The Securities & Exchange Commission suggests contacting the ABA (American Bar Association) to obtain legal resources.
Regulation D is also an important consideration of a closely-held company's decision to sell securities. Regulation D, as part of the Securities Act of 1933, requires an issuer's registration or exemption from the registration requirements. Closely-held companies may sometimes sell shares without prior SEC registration. As noted above, ask your attorney before assuming that your company may forego registration under Reg D. Issues of less than $5 million may be exempt (according to Rules 504 to 506). Your attorney should advise you about the requirements of the Dodd-Frank Act and how the laws potentially apply to the closely-held company's decision to sell securities. Stephen M. Honig, partner at Duane Morris in Boston, recommends Louis Loss and Joel Seligman's text Fundamentals of Securities Regulation as a primary resource.
Principals of closely-held companies should also ask their attorney to evaluate tax-related issues of selling securities and withdrawing assets as compensation, according to tax advisors.