Key Takeaways:

  • Before issuing more shares, understand your company’s authorized share limit and applicable federal and state regulations.
  • Consider the impact of share dilution on current shareholders and voting power.
  • Board and shareholder approvals may be required depending on corporate bylaws and incorporation documents.
  • Share classes (common vs. preferred) influence rights, voting power, and liquidation preferences.
  • Issuing new shares involves corporate resolutions, legal documentation, and updating the shareholder register.
  • Companies should comply with securities regulations, including potential filing requirements or exemptions.
  • Legal and financial professionals should be consulted to ensure accuracy and compliance.

If you're wondering how to issue more shares, you're probably thinking about a business that is deciding to issue more shares of its stock in order to sell them and raise capital. The resulting gain in capital is typically used by the company to finance growth. The major downside in issuing more shares is that the already existent shares will have their value diluted, affecting the current stockholders. When the company increases in size, the currently-owned shares represent a smaller portion of the entire company, lowering their value and the voting power they provide to their owners.

Important Considerations Before Issuing More Shares

For a corporation to proceed in issuing more shares, there are questions to be answered and steps to be taken. Before beginning to issue shares, you should ask yourself the following:

  • How much capital do I expect to raise?
  • How many shares is the company allowed to issue?
  • What type of shares will be issued?
  • Are there are relevant federal or state regulations I need to be aware of?

Regarding the number of shares, public companies usually authorize a very large number of potential shares that can be issued, so they have the necessary flexibility needed to issue shares according to their needs. Even if that number is reached and more shares need to be issued, the maximum number of authorized shares can be increased if all current shareholders agree.

For the type of shares, there are two general options: preferred and common. Holders of preferred stock get paid first if the company sells any assets or goes through liquidation, but do not have voting rights. On the other hand, owners of common shares only get paid after the preferred shareholders but have a say on the decisions made by the company. Depending on the situation, a securities attorney will advise on the best way to proceed, given the specifics of each situation.

A crucial part in knowing the right way to issue more shares is knowing the regulations specific to the company's location and status. A company must register with both the federal and state government and follow both of their sets of rules. There are certain exemptions that a company may qualify for, and they differ from state to state. Like when deciding what type of shares to issue, a securities attorney will help shareholders navigate through the complicated web of federal and state regulations.

Reasons for Issuing More Shares

Understanding why you're issuing more shares can guide your decision-making and help maintain investor trust. Common reasons include:

  • Raising capital for expansion, operations, or debt repayment.
  • Attracting investors through equity financing.
  • Providing equity compensation to employees or advisors via stock options or restricted stock.
  • Facilitating mergers or acquisitions by offering shares in lieu of cash.

Being transparent about your objectives also helps in gaining shareholder approval when necessary.

Understanding Authorized vs. Issued Shares

Before proceeding with issuing more shares, it's critical to distinguish between authorized shares and issued shares. Authorized shares are the maximum number of shares a company can legally issue, as specified in its articles of incorporation. Issued shares are those that have actually been distributed to shareholders.

If your company wants to issue more shares than currently authorized, you must:

  • Amend the articles of incorporation to increase the authorized share count.
  • Obtain board and shareholder approval, typically through a formal resolution.
  • File the amended articles with your state’s Secretary of State.

Maintaining a clear record of these distinctions is essential for legal compliance and accurate capitalization reporting.

Issuing the Shares

Once all the details were set, such as the number of issued shares, their worth, and the type of shares issued, as well as full compliance to state and federal laws, a stock purchase agreement can be drafted. The document will contain all the details of the stock issuing and should be thoroughly reviewed by securities attorneys before being signed. Drafting it without professional assistance from a lawyer highly increases the possibility of an error or an omission in the drafting of the document.

When everything is set, meaning the stock purchase agreement is ready and the investors are lined up to buy the shares, what remains is the simple matter of transferring the shares to their new owners in exchange for the corresponding amount of money.

Corporate Actions and Legal Steps to Issue Shares

To issue shares legally and effectively, follow these corporate actions:

  1. Board Approval: The board of directors must approve the issuance, specifying:
    • Number and class of shares
    • Issuance price (if applicable)
    • Intended recipients or investor group
  2. Prepare Issuance Documents: Common documents include:
    • Board resolution
    • Stock subscription or purchase agreement
    • Updated cap table
    • Share certificates (if physical shares are issued)
  3. File Necessary Paperwork: Depending on your jurisdiction, you may need to:
    • File a notice of stock issuance with your state
    • Comply with securities laws or seek exemptions (e.g., Regulation D under the SEC)
  4. Record the Transaction:
    • Update the shareholder ledger or register
    • Reflect the new issuance in your company’s cap table
    • Report the issuance in your corporate records

How to Make Shares of My Company for the First Time

If you're forming a new corporation and wondering how to make shares of your company, the process starts during incorporation:

  • Set the authorized share amount in your articles of incorporation.
  • Define the share classes, such as common and preferred, and their associated rights.
  • Issue initial shares to founders or early investors by executing stock issuance agreements and recording them in a shareholder ledger.

It’s important to price the initial shares reasonably and ensure proper documentation for legal and tax purposes.

When Are Shares Issued?

If the company's constitution prevents new shares from being issued, the restrictions can be lifted if the decision is approved by the majority of shareholders. This is done with a special resolution, and in order for it to be valid and for new shares to be issued, at least 75% of shareholders must agree to the decision.

Before new shares are issued by a company, board members have to agree to all the terms concerning the issuing and conclude that all the conditions are equitable for everyone involved. The moment when shares are officially issued is when the company's shareholder register adds the names of the new holders. If a person's liability in regards to the company increases as a result of the issuing of new shares, or if it creates a new liability on someone to the company, the issuing must be done with that person's full consent, otherwise it will be considered void.

Common Mistakes to Avoid When Issuing Shares

Avoiding these common errors will safeguard your company’s legal standing and financial health:

  • Issuing shares without board or shareholder approval
  • Failing to update the articles of incorporation for increased authorized shares
  • Non-compliance with federal or state securities laws
  • Inaccurate or missing cap table updates
  • Improper valuation of shares, which can cause tax consequences

Working with legal counsel helps ensure all steps are followed precisely.

Post-Issuance Compliance and Reporting

Once new shares are issued, your responsibilities don't end there. You must:

  • Update the cap table to reflect ownership changes.
  • Issue Form D (for Regulation D exemptions) or other filings with the SEC, if applicable.
  • File state-specific securities notices or qualify for exemptions.
  • Maintain proper records for accounting and future due diligence.

Staying compliant protects the company from legal liabilities and ensures transparency for stakeholders.

Frequently Asked Questions

1. What’s the difference between authorized and issued shares? Authorized shares are the total number a company can issue; issued shares are those already allocated to shareholders.

2. Can I issue more shares than what's authorized in my articles of incorporation? Not without amending your articles and obtaining shareholder approval.

3. Do I need a lawyer to issue shares in my company? While not legally required in all cases, consulting a securities or corporate attorney helps ensure legal compliance and proper documentation.

4. What is a stock purchase agreement? It’s a legal contract that outlines the terms of share issuance between the company and the buyer.

5. How do I reflect new shares in my records? Update your shareholder register and cap table, and file any necessary forms with state or federal agencies.

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