How to Issue More Shares: Everything You Need to Know
If you're wondering how to issue more shares, you might be thinking about a business that is deciding to issue more shares of its stock in order to sell them.3 min read
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.
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.
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.
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