RAISING SMALL BUSINESS CAPITAL
Many small businesses reach a point in their development when the owner’s capital, gifts from friends and family, and lines of credit or other loans are exhausted prior to the company becoming self-sustaining.
If your business is at this point, you might want to consider whether raising capital through a securities offering is right for you. This webpage provides an overview of securities regulation and securities offerings, and provides general information on how to prepare for, register, and sell a securities offering in Montana.
Please keep in mind the purpose of this webpage is to acquaint you with the possibility of raising capital through a securities offering and should not be relied upon as advice to actually make a securities offering. We recommend you consult with an experienced securities attorney and a qualified accountant as you prepare to raise capital through a securities offering.
Before proceeding, you should know that all businesses conducting a securities offering must comply with both federal and state securities laws. These laws are intended to protect investors, while providing a mechanism for capital formation and economic growth.
- Every offering of securities must either be registered or exempt from registration under both federal and state securities laws.
- Most securities offerings conducted by small businesses are exempt from registering federally with the Securities and Exchange Commission (SEC).
- In addition, many securities offerings conducted by small businesses in the state of Montana also qualify for exemptions from registration with the CSI Securities Division. However, if an offering is unable to meet the requirements for one of the exemptions, several registration options exist for small businesses raising capital in Montana.
- Regardless of whether an offering is registered or exempt from registration, an application or notification is usually required to be filed with the SEC, and with the securities division of every state in which the offering will be made.
- In addition, regulations frequently specify the content of offering circulars and contain restrictions on the way in which the securities can be sold or transferred.
- Before conducting a securities offering, you should be aware that Montana securities laws impose both civil and criminal liability on businesses and their principals for offers and sales of securities made in violation of the law. Generally, this means investors who purchased securities from a business – while the offer or sale of the securities was in violation of the Securities Act of Montana – can sue the business and its principals for the full amount of their investment plus interest. The CSI Securities Division will also make a determination if a business or its principals have done anything criminal..
This page provides summaries of the basic exemption and registration provisions available for small businesses conducting a securities offering in Montana.
If you wish to sell in other states, you should contact the SEC and the securities divisions of the states in which you wish to conduct your offering.
Equity securities are usually common stock and convey a portion of the ownership interest in the business to the holder of the security.
Stockholders are usually entitled to receive dividends when and if declared, vote on corporate matters, and receive information about the business, including financial statements.
A business must be incorporated under state law to issue common stock, which requires the business to file its articles of incorporation with the state in which it wishes to incorporate. The articles of incorporation specify the amount and type of stock the company is authorized to issue. To incorporate in Montana, the company must file with the Montana Secretary of State.
Debt Securities usually consist of bonds or promissory notes and represent debt obligations of the business. They have a specified interest rate, maturity date, and repayment amount.
In a registered securities offering, a business can only offer debt securities if it can demonstrate that it has the ability to repay the debt based on its past performance. Since it is usually difficult, if not impossible, for small businesses to demonstrate this ability, offering debt securities in a registered offering is usually not an option available to small businesses in need of capital.
To provide adequate and complete disclosure of all material information about the business to prospective investors, a requirement under securities laws, you will need to prepare a disclosure document.
The disclosure document and any attached exhibits are the basic offering materials you will need to provide to prospective investors and are different than the business plan you may have already developed.
Piecing together a well-prepared offering package requires a lot of time and expertise in many areas. Consulting with an experienced securities attorney and a qualified accountant early in the decision-making process is strongly recommended. Even if you decide to prepare the bulk of the package yourself, attorneys and accountants can offer invaluable assistance with many general business planning issues and with determining what type of offering to pursue.
It is also a good idea to contact the CSI Securities Division to obtain the rules, as well as any forms required to be filed, in connection with the offering exemption or registration provision upon which the offering will rely.
When preparing the disclosure document, you must clearly disclose the following:
- Terms of the offering and the type of security offered
- A complete description of the business
- How the funds from the offering will be used
- Background of the business’ officers and directors and their compensation
- Any transactions between the business and affiliates
- The risks associated with an investment in the business
- Financial information on the business’ assets, liabilities, income, and cash flows (financial statements); and
- All other information necessary for a reasonable person to make an informed investment decision.
If you make any earnings or cost projections, you must carefully explain and justify the assumptions underlying those projections. Unjustified or otherwise inappropriate assumptions are a frequent problem, so you should consult the CSI Securities Division before including any projections in your document. Financial projections are rarely, if ever, justifiable for publicly offered start-up or development stage companies. You should double check figures and proofread all documents to avoid errors, omissions and discrepancies.
Complex offerings, start-up companies, and companies in a unique business often have special disclosure problems that complicate the drafting process. If you are unfamiliar with securities, or are having trouble drafting the disclosure document, you should consider hiring a securities attorney or other professional.
For more information, see our role of disclosure webpage which provides more information about this important legal obligation.
If you will be seeking registration in the Montana, you may also wish to consider scheduling an appointment with the small business section of the CSI Securities Division to learn about the application process and get an idea of potential problems before you begin. You can also obtain disclosure documents from prior offerings that were approved by the CSI Securities Division, so that you can become familiar with the kind of information you will be required to disclose in your own offering document.
Most small business securities offerings in Montana are subject to a filing requirement with the CSI Securities Division, even if the offering is exempt from registration. You may also be required to make a filing with the Securities and Exchange Commission (SEC).
Most exempt offerings only require a notice filing and are subject to a cursory review by the CSI Securities Division.
Typically, in order to claim an exemption from registration, the company is required to file a form notifying the CSI Securities Division of the offering, a consent to service of process, Form U-2, and a nominal filing fee.
The offering materials are not typically required to be filed; however, the CSI Securities Division reserves the right to request them in connection with certain exemptions.
Offerings that may be sold to the general public through advertising or general solicitation must be registered and are subject to an extensive review by the CSI Securities Division. This initial review:
- Seeks to ensure that adequate information is contained in the disclosure document to be provided to prospective investors, and that the issuer has complied with limits imposed in such areas as offering amount, selling expenses, affiliated transactions, and promotional shares.
- Focuses on identifying major content issues that must be dealt with first. Further reviews are then made to identify and correct smaller content and disclosure problems. Several reviews may be required before the offering is ready to be cleared.
- Usually takes place within two (2) weeks of the receipt of your application.
- Normally centers on “deal killers” ─ a substantive problem areas that, unless resolved, will kill an offering regardless of the quality of the disclosure. Typical “deal killers” include:
─Excessive amount of promotional shares
─Inability to service debt consistent with CSI Securities Division regulations
─Affiliated transactions/conflicts of interest
─Excessive selling expenses
─Problems with financial statements.
CSI Securities Division staff will maintain regular contact with you during the review process so you will always be aware of the status of your application. We will also provide comment letters to explain the changes you must make to the disclosure document.
The length of the review period varies with the number of comments issued and how quickly you respond. Naturally, the more complete and thoughtfully prepared your offering is, the shorter the review time.
If your file is particularly complex, or has some unusual problems, it will usually take longer for the CSI Securities Division to review and longer for you to make necessary changes prior to clearance.
Few offerings are cleared in less than six (6) weeks and the process can take several months. You should therefore begin preparing for the offering well before the money is needed.
Once all issues have been resolved, the offering can begin.
Preparing the offering documents is a difficult task, but your greatest challenge will probably be finding investors.
Small offerings tend to be high risk, and investors are often wary. Most securities broker-dealers do not handle small offerings because they cannot make enough in commissions to cover their marketing costs. In addition, some offering alternatives, particularly those exempt from registration, do not allow you to advertise the securities offering. For the most part, you will be relying on family, friends, and business acquaintances to invest in your offering.
If changes are to be made at any time to the offering that are material to the investors, you must notify the CSI Securities Division and your disclosure document must be amended to reflect these changes.
In addition, if you are conducting a registered offering, a copy of every advertisement for your offering must be reviewed and cleared by the CSI Securities Division before you can use it. Remember that exempt offerings generally cannot engage in “general solicitation,” including advertising.
Some securities offerings, particularly registered offerings, require you make periodic reports to the CSI Securities Division or the SEC regarding the status of the offering. In addition, you may also be required to report the final sales results to the CSI Securities Division when the offering is completed.
If you do not raise the minimum offering amount specified in the disclosure document, all funds collected from investors must be returned.
After completion of the offering, the company may be required to provide periodic financial reports to investors.
Undertaking a securities offering is a serious matter. It can be costly and will take time away from running your business.
Ask yourself some basic questions.
- Do you have a clear sense of where your business is going and why you need the funds?
- Have you prepared a business plan?
- Are you willing to provide written documentation to investors describing your business, the offering, and the risks associated with investing in your enterprise?
- Are you willing to comply with all applicable requirements of the securities laws?
The consequences for not making a filing when required or exceeding certain numerical limitations can be costly and embarrassing. Contacting the CSI Securities Division before you offer or sell securities is an inexpensive and easy way to obtain accurate information about your specific circumstances.
Finally, the purpose of this document is to acquaint the small businessperson with the possibility of raising capital through a securities offering. It should not be relied upon to actually make a securities offering. There are many additional important issues, of which a person making a securities offering should be aware. This document summarizes only some of these issues.
- CSI Securities Division—800.332.6148 or 406.444.2040
- Office of Small Business Policy of the Securities and Exchange Commission (SEC)—For more information on federal securities laws—202.942.2950
- Small Business Development Centers (located throughout the state)—For information on how to prepare a business plan may be available through
- SCORE—A nonprofit organization of retired businessperson often operates programs to assist entrepreneurs. The location of chapters around the state usually can be found in the white pages of the telephone directory.
- U.S. Small Business Administration—Provides assistance to the entrepreneur. Montana has two regional offices, located in Helena and Billings.
The following definitions are included to help clarify some of the terms used throughout this document.
Accredited investor: Any investor whose income, net worth, or business purpose meet certain requirements defined by the Securities and Exchange Commission (SEC).
Banks, registered broker-dealers, insurance companies, investment and business development companies, certain employee benefit plans, and charitable organizations with assets over $5 million are considered accredited investors.
Accredited investors also include: directors, executive officers, and general partners of the issuer; persons with income greater than $200,000 in each of the two most recent years (or joint income greater than $300,000), and a reasonable expectation of the same income in the current year; and persons whose individual or joint net worth exceeds $1 million.
Common stock: An ownership interest in a corporation.
Consent to service of process: A form submitted by the issuer that allows the CSI Securities Division to be served with legal papers on the issuer’s behalf. This form must be filed for each financing option.
Debt security: A security in which the seller must repay the investor’s original investment amount plus interest. A company can offer debt securities only when it can demonstrate that it has the ability to repay the debt based on current earnings.
Equity security: Involves conveying a portion of the ownership interest in the business to the holder of the security, typically through stock.
Disclosure document: The disclosure document distributed to potential investors is the primary source of information about your company. This document is also referred to as a prospectus or offering circular.
Limited Liability Company: An unincorporated entity that combines the limited liability features of a corporation with the pass-through taxation and structural flexibility of a general partnership. Non-accredited investor: Any investor not included in the definition of an accredited investor.
Preferred stock: Stock that has priority over common stock as to dividend payments and/or the distribution of the assets of the company. Preferred stock can have the characteristics of either common stock or debt securities.
Promotional shares: Equity securities that were issued within the last three (3) years ─ or that are to be issued ─ to certain founders or organizers of the issuer for less than 85% of the public offering price.
Selling expenses: Selling expenses include those costs that are directly related to issuing and selling the securities, such as underwriting and brokerage discounts and commissions, printing costs, and filing fees paid to the Securities and Exchange Commission (SEC) and/or state securities divisions. Fees paid to attorneys and shares made available to underwriters are also counted as selling expenses.
Sophistication: The investor and/or his/her representative have sufficient business knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of an investment opportunity.