Capitalization

• Determine the amount of money needed for capitalization.
• Funding a project or part of a business requires capitalization

Example

• Let’s just say that you want to expand your business by adding 3 more branches. Each would cost $500,000 per branch. You will then require an amount of $1.5M of capital. This will determine the number of shares to issue and the price per share.

Articles of Incorporation

In the process of Incorporating your business in Nevada, part of the requirement includes filing the Articles of Incorporation. This legal document specifies the maximum number of shares that your corporation can issue to shareholders.

Shares

Initially, Public Companies will issue a high volume of shares that can or will be issued eventually at the time that a company has to pool funds as capital, that will determine the number of shares that a company can issue to its employees and investors.

Issuing of Additional Shares

In cases where there is a shortage of shares that are authorized, the Directors of the Board may authorize additional shares to be issued by altering the charter. This process may be difficult as it requires the approval of shareholders. Therefore, the possibility of opposition may happen due to the dilution of having more shares being issued.  

Determining The Number Of Shares

You will be able to determine the Number of shares you can issue once you know the amount of capital you need simply by taking the amount of the capital you would like to raise and divide it by the unit price of a share. For example, if you want to raise $1 million and you determine the worth of the stock you will issue at $100 per share, then you would simply issue a number of 10,000 shares.

Safety Net

Keep in mind that it is wise to have half of the total shares issued to yourself. This is because, in the event where the other 50 shares are issued at a later time, you will own 50% of the business by owning 5000 shares (if you are willing and have the means to invest your own money). 

Consult With A Professional

A lot of factors have to be taken into consideration in determining how much a share is worth. Given that the stocks are mostly influenced by the current value of other shares, the rights connected to the shares, and the type of stock-it would be advisable to consult with an attorney or an experienced professional to help you in pricing your new shares.

Types of Shares

There are two (2) main types of shares that can be issued: Preferred and Common. Although both of these types of shares allow shareholders to own a percentage of the business, there are minor differences with different factors and voting rights.

Preferred Share

A Preferred Share doesn’t give shareholders the right to vote on company decisions. However, they are the first to have a claim on the company’s profits and assets. This is in cases of bankruptcy and any amount that is left will be distributed to common shareholders.

Common Shareholders

Common Shareholders, on the other hand, have voting rights. They take profit after the preferred shareholders are fully paid. Companies have different preferences when it comes to the control of voting and shareholders flexibility in profits. It is good advice to consult with a lawyer or an accountant to decide on the ideal kind of setup.

Government-Regulated

Federal and State governments have adopted laws to regulate the selling of stocks and other securities for the protection of investors. In this case, consulting with a lawyer before issuing stocks is important due to detailed and complex regulations in compliance with the state and federal security standards.

Nevada Requirement

The State of Nevada requires registering with both federal and state government. However, there are exemptions under Nevada Revised Statutes 90.520, 90.530, and 90.540. Each of these sections has a lot of potential exceptions and the governing securities transaction laws and regulations are complicated

Importance Of Stock Subscription Agreement

Creating the Stock Subscription Agreement for the purpose of detailing everything that surrounds the transaction and issuance of stock certificates to shareholders is important and it is advisable to draft this document with the assistance of a lawyer.

What It Outlines

The stock subscription agreement outlines the number of shares, the price per share, the date of the transaction, the payment method and the amount of cash received as well as the subscriber. The same document also outlines the risks and responsibilities of the shareholder. Once an agreement is made, a hard copy of the shareholder certificates must be printed and given to the shareholders.

Helpful Link

You may click on How to Draft a Stock Subscription Agreement for a detailed guide

Cash And Non-Cash

The process of issuing the shares primarily involves the process of receiving the specific amount of cash in the stock subscription agreement in exchange of providing a share certificate to indicate ownership, and payment given is usually issued by check. It should, however, be noted that on occasion, assets instead of cash can be exchanged for stock certificates, which is referred to as “non-cash consideration”.

Extensive Consultations

While the process of issuing stocks seem fairly simple, however, when it comes to a large multi-million dollar-corporation, issuing shares usually involves an extensive consultation with investment banks and a team of professionals due to corporations issuing stock to the general public through an IPO (Initial Public Offering) and banks are required to look for buyers of shares in large quantities.

In Summary

In this article, we’ve learned what a stock is, why it is issued and how to issue stocks.