By Jeff Wolfe

In our Business Capital Basics Series, we’ve been outlining some of the avenues for small businesses and startups to achieve their funding goals.  In the first few posts, we took a look at the types of financing available (equity, debt, and crowdfunding), different types of investors (friends, family, angels, and venture capital firms), legal considerations of fundraising (securities law and tax code) and the specific types of securities that may be offered (common stock, preferred stock, corporate debt, and convertible securities).

This week, let’s explore the different transaction structures available for a securities offering.


jeff2Startup companies typically use a private offering transaction structure when soliciting early financing.  Also known as private placements, private offerings are securities offerings (stocks or bonds) made to a limited number of investors that are not made available to the general public and are thus exempt from Securities and Exchange Commission filing requirements.  There are several safe harbor provisions that the Securities and Exchange Commission has established that demonstrate an offer is private, which include various limitations related to the size of the offering, the number and characteristics of the investors, and the offering materials provided to the investors.  The most common safe harbor is Rule 506(b) of Regulation D, which permits a company to raise an unlimited amount of money from an unlimited number of accredited investors (such as executives, institutional investors, and individuals with certain net worth or annual income) and up to 35 non-accredited investors, provided certain additional requirements are met.

A private offering can involve any type of security.  Often in a private offering, investors will obtain “registration rights,” which allow the investors to resell their shares to the public either after certain events occur (e.g., “piggyback” registration rights if another public offering is consummated), or more rarely, at the election of the investors (so called “demand” registration rights).


The transaction structure that receives the most media attention is that of the public offering, where companies seek to issue stocks or bonds directly to the public through open trading markets such as the New York Stock Exchange or NASDAQ.  Generally, a public offering will involve common stock but companies can offer any type of security and it is not uncommon for large public companies to offer bonds.  Companies typically receive the most attention when they file for their initial public offering (IPO), but public companies are also able to raise additional funds once they are a public company in a “follow-on” public offering.

Public offerings require considerable regulatory consideration, starting with federal filings with the Securities and Exchange Commission.   The expense and time involved in preparing a registration statement and marketing securities to the public are significantly greater than the private placement alternative.  Furthermore, public companies have higher ongoing legal and administrative costs as a public company, including the costs associated with complying with the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.


Due to the expense and time involved in a public offering, some public companies pursue a hybrid approach when they need additional capital.  One hybrid alternative is a PIPE—private investment in public equity.  Basically, PIPEs are transactions allowed by the SEC when a group of accredited investors buy a block of stock or bonds at a discounted price in a private offering and then require the issuer to file a resale registration statement promptly following the closing of the transaction.  A PIPE is attractive to a public company because it reduces the transaction costs and can be accomplished in a shorter period of time than a follow-on public offering.  Just like public offerings, the securities sold in a PIPE transaction may include common stock, preferred stock, convertible debt, warrants, or other securities (or any combination of the above).

Another hybrid alternative available for companies that are already public is a registered direct offering, which involves a company filing a “shelf” registration statement with the Securities and Exchange Commission that is used by the company to privately identify a limited number of investors to participate in the offering.  A registered direct offering is generally handled by a third party placement agent that sells securities of a company either on a best efforts basis or a firm commitment basis where they placement agent is obligated to purchase any securities remaining in the offering that were not sold to investors.  Similar to PIPES, registered direct offerings may involve any type of security and normally are offered at a discount price.

If you’re thinking about raising capital, the attorneys at the Forrest Firm are here to help you to structure your transaction in the best way possible to comply with all legal obligations and meet the strategic needs of your business.