Deciding on raising capital through selling membership shares involves a whole realm of legal complexities that can carry some hefty penalties for registering incorrectly, late, or fraudulently.
Being a Limited Liability Company (LLC) carries with it some great benefits, but also additional headaches. Selling membership shares is one of those.
So the real question might not be “are you going to sell membership shares” but more along the line of “how are you going to sell membership shares?” The trick lies more with the “how” than the “why.”
I’ll briefly discuss the basic decision making process I used in dealing with the SEC and State of Illinois. Then, I’ll go into further detail about the decisions I made.
So, deciding between registering or filing for exemption? Read on!
3 Easy Steps to Registration/Exemption
- Information Gathering!
Check out Limited Liability Companies for Dummies, by Jennifer Reuting; also consult with an Attorney who specializes in securities.
I ended up doing a lot of extra research and more or less have done things the hard way. If you trust your capabilities to correctly interpret Federal and State securities regulations and choose not to consult an attorney who specializes in securities you’re taking a greater risk than if you just made the effort and spent a bit of cash. I went with the former rather the later, but I’ll explain my rational below.
- Federal Level.
Decide if you are going to register, or file for exemption, with the SEC.
I went with filing Form D with the SEC for exemption because it involves a lot less work and money. The federal government has made it pretty decent to apply for an exemption. I went with Regulation D Rule 504, which has some important limitations (see below for the exert from the SEC’s FAQ regarding Are There Legal Ways To Offer and Sell Securities Without Registering With the SEC?).
If you register with the SEC, you’ll most likely have to register at the State level. If you file for exemption, you’ll still have to decide on registering vs. exemption.
- State Level.
Decide if you are going to register, or file for exemption, in your State.
Your decision on this one will be based on what you decided to do for question 2. If you registered with the SEC, you’ll most likely have to register with your State. However, if you filed an exemption with the SEC, you have some options: register or file for exemption.
As I went with exemption under Regulation D Rule 504, I had to choose between using or not using general solicitation and general advertising. In the State of Illinois, if you want to sell your securities (i.e., membership shares) using general solicitation or general advertising, you have to register with the State.
If you decide not to use general solicitation or general advertising, then things are a bit easier on you to file for exemption. I took the path of least resistance, even though being unable to use general solicitation or general advertising really is quite limiting in raising capital through selling membership shares.
Why I Filed for Exemption
I decided to file for exemption instead of registration primarily for two reasons: time and money. Registration costs both at both the Federal and the State levels.
- Registering with the SEC can be costly and time consuming.
I’m not raising more than a million dollars, and my venture is limited. Filing for an exemption cost me the price for the paper on which I printed my Form ID and Form D, a buck for the notarization, and my time filing Form D with the SEC on EDGAR.
- Registering with the State of Illinois can be costly and time consuming.
With the option to use general solicitation and general advertising, even under Regulation D, Illinois requires a Form U-1 (Uniform Application to Register Securities) and Form U-7 (Disclosure Document). In addition, Illinois has an exam fee of $150.00 and a filing fee of $250.00, so you should be sure you’re going to raise some serious capital through the use of general solicitation and advertising to sell your membership shares.
Also, if you plan on using general solicitation or advertising, make sure in your filing for exemption with the SEC you select Rule 504(b)(1)(i) for Item 6, which will allow you to use general solicitation or advertising as long as you register with the State and deliver a substantive disclosure document to investors before the sale, and abide by other state regulations.
However, filing for exemption under Regulation D Rule 504 in the State of Illinois requires you to submit Illinois Form 4G – Limited Offering Exemption within 12 months of your first sale to an Illinois resident. Much easier for my purposes, and will only cost $100. More limited because I can’t use general solicitation or general advertising, but I’m also applying for bank loans to raise initial capital, and going through more trusted channels to find any personal investors.
Also, I went ahead and completed Form U-7, as a disclosure document will come in very handy and ensure any investors are adequately informed. It’s also nice to cover all my bases.
Excerpts from Quoted Regulations
Rule 504 provides an exemption for the offer and sale of up to $1,000,000 of securities in a 12-month period. Your company may use this exemption so long as it is not a blank check company and is not subject to Exchange Act reporting requirements. Like the other Regulation D exemptions, in general you may not use public solicitation or advertising to market the securities and purchasers receive “restricted” securities, meaning that they may not sell the securities without registration or an applicable exemption. However, you can use this exemption for a public offering of your securities and investors will receive freely tradable securities under the following circumstances:
- You register the offering exclusively in one or more states that require a publicly filed registration statement and delivery of a substantive disclosure document to investors;
- You register and sell in a state that requires registration and disclosure delivery and also sell in a state without those requirements, so long as you deliver the disclosure documents mandated by the state in which you registered to all purchasers; or,
- You sell exclusively according to state law exemptions that permit general solicitation and advertising, so long as you sell only to “accredited investors,” a term we describe in more detail below in connection with Rule 505 and Rule 506 offerings.
Even if you make a private sale where there are no specific disclosure delivery requirements, you should take care to provide sufficient information to investors to avoid violating the antifraud provisions of the securities laws. This means that any information you provide to investors must be free from false or misleading statements. Similarly, you should not exclude any information if the omission makes what you do provide investors false or misleading.
Section 4.G of the Illinois Securities Law and Sections 130.440, 130.441 and 130.442 of the Rules and Regulations may be used for a Regulation D Rule 504 limited offering.
The maximum offering amount for a Regulation D Rule 504 offering is $1 million.
The Section 4.G exemption may be used in conjunction with federal Regulation D Rule 504, provided there is no advertising or general solicitation of investors.
Filing Requirements:
- Illinois Form 4G “Report of Sale” or SEC Form D.
- Payment of a filing fee of $100 made payable to the Secretary of State.
Mail to:
Illinois Securities Department
Jefferson Terrace, Suite 300A
300 West Jefferson Street
Springfield, Illinois 62702
Illinois Form 4G or Form D must be submitted to the Illinois Securities Department no later than twelve months after the date of the first sale to an Illinois resident.
Securities of issuers, including but not limited to, notes, stocks, bonds, debentures, fractional undivided interests, limited partnership interests or, in general, any interest or instrument commonly known as a “security”, relying upon Regulation D, Rule 504 if using general solicitation or advertising, or Regulation A under the Federal Securities Act or intra state filings are subject to registration by qualification.
An application for registration on Form U-1, Uniform Application to Register Securities must be filed with the Secretary of State together with Form U-7, Small Company Offering Registration Form (“disclosure document”) or other offering circular and a filing and examination fee. (add): An instruction manual is available here. http://www.nasaa.org/content/Files/SCORIM92899.doc.
Material changes to information contained in the disclosure document must be reported to the Secretary of State within two business days after such occurrence together with an amendment or supplement to the disclosure document. Periodic sales reports are required during the period of registration. The registration is effective for one year unless sooner terminated. The securities may be re-registered if all of the securities were not sold during the initial registration.
Fees:
Exam Fee: $150
Filing Fee: $250
Amendment Filing Fee: $25
Re-Registration Fee: Same as initial fee(s)
(c) Limitation on manner of offering. Except as provided in §230.504(b)(1), neither the issuer nor any person acting on its behalf shall offer or sell the securities by any form of general solicitation or general advertising, including, but not limited to, the following:
(1) Any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio; and
(2) Any seminar or meeting whose attendees have been invited by any general solicitation or general advertising; Provided, however, that publication by an issuer of a notice in accordance with §230.135c or filing with the Commission by an issuer of a notice of sales on Form D (17 CFR 239.500) in which the issuer has made a good faith and reasonable attempt to comply with the requirements of such form, shall not be deemed to constitute general solicitation or general advertising for purposes of this section; Provided further, that, if the requirements of §230.135e are satisfied, providing any journalist with access to press conferences held outside of the United States, to meetings with issuer or selling security holder representatives conducted outside of the United States, or to written press-related materials released outside the United States, at or in which a present or proposed offering of securities is discussed, will not be deemed to constitute general solicitation or general advertising for purposes of this section.
Disclaimer: the author is neither an expert in securities nor qualified to offer advice or consult on securities or LLCs. Should something here within be erroneous, inaccurate, or downright wrong, you can bet you’ll see a follow up article titled “How I Did My Own Research into Filing For an Exemption from the SEC and State of Illinois under Regulation D Rule 504 and Got Pwned.”
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Selling Membership Shares as an LLC
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Categories:Commentary
Deciding on raising capital through selling membership shares involves a whole realm of legal complexities that can carry some hefty penalties for registering incorrectly, late, or fraudulently.
Being a Limited Liability Company (LLC) carries with it some great benefits, but also additional headaches. Selling membership shares is one of those.
So the real question might not be “are you going to sell membership shares” but more along the line of “how are you going to sell membership shares?” The trick lies more with the “how” than the “why.”
I’ll briefly discuss the basic decision making process I used in dealing with the SEC and State of Illinois. Then, I’ll go into further detail about the decisions I made.
So, deciding between registering or filing for exemption? Read on!
3 Easy Steps to Registration/Exemption
Check out Limited Liability Companies for Dummies, by Jennifer Reuting; also consult with an Attorney who specializes in securities.
I ended up doing a lot of extra research and more or less have done things the hard way. If you trust your capabilities to correctly interpret Federal and State securities regulations and choose not to consult an attorney who specializes in securities you’re taking a greater risk than if you just made the effort and spent a bit of cash. I went with the former rather the later, but I’ll explain my rational below.
Decide if you are going to register, or file for exemption, with the SEC.
I went with filing Form D with the SEC for exemption because it involves a lot less work and money. The federal government has made it pretty decent to apply for an exemption. I went with Regulation D Rule 504, which has some important limitations (see below for the exert from the SEC’s FAQ regarding Are There Legal Ways To Offer and Sell Securities Without Registering With the SEC?).
If you register with the SEC, you’ll most likely have to register at the State level. If you file for exemption, you’ll still have to decide on registering vs. exemption.
Decide if you are going to register, or file for exemption, in your State.
Your decision on this one will be based on what you decided to do for question 2. If you registered with the SEC, you’ll most likely have to register with your State. However, if you filed an exemption with the SEC, you have some options: register or file for exemption.
As I went with exemption under Regulation D Rule 504, I had to choose between using or not using general solicitation and general advertising. In the State of Illinois, if you want to sell your securities (i.e., membership shares) using general solicitation or general advertising, you have to register with the State.
If you decide not to use general solicitation or general advertising, then things are a bit easier on you to file for exemption. I took the path of least resistance, even though being unable to use general solicitation or general advertising really is quite limiting in raising capital through selling membership shares.
Why I Filed for Exemption
I decided to file for exemption instead of registration primarily for two reasons: time and money. Registration costs both at both the Federal and the State levels.
I’m not raising more than a million dollars, and my venture is limited. Filing for an exemption cost me the price for the paper on which I printed my Form ID and Form D, a buck for the notarization, and my time filing Form D with the SEC on EDGAR.
With the option to use general solicitation and general advertising, even under Regulation D, Illinois requires a Form U-1 (Uniform Application to Register Securities) and Form U-7 (Disclosure Document). In addition, Illinois has an exam fee of $150.00 and a filing fee of $250.00, so you should be sure you’re going to raise some serious capital through the use of general solicitation and advertising to sell your membership shares.
Also, if you plan on using general solicitation or advertising, make sure in your filing for exemption with the SEC you select Rule 504(b)(1)(i) for Item 6, which will allow you to use general solicitation or advertising as long as you register with the State and deliver a substantive disclosure document to investors before the sale, and abide by other state regulations.
However, filing for exemption under Regulation D Rule 504 in the State of Illinois requires you to submit Illinois Form 4G – Limited Offering Exemption within 12 months of your first sale to an Illinois resident. Much easier for my purposes, and will only cost $100. More limited because I can’t use general solicitation or general advertising, but I’m also applying for bank loans to raise initial capital, and going through more trusted channels to find any personal investors.
Also, I went ahead and completed Form U-7, as a disclosure document will come in very handy and ensure any investors are adequately informed. It’s also nice to cover all my bases.
Excerpts from Quoted Regulations
VI. Are There Legal Ways To Offer and Sell Securities Without Registering With the SEC? D. Regulation D Rule 504
Rule 504 provides an exemption for the offer and sale of up to $1,000,000 of securities in a 12-month period. Your company may use this exemption so long as it is not a blank check company and is not subject to Exchange Act reporting requirements. Like the other Regulation D exemptions, in general you may not use public solicitation or advertising to market the securities and purchasers receive “restricted” securities, meaning that they may not sell the securities without registration or an applicable exemption. However, you can use this exemption for a public offering of your securities and investors will receive freely tradable securities under the following circumstances:
Even if you make a private sale where there are no specific disclosure delivery requirements, you should take care to provide sufficient information to investors to avoid violating the antifraud provisions of the securities laws. This means that any information you provide to investors must be free from false or misleading statements. Similarly, you should not exclude any information if the omission makes what you do provide investors false or misleading.
State of Illinois Regulation D Rule 504 – Limited Offering Exemption
Section 4.G of the Illinois Securities Law and Sections 130.440, 130.441 and 130.442 of the Rules and Regulations may be used for a Regulation D Rule 504 limited offering.
The maximum offering amount for a Regulation D Rule 504 offering is $1 million.
The Section 4.G exemption may be used in conjunction with federal Regulation D Rule 504, provided there is no advertising or general solicitation of investors.
Filing Requirements:
Mail to:
Illinois Securities Department
Jefferson Terrace, Suite 300A
300 West Jefferson Street
Springfield, Illinois 62702
Illinois Form 4G or Form D must be submitted to the Illinois Securities Department no later than twelve months after the date of the first sale to an Illinois resident.
State of Illinois Small Company Offering Registration
Securities of issuers, including but not limited to, notes, stocks, bonds, debentures, fractional undivided interests, limited partnership interests or, in general, any interest or instrument commonly known as a “security”, relying upon Regulation D, Rule 504 if using general solicitation or advertising, or Regulation A under the Federal Securities Act or intra state filings are subject to registration by qualification.
An application for registration on Form U-1, Uniform Application to Register Securities must be filed with the Secretary of State together with Form U-7, Small Company Offering Registration Form (“disclosure document”) or other offering circular and a filing and examination fee. (add): An instruction manual is available here. http://www.nasaa.org/content/Files/SCORIM92899.doc.
Material changes to information contained in the disclosure document must be reported to the Secretary of State within two business days after such occurrence together with an amendment or supplement to the disclosure document. Periodic sales reports are required during the period of registration. The registration is effective for one year unless sooner terminated. The securities may be re-registered if all of the securities were not sold during the initial registration.
Fees:
Exam Fee: $150
Filing Fee: $250
Amendment Filing Fee: $25
Re-Registration Fee: Same as initial fee(s)
Regarding General Solicitation and Advertising:
(c) Limitation on manner of offering. Except as provided in §230.504(b)(1), neither the issuer nor any person acting on its behalf shall offer or sell the securities by any form of general solicitation or general advertising, including, but not limited to, the following:
(1) Any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio; and
(2) Any seminar or meeting whose attendees have been invited by any general solicitation or general advertising; Provided, however, that publication by an issuer of a notice in accordance with §230.135c or filing with the Commission by an issuer of a notice of sales on Form D (17 CFR 239.500) in which the issuer has made a good faith and reasonable attempt to comply with the requirements of such form, shall not be deemed to constitute general solicitation or general advertising for purposes of this section; Provided further, that, if the requirements of §230.135e are satisfied, providing any journalist with access to press conferences held outside of the United States, to meetings with issuer or selling security holder representatives conducted outside of the United States, or to written press-related materials released outside the United States, at or in which a present or proposed offering of securities is discussed, will not be deemed to constitute general solicitation or general advertising for purposes of this section.
Disclaimer: the author is neither an expert in securities nor qualified to offer advice or consult on securities or LLCs. Should something here within be erroneous, inaccurate, or downright wrong, you can bet you’ll see a follow up article titled “How I Did My Own Research into Filing For an Exemption from the SEC and State of Illinois under Regulation D Rule 504 and Got Pwned.”