We recently formed a corporation for our startup company and would like to issue equity to our co-founders. We have read that it may be necessary to file a Form D with the SEC and a Form 99 with the state of NY. Is this necessary for founders that are primarily working for equity? There won't be a significant monetary investment. The stock sale would essentially be for a nominal value for the purposes documenting the transfer of shares.
Believe it or not, the question posed is an extremely complicated one. "Stock" is included within the literal definition of a "security." Since all of the recipients of the stock are working (presumably actively) in the enterprise, however, there is considerable authority that a court might find these shares are not securities at all. No securities = no form D required. Moreover, it is likely that Rule 701 can be made to apply to the issuance, in which case the Form D is also not required. The Form 99 issue involves another level of complexity. Suffice it to say that the securities bar and the State of New York might disagree on the limits of the New York State securities laws.
Louis E. Black is licensed to practice law solely in New York. His answers are for general information and no Answer or Comment shall be deemed to create an attorney-client relationship or create any right of confidentiality. The reader should never assume that this information applies to his or her specific situation or constitutes legal advice. Therefore, please consult an appropriate attorney in your jurisdiction and who is familiar with your specific facts and all of the circumstances Any U.S. federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
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All of this should have been handled before you drafted your articles of incorporation and by-laws. This is why DIY Incorporation kits are only nominally useful.
If you will be issuing equity shares in the corporation and will have employees working for equity, you need to not only draft the appropriate securities documents, but draft employment agreements for those working for equity.
See a business formation attorney for assistance.
This does not constitute legal advice or the engagement of my services as an attorney.
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No Form D required as you are not offering securities to the public as such terms are contemplated under the 1933 Securities Act. This is an exempt transaction.
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