Some businesses produce a reliable income stream, year after year. People often refer to these types of businesses as cash cows, and they can be very good investments because their revenues generally result in stable or increasing stock prices, if public. Another type of investment provides the investor with an income stream based on revenues from business operations or royalties. It is possible to sell share ownership in a revenue stream, either via a private sale of stock or through a public offering via the Security and Exchange Commission's (SEC's) Form S-1, through which your company can go IPO.
1. Prepare your business plan. There are different ways to approach issuing stock based on the cash flow performance of your company. One is to provide an income source to investors through stock that pays dividends based on the cash flow. Another is to use the cash flow to grow your company value through acquisition of assets, and sell non-dividend common stock that can appreciate in value as the company grows.
2. Print out the SEC's Form D and prepare answers to the questions. Form D registers your intention to sell shares in your private company and must be filed prior to putting out your private placement memorandum (PPM). Form D can be submitted online. If attempting a public offering, use SEC Form S-1. Your attorney will be able to help you determine whether or not your offering needs state registration.
3. Prepare your PPM for a private placement. You can buy PPM templates or have your attorney or a consultant prepare your PPM. Always have the document reviewed by your attorney before presenting it to an investor. The PPM package consists of the offering memorandum, an accredited investor questionnaire and a stock subscription agreement. All these must be given to each potential investor. A public offering should be handled by an investment banker.
4. Market your investment by inviting accredited investors to an informational presentation. Marketing a PPM is tricky. You cannot openly solicit investment, but you can provide information to a group of interested investors, through a private presentation, that might result in them wanting to invest. If you choose to go public, your investment banker will handle the marketing.
5. Hire an investor relations adviser to handle investor inquiries and communications as well as any reporting requirements for your state or the SEC and Financial Industry Regulatory Authority (FINRA), depending on whether you do a private or public offering.
- Unless your cash flow is substantial enough to support a public offering of millions of shares, it is better to package your revenues into a private offering. A private offering will give you more versatility in structuring your deal. Attorneys, accountants, bankers and local business and service groups are excellent sources of accredited investors who might be interested in reviewing your PPM. It is wise to use a firm that specializes in marketing private placements -- usually small regional brokerage firms.
- Selling stock to private investors should be overseen by an experienced SEC attorney. A small number of sophisticated investors, who are not actually accredited investors, can buy stock. All other investors must be accredited investors, having a net worth of at least $1 million or income of $200,000 per year or $300,000 per year with a working spouse. Institutions must have $5 million total assets or more.