To issue stock in a corporation, you confirm you have unissued shares available under your charter, get board approval, sell the shares under a valid federal exemption (almost always Regulation D for private companies), execute a stock purchase agreement, record the new owner on your stock ledger, and file Form D with the SEC within 15 days of the first sale along with any required state notice filings. Knowing how to issue stock is largely a matter of running that sequence in order, because skipping a step can give your investors the right to demand their money back.
Confirm You Have Shares Available
Your articles of incorporation state the total number of shares the corporation is authorized to issue, broken down by class if you have more than one. That number is a hard ceiling. Before the board approves any new issuance, someone needs to check how many shares are already outstanding and confirm there is room under the cap.
If there isn’t, you file an amendment to the articles with your state’s Secretary of State to raise the authorized share count. Filing fees for the amendment typically run between $30 and $150 depending on the state. One thing to weigh before you inflate the number: several states calculate annual franchise taxes based on how many shares you authorize, so authorizing ten million shares “just in case” can produce a noticeably larger tax bill than authorizing what you actually need in the near term.
While you’re looking at the charter, note the par value. Par value is set in the articles of incorporation and represents a nominal floor price per share, commonly set at something like $0.0001. It matters for franchise tax calculations and balance sheet accounting, but the number itself has little practical effect on the deal.
Get Board Approval
Every stock issuance has to be formally authorized by the board of directors, either at a meeting with a quorum present or through unanimous written consent in lieu of a meeting. Most corporate statutes require a majority of directors for a quorum and a majority of those present to pass the resolution. For early-stage companies with small boards, unanimous written consent is the standard route because it avoids scheduling a meeting.
The resolution should specify the number of shares, the class, the price per share, the identity of the buyer, and the form of consideration. Consideration doesn’t have to be cash. It can be property or services, but the board must determine the fair value of anything non-cash. Once the resolution is signed, the officers named in it are authorized to execute the stock purchase agreement and accept payment.
Pick a Federal Exemption
Unless you’re running a public offering registered with the SEC, you need an exemption to sell stock legally. Section 4(a)(2) of the Securities Act exempts transactions by an issuer that don’t involve a public offering.1Office of the Law Revision Counsel. 15 USC 77d – Exempted Transactions In practice, most private companies rely on Regulation D, which offers three safe harbors with clearer conditions than the bare statutory exemption.2U.S. Securities and Exchange Commission. Regulation D Offerings
Rule 506(b)
This is the workhorse. Rule 506(b) lets you raise an unlimited amount of capital, but you cannot advertise the offering or use general solicitation. You can sell to an unlimited number of accredited investors plus up to 35 non-accredited investors, though every non-accredited buyer must be financially sophisticated enough to evaluate the risks.3U.S. Securities and Exchange Commission. Private Placements – Rule 506(b) Including non-accredited investors triggers additional disclosure requirements, so most startups stick to accredited investors only.
Rule 506(c)
If you want to publicly advertise the offering, Rule 506(c) is the path. General solicitation is allowed, but every single purchaser must be an accredited investor, and you must take reasonable steps to verify that status rather than accept the investor’s word.4U.S. Securities and Exchange Commission. General Solicitation – Rule 506(c) Verification typically means reviewing tax returns, bank statements, or getting written confirmation from a broker-dealer or attorney.
Rule 504
Smaller raises can use Rule 504, which caps the total offering at $10 million within any 12-month period.5eCFR. 17 CFR 230.504 – Exemption for Limited Offerings and Sales of Securities Not Exceeding $10,000,000 Unlike Rule 506, Rule 504 does not preempt state securities registration, so you may need to comply with full state-level registration requirements on top of the federal notice filing.
Verify Your Investors Qualify
For Rule 506 offerings, the accredited investor definition does most of the heavy lifting. An individual qualifies by meeting any one of the following:6U.S. Securities and Exchange Commission. Accredited Investors
- Individual or joint net worth with a spouse or partner exceeding $1 million, excluding the value of a primary residence.7eCFR. 17 CFR 230.501 – Definitions and Terms Used in Regulation D
- Individual income over $200,000 in each of the two most recent years, with a reasonable expectation of the same in the current year.
- Joint income with a spouse or partner over $300,000 under the same two-year lookback.
- Holders of certain FINRA licenses in good standing: Series 7, Series 65, or Series 82.
- Directors, executive officers, or general partners of the issuer.
Watch the net worth math. Mortgage debt up to the home’s fair market value doesn’t count as a liability, but if a home equity loan pushed the mortgage balance above the home’s value, the excess does count against the investor.7eCFR. 17 CFR 230.501 – Definitions and Terms Used in Regulation D
Sign the Purchase Agreement and Deliver the Shares
The stock purchase agreement is the contract that actually transfers shares from the corporation to the investor. At minimum it identifies the buyer by full legal name and address, the number of shares, the price per share, and the form of consideration. It should also state the par value of the shares.
For shares issued without SEC registration, the agreement should include a restrictive legend or reference one. Certificates for restricted securities will almost always carry a legend indicating the shares cannot be resold unless they are registered or exempt from registration.8U.S. Securities and Exchange Commission. Rule 144 – Selling Restricted and Control Securities Even if the shares are uncertificated, the transfer agent’s records should reflect the restriction. Buyers should understand that under Rule 144, restricted securities in a non-reporting company generally can’t be resold for at least a year.9eCFR. 17 CFR 230.144 – Persons Deemed Not to Be Engaged in a Distribution
After payment clears, update the company’s stock ledger, sometimes called the capitalization table. This is the official internal record of who owns what. Most companies now use equity management software rather than paper ledgers, and many issue uncertificated shares tracked entirely through electronic records. However you keep it, the ledger must accurately reflect every outstanding share, its owner, the date of issuance, and any restrictions or vesting conditions attached to it.
Add Vesting If the Buyer Is a Founder or Employee
Stock issued to founders and early employees almost always comes with a vesting schedule. The standard arrangement is four years with a one-year cliff: no shares vest during the first year, then 25% vest at the one-year mark, and the remainder vests monthly over the following 36 months. Deviating from this structure invites questions from future investors.
Vesting works through a repurchase right. If the shareholder leaves before fully vesting, the company can buy back the unvested shares, typically at the original purchase price. Spell that right out clearly in the stock purchase agreement or a separate restricted stock agreement. Many private companies also include a right of first refusal so the company or existing shareholders can buy any shares a holder wants to sell before they go to an outside party.
File the 83(b) Election Within 30 Days
When stock is issued in exchange for services and subject to vesting, the default rule under Section 83 defers tax until the shares vest, and calculates ordinary income based on the fair market value at vesting minus what the recipient paid.10Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection with Performance of Services If the company appreciates significantly between grant and vesting, the recipient owes ordinary income tax on the entire spread, potentially a large bill on shares they can’t easily sell.
A Section 83(b) election accelerates the tax event to the grant date instead. The recipient pays ordinary income tax on the spread between what they paid and the fair market value at grant. When a founder buys shares at $0.001 when fair market value is also $0.001, the taxable income is zero, and all future appreciation qualifies for capital gains treatment when the shares are sold.
The election must be filed with the IRS within 30 days of receiving the stock. This deadline is absolute and cannot be extended.11IRS. Form 15620 – Section 83(b) Election Mail it to the IRS by certified mail with return receipt requested, give a copy to the company, and keep one for your tax records. The gamble: if you file and then forfeit the shares before vesting, you can’t recover the taxes you paid, only claim a capital loss equal to what you originally paid for the forfeited shares.
File Form D and Any State Notices
After the first sale of securities in a Regulation D offering, the company files Form D with the SEC through the EDGAR electronic filing system.12U.S. Securities and Exchange Commission. What is Form D? The filing is due within 15 calendar days after the first sale, and “first sale” means when the first investor becomes irrevocably committed to invest, not when the funds arrive.13U.S. Securities and Exchange Commission. Filing a Form D Notice If the 15th day falls on a weekend or holiday, the deadline extends to the next business day. There’s no SEC fee for filing Form D or maintaining an EDGAR account. If the offering runs longer than 12 months, an annual amendment is required.
One nuance worth knowing: failing to file Form D on time does not technically destroy your Regulation D exemption. The SEC has confirmed that filing Form D is not a condition of the exemptions under Rules 504, 506(b), or 506(c).14U.S. Securities and Exchange Commission. Frequently Asked Questions and Answers on Form D But missing the filing can trigger consequences under Rule 507 and will draw scrutiny from state regulators and future investors reviewing your compliance history.
Securities sold under Rule 506 are “covered securities” under federal law, which preempts states from requiring registration. States can still require notice filings and assess fees when securities are offered to their residents.15Office of the Law Revision Counsel. 15 USC 77r – Exemption from State Regulation of Securities Offerings Notice filings go to the securities regulator in each state where an investor resides. Some states charge a flat fee, others scale by offering size, and a handful require nothing for Rule 506 offerings. Most companies use a compliance service to handle multi-state filings rather than working through each state’s portal. Rule 504 securities are not covered securities and do not receive federal preemption, so a Rule 504 offering may require full state registration on top of the federal exemption.
What Noncompliance Actually Costs
Issuing stock without a valid registration or exemption creates three categories of risk.16U.S. Securities and Exchange Commission. Consequences of Noncompliance
The most immediate is rescission. Anyone who buys securities sold in violation of registration requirements can sue to recover the full purchase price plus interest.17Office of the Law Revision Counsel. 15 USC 77l – Civil Liabilities Arising in Connection with Prospectuses and Communications For a company that has already spent the capital, an investor demanding their money back is a crisis. Some companies proactively make rescission offers to clean up problems before they escalate.
Beyond that, the company and its officers can face civil or criminal enforcement from federal and state regulators, including financial penalties and potential incarceration for willful violations. The company can also be disqualified as a “bad actor,” which bars it from using Rule 506(b) or 506(c) for future fundraising. And sophisticated investors in later rounds routinely demand representations about past securities law compliance. A botched early issuance can poison your ability to raise capital for years.