Previously, we have discussed several ways wineries can raise more money to enlarge or increase business.  One growing method is “Private Placements.”   We are seeing increased usage by wineries of private placements - issuing stock in the winery in exchange for funds.  In fact, there have been proposed regulatory changes that would make it even easier to use this method in the future. 

This type of fund raising involves the offer of stock or a share of ownership in the company in exchange for an investor’s money.  No new debt is assumed, so there are no new loan payments.  Wineries often offer investors stock dividends in the form of wines, investor parties and promotional incentives.  In return, the funds raised can be used to pay off loans, expand business operations or purchase capital for operations or sales. 

A “private placement” is a stock offering that does not have to go through the normal rigorous review of the Securities and Exchange Commission (“SEC”).  Although there are forms that must be filed, the SEC generally will not review and comment on the terms of the offering. 

The private placement uses a document, called a private placement memorandum, to solicit money in exchange for stock.  The memorandum includes the terms of the offering, a description of the nature of the stock offered and the conditions on resale. 

Under Federal law, the private placement is regulated by the SEC, but the securities do not need to be registered with the SEC.  The grounds to qualify for private placements are in an SEC regulation called “Regulation D.”  Rules are issued under Regulation D and set conditions on the stock offering.  For example, there can be no “general solicitation” of the public and there must be restrictions on resale of stock.

Rule 506 of Regulation D limits the investors who can be investors.  It allows the stock to be offered to an unlimited number of “accredited” investors, and up to 35 “non-accredited” investors.  “Accredited” is defined very specifically and basically includes criteria that would indicate someone is a sophisticated investor.   Tests in the Rule include minimum personal wealth and annual income for the potential investors.

If the stock being offered is less than one million dollars, Federal Rule 504 combined registration exemptions allow the stock seller to advertise the availability of the stock.  However, most other stock sales are not allowed to be advertised. 

Each state has different regulations that may or may not apply.  A major advantage of using the federal form of  private placement is that states cannot require their own reviews of merits of an offering.  However, states do have regulations, including regulations in a half-dozen states that may require the stock offerer to register as a broker.  

Additionally, states may have their own version of intrastate private placement exemptions.   For example, California has several exemptions that allow the offerings to its citizens, in intrastate offerings.

In August, 2012 the SEC proposed amendments which would increase the flexibility of an issuer of stock and allow more general advertising.  Under the proposed rules, general solicitation and advertising will be allowed under all Rule 506 offerings to accredited investors.  However, more of a burden will be placed on the stock issuer to verify that an investor is accredited. 

As with any fund raising, there are rules and regulations that must be followed.  Also, state law needs to be consulted.  Consider discussing a private placement with a qualified attorney and accountant who can help steer you through this maze.