Board Resolution: Unregistered Offering of Preferred Stock
(Regulation D)

Summary

This board resolutions template may be used to authorize an unregistered offering of preferred stock in accordance with the requirements of Regulation D of the Securities Act. This template includes practical guidance, drafting notes, and an alternate clause. Unregistered offerings of preferred stock in private placements are possible both for corporations that have already engaged in a public offering of their common stock (i.e., public companies) and for companies whose common stock has not been publicly offered and therefore remains in private hands (i.e., private companies). Federal securities laws do not require corporations to seek shareholder approval before conducting an unregistered offering of preferred stock in a private placement. However, beyond the purview of federal law, state securities laws may dictate whether shareholder approval is required for a corporation to conduct an unregistered private placement, as will a corporation's by-laws or articles of incorporation. Nevertheless, as a general matter, any corporate action affecting, or potentially affecting, the rights of the holders of the common stock of the corporation should be put to a vote of the shareholders. Several different types (and classes and series) of preferred shares are possible and each may affect the interests of the shareholders of the common stock of the corporation to the same or to different extents. Moreover, preferred stock may affect the interests of the shareholders of common stock of the corporation in three substantive ways. First, if the preferred stock is ultimately convertible into shares of common stock, this is directly dilutive to the common stock. In this regard, counsel is cautioned to consult NYSE Rule 312.03(c) or Nasdaq Rule 5635(d), as applicable, if it is anticipated that an unregistered offering of preferred stock in a private placement to a related party will later become convertible into common stock. Second, preferred stock generally pays a set dividend, and dividends (whether for common or preferred stock) are generally paid from retained earnings (except in limited circumstances, and depending on state law). The payment of preferred stock dividends, however, directly impacts the amount of retained earnings available to pay dividends to the shareholders of common stock or for the corporation to engage in stock buyback programs. Accordingly, because of the effect on retained earnings, dividend payments to preferred shareholders will negatively affect the market value of shares of common stock. Third, if shares of preferred stock carry independent voting rights, then the interests of the shareholders of the corporation's common stock will be impacted accordingly. For a full listing of key content covering Board Resolutions for Private Company Corporate Governance, see Private Company Corporate Governance Board Resolutions Resource Kit. For related templates, see Board Resolution: Unregistered Offering of Common Stock (Regulation D) and Board Resolution: Unregistered Offering of Debt Securities (Regulation D).