nd.gov - The Official Portal for North Dakota State Government
North Dakota: Legendary. Follow the trail of legends

Karen Tyler

Commissioner
ND Securities Department
600 East Boulevard Avenue
State Capitol, 5th Floor
Bismarck, ND 58505-0510
Phone: (701)-328-2910
Toll Free: (800)-297-5124
Fax: (701)-328-2946
Grafton Office
701 W 6th Street, #312
Grafton, ND 58237
Phone: 701-352-4592

Capital Raising

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RAISING CAPITAL - A Guide for Small Business

Organization
Business plan
Sources of Capital
Overview for Raising Capital
Small Business Information Web Sites

This guide is designed to assist a company seeking to raise capital in North Dakota. The information stated here is meant to provide only an overview of helpful information and should not be considered as a substitute for business advice that should be obtained from accountants, attorneys, and other professionals.

Organization:

Determining the structure of your business is a critical step in the business development process. Consult with your professional advisors to establish which structure is appropriate for your specific business.

  1. Sole Proprietorship - The easiest and least costly way to start a business. It is owned and operated by one person who receives all the profits and takes the losses. It can be formed by finding a location and starting the business. There will be fees incurred to register a business name and obtain other necessary licenses.
  2. Partnership - This venture is owned and/or financed by two or more persons who join to manage the venture. There are two major types of partnerships, namely a general partnership and a limited partnership. There will be legal fees incurred to register the entity, have a partnership agreement drawn up by an attorney and to obtain other necessary licenses.
  3. Corporation - A corporation is a separate legal entity formed by filing articles of incorporation with the Secretary of State and is governed by bylaws. It is owned by one or more shareholders who may, or may not, have responsibility for the management and control of the entity. Legal advice is highly recommended as this is the most complex structure and more costly to organize than sole proprietorship or partnership. Control depends on stock ownership and is exercised through meetings of the board of directors and stockholders. Records must be kept to document decisions made at the meetings.
  4. Limited Liability Company - This type of venture is often referred to as a hybrid between a corporation and a partnership. It is similar to a corporation and a partnership. It is similar to a corporation because it allows for protection from personal liability and comparable to a partnership because it has similar tax advantages. It is created by the filing of a document similar to the articles of incorporation with the Secretary of State and is governed by an operating agreement. The operating agreement is closer in form to a partnership agreement but also incorporates aspects of bylaws. The operating agreement is not filed with the Secretary of State.

At www.nd.gov/businessreg/ you will find a consolidated packet of information and forms for the registration of a new business.

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Business Plan:

A business plan is a blueprint for success. Assumptions and decisions concerning fundamental aspects of the operations of a business should be documented in a business plan that describes and analyzes the type of business, the market for its products and services, competition, location, operating procedures, management, and financial data. The process of creating a business plan provides the opportunity for critical self-assessment and facilitates the future success of the business. A business plan is a valuable tool for a company that is trying to raise capital. It is a source of information for potential lenders and can be used as a communication tool when locating and receiving indications of interest from potential investors.

Information relating to the fundamentals of a business plan can be found at www.sba.gov.

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Sources of Capital:

Traditional sources of funding for business start-up and continued operation include personal savings and personal credit. It may also be necessary for a business to obtain funding from other sources. Capital can be raised from the sale of a security to, or the receipt of a loan or grant from:

  • Family and Friends
  • Customers and suppliers
  • Financial institutions
  • Programs sponsored by the State of North Dakota through the Bank of North Dakota and other state and federal agencies
  • Local economic development corporations
  • Other public investors
  • Venture capitalists

A "security" is broadly defined to include common and preferred stock, limited partnership interests, membership interests or units, and any debt instrument whether it is called a note, bond, debenture, certificate of indebtedness, etc. Generally, a security is an investment of money in an enterprise with an expectation of profits to be earned through the efforts of others.

If a company decides to issue securities, the type of security to offer to potential investors should be given careful consideration in consultation with professional advisors. Also, it is imperative that the issuing company comply with the registration requirements of the securities laws at the federal level, and with the securities laws in each state in which an offer will be made, unless an exemption from registration requirements can be relied upon. It is important to note that there are some exemptions both at the federal and state level that are not self-executing and do require a filing and approval process prior to the offer and sale of the security. Refer to the Overview for Raising Capital for more information on securities registration and exemptions.

Financing received from family, friends, and private investors regularly involves the offer and sale of a security. Full disclosure of all material information about the company and the security to all potential investors in the form of an offering document is necessary. The offering document is often the primary means of communicating pertinent information to potential investors. It helps to ensure that consistent disclosure is made, creates a record of regulatory compliance, and can serve to protect the company in the event of future disputes with dissatisfied investors. Some examples of material information disclosed in an offering document include: the Business of the Company, Risk Factors, Use of Proceeds, Key Personnel and Shareholders, and Financial Statements.

A security, in most cases, must be offered and sold through a registered securities dealer and agent. There may be cases in which the issuing company will need to register itself as a dealer and register a number of its officers as agents.

When financing a start-up or early stage business, Venture Capitalists and Economic Development organizations generally receive equity securities in exchange for the investment made, thereby taking an ownership interest in the business. In addition to financing, Venture Capitalists may also contribute management experience and assist in the development of new products and services.

Instead of, or in addition to, issuing securities, many small companies seek to obtain financing through loans from financial institutions. The Small Business Administration (SBA) operates a number of loan guaranty programs that are specifically designed to assist small businesses in obtaining financing from lending institutions. More information is available at the SBA website, www.sba.gov.

The North Dakota Securities Act of 1951 governs the offer and sale of securities within or from the state. The law pertaining to securities, Chapter 10-04 of the North Dakota Century Code, can be found here.

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Small Business Information Web Sites:

  1. www.sec.gov - Information and forms for Small Businesses.
  2. www.nasaa.org - Information relating to the coordinated review programs.
  3. www.sba.gov/financing - Information relating to loan programs.
  4. www.rurdev.usda.gov/nd/busdevel.htm - Information relating to various loan programs.
  5. www.banknd.com - Information relating to various programs for start-up businesses and small business financing.
  6. www.ndsbdc.org - The North Dakota Small Business Development Center web site will provide information relating to the providing of free management counseling to North Dakota businesses through education and training programs.
  7. www.growingnd.com - The web site of Economic Development and Finance, a division of the North Dakota Department of Commerce, to facilitate, retain, and expand businesses.
  8. www.score.org - The Service Corps of Retired Executives offers free business counseling and workshops to small businesses.
  9. www.business.gov - The U.S. Business Advisor has links to information on grants, loans, contracts, regulations, statutes and business resources.

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Related Items

Century Code

N.D.C.C. 10-04 - Securities Act

The North Dakota Securities Department administers and enforces the North Dakota Securities Act, N.D.C.C. Chapter 10-04, by registering securities; reviewing exemptions; issuing no-action letters and interpretive opinions; and licensing broker-dealers and their agents, and investment advisers and their representatives.  The Securities Department investigates complaints alleging violations of the Securities Act and rules and if violations are found, the Securities Commissioner may bring an administrative or civil action or make a referral for criminal prosecution.