Issuing Shares vs. Selling Shares: Understanding the Differences and When to Use Each

In the world of corporate finance, understanding the distinction between issuing shares and selling shares is crucial for business owners, investors, and legal professionals. Each process serves a different purpose and has unique legal and financial implications. Whether you’re looking to raise capital, bring in new investors, or manage your company’s equity, it’s important to know when to issue shares and when to sell them. At Barter McKellar, we provide expert legal guidance on all aspects of equity management, helping you make informed decisions that align with your business goals.

What is Issuing Shares?

Issuing shares refers to the process by which a company creates and allocates new shares to shareholders. This is typically done to raise capital, reward employees or bring in new investors. When a company issues new shares, it increases the total number of shares outstanding, which can dilute the ownership percentage of existing shareholders.

Key Points About Issuing Shares:

• Raising Capital: Companies often issue shares as a way to raise capital for growth, expansion or other business needs. The funds raised from issuing shares go directly into the company’s accounts, providing the necessary capital to finance operations or investments.

• Dilution of Ownership: Issuing new shares dilutes the ownership of existing shareholders since the total number of shares outstanding increases. However, it can be a necessary trade-off for raising the capital needed to grow the business.

• Types of Share Issues: Companies can issue various types of shares, including common shares, preferred shares and convertible securities, each with different rights and benefits for shareholders.

What is Selling Shares?

Selling shares refers to the transfer of existing shares from one shareholder to another. Unlike issuing shares, selling shares does not create new shares; it simply changes the ownership of the shares. This process typically occurs in secondary markets, where shareholders sell their equity stake in the company to other investors.

Key Points About Selling Shares:

• Transfer of Ownership: When shares are sold, ownership of those shares is transferred from the seller to the buyer. The total number of shares outstanding remains unchanged, and there is no dilution of ownership for other shareholders.

• Generating Liquidity: Selling shares is a way for existing shareholders to generate liquidity from their investment. This can be done through private transactions or on a stock exchange if the company is publicly traded.

• Market Value: The price at which shares are sold is determined by the market value at the time of the transaction. This can fluctuate based on the company’s performance, market conditions, and investor sentiment.

Key Differences Between Issuing Shares and Selling Shares

Understanding the differences between issuing shares and selling shares is essential for making strategic decisions that impact your company’s equity structure and financial health.

1. Purpose and Objectives

• Issuing Shares: The primary purpose of issuing shares is to raise capital for the company. This capital can be used for a variety of purposes, including expansion, research and development, paying off debt or funding day-to-day operations.

• Selling Shares: The primary purpose of selling shares is to transfer ownership and generate liquidity for the shareholder. This does not raise new capital for the company, but it allows existing shareholders to monetize their investment.

2. Impact on Shareholder Equity

• Issuing Shares: When a company issues new shares, the ownership percentage of existing shareholders is diluted because the total number of shares outstanding increases. This dilution is a key consideration for shareholders when a company is considering issuing new shares.

• Selling Shares: Selling shares does not dilute the ownership of other shareholders, as it involves the transfer of existing shares. The company’s equity structure remains unchanged and the transaction only affects the parties involved in the sale.

3. Regulatory Considerations

• Issuing Shares: The process of issuing shares is governed by the company’s MOI, shareholders’ agreements, and relevant provisions of the Companies Act. Companies must comply with legal requirements, including shareholder approval and disclosure obligations, when issuing new shares.

• Selling Shares: Selling shares is typically a private transaction between the buyer and seller, though it may still be subject to regulatory requirements, especially in the case of publicly traded companies. Shareholders may also be subject to restrictions on selling shares, such as lock-up periods or preemptive rights.

When to Issue Shares

Issuing shares is a strategic decision that can have significant implications for a company’s capital structure and long-term growth. Here are some scenarios where issuing shares might be the right choice:

1. Raising Capital for Expansion

If your company needs to raise capital for expansion, such as opening new locations, entering new markets or investing in research and development, issuing shares can provide the necessary funds without taking on debt.

• Equity Financing: Issuing shares is a form of equity financing, which does not require repayment like a loan. This can be a more sustainable way to fund growth, especially for companies with limited cash flow.

2. Attracting Strategic Investors

Issuing shares can be an effective way to bring in strategic investors who can add value beyond just capital. These investors might bring industry expertise, networks or other resources that can help accelerate your company’s growth.

• Partnership Opportunities: Strategic investors may offer partnerships, joint ventures or other collaborations that can enhance your company’s competitive advantage.

3. Employee Incentives

Issuing shares as part of an employee stock ownership plan (ESOP) or stock options can be a powerful tool for attracting, retaining and motivating employees. This aligns employees’ interests with the company’s long-term success.

• Employee Retention: Offering equity as part of compensation can help retain key talent, as employees have a vested interest in the company’s performance.

When to Sell Shares

Selling shares is a common strategy for existing shareholders who wish to monetize their investment or exit their position in the company. Here are some scenarios where selling shares might be appropriate:

1. Generating Liquidity

If you are an investor or founder looking to cash in on your investment, selling shares can provide the liquidity you need. This is often done after a company has gone public or reached a significant milestone.

• Exiting Investment: Selling shares allows you to exit your investment and realize the gains from your equity stake, providing cash for other investments or personal use.

2. Changing Ownership Structure

Selling shares can be part of a broader strategy to change the ownership structure of the company. This might involve bringing in new investors, changing control or facilitating a buyout.

• Ownership Transitions: Selling shares can be part of succession planning, where ownership is transferred to the next generation or new management.

3. Responding to Market Opportunities

If the market value of your shares has increased significantly, selling shares can allow you to capitalize on favorable market conditions. This is particularly relevant for publicly traded companies where share prices can fluctuate based on market sentiment.

• Maximizing Returns: Selling shares at a high market value can maximize returns on your investment, especially if you anticipate a future decline in value.

How Barter McKellar Can Assist with Issuing and Selling Shares

At Barter McKellar, we provide comprehensive legal services to help companies and shareholders navigate the complexities of issuing and selling shares. Our team of experienced corporate attorneys offers strategic advice and expert guidance to ensure that your equity management decisions align with your business goals.

1. Legal Consultation and Strategic Planning

We begin by understanding your specific needs and goals, whether you’re looking to issue new shares or sell existing ones. We’ll provide tailored legal advice to help you make informed decisions that protect your interests.

• Strategic Advice: Our attorneys will work with you to develop a strategic plan that aligns with your company’s long-term objectives, whether you’re raising capital, attracting investors or managing ownership transitions.

2. Compliance and Regulatory Guidance

Issuing and selling shares involve navigating complex legal and regulatory requirements. We’ll ensure that your transactions comply with all relevant laws, including the Companies Act and that all necessary approvals and disclosures are obtained.

• Regulatory Compliance: We’ll help you navigate the legal requirements for issuing and selling shares, including obtaining shareholder approval, filing necessary documents and ensuring compliance with securities regulations.

3. Drafting and Reviewing Agreements

We’ll draft and review all necessary agreements related to issuing and selling shares, including shareholder agreements, subscription agreements and sale and purchase agreements. Our goal is to protect your interests and ensure that all terms are clearly defined.

• Agreement Drafting: Our attorneys will draft agreements that reflect the terms of the transaction, protect your legal rights and minimize risks.

Why Choose Barter McKellar?

At Barter McKellar , we are committed to providing high-quality legal services that help you navigate the complexities of equity management. Our team of skilled attorneys has extensive experience in corporate law, making us uniquely qualified to handle your legal needs in issuing and selling shares.

• Expertise in Corporate Law: Our attorneys have deep knowledge of South African corporate law, ensuring that you receive accurate and reliable legal advice.

• Tailored Legal Solutions: We provide customized legal services that address the specific challenges and opportunities of your situation.

• Client-Centered Approach: We prioritize clear communication, transparency and a focus on achieving your business and legal goals.

Contact Us

If you’re considering issuing or selling shares, trust the experts at Barter McKellar to provide the guidance and support you need. Contact us today to discuss your case and how we can assist with your equity management needs.