1. Basic Organization Documents
4-1
Basic Organization Documents
Corporations
Pre-incorporation agreement
Articles of Incorporation
Bylaws
Organization Resolutions: Officers, Directors, stock issuance, employment agreements, bylaws, bank account, transactions, etc.
Shareholder Agreement (Buy-Sell)
Employment Agreements
Stock certificates and record
Asset and liability transfer documents
Required government and tax filings
LLCs and Partnerships
LLC Operating Agreement or Partnership Agreement
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

2. Delaware or Not? Internal Affairs Doctrine Big Boy Requirements
4-1
Delaware or Not?
Internal Affairs Doctrine
Big Boy Requirements
Dual Registrations
Fees
Hassles
Lawsuit Jurisdiction
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

3. Key Article’s Issues (23B.02.010)
Incorporator identity? 23B
Corporate name? 23B
Registered agent/office? 23B
Authorized shares? Par Value? 23B – 020
Purpose and Perpetual Existence? 23B – 020
Initial directors?
Number of directors or delegate to board? 23B
Preemptive rights? 23B
Cumulative voting? 23B
Shareholder consent voting? 23B
Majority voting overriding 2/3 requirements? 23B (3)
Limited liability for directors? 23B
Maximum director indemnification and expense advance? 23B
Special stock classes or voting restrictions? 23B
Authorized “blank check” preferred stock? 23B

4. Mandatory Preemptive Right Problems
Exceptions and dashed expectations.
Timing problems and delays.
New investor hurdles and mixed messages.
Enhanced security law complexities.
A weapon for trouble makers.
It can happen even if not required.

5. Cumulative Voting Formula
A = B x C + 1
D + 1
A = Total shares needed by minority
B = Total shares voted by all
C = Number of directors minority to elect
D = Total directors to be elected
Example: Minority want to elect 1 of 4 directors and 1000 shares outstanding. Minority would need 201 shares per formula.

6. Washington Corporate Control Statutes
23B : Cumulative Voting
23B : Voting Trusts. Agreement and share transfer to trustees. 10 year max term, subject to extensions.
23B : Voting Agreements. Specifically enforceable; not subject to voting trust restrictions of 23B
23B : Irrevocable proxy coupled with any interest. Term 11 months unless longer term specified. Couple interest holder includes stock pledgee, contract stock purchaser, corporation creditor, employee of corporation, party to voting agreement.
23B : Shareholder Agreements – The Big One
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

7. Shareholder Agreements Under 23B.07.320
Huge scope – Hard to imagine how it could be any broader.
Must be in writing, signed by all shareholders, valid for 10 years unless provides for longer period. (Often does)
Stock Certificate Legend Requirement. Failure does not invalidate agreement, buy gives new shareholder who has no knowledge (actual or constructive) rescission right or damage claim. Just do it!
Terminates if shares listed or publicly traded.
Board relieved of duties per agreement, but legal duties transferred to shareholders under agreement. The “Jerk” factor comes into play.
Agreement not impose personal liability on shareholders – ala general partner of partnership.
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

8. Client Non Buy-Sell Planning Process
4-2
Client Non Buy-Sell Planning Process
Step One: Layout Potential Issues
Step Two: Identify Client’s Hot Issues
Step Three: Determine Key Facts that Impact Hot Issues
Step Four: Identify Potential Solution Techniques
Step Five: Select Best Solution Technique(s)
Step Six: Develop Rationale for Convincing Co-Owners
Step Seven: Present to Co-Owners (Lawyer’s role may range from passive advising, to strategic negotiation, to hardcore sales)
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

9. Important Non Buy-Sell Owner Issues
4-3
Important Non Buy-Sell Owner Issues
Scope of Enterprise - liability exposure, “Tag along” issues
Business Plan Changes - diversion, expansion, speed-ups
Debt - Changing, expanding, personal guarantees
Additional Capital - dilution risks, mandatory
New Equity Owners - disruption, dilution, synergies
Owner Roles - service commitments, inner circle
Owner Employment Rights - tie to equity, expulsion
Business Location - headquarters, changes
Outside Owner Activities - competitors, supplies, customers
Related Party Transactions - conflicts, disclosures, prohibitions
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

10. Important Non Buy-Sell Owner Issues
4-4
Important Non Buy-Sell Owner Issues
Tax Elections - cost recovery, inventories, fiscal yr, etc.
Confidentiality Covenants - extent to owners?
AP Management - discount fast or normal slow?
Cash Distributions - priority or no or low expectations?
Loss Allocations - deficit restoration obligation, three hurdles
Professionals - selection process and criteria
Indemnification - words vs. reality, insurance
Dispute Resolution Procedures - fast, cheap vs. slow, costly
Life After Rights - fast, easy restarts
Sell-Out Options - who and how many must bless
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

11. Solution Techniques 4-5 Debt Levels Definitive Contract
Supermajority Vote
Designated Board or Management Committee
Specified Conditions
Individual Veto Right
Opt-Out Rights
Buy-Out Trigger
Cumulative Voting
Preemptive Rights
Different Equity Interests
Debt Levels
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

12. Solution Techniques 4-6 New Owner Definitive Contract
Supermajority Vote
Designated Board or Management Committee
Specified Conditions
Individual Veto Right
Opt-Out Rights
Buy-Out Trigger
Cumulative Voting
Preemptive Rights
Different Equity Interests
New
Owner
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

13. Solution Techniques 4-7 Cash Distributions Definitive Contract
Supermajority Vote
Designated Board or Management Committee
Specified Conditions
Individual Veto Right
Opt-Out Rights
Buy-Out Trigger
Cumulative Voting
Preemptive Rights
Different Equity Interests
Cash
Distributions
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

14. If Section 351 Does Not Apply?
4-11
If Section 351 Does Not Apply?
C Corp
Tax Impacts:
Linda recognizes 100k income
Linda stock basis equals 200k
Linda has new holding period in stock
Corp’s basis in equipment 200k
Corp has new holding period in equipment
Corp has no income recognition per 1032
Equipment
Basis 100k
FMV 200k
Stock
Shareholder
Linda
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

15. 4-12
Rule 1: The 351 Rule
No gain or loss is recognized by the transferor on the transfer of property to a corporation in exchange for stock of the corporation if:
1. Property is transferred
2. Solely in exchange for stock
3. Transferor(s) in “control” “immediately after exchange. Two 80% requirements – 80% of all voting stock and 80% of total shares of all classes of stock.
Example: XYZ Inc issues 100 share of its stock to its sole shareholder Jim for equipment worth 200k that has a basis of 100k. Jim recognizes no gain or loss on the exchange.
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

16. If Section 351 Does Apply? 4-13 Tax Impacts: C Corp Shareholder Linda
Linda recognizes no income (Rule 1)
Linda stock basis equals 100k (Rule 3)
Linda has tacked holding period in stock
(Rule 4)
Corp’s basis in equipment 100k (Rule 6)
Corp has tacked holding period in equipment
(Rule 7)
Corp has no income recognition per 1032
(Rule 5)
C Corp
Equipment
Basis 100k
FMV 200k
Stock
Shareholder
Linda
Note: Double basis impact trade-off for shareholder non-recognition. What is future impact?
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

17. Section 351 Eligibility Traps
4-14
Section 351 Eligibility Traps
Trap Solution
Stock for services Keep under 20% or have dual consideration
and meet 10% standard of Rev. Proc
Multiple transfers Document part of integrated plan
at different times
Subsequent stock sale Prohibit; require time lapse; no prearrangement;
gifts generally not a problem
Accommodation transfers Meet 10% threshold of Rev. Proc
Subsequent corp property Consistent with ordinary business or insure
sales time lapse and no pre-arrangement
Nonvoting stock % of each class. Only direct ownership counts
Nonqualified preferred Boot for income recognition purposes
Investment company risk? Diversification issue is ballgame
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

18. Rule 2: The 351(b) Boot Rule 4-15
If 351 would apply except that corporation issues property in addition to stock (“boot”) to the shareholder, then shareholder recognizes gain on the property transferred to corporation equal to the lesser of:
1. The built-in gain on the property transferred – the excess of FMV over basis
2. The FMV of boot received by the shareholder.
Example: XYZ Inc issues 100 share of its stock and 80k cash to its sole shareholder Jim for equipment worth 200k that has a basis of 100k. Jim recognizes gain equal to boot – 80k. If 120k boot was paid by XYZ Inc in addition to stock, Jim would recognize gain equal to 100k – excess of 200k FMV over 100k basis.
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

19. Section 351 With Boot 4-16 Tax Impacts: C Corp Shareholder Linda
Linda recognizes 80k income (Rule 2)
Linda stock basis equals 100k (Rule 3)
Linda has tacked holding period in stock
(Rule 4)
Corp’s basis in equipment 180k (Rule 6)
Corp has tacked holding period in equipment
(Rule 7)
Corp has no income recognition per 1032
(Rule 5)
C Corp
Equipment
Basis 100k
FMV 200k
Stock and 80k cash
Shareholder
Linda
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

20. 4-17
Rule 3: The 358 Basis Rule
If 351 applies to an exchange of property for stock in a corporation, the basis of the stock received by the shareholder equals:
1. The basis of the property transferred to the corporation in the hands of the shareholder, plus
2. Any gain recognized the shareholder ala the 351(b) rule, less
3. The FMV of any boot received.
Example: XYZ Inc issues 100 share of its stock and 80k cash to its sole shareholder Jim for equipment worth 200k that has a basis of 100k. Jim recognizes gain equal to boot – 80k. Jim’s basis in stock is equal to 100k (basis in equipment), plus 80k gain less 80k boot = 100k.
If 120k boot was paid by XYZ Inc in addition to stock, Jim would recognize gain equal to 100k. Basis in stock would equal 100k, plus 100k gain, less 120k boot = 80k basis.
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

21. Rule 4: The Shareholder Tacking Rule
4-18
Rule 4: The Shareholder Tacking Rule
If 351 applies to an exchange of property for stock in a corporation, the holding period of the property transferred by the shareholder is “tacked on” to the holding period of the stock if the transferred property was a capital asset or a 1231 asset (asset used in trade or business). No inventories or receivables.:
Example: XYZ Inc issues 100 share of its stock and 80k cash to its sole shareholder Jim for equipment worth 200k that has a basis of 100k. Jim’s holding period of equipment is “tacked on” in determining holding period of stock.
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

22. 4-19
Rule 5: The 1032 Rule
Corporation recognizes no gain or loss on receipt of money or property in exchange for its own stock
Example: XYZ Inc issues 100 share of its stock and 80k cash to its sole shareholder Jim for equipment worth 200k that has a basis of 100k. XYZ Inc recognizes no gain or loss.
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

23. 4-20
Rule 6: The 362 Rule
A corporation’s basis in property acquired in exchange for its stock in a transaction that qualifies under 351 equals the shareholder’s basis in the property’s basis plus any gain recognized by the shareholder. But if net built-in loss, basis limited to FMV of property unless all elect to reduce stock basis of shareholder to FMV.
Example: XYZ Inc issues 100 share of its stock and 80k cash to its sole shareholder Jim for equipment worth 200k that has a basis of 100k. Jim recognizes gain equal to boot – 80k. XYZ Inc.’s basis in equipment is 100k (Jim’s basis in equipment), plus 80k gain recognized by Jim = 180K.
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

24. Rule 7: The Corp Tacking Rule
4-21
Rule 7: The Corp Tacking Rule
If 351 applies to an exchange of property for stock in a corporation, the holding period of the property transferred by the shareholder is “tacked on” in determining the holding period of the property in the hands of the corporation.
Example: XYZ Inc issues 100 share of its stock and 80k cash to its sole shareholder Jim for equipment worth 200k that has a basis of 100k. Jim’s holding period of equipment is “tacked on” in determining XYZ Inc.’s holding period of equipment.
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

25. Rule 8: The Assumed Liability Rule
4-22
Rule 8: The Assumed Liability Rule
General Rule: If corporation assumes liability of shareholder in 351 exchange:
1. Assumption not considered “boot” for gain or loss purposes. 357(a)
2. Assumption does reduce shareholder stock basis by debt amount. 358(d)
Exception: Debt treated as “boot” for gain purposes if:
1. Tax avoidance purpose or not bona fide business purpose. Burden on taxpayer to prove by clear preponderance of evidence.
2. Debt exceeds basis of all property transferred to corp – then excess treated as taxable boot.
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

26. Section 351 With Assume Debt
4-23
Section 351 With Assume Debt
Tax Impacts:
Linda recognizes 20k income (Rule 8)
Linda stock basis equals 0 (Rule 3)
Linda has tacked holding period in stock
(Rule 4)
Corp’s basis in equipment 120k (Rule 6)
Corp has tacked holding period in equipment
(Rule 7)
Corp has no income recognition per 1032
(Rule 5)
C Corp
Stock and 120k debt assumed
Equipment
Basis 100k
FMV 300k
Shareholder
Linda
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

27. Section 351 Assumed Debt Traps
4-24
Section 351 Assumed Debt Traps
Trap Solution
Tax avoidance purpose Bad purpose taints all debt. Proof burden on
taxpayer. Recent debts suspect.
Lingering shareholder Leave no doubt as to parties’ expectations.
Liability
Nonrecourse debts Specify amount to be paid from outside assets.
Amount should never exceed FMV.
Future accountable debts Not debt for 351 purposes. Identity and exclude.
Both deductibles (cash basis APs) and capital
expenditures excluded. Rev. Rule 95-74
Basis pumping Helps to avoid debt in excess of basis problem.
Will personal notes do job? The Peracchi impact.
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

28. Partnership Rules Comparison
4-30
Partnership Rules Comparison
Corporate Partnership
Rule 1: The 351 Rule : No gain or loss to partner and
control requirement. But built-in
gain allocated back to partner on
sale per 704(c)
Rule 2: The 351(b) Boot Rule Portion of property allocated to Boot
treated as sale or exchange
Rule 3: The 358 Basis Rule Same per 722 & 733, except
reduction for non-money boot
limited to partnership’s basis
in property and 721(b) gain limited to investment companies
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

29. Partnership Rules Comparison
4-31
Partnership Rules Comparison
Corporate Partnership
Rule 4: Shareholder Tacking Rule Same per 1223 (1)
Rule 5: The 1032 Rule Same per 721 if for property
Rule 6: The 362 Rule Same per 723 (Note limiting
reference to 721(b) gain)
Rule 7: The Corp Tacking Rule Same per 1223(2)
Rule 8: The Assumed Liability Rule Similar result - New Game
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

30. Partnership Liability Game
4-32
Partnership Liability Game
Upside Twist: Increase in partner’s share of partnership’s liabilities
deemed contribution of money to partnership. Basis increase.
Downside Twist: Decrease in partner’s share of partnership’s
liabilities deemed money distribution. If money distribution exceeds
basis before distribution, then gain recognized to extent of excess per
731. No negative basis.
3. Recourse liability allocation: Allocated to partners according to how
partners agree to bear ultimate risk for liability.
4. Non-recourse liability: Allocated to partners according to profits
interests with some flexibility. But if property contributed with NR
debt in excess of basis, debt first allocated to contributing partner to
amount of gain allocated to such partner under 704(c) if property
sold for debt.
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

31. Partnership Capital Interest For Services
4-33
Partnership Capital Interest For Services
Capital Interest: An interest that gives service partner a share of the partnership’s existing capital and future profits. A profits interest only gives share of future profits. Test: If partnership liquidated now, would service partner get anything?
Triple Impact: Capital interest for services
1. Partner has section 61 compensation income equal to FMV of interest,
subject to section 83 game.
2. Partnership gets section 162 deduction in same amount, allocated to
existing partners (not new partner)
3. Existing partners may share gain equal to FMV of interest transferred
over allocable basis of each partner. Deemed sale from existing to new.
Proposed Regs would eliminate deemed sale
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

32. 2. Re-sales of Securities 3. Anti-fraud
4-38
Securities Laws: The Three Big Ones
1. Exemption from Registration
2. Re-sales of Securities
3. Anti-fraud
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

33. 1. Some one puts up money, and
4-39
What is a Security?
- No particular form
- Two factors:
1. Some one puts up money, and
2. Looks to the efforts of another for a
return on the money
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

34. 4-40
Registration Game
Section 5 of ’33 Act: Securities offering require registration.
Section 4 of ’33 Act: Securities sold by issuers, underwriters and dealers are subject to Section 5.
Two big exemptions:
Section 4(2) non-public offering exemption (private placement)
Section 3(a)(11) “intrastate offering exemption
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

35. 4-41
Antifraud – 10b-5
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

36. 3. What money sources are available to us? 4. How do we stay legal?
4-42
The Start-Up Money Questions
1. How much do we need?
2. What deal can we offer?
3. What money sources are available to us?
4. How do we stay legal?
- Compliance legal
- Mitigate personal liability exposure
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

37. How Does the Investment Pay
4-43
How Does the Investment Pay
Future Public offering: Big pay day; liquidity. Not a viable hope for most.
Strategic Sale: Establish envied position – then cash in on sale.
Natural Liquidation: Return generated through asset liquidation. Example: real estate development; movie venture.
Inside Buy-Out: Once established, inside management will secure debt financing to take out seed-money investors at profit.
Inside Triggered Buy-Out: Event triggers buy-out under shareholder buy-sell agreement - right of first refusal, showdown clause, death, etc.
Cash Flow Vehicle: Business perpetually throws off cash to shareholders.
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

38. Common Funding Sources
4-44
Common Funding Sources
Closest people - Family and real friends
Acquaintances - Those you know
Acquaintances of acquaintances
Strangers
Funds – Venture and Vulture
The SMA – No free lunch
Banks and financial institutions – Lousy up front; gold once established, up and running.
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

39. Some Truisms 4-45 The fewer the better. The smarter the better.
The wealthier the better.
Money loss reactions – prepare for the worse; assume the worse.
Your risk avoidance can be very expensive.
Never count the other guys money.
Never forget the “deal moment”.
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

40. Accredited Investors:
4-46
Legal Investor Types
Accredited Investors:
- Issuer insiders (promoters, officers, directors)
- Corps, partnerships and trust with over 5 mill assets
- Natural persons with over 1 mill net worth or over
200k (300k if married) of income in prior two years.
Sophisticated, Non-Accredited: Knowledge or experience in financial and business matters, capable of evaluating the merits and risks of investment. (Rep may qualify person)
All-Others: The dumb, poor crowd
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

41. Rule 504 Exemption 4-47 $1 mill limit within 12 months
Any number of any type of investor – for own account, not for resale.
Must comply with state security laws.
Required disclosures a must.
General solicitation usually prohibited or limited by state laws.
Purchasers must give signed proof of investment intent.
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

42. Rule 505 Exemption 4-48 $5 mill limit within 12 months
35 non-accredited (both types) and any number of accredited.
Must comply with state security laws.
Required disclosures mandated for non-accredited.
General solicitation and advertising prohibited.
Purchasers must give signed proof of investment intent.
Securities restricted, not subject to resale
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

43. Rule 506 Exemption 4-49 No limit.
35 non-accredited sophisticated and any number of
accredited.
Need not comply with state security laws.
Required disclosures mandated for non-accredited.
General solicitation and advertising prohibited.
Purchasers must give signed proof of investment
intent.
Securities restricted, not subject to resale
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

44. Intrastate Offering Exemption
4-50
Issuer must be resident and doing business in state
Tough three prong 80% tests for issuer - revenues, assets, and use of net proceeds in state
Securities sold only to state residents
Need comply with state security laws
Required precautions against interstate offers or sales
Resale restrictions
Proof of residence precautions and purchaser representations
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

45. 1. Place “no resale” legends on certificates
Protective Precautions
4-51
1. Place “no resale” legends on certificates
2. Signed purchaser letter than says
- Verify “accredited” status (backed up by numbers)
- Can afford complete loss
- Been given all disclosures
- Understands risks and potential of complete loss
- Been given full opportunity to ask questions
- Purchase for investment, with no intent to resale
- State of residency
3. Comprehensive, smart disclosure document (PPM or accredited investor disclosure document)
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

46. Disclosure Precautions
4-52
Disclosure Precautions
Tailored risk factors - Lay them all out. You are protecting here, not selling.
Complete market discussion and analysis – nothing overstated.
Stay clear of bold adjectives.
Make sure financials are accurate – fair reserves if needed.
Avoid projections. If required, use appropriate “forward looking” disclaimer and lay out specific and general risk factors.
Do not overstate background, expertise or qualifications of key people.
Make sure all deals, understandings, and conflicts are thoroughly disclosed.
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com