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Answers to common questions about Direct Public Offerings

• Please summarize SCOR and Reg A offerings.
• Why did the Federal Government create SCOR and Reg A?
• What advantages do SCOR and Reg A offer a small company?
• What are the disclosure requirements of SCOR and Reg A?
• Where may I make a SCOR or Reg A offering?
• What is an "affinity group?"
• Can any company make a SCOR or Reg A offering?
• What makes for a successful DPO?
• How do we guide a company through the DPO process?
  

Please summarize SCOR and Reg A offerings.

Both enable small companies to acquire equity capital by offering shares directly (DPOs - direct public offerings) to potential stockholders. In the case of a SCOR (Small Corporate-Offering Registration), a company can raise up to 1 million in capital over a one-year period. A Reg A offering allows up to a $5-million offering over the same span.

To make either offering, a company, if it is not already a corporation, must incorporate in each state in which it intends to solicit capital. (If your company is already a corporation, it still must meet this requirement in states outside its own.) The new corporation may act as a separate entity - a spin-off - of your company, or it may acquire your company’s current assets from monies raised through the offering. The specific use of the corporation depends on your situation and goals.

Why did the Federal Government create SCOR and Reg A?

To give smaller companies a chance to compete for equity capital. By the early 1990s, after a decade of spectacular success stories by venture capitalists (VCs) and investment bankers, it became obvious that their exploits were severely limited in two ways: One, they restricted themselves primarily to companies that already had a track record in its industry or a relatively high threshold annual gross income (usually $10 million and above). 

Second, even where VCs and investment bankers dealt with smaller companies, they would typically demand a controlling share of the companies in which they either invested or directed investment to. Accepting outside capital became tantamount to "destroying the village to save it." 

The SEC saw the dangers of a closed system of investment that would endlessly cycle and recycle investment money among an elite group of companies, VCs and investment bankers. In the process, smaller companies would be left starving for investment capital even though they had become among the most important engines of the U.S. economy by the early 1990s. 

By devising a way to allow small companies to compete reasonably for capital through DPOs, the SEC was attempting to break open the old boys’ club and democratize the market.

What advantages do SCOR and Reg A offer a small company?

The most obvious is that they allow small companies to bypass the high fees and equity demands of venture capitalists and investment bankers. For example, a VC may ask for up to a 60% equity stake in a company it invests in. This immediately puts that company at a disadvantage since its goal shifts from making a large return on investment to pleasing the VC. It is a captive situation where a company may well succeed economically, even as its original players are eventually squeezed out or become fronts for the VC. In the end, economic control remains concentrated in the hands of the usual  old boy VC network. 

Another advantage is that a small company, using the Internet, can successfully publicize its offering as effectively as much larger companies. Any company with Internet access can potentially reach millions of people cheaply, paying no more or less to do so than other companies. (Prior to the maturation of the Internet, SCOR and Reg A made much less sense since small companies could not afford to publicize their offerings extensively in such expensive media as business magazines, TV ads and direct mail.) 

What are the disclosure requirements of SCOR and Reg A?

They are not as burdensome as what you might be expected to tell a VC or an investment banker, but they are thorough. You must disclose the amount you are seeking, what it will be used for, projected results from the use of investors’ funds and the estimated rate of return on their investments if your scenario pans out. You must profile your management team and state the problems your company is trying to overcome with the infusion of capital. 

Where may I make a SCOR or Reg A offering?

Your company may only make these offerings in a.) those states where it is registered as a legal corporation and b.) where the states’ departments of corporations have approved the offering content. You must file a separate application in each state to incorporate, which means you may want to restrict your offering at first to states whose large populations and economies have created large pools of potential investors. 

Companies making SCOR or Reg A offerings are expected to restrict their solicitations to those states where they are so registered and approved. In the case of an Internet offering, although a company cannot reasonably keep anybody from viewing an online prospectus, it may not respond to any inquiry that is not from a state in which its offering has been approved.
 

What is an "affinity group?"

For SCOR and Reg A companies, an affinity group is probably their most important pool of potential investors. Affinity groups might include customers, suppliers and even competitors. For example, a printing company with a great investment idea might look to the suppliers for investment, especially if its plan involves the greater consumption of materials those suppliers provide. In the case of an upscale bed-and-breakfast inn, affluent repeat customers who love the property might make a wonderful pool of investors.
 

Can any company make a SCOR or Reg A offering?

It can if it wants to, but simply making a DPO is no guarantee of success (see the question directly below). Neither offering form is a "gimme." A company must have a genuine product or service to sell, and must be motivated by something other than a sole desire to retire debt or fatten executive paychecks. 

What makes for a successful DPO?

• A market or service that, if funded, would make a substantial difference in a given market. For example, a company that can guarantee overnight delivery of important mail packages as opposed to 2-to-3-day delivery by the current monopoly deliverer.
• A set of financial statements and projections that show a prudent approach to the use of investment capital and prudent expectations of what it will do.
• A business plan that shows a clear understanding of the market and how to develop a new segment of it.
• A clear refusal to assign investment capital to manager or owners’ salaries.
• The existence of distinct  "affinity groups" as potential investors.
• A well-developed plan for publicizing the DPO, including publicity, "road shows," Internet distribution of the prospectus.

How does we guide a company through the DPO process?

First, by establishing that a company can satisfy the conditions listed above. Not every company is a successful candidate for issuing a DPO. 

Once we do commit to a company’s DPO, we provide every conceivable service that can be mustered: 

• Preliminary analysis and recommendations
• Expert legal help with the incorporation and offering forms
• Creation of viable financial statements that make sense to investors
• Creation of a business plan, including market research, that gives potential investors greater background and more "emotional" reasons for investing.
• Establishment of an Internet presence - web site content and capabilities
• Development of a DPO marketing plan based on use of the Internet and other pertinent media
• Creation and maintenance of pertinent databases: investor pools, media contacts, etc.