SCOR ¹ - Small Company
Offering Registration

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Under a Rule 504 SCOR offering companies may raise up to $1,000,000 in any 12-month period.

 

In 1997 a total of 185 companies filed 358 direct public offerings, an increase of almost 40% over 1995, according to the SCOR Report, a Dallas-based newsletter. California companies ranked fourth in the nation for SCOR offerings, with 19 filings. For '98, California companies have already filed eight registration statements, although only two have become effective.

Companies willing to file certain disclosure information with the Securities and Exchange Commission (SEC) may raise up to $5,000,000 in any 12-month period under a Regulation A SCOR offering. Regulation A allows companies to "test the waters" or solicit indications of interest in ten states in order to determine potential investor interest prior to incurring the cost of drafting a SCOR registration statement. Accounting and legal fees to draft such a statement
are normally around $50,000 for most companies.

A company must "Blue Sky" in each state it intends to sell securities. The Blue Sky laws are designed to protect investors and ensure complete disclosure of material information on the company. Companies need to be aware that there are widespread differences among the states' Blue Sky laws, with some states imposing much more stringent conditions than others. For example, the California Commissioner of Corporations imposes burdensome qualification
procedures. Under the present process, commonly referred to as "merit review," the California Commissioner's staff determines whether each SCOR offering is "fair, just, and equitable" to investors. A pending bill, Senate Bill 1205, sponsored by the Department of Corporations, would change the current merit review to one based on disclosure - the standard in most states. The Bill, still in committee, is not expected to be voted on until this summer, according to Blake Campbell of the Department of Corporations. A California company is not precluded from registering its SCOR offering in other states, even if it opts not to Blue Sky in California. Since the Blue Sky process can be lengthy and expensive, it is more cost-effective for a company to target the states where it has strong investor interest.

One of the major benefits of a SCOR offering is the securities are freely-tradable stock, although much of it remains illiquid for lack of a secondary marketplace. There are, however, some organized marketplaces such as the Pacific Stock Exchange which lists SCOR offerings; provided the issuer is able to meet certain listing criteria (age of business, net worth, etc.). Upon approval by NASDAQ, the Electronic Bulletin Board will list SCOR offerings;
provided a market-maker agrees to file on behalf of a company certain disclosure information on a Form 211 (audited financials, issuer and security information, etc.).

Cost savings is another major DPO benefit. Generally, Direct Public Offerings are less costly then Initial Public Offerings (IPOs). Companies that decide to sell their offering without the benefit of brokers will also save on commission fees.

As attractive as DPOs may appear, not all companies are suitable candidates. In fact, only 30% of the DPOs were successful last year, which is up from a success rate of only 20% three years ago. In comparison, the major stock exchanges and NASDAQ had a total of 755 IPOs last year, with only 38 of such offerings withdrawn or postponed, according to Securities Data Company, a New York company that compiles securities data.

The best candidates for a DPO are companies seeking expansion capital. Start-up companies and those seeking capital for initial research and development will have a much harder time enticing investors.

Before jumping into the DPO marketplace, a company should ask itself the following questions:

• Is management ready to take the time and effort required to prepare a SCOR offering?
• Does your company have an affinity group which can be targeted for sales of your securities?
• Who will conduct research to determine this affinity group and the location of these potential investors?
• Who will conduct follow-up to initial leads and close the sales?
• Does your company have name recognition or sizzle that will help sell the offering?
• Is your company willing to develop and pay for a marketing program to sell the offering?

The Securities and Exchange Commission (SEC) has introduced provisions which drastically reduce the cost and complexity for a small business seeking public funds. These provisions are designed to allow a self reliant business owner to complete with only minor assistance from their current lawyer and accountant. GOING ïPUBLIC' will give your investors a tradeable security which goes a long way toward establishing an exit strategy for them. These programs are referred to as DIRECT OFFERINGS and, in some cases, are administered by your State Security Board. Call them for information.

One of these Direct Offerings, SCOR (Small Corporate Offering Registration) has developed a lot of interest and activity around the country to offer SCOR investors liquidity for their investments. The SCOR Task Force has held a number of seminars and is part of the Austin, Texas, Chamber of Commerce.

SCOR can be used at any stage of development from start-up onwards.

What is SCOR?

SCOR (Small Corporate Offering Registration) is a do-much-of-it-yourself securities registration document ("prospectus") in the form of a 50-question form designed so that knowledgeable business people, their attorneys and accountants can create the documents needed to sell state-registered securities to the general public--a direct public offering.

SCOR gives small businesses access to public capital by making the process affordable. It is up to them to seize that opportunity, and to make something of it. Selling debt or equity securities (common or preferred stock, bonds, promissory notes, etc.) directly to the public, (that is, without having to pass muster with the Securities and Exchange Commission and stock exchanges such as the New York, American, or NASDAQ the national market, or even regional exchanges such as the Boston, Philadelphia, Chicago, or Pacific) is an option every small business--start-up, developing, or going concern--should consider.

More than 700 companies have attempted to register almost $1 billion in equity and more than $100 million in debt using this process. While not all have succeeded, many have. Several companies have used direct public offerings (DPO) to move their businesses from their garages onto national or regional exchanges.

SCOR is an Important Part of the DPO Process

Small companies have been able to sell securities directly to the public without having to go through the expense of a full SEC registration since 1982. However, it was not until 1989 when the North American Securities Administrators Association adopted the Small Corporate Offering Registration form, that the process of state registration became truly practical.

SCOR refers to both a public offering of $1 million or less and the form used as the offering document (prospectus). Companies seeking to raise up to $1 million in a 12-month period must register the securities only in the states in which they intend to sell them.

Who can use the SCOR form?

While the federal exemption is very broad, there are additional limitations on who can use the SCOR Form. Generally, the form may be used by all small corporations except: Blank check and blind pool companies (companies that have no specific purpose for the funds they are trying to raise); Companies involved in extractive industries, such as oil and gas, and mining companies; Reporting companies (companies required to make regular reports such as 10-K and 10-Q to the Securities and Exchange Commission); and Investment companies. Other than those, the form has been used by high tech, low tech, real estate, lifestyle, manufacturing, merchandising and financial companies at stages of development.

What does it cost?

Depending on the knowledge and patience of the company's management, a DPO can be prepared and registered for a few thousand dollars if management can do most of the work itself. Accounting charges are usually the biggest factor in the cost of a SCOR offering. Most states require offerings of more than $500,000 to submit audited financials. Offers of less than $500,000 usually can submit reviewed financials. The accountant doing the financials has only to be an independent CPA.

If management is unwilling or unable to create the offering documents itself, costs go up appreciably. However, most states will not allow a company to spend more than between 15 and 20 percent of what it hopes to raise on raising the money. Most of the do-it-yourself offerings we have seen have cost between $7,300 and $39,000 including accountants, lawyers, printing, postage, phone calls, seminars and advertising. Some of those using packagers have cost more than $100,000.

SCOR - FAQ REVIEW

The SCOR Program signals a notable breakthrough in small business financing. Many state securities divisions have adopted a question and answer registration to enable corporations to raise up to One Million ($ 1,000,000) Dollars each twelve (12) months through the sale of its securities to the public. The "Merit" Standards used by the securities division to review registration in some states have been relaxed.

This action significantly reduces the overall cost and simplifies the raising of "seed Capital" for business start-ups, expansions and other allowable small business financing. Companies may use commissioned selling agents or sell the registered securities themselves through advertising, seminars or other approved means of mass solicitation. Investors are not limited as to their number or type, nor is there any restriction on the amount that may be sold to any one Investor.

The Emphasis has been made on minimizing cost: For example; offerings of $ 500,000 or less require only reviewed financial statements in some states.

All U. S. corporations may use SCOR to register securities for sale to the public except such companies as petroleum exploration and / or petroleum production concerns, those engaged in mining or other extractive industries or blind pool offerings . Securities may not be sold on behalf of any entity other than the issuing corporation.

However If the company, or any of the company's management or 10% or greater stockholders, have past or current regulatory problems or the company's securities are subject to registration with any governmental agency other than the SEC or a state regulator, then in most cases may not use SCOR.

The corporation may raise up to One Million ($ 1,000,000) each twelve (12) months. In calculating this limit, sales in all jurisdictions must be included together with any other securities sold under the SEC Rule 504 or section 3(b) of the Securities Act of 1933, or sold in violation of the registration provisions of federal securities law.

The offering price must be at least five ($ 5.00) dollars per share in most states, and the company may not split its stock or declare stock dividends for two (2) years following effectiveness of the registration, except with the permission of the Securities Administrator in connection with a subsequent registered public offering.

The securities registered and sold are "freely" transferable and tradable. You should note that because of the offering size and the five ($ 5.00) minimum price a public trading market is unlikely to arise. Note: The Pacific Stock Exchange received approval in May of 1995 from the SEC to list SCOR and Regulation. A securities, this should create a market for "Listed" SCOR and Regulation. A securities. Thus the SCOR offering is in nature an early stage venture financing, using public investors solicited by means of advertising and / or other general solicitation. If appropriate, the SCOR may be followed at some later stage by a "conventional" public offering that could result in the development of a publicly traded market. Depending on the state, SCOR may be used to register common or preferred stock, including convertible preferred and options, warrants or rights. Upon a showing that the company will be able to meet debt service, SCOR may be used to register debt securities, including convertible debt.

The offering may be sold directly by the company ( in some states the selling officer or director must be registered) or by a commissioned selling agent or finders. Mass solicitations may be used, including public meetings and advertisements (may need to be pre-approved by regulators in some states). Any type of investor may purchase any amount in the offering.

Proceeds of the offering must be placed in an escrow account with an independent bank or similar institution until the minimum amount necessary for the company to achieve its stated objectives is raised .(This is the min/max provision required by most states).

1. What is a SCOR LPO (Small Corporate Offering Registration, Limited Public Offering)?

A SCOR LPO is a vehicle that permits companies to raise up to $1 million in equity funds directly from the general public, e.g. , from their customer base or others with a keen interest in the product, services or management.

2. What type of company is suitable for a SCOR LPO?

A SCOR is suitable for companies that have a "growing" business, that have potential to be a profitable organization that sells a product or a service, and in which the shareholders will stand to make a return on their investment commensurate with the risk they are taking.

It is also possible to do a SCOR offering to fund an acquisition or a franchise operation.

3. What do the entrepreneur/ initial stockholders give up in return for the investors' money?

Investors receive common stock in the company. The value and percentage that they receive depends upon the value of the company at the time of the offering. More often than not, this will depend on the company's potential, its product line, investors' perception of the future, and management's ability to successfully lead the company to that future.

In most cases we expect the company will give up 35-55% of its stock. It is unlikely that your company is suitable for a SCOR offering if you will be required to give up in excess of 55% of the company's equity. The valuation is subject to "substantive fairness" review in many states and to negotiation with the Broker, if any, that will sell the security.

4. Does LPO mean the company is a publicly traded company?

No. It simply means that your stock is being offered directly to the public, however it is registered with the state or states that it is offered in and may be traded. If you wish to and you fit the requirements, you can have your company quoted on the SCOR Market Place of the Pacific Stock Exchange of on the NASDQ Electronic Bulletin Board. At DFS , we do not recommend listing too quickly, on the PSE, but the objective should be taken into account from an early stage in order to ensure that the company builds the correct profile.

5. Who can the stock be offered to?

The stock may be offered to anyone in those states in which the offering has been registered (permitted) and approved. SCOR offerings are permitted to residents of more than 41 states and most of those states require a merit review to test the offering's "fairness." You may find that one of your company partners, such as suppliers, distributors or customers will buy up all or a substantial part of the offering.

6. Who is authorized to sell the stock?

Licensed Broker/Dealers. However, few are able or willing to take any interest in issues of only $1 million. Licensed directors and officers of the company are permitted to sell in some states (Series 63 exam, Uniform Securities Act).

We have created an alliance with several Broker - Dealer Firms to handle the retail aspect of the SCOR offering. If Your Company qualifies we are able to provide you with a "Best Efforts" underwriting / sales agreement.

7. What is the difference between a private placement and a SCOR LPO?

There are two substantial differences between a private placement and a SCOR offering:

1. A SCOR may be offered to and subscriptions accepted from any number of unaccredited or accredited investors . As for private placements in most states, the company is limited to just 10 offers /year, while some states permit subscriptions from 35 unaccredited investors and unlimited accredited (wealthy) investors.
2. A SCOR offering may be advertised to the public and promoted by direct mail, Television, Radio, Internet, cold calling, public meetings and many other forms of promotion generally available.

Private placements, generally, may not be advertised in any way.

There is a much higher chance of funding your SCOR offering than funding a private placement.

8. Is there any guarantee of success that a SCOR offering will work for your company?

No. --- The success of the SCOR offering depends upon a number of factors including (not exhaustive)

1. Your "story" to date.
2. The product or service offered.
3. The quality of the management team.
4. The stock retail program, particularly
5. The marketing and promotional activity that generates the initial interest.
6. The quality and suitability of the prospect base.
7. The ability of the broker to respond to questions and sell.
8. The investors' perception of the risk factors. An investment decision in an early stage company is a high risk and a very personal decision.
9. The amount of time and skill dedicated to "retailing" the stock and communicating with potential investors.

9. Is there a minimum or maximum that any one investor may invest?

There are no absolute rules. We will sometimes recommend a minimum investment of $500 but this may be considerably higher in cases where the prospect list is particularly affluent. In no case can you accept an investment from an investor if the investment's total loss would have a significant effect on his or her net worth.

10. Can the stock be sold to customers?

Certainly and in cases where the product is retailed, we recommend it. It can be a great marketing tool to sell more of your product or service. In some cases such as software companies, it can also be a great inducement to stop pirating. This is an excellent method of creating loyalty from your customers.

11. Does the offering have to be for $1 million? Can it be less or more?

The SCOR offering can be for less than $1 million but it cannot be for more, in most states. It is possible to make a second SCOR offering after a twelve month period for a further million dollars. After a period of six months (safe harbor), it may be possible to make non-SCOR offerings under certain circumstances. Note the SCOR offering cannot exceed $500,000 without audited financial statements. Please note that DFS does not consider engagements for offerings of less than $600,000 and we do consider engagements for Reg. A offerings of up to $ 5,000,000.

12. When are the funds released to the company?

The funds are released to the company on breaking escrow if the company has established an escrow "minimum" level. Breaking escrow occurs when there are sufficient subscriptions paid in to have achieved the "minimum" amount of the offering that has been filed and approved by the various state merit reviews.

13. Whose and what laws govern SCOR offerings and who is exposed to liability?

Although the SEC (federal government) and most states made SCOR offerings more financially bearable on small companies, your directors, officers, and major shareholders could be open for civil or criminal penalties if the offering is carried out improperly. Even honest, accidental mistakes or omissions could require pay back of all moneys raised plus interest and attorneys' fees.

14. How much must the company invest in the offering before the proceeds are available?

This depends on the escrow level, if any, the speed of response of state administrators during the merit review period, and the time investors take to respond. As this number depends upon your company's product and the SCOR promotion, these costs will range between $25,000 and $50,000.

15. Can the company fund its SCOR offering through bridge financing?

The offering can be funded by such methods as an SBA "LOW DOC" loan or raising the money by a "quick-fix" subscription offering or other alternatives. It is possible, depending upon the company, to complete a SCOR Offering with an initial investment of $5,000 on the part of the company. This is achieved by undertaking a "quick fix" bridge equity offering followed by a SCOR Offering. DFS can advise and assist on this topic.

16. What is the cost to the company if the offering is not a success?

The company must pay the professional registration fees, outside counsel, outside independent auditor, escrow fees, state filing fees, advertising & marketing fees, printing and postage. Selling commissions are paid only on moneys received by the company, No success, No fee.

17. How much does the company receive?

Net of all expenses, the company will receive on average a net of $800,000+/- if the offering is sold out at $1 million.

18. How are states chosen in which to register?

At DFS , before recommending the states for registration, we take into account the following: prospect base residency, proximity, advertising restrictions, escrow rules, filing, registration, merit review approvals, and "substantive fairness" attitudes of each state's administrator.

19. Is there any difference between existing stock and SCOR stock?

Usually. Existing stock is usually deemed "promoters stock or cheap stock" and there are restrictions on stock splits, dividends, and resale of the stock. The State or States in which the offering is registered generally requires that the promoters stock be escrowed for a period of three to eight years. The rules are different if the company is quoted on the SCOR Market Place of the Pacific Stock Exchange.

20. How do you go about a SCOR LPO offering?

There are 3 MAJOR phases to a SCOR offering: IBC Inc can directly and indirectly handle all three phases for the Issuer.

Evaluating and preparing the company for an offering by reviewing all corporate documents, restructuring the capital structure, and analyzing the appropriate states in which to file.

1. Preparing the U-7, U-1, U-2, and U-2a documents, securing the required audit and documents from your corporate attorney and CPA, negotiating merit review substantive fairness issues with the state or states selected for the offering, structuring escrow arrangements and receiving the permit to sell.
2. Promoting and advertising the offering to a suitable prospect base, there by generating sufficient investor inquiries to break escrow and eventually close out the offering. Designing, Printing and Distributing the Offering Documents.
3. Retailing the investment to a suitable prospect base, and most importantly closing the sale of the stock to investors through a Broker - Dealer Firm and / or the issuer's appointed and qualified management. A successful closing of the offering is best achieved through utilizing a variety avenues.

SCOR Filings and the States

The SCOR filing process and performance varies widely among the states. For example, almost 40% (190 of 476) of the approvals have occurred in just four states: Iowa, North Carolina, South Carolina, and Washington. About 55% (60 of 110) of the companies that have successfully raised money are from four states: Iowa, North Carolina, Mississippi, and Washington.

The activity of filings and approvals on a per capita basis varies widely from state to state. The top ten states have 30 to 100 times the activity of the lowest ranking states, such as Pennsylvania. This is a significant and important difference, as the performance of the top states results in many more public companies being created.

For example, if Pennsylvania matched the performance of the top states in the rate of approvals and therefore the number of companies successfully raising money, about 50 to 75 more public companies would have formed in the state over the past four years. In a region like the Pittsburgh area, this would have equated to about 15 new public firms, nearly double the number of public firms that were created in the region over the last four years.

SCOR Promotion

States also vary in regards to how proactive they are in promoting SCOR, educating businesses on its use, and holding pre-filing conferences or meetings to resolve problems before reaching a more formal, potentially adversarial approval process.

This proactive stance directed towards making SCOR work for the benefit of small companies correlates with high performance. Arizona, Iowa, South Carolina, and Washington are among the states cited as the most proactive. Iowa, South Carolina, and Washington rank in the top ten in SCOR approvals per capita, and Arizona ranks 17th; all have per capita approval rates that are four to 15 times the median rate among the states.

Pennsylvania ranks 38th in SCOR approvals on a per capita basis. Its rate of approvals is about one-fourth the median of all the states, and its approval rate is about one-sixtieth that of the top ten states.

Recommendations

Pennsylvania should strive to match the proactive efforts and performance of the best states by implementing the following five actions:

1. Institute face-to-face pre-filing conferences for SCOR applicants. This resolves many informational problems that can turn more adversarial and bureaucratic in the formal review process.
2. Create an educational campaign designed to educate Pennsylvania businessmen on the opportunities that SCOR filings can make available.
3. Train many of those who deal with entrepreneurs within the state. Work with the existing entrepreneurial support infrastructure, including the Small Business Development Council, the Ben Franklin Technology Center, university-run entrepreneurial centers, and organizations such as the Enterprise Corporation, to encourage the use of SCOR offerings.
4. Work to address the marketing problem faced by would-be SCOR filers through the creation of a centralized registry of approved SCOR filings within the state and other efforts to ease the difficulty in marketing these securities.
5. Examine and reconsider all of the merit policies within the state as they pertain to SCOR filing approval. Merit policies may limit the offerings unnecessarily

¹ Courtesy Interactive Business Channel - pay them a visit!

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