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Small Company Offering Registration (SCOR) - A Simplified Method for the Public Offering of Securities

Public Offering of Securities

Overview
Who is Eligible to Use SCOR?
Question-and-Answer Disclosure Document
Offering Size and Price
Types of Securities
Financial Statements
Regulatory Review of the Filing
Selling the Offering
Caution

Overview

The Small Company Offering Registration (SCOR) is a unique means by which a company needing capital may make a public offering of securities, without the often costly and time-consuming process of an SEC registration. The program enables corporations and limited liability companies to raise up to $5,000,000 in any 12-month period through the sales of securities to the public.

Most states, including Maine, have adopted this uniform registration process, which is designed to simplify the raising of capital for small businesses. Companies may use commissioned broker-dealers as selling agents or sell the securities to the public themselves through general solicitation and advertisement. Investors are not limited as to number or type, nor is there any restriction on the amount that may be sold to any one person.

The program's primary focus is reducing the cost of capital to small businesses. The Form U-7, which is the standard form for registering securities under SCOR, is designed for use by companies whose attorneys and accountants are not necessarily securities experts. This question-and-answer form serves not only as the registration document for each state where offers and sales will be made, but also serves as the prospectus or disclosure document for soliciting investors. SCOR registration costs are usually significantly lower than for other securities registrations because SCOR securities are exempt from federal registration under Rule 504 of SEC Regulation D.

 

Who is Eligible to Use SCOR?

The SCOR program is available to any corporation or limited liability company organized under the laws of the United States or Canada, except for any company which is:

  1. Subject to the reporting requirements of the Securities Exchange Act of 1934;
  2. An investment company under the Investment Company Act of 1940;
  3. Engaged in petroleum exploration and production, mining, or other extractive industries;
  4. A development stage company with no specific business plan or purpose other than merger;
  5. Disqualified under other requirements in the NASAA Statement of Policy Regarding Small Company Offering Registrations.

Question-and-Answer Disclosure Document

As previously mentioned, the Form U-7 is the core document for SCOR registrations. It serves not only as the registration document with state regulators, but also as the primary disclosure document for potential investors. The U-7 consists of 50 questions intended to provide important information about the business to investors. While sometimes referred to as a "fill-in-the-blanks" form, it is really far more than that. It compels a company to provide a detailed disclosure of its business plan, including a discussion of how the proceeds of an offering are expected to enhance the company's operating performance and the critical milestones which must be reached to make the company profitable. Just as importantly, it requires substantial disclosure as to the risks of investment, detailing all of the facts and circumstances which might make the offering one of a highly risky or speculative nature. Because investors see the questions being asked, a "no" or "not applicable" answer may in itself convey information about the offering to the investor. Also, the U-7 contains a number of notes directed to investors, indicating how they may use or interpret answers to certain questions. This approach is unique to the U-7 and is designed to enhance disclosure to investors.

Offering Size and Price

Up to $5,000,000 may be raised each 12 months using SCOR. In calculating this limit, sales in all jurisdictions must be included, together with any other securities sold under SEC Rule 504 or under Section 3(b) Securities Act of 1933, or in violation of the registration provisions of federal securities laws. The offering price must be at least $1.00 (US) per share or unit of ownership interest, and the company may not split its common stock or declare a stock dividend for two years after the effective date of the registration if such action has the effect of lowering the price below $1.00 (US). Securities sold in a SCOR offering are freely transferable. However, because of its small size, a public trading market is unlikely to arise for a substantial period of time. Businesses which utilize SCOR are generally early-stage companies seeking funds to achieve a specific aspect of their growth strategy. If appropriate, a SCOR offering may be followed at some later stage by a more conventional public offering that would result in a public trading market for the corporation's securities.

Types of Securities

SCOR may be used to register common or preferred stock (including convertible preferred), options, warrants, rights, or membership interests in a limited liability company. SCOR may also be used to register debt securities, if a company can exhibit an ability to meet debt service on a pro forma (not projected) basis. Common stock with lesser voting rights than other common shares may not be registered under SCOR.

Financial Statements

Generally, the Office of Securities will require audited financial statements for companies seeking to raise more than $500,000 in a SCOR offering. For offers of $500,000 or less, reviewed financial statements, in accordance with generally accepted accounting principles, are sufficient. Whether audited or reviewed, an issuer must provide, at a minimum, financial statements for the most recent fiscal year-end and interim statements for the most recent period available. If disclosures in the U-7 materially rely on discussion of historical financial statement trends, the Division may require submission of earlier fiscal year-end statements.

Regulatory Review of the Filing

Once the Form U-7 and any related exhibits are completed, they are forwarded to the Office of Securities. The Office's professional staff begins a detailed review, designed to ensure full disclosure to potential investors. The review process can be time-consuming and may involve several rounds of comments and revisions, but the amount of time necessary to clear a registration filing can be significantly shortened if the issuer closely follows the instructions in the Form U-7 Issuer's Manual when preparing the initial filing. The Office's review of a SCOR filing centers on potentially substantive problem areas which, unless resolved, will preclude a registration regardless of the quality of the disclosure. These potential "deal-killers" include:
  1. Excessive promotional shares - These are shares issued to the company's founders at significantly lower prices than what public investors are being asked to pay in the SCOR offering. The Office may require these shares to be escrowed during the early stages of a company's "public" life.
  2. Inability to Service Debt - An offering of debt securities requires an issuer to exhibit the ability to service the debt on a pro forma, not projected, basis. Because it is difficult for an early-stage company to do this, debt issues under SCOR are uncommon.
  3. Inadequate Minimum or Excessive Maximum Offering - It's very important that the minimum amount stipulated in the offering document be sufficient to accomplish the key purposes of the offering. Otherwise, it is likely that the Office of Securities will determine that the offering is not in the public interest and deny the registration. The degree of specificity in the "Use of Proceeds" section of the U-7 will be closely scrutinized, as it is often an indication of management's clarity about the company's business plan and the adequacy of the minimum offering amount.
  4. Inappropriate Affiliated Transactions - The Office will closely review transactions into which the company has directly or indirectly entered with its insiders. Changes may be required in a company's affiliated-transactions policies or a registration may be denied if it is determined that such transactions unfairly benefit the company's insiders to the detriment of public investors.
  5. Excessive Selling Expenses - As discussed below, there are selling expense limitations in relation to gross offering proceeds. To the extent that it is determined that excessive expenses preclude an issuer from accomplishing its stated financial plan, the Office may disallow a registration.

Selling the Offering

Once the registration process is complete, the Office will issue a "notice of effectiveness," and the issuer is free to begin selling. A SCOR offering may be sold directly by the company or by commissioned selling agents. Mass solicitation may be used, including public meetings and advertisements. There is no limit to the amount that any investor may purchase. Selling expenses (including brokers' commissions) may not exceed 17% of the gross proceeds of the offering. Total expenses, which would also include legal, accounting, and printing costs, may not exceed 20%. A selling agent engaged in the business of selling securities must be licensed as a broker-dealer with the Office of Securities. If the corporation is selling the securities directly without paying commissions, directors, officers, and employees of the company may become licensed as sales representatives (a/k/a agents of issuer) without taking any examinations. In that instance, licensing is accomplished by filing a completed U-4 application and paying a licensing fee of $25.00 per person. Proceeds of the offering must be placed in an interest-bearing escrow account at an independent bank or similar institution until the minimum amount stated in the Form U-7 is raised.

Caution

Because of its generality, the information provided herein may not be applicable in all situations and may be superseded by subsequent regulations or interpretations. It should not be acted upon without first consulting legal counsel as to any specific circumstances or the current state of applicable law.

 

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Last Updated: November 20, 2024