SCOR stands for Small Corporate Offering Registration. It looks like a 50 question form, something like a business plan in question and answer format. It is actually a financial tool that can open opportunities for growth that most small companies only dream about.

In many ways, small corporate offerings are the modem equivalent of a barn raising They are a community economic and social activity. SCORs sell best in the community where the company, its products and services, and management are known Just like ventures on the frontier, small corporate offerings are extremely risky. And just like the barn raisings of an earlier time, a SCOR offering gives the community a chance to grow by helping one of its own. If the company grows and prospers, the members of the community profit from their investment.

SCOR came out of the Small Business Incentive Act of 1980. It was created because Congress realized that small companies could not find adequate financing b other means. The astronomical interest rates of the late 1970s and early 1980s put borrowing out of reach for most small companies. They could not hope to grow fast enough to be profitable while paying interest rates well in excess of 20% a year.

The Small Business Incentive Act directed the Securities and Exchange Commission to do something to help small business. In 1982. the SEC adopted Rule 504 of the Securities Act of 1933, the act covers the sale of securities to the general public. The Rule means that small companies can sell up to $1 million worth of stock or other securities to the general public without having to go to the expense of filing the offering with the SEC, provided the company meets the requirements of the states in which it wishes to sell.

Small companies stayed away from Rule 504 in droves. The paperwork was still onerous and the process was still too costly to be of much use. It wasn’t until April 29, 1989 that it became truly practical for a small company to take advantage of the ability to sell securities directly to the public. That was when the North American Securities Administrators Association, Inc, adopted the SCOR form.

The form was developed by a group of state securities regulators and a group of securities lawyers from the American Bar Association. Their objective was to create a way that a reasonably knowledgeable businessman could do most of the work required to register securities in a state without needing attorneys and accountants specialized in securities matters. They developed the SCOR Form.

The SCOR Form has lowered the cost of registering a public offering with the state to a few thousand dollars compared with the tens and hundreds of thousands of dollars registrations would cost if the company could not do most of the work itself. Since then, the SEC has adopted a form very like the 11-7 Form for two other types of offering. One is a combination of state and federal registrations called a Regulation A offering after the section of the securities law in which it is found. The other is an SB-1. a rarely used transitional offering designed to be used to put a company on an exchange. The Regulation A offering permits a non-reporting company to raise up to $5 million a year while an SB-1 offering permits a company to raise $10 million, but the company has to make periodic financial reports to the Securities and Exchange Commission, that is become a reporting company.

Since the U-7 Form was adopted, almost 2,000 companies have filed more than 4,000 offerings in 48 states. (Author's note: Kentucky, which used to accept the Form U-7, not longer does. Hawaii and Alabama have never accepted the form. What that means is that an issuer may still register to sell securities in those states while relying on Rule 504, Reg A or Rule 147 at the federal level, but will have to file a narrative-type disclosure document and undergo a full registration by qualification at the state level, or one may be able to get them to accept the U-7, but will still have to undergo a full registration by qualification.

For the small business person, sources of capital are extremely limited. In the earliest stages, he has only his own resources including credit cards, savings, borrowing from friends, family and acquaintances (FF&A), and perhaps mortgaging his home. If his business has been around for a time, he may have access to bank loans, either direct, or partially guaranteed by the Small Business Administration.

The SCOR program puts the opportunity to raise equity capital within the reach of many small and start-up companies. Nationally, at least six companies have used SCOR to move from the founder’s garage to listings on the Pacific Stock Exchange or the NASDAQ Small Cap listings quoted in the Wall Street Journal. Considering that there are some 4.6 million corporations in this country and fewer than 18,000 of them are listed on a major exchange, SCOR’s listing rate is truly phenomenal.

Traditional public offerings can cost hundreds of thousands of dollars. A SCOR offering can be done for a few thousand dollars.

The Small Corporate Offering Registration is a financial tool and as such must be used for a specific purpose by a knowledgeable business man. However not every corporation can or should attempt a SCOR offering.

General Information on the Small Corporate Offering

Registration Form (also called SCOR or Form U-7)

Form U-7 is the general registration form for corporations registering securities under state securities laws. The form streamlines the disclosure process in many states. Using the SCOR form to register securities at the state level can mean the corporation does not have to register at the federal level, if an appropriate exemption is available. The most often-used exemption is found in Rule 504 of Regulation D of the Securities Act of 1933. However, the company will have to tell Securities and Exchange Commission that it is claiming an exemption under Rule 504. That is done by filing a Form D with the with the Exchange within 15 days of the first sale.
In addition to the Form U-7 and Form D, issuing companies will also have to submit a Uniform Application to Register Securities (Form U-1), a Uniform Consent to Service of Process (Form U-2 and a Uniform Corporate Resolution (Form U-2A).
The SCOR Form and the instructions are Fairly self-explanatory. However, most small business people will probably require legal assistance, and all will need a CPA to review or audit the corporation’s financial statements.
A "Blind pool" company (one for which the specific business or properties cannot now be described), partnerships, or by reporting companies (a company required to make periodic reports to the Securities and Exchange Commission by the Securities exchange Act of 1934), companies in extractive industries (oil or gas producers, mining companies. etc.), or investment companies are ineligible to use the SCOR Form.
The Form may be used by start-up and established corporations and limited liability companies.
Generally, corporations using the Form may raise up to $1 million, with some restrictions. The offering price for common stock must be at least $1.00 per share in most states. 7. If the issuer is claiming the exemption found in Rule 147 (the Intrastate exemption) there is, effectively, no limit to the amount the issuer can raise from residents of the state in which it is incorporated.
In addition to filing a copy for the federal Form D with the Securities and Exchange Commission, copies of the Form D must also accompany the U-7 Forms sent to all other states in which the offering is to be registered.
Company officers, directors, or agents of the issuing company, may sell the offering themselves, provided they meet state requirements, or the offering can be sold by registered broker/dealers. However, the Form U-7 cannot be used for the secondary sale of securities. That is, people who have gotten securities from the issuing company cannot use the Form U-7 as an offering document to sell those securities to a third party.
The company must include financial statements with the Form U-7. If the offering is for less than $500,000, most states permit the issuer to submit reviewed financial statements. If the offering is for more than $500,000, most states required audited financials.
Issuing companies can take as much time as they like to complete a registration, although they may have to provide fresh financial statements if the process takes too long.
The securities may not be offered for sale until the registration has been declared effective by the state securities regulator. Once the offering has been registered, the issuer may put "tombstone" ads in local publications, can make mass mailings, can do "dog and pony" shows for potential investors, and can make cold calls to sell the offering.
Most states will permit the issuer to spend an amount equal to only a small percentage of’ what the issuer hopes to raise on selling the securities. The percentage varies from state to state as does what is counted as a selling cost.
Other restrictions on the use of the U-7 Form are explained in the instructions which come with the Form. Reading through the instructions before calling the state securities regulator will save time and bother.

Advantages and Disadvantages of Going Public

Advantages

Increased awareness in the investor and banking communities. Many SCOR companies find that investment bankers who wouldn’t look at them before, are extremely interested once the company has gone through the registration process.
Wider recognition of the company name, its product or service.
An equity offering, from a lender’s perspective, strengthens a company’s financial condition by reducing leverage. That means that the company can support additional debt if it is needed.
A successful offering develops the company’s track record
Equity investments don’t have interest costs.
The company can attract investors from the general public.
The company would be able to offer stock options and stock bonuses to key employees which may help attract and keep highly qualified personnel.
The principal owners of the company may be able to undertake subsequent borrowing without making personal guarantees.

Disadvantages

Additional paperwork.

The company takes on the responsibility to tell shareholders and the general public how the company is doing. The company will also have to reveal how much it is paying management.

Reduced freedom of action

Management is accountable to the shareholders and may not be able to act as freely as before. It may have to get shareholder approval before taking certain actions.

Ownership will be diluted
There will be additional legal and accounting fees.
The company and its officers may be subject to a class action lawsuit.
There may be serious estate tax consequences.

How does a company know if it is ready to go public?

Are you ready and/or able to market a public offering?
Do you have a business plan which describes our company’s long terms goals?
Do you have the time to invest in preparing the offering documents and in selling the offering?

Management Attitudes

Are the founders willing to give up total ownership of the company? Do they accept that owning a part of a larger company is better than owning all of a small one?

Additional Costs

Can management take time away from the day-to-day running of the business to structure the offering and to discharge disclosure requirements?

Management Team

Will potential investors be favorably impressed by management's experience and achievements?

Growth Potential

Many companies make an attractive living for their owners, but have limited growth potential. Can the company realistically offer a rate of return that is equal to or greater than other investment alternatives? And, if so, is the company prepared to share those returns with outside stockholders?

Company Value

Can management convince regulators, investors or broker/dealers that the percentage of stock for sale is priced correctly in relation to total corporate worth? For instance, if you offer to sell 10% of your company for $1 million, that means the whole company must be worth $10 million.

Small company valuation is one of the least understood areas of corporate finance. Most work in this area has been done assuming the operation would be closed and the assets sold. Very few going concern evaluation studies have been done.

Advantages of Using the SCOR Form to go Public

Using the form is much cheaper than doing a traditional offering document.
The form uses a question and answer format which can be answered by the company’s management team. This should reduce legal expenses.
In many states, companies trying to raise $500,000 or less may submit reviewed, rather than audited financial statements. That should reduce accounting costs.
The process requires no specialized knowledge or credentials, so general business lawyers and certified public accountants can be used.
SCOR companies don’t have to register with the Securities and Exchange Commission (but do have to file a Form D).
The financial statements must be prepared by an independent certified public accountant, but the accountant does not have to be admitted to SEC practice.
The Form U-7 is used as both the registration statement and the offering document (the prospectus). The prospectus can be photocopied or posted to the Internet and distributed on an as needed basis. That reduces printing costs and mailing costs.
The form may be used by all U.S. corporations with certain exceptions. A company need not be incorporated in a state to register its securities in that state.

Exceptions

The form may riot he used by corporations which already have to report to the Securities and Exchange Commission under Sections 12 or 15(d) of the Securities Exchange Act of 1934.
The form may not be used by "blank check" companies--companies which cannot completely describe how they intend to use any money raised from the offering.
Investment companies such as mutual funds, etc., (which come under the Investment Company act of 1940)cannot register using the SCOR form.
Companies in extractive industries such as oil and gas exploration and production, and mining, cannot use the form.
The form may not be used to register securities for resale.
The form may not be used by partnerships since they are not corporations. Most states allow limited liability companies to use the form.
If a company, its management, or shareholders with more than a 10% stake in the company, have had certain regulatory problems ("bad boys"), the company cannot register using the form.

Technical Requirements

The company can use the Rule 504 exemption to raise up to $1 million in an 12 month period.
The per share price of any common stock offered must be at least $1.00 ($2.00 in California).
The company must not split its stock or declare a stock dividend for two years without specific permission from the state regulators.

Filing Procedure

Develop a business plan and a plan of operation which will tell you how much capital ou need and at what stages you will need it.
Visit Drew Field's Web site and take the Screen Test to get an idea of whether a direct public offering will work for your company.
Contact the State Securities Board for the necessary forms and instructions, or download the forms and the Issuer's manual from the NASAA Web site.
Review the U-7 form to make sure that a small corporate offering is the best capital formation alternative available for your company.
Put together your filing team (management, attorney and accountant). Also determine who will be responsible for selling the offering. The president will probably have to do the dog and pony shows and the closing, but strategy and implementation should be someone else's responsibility. That person must report directly to the CEO.
Determine who will value the company.
Do a rough draft of the offering document
Contact the State Securities Board and request a pre-filing conference to resolve questions, and to broadly outline what the issuer intends to do.
Revise the U-7.
File the U-7 and any other required forms with the state securities board and pay required fees.
If your securities are to be sold by a registered broker/dealer, you will also have to file a copy of the U-7 with the National Association of Securities Dealers (NASD).
Negotiate issues with State Securities Board analyst.
Form is reviewed and approved by the analyst, the director of securities registration and the deputy commissioner or the commissioner.
Meet state dealer registration requirements. Directors and officers of the company generally do not need to take the Series 63 test if they will not receive commissions for selling securities. Agents of the issuer will have to pass the Series 63 test and pay a fee. In Texas. issuer-dealer registration is available for an issuer to deal exclusively in its own securities. The issuer must file an application of form and pay the appropriate fee. At least one person must be registered as an agent for that issuer/dealer.
Market and sell the securities

You may have to set up an escrow account to hold any money received until the minimum requirement is established. To market the securities, you can put tombstone advertisements in newspapers, and use radio and television. However, there is usually a selling cost ceiling which limits the amount of money the issuer can spend on selling the deal. This is an investor protection measure. Securities regulators, especially in merit states, want has much of the investors' money as possible to go into the business. You can also use direct mailings and the telephone to find prospective investors.

Stewart-Gordon Associates, Inc.
P.O. Box 781992
Dallas TX 75378-1992
voice (972) 620-2489
fax (972) 406-0213
e-mail Tom Stewart-Gordon