Capital Opportunities for Small Businesses - sbtdc

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C A P I T A L O P P O R T U N I T I E S F O R SMA L L B U S I N E S S E S Updata Partners Two Freedom Square 11955 Freedom Dr., Suite 7000 Reston, VA 20190 703.736.0020 info@updata.com www.updatapartners.com Warburg Pincus LLC 450 Lexington Ave. New York, NY 10017 212.878.0600 info@warburgpincus.com www.warburgpincus.com 114
C A P I T A L O P P O R T U N I T I E S F O R SMA L L B U S I N E S S E S Securities Offerings Regulation D (Rule 504) The issuance of equity securities usually must be registered with the Securities and Exchange Commission (SEC). Registration documents include detailed disclosure, historical financial statements, and third-party audits. This can be a costly process. A private placement, however, is exempt from federal registration. A private placement under Regulation D of the security code can minimize costs and delays while giving a business access to equity capital. Rule 504 is the most commonly used Regulation D exemption. Under Rule 504, the SEC exempts companies that are raising up to $1 million from most of the SEC registration and reporting rules that govern larger stock sales. The only restriction is that the company must not raise more than $1 million over a twelve-month period before or after the offering. Somewhat more restrictive requirements for Regulation D exemptions are outlined under Rules 505 and 506 for larger offerings that include nonaccredited investors. Rule 504 itself has no prescribed disclosure requirements, no limit on the number of purchasers, and no investor sophistication standards. If the company adheres to the above limits, it can advertise and sell to any number of people. Some states require additional filings and impose further restrictions. Regulations must be looked into on a state-by-state basis where it is anticipated that the securities will be sold. It is important to remember that the exemptions from registration provided by Regulation D do not include exemptions from the anti-fraud or civil liability provisions of any of the federal or state securities laws. Although the 504 offering seems tailor-made for entrepreneurs, even simplified stock offerings carry a cost. These offerings are designed to be conducted without the use of an investment banker, but there still are costs associated with marketing the stock offering. The company must either sell the security offering itself or engage the assistance of a licensed brokerage firm. Handling the administration for the first time may lead to unanticipated delays in putting out the issue. Additionally, this method is not for all small companies considering stock offerings. If the company is growing quickly, it may be able to raise more capital by waiting for a traditional IPO. Small Corporate Offering Registration (SCOR) The Small Corporate Offering Registration (SCOR) was adopted by the North American Securities Administrators Association to standardize state filing requirements in conjunction with Regulation D, Section 504, security offerings. SCOR standardizes the state filing process with Form U-7, the general registration form for corporations registering under state securities laws. Up to $1 million may be raised at a minimum offering price of one dollar ($1) per share. Prior to using Form U-7, a company should contact the staff of the securities administrator of each state in which the offering is to be filed to review applicable substantive fairness standards. Please note that not all states have adopted the use of Form U-7. The U-7 and issuer’s manual may be located through the North American Securities Administrators Association’s website: www.nasaa.org. 115
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Capital Opportunities for Small Businesses - sbtdc

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