How to Raise Money for Your New Business Venture…Without Having to Pay it All to Your Attorney: the Small Corporate Offering Registration
The single biggest issue most startup business ventures encounter is the need for capital. Banks rarely, if ever, lend money to startups – especially with tighter credit standards these days – outside of an SBA guaranteed loan product, and while there are some other alternatives (factoring or using funds from a self-directed retirement account), for most startups, the only other practicable alternative is equity capital.
Equity capital, however, is not cheap. Aside from the fact that the founders of the venture are going to have to part with some portion of future profits in order to entice investment capital, there is the simple matter of the cost involved with raising capital that can preclude many from ever seeking it. A business looking to solicit funds from investors will find a myriad of Federal and state securities laws that govern the process, and hiring a lawyer is essential given the complexities of these laws. It is this labyrinth of laws and costs that leads to an early demise for many worthy ventures.
Enter the Small Corporate Offering Registration (SCOR) securities registration process. Many state securities laws – including Minnesota’s – have been amended to provide a simplified procedure for stock offerings requirements and enable development-stage companies to raise capital by utilizing the SCOR.
Here’s what the Minnesota Department of Commerce says on its website about its SCOR:
Under the law, small and emerging businesses can raise up to $1 million annually by selling securities directly to the public without having to go through a brokerage firm. In addition, the securities would not have to be registered with the SEC – only the state – and the simplified form and filing requirements would alleviate much of the need for some, but not all, specialized legal assistance. For example, the issuer will still require the services of a CPA and an attorney.
SCOR was developed as a counterpart to federal laws designed to reduce regulatory burdens on small businesses seeking to raise capital in securities market and has been adopted by most states, including Minnesota.
Here’s how a SCOR offering works:
• Issuer must complete a disclosure document, or prospectus (FORM U-7) describing the company and offering and submit it to Dept. of Commerce for review.
• If approved, the issuer can sell common stock, LLC units and debt securities.
• Issuer can raise up to $1 million in a 12 month period.
• Offerings must sell for at least $1 per share.
Small businesses and companies must generally meet the following requirements, and the filing will be subject to the discretion and review of the commissioner:
• Complete Form U-7 and obtain approval from Department of Commerce Securities Division. Please refer to Minn. Statutes Chapter 80A.115 and Minn. Rules chapter 2875 for the requirements.
• Additionally, there are specific requirements regarding minimum investment and cheap stock (see Chapter 80A.115, subd. 4 (3) and (4)
• Operate principal place of business in Minnesota, North Dakota, South Dakota, Iowa or Wisconsin
• Locate at least 50 percent of full-time employees in Minnesota, North Dakota, South Dakota, Iowa or Wisconsin
• Use 80 percent of net proceeds of offering for operations in Minnesota, North Dakota, South Dakota, Iowa or Wisconsin
The intent of the SCOR option is to offer a vehicle for development stage companies to raise capital, to provide investment opportunities to local investors, to streamline the regulatory process, and to provide a tool for economic development for communities throughout the state.
The Small Corporate Offering Registration can be a useful tool for startup ventures whose capital needs fall within SCOR’s guidelines. One note of caution: just because you can get the forms off of the internet does not mean that you should forego the use of a qualified, competent attorney to assist you in the process. In fact, the cost of preparing a Form U-7 is certainly less than the private placement memorandum common to larger exempt offerings, making the use of an attorney all the more affordable.