It was this concern that prompted Regulation D, a special exemption that became effective April 15, 1982. It’s not just another exemption, but rather one of the key exemptions for small business that want to raise money by selling stock to the general public. It is also considered a form of taking a company public without the burden and expenses of a full registration process with the SEC such as in a traditional Initial Public Offering.
Regulation D consists of six basic rules. The first three are simply basic rules; they are concerned with definitions, conditions, and notification. Rule 501 covers the definitions of the various terms used in the rules. Rule 502 sets forth the conditions, limitations, and information requirements for the exemptions in rules 504, 505, and 506. Rule 503 contains the SEC notification requirements. The last three rules deal with the specifics of raising money. Rule 504 generally pertains to securities sales up to $1 million. Rule 505 applies to offering from $1 million to $5 million. Rule 506 is for securities offerings exceeding $5 million.
Regulation D contains the type of exemptions that many small businesspersons have been looking for. These exemptions can easily be used in private placements or “limited public offerings”. Thus, a Regulation D private placement document, better known as the Private Placement Memorandum, has been regarded as one of the most workable exemptions for small offerings.
While Regulation D offerings can provide a capital formation solution for a small business (the good news), it does have some legal limitations (the not so good news). There are strict limitations placed how the solicitation process is done on these stock sales (securities) to the public as well as suitability standards that are imposed on the type of investors. These limitations drastically reduce the number of private placements that are successful. A Regulation “A” offering (another exemption) has a higher probability of success based on a more dynamic SEC exemption rule. This Exemption will be discussed in future articles.
The Small Corporate Offering Registration, better known as SCOR, (falls under Regulation D) is designed to assist small companies in their capitalization by issuing stock directly to the public. This process is called a Direct Public Offering or DPO since an Investment Banker does usually not underwrite the offering. A SCOR offering is an ideal format for executing a limited Internet DPO. Think of a SCOR offering as a quasi-public private offering.
A SCOR candidate may raise as much as $1 million within a 12-month period with a minimum stock price of $5. Typically, the prospective SCOR candidate will set a minimum amount of capital to be raised to ensure that sufficient funds will be available for growth and development before any of the funds are accessible for company use.
While a SCOR offering does not contain the substantial costs usually associated with larger public offerings, it is a prime candidate for an Internet DPO (On-line Direct Public Offering), which typically costs much less and provides a small company with an effective means by which to raise capital. The filing, which consists of a form called Form U-7, is exempted from the provisions of the SEC Act of 1933 under Regulation D, which means that the DPO candidate will not have to file a full registration statement with the SEC. However, as with any public company, compliance with antifraud and personal liability provisions of the SEC Act of 1933 is a requirement.
SEC Filing (U-7)
DPO candidates are required to complete and file a FORM U-7 that has been designed with idea in mind that non- securities attorney can complete it; nevertheless, it will most likely require expert assistance. Furthermore, in some cases, 2 years of audited financial statements are required and should be included with the Form U-7 filing.
Blue Sky; State Filing (SCOR)
Regulations at both federal and state levels must be complied within a SCOR-based DPO as well as with any IPO. The State regulations are called Blue Sky laws. Blue Sky laws were designed to protect investors from “unscrupulous” issuers of stock. Since its inception in 1987, SCOR filings have been adopted in 42 states. Some states may require minimum amounts to be raised before the DPO candidate may access the raised capital.