Washington State Department of Financial Institutions

SCOR: Small Company Offering Registration

A Simplified Method for Raising Small Business Capital in Washington State

The Securities Division has adopted a question and answer registration form (Form SCOR "Small Company Offering Registration") to enable corporations and Limited Liability Companies (LLCs) to raise up to $1 million each 12 months through the sales of securities to the public. "Merit" standards used by the Securities Division to review these registrations are somewhat more relaxed that those applied to larger public offerings.

This program greatly simplifies the process of raising seed capital for small businesses. Companies may use commissioned selling agents or sell the securities to the public themselves through classified ads or other means of mass solicitation such as the Internet. 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 emphasis of the program is to minimize costs. The form is designed for use by companies whose attorneys and accountants are not securities experts. The question and answer form reproduced on an office copier can be used as the prospectus in soliciting investors. SCOR offerings are designed to be exempt from registration under federal securities laws by virtue of SEC Rule 504, so registration with the SEC is not required.

Question and Answer Disclosure Document

The core of the SCOR registration is the Form SCOR Disclosure Document, which uses an easily readable question and answer format. The form is designed for use by small and emerging businesses. The questions are designed to elicit specific types of information of special relevance to these companies. The requests for information are more detailed than on general registration forms, so that persons using Form SCOR can more easily understand what information is being sought. Because a registration is involved, examiners for the Securities Division will comment on the disclosure provided and request different or more detailed disclosure if the answers are not sufficiently responsive.

Because investors see the questions being asked, a "no" or "inapplicable" answer may itself convey information about the offering to the investor. Also, the form contains a number of notes directed to investors, indicating how they may use or interpret answers to certain questions. This approach is unique to Form SCOR and enhances disclosure to investors.

Another unusual aspect of the form is that its questions present issues that a small business should address to become successful. Thus, in providing satisfactory answers, a company is compelled to create a business plan describing, systematically, its anticipated steps to success. If the form is filled out properly, the assumptions and weaknesses in the plan should be evident, and these should be prominently disclosed in the order of their importance as risk factors in the offering.

Who May Use the Form

All American and Canadian corporations and LLCs may use Form SCOR, with certain exceptions. Specifically, the form may not be used:

Offering Size and Price

Up to $1 million may be raised each 12 month period 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) of the Securities Act of 1933, or in violation of the registration provisions of federal securities laws. The offering price must be at least $1 per share (for LLCs, $1.00 per unit of interest), and the company may not split its stock or declare stock dividends for 2 years following effectiveness of the registration, except with the permission of the Securities Administrator or in connection with a subsequent registered public offering.

Securities sold in a SCOR offering are freely transferable. However, because of its small size, a public trading market is unlikely to develop following a SCOR offering. Thus, SCOR offerings are a form of early-stage venture financing, raising funds from investors solicited by means of advertising or other general solicitation, which, if appropriate, may be followed at a later stage by a more conventional public offering that would result in the development of a public trading market for the company's securities.

Types Of Securities

Form SCOR may be used to register common or preferred stock (including convertible preferred) and options, warrants, or rights, and membership interests in an LLC. If the company can show it will be able to meet debt service based on current earnings, Form SCOR may be used to register debt securities, including convertible debt. Common stock with lesser voting rights than other common shares may not be registered using Form SCOR.

Selling the Offering

The overwhelming majority of SCOR offerings are sold directly by the company. These offerings are frequently called "self-underwritten" offerings or "direct public offerings" (DPOs). Commissioned selling agents or finders may also be used. Mass solicitation may be used, including public meetings, advertisements, and the Internet. Any type of investor may purchase any amount in the offering.

Past regulatory problems by potential selling agents in the offering, the selling agents' management, or 10% or greater owners may result in the disqualification of the selling agents. Selling agents must sell only on behalf of the company and not on their own behalf. Accordingly, firmly underwritten offerings are prohibited.

A selling agent or finder engaged in the business of selling securities must be registered as a Broker-Dealer with the Securities Division. Individuals receiving commissions or other compensation for selling securities in the offering must be registered as securities salespersons and have passed appropriate examinations. If the corporation is selling the securities directly without paying commissions, officers and directors of the company may become registered to sell the offering without taking any examinations. In that instance, registration is accomplished by filing a completed Form U-4 salesperson application and paying the required $40 licensing fee.

Proceeds of the offering must be placed in an impound with an independent bank or similar institution until the minimum amount necessary for the company to achieve its stated objectives is raised. The company may raise additional funds so long as their anticipated use is clearly disclosed. The Division has a sample Impound Agreement .

Relaxed Merit Review Standards

Because of the restrictions on the use of Form SCOR and the nature of the capital structure of small businesses, the Securities Division has relaxed certain of the tough merit review standards it usually imposes on registered offerings (please see WAC 460-17A-070). One of the merit standards that is applied is a modified version of the state's promotional stock rules.

The formula for determining "promotional shares" is complex. From those shares issued to founders, management, or major owners of the corporation, a determination is made of those deemed "fully paid" shares. This is determined by dividing the amount of consideration paid in past purchases of the shares by 85% of the proposed public offering price in the offering. Tangible property used as payment in past purchases is counted at its fair value, if that is readily and objectively ascertainable.

As applied to SCOR offerings, there may be an unlimited number of promotional shares. However, those in excess of 60% of the shares to be outstanding after the offering must be escrowed for a certain period of time, usually four years, or until the company satisfies other release provisions in the escrow agreement. In lieu of an escrow, the company may enter into a lock-in agreement that does not involve the expense of a third party escrow agent.

Shares held in escrow or lock-in are still outstanding and may be voted by their owners to retain control. All dividends and other distributions upon securities held in escrow, and any substitute securities or property received upon any merger or reorganization, must also be placed in escrow. The Division has a sample escrow and lock-in agreements.

Financial Statements

Financial statements for the company's last fiscal year must be attached to Form SCOR. Financial statements must be prepared in accordance with generally accepted accounting principles (GAAP), complete with appropriate footnote disclosure. They need not be reviewed or audited by an accountant, though audited statements are strongly encouraged. They also provide added comfort to prospective investors. Further, if you are planning to sell the offering in other states, you will need to comply with their requirements which often include reviewed or audited financial statements.

Other Programs of Interest

Coordinated Review-SCOR-West is a coordinated review program available for companies that intend to sell an offering in more than one state. This program streamlines the review process for the company.

Caution

Because of its generality, the information provided herein may not be applicable in all situations.

Forms

Please click on the links below to be directed to the NASAA website.  Once there, select "corporate finance" from the drop down menu at the top of the page.  Then select from the 'SCOR' forms on the left side of the page.

SCOR Manual (Adopted September 28, 1999)

SCOR Form Introduction, Instructions, and Requirements

Small Company Offering Registration Form (U-7) (Adopted September 28, 1999)

Statement of Policy Regarding Small Company Offering Registrations

Revised versions of the Form U-7 Disclosure Document and Issuer's Manual were adopted on September 28, 1999, The revised Form U-7 has not been adopted by the Securities and Exchange Commission for use as the disclosure document in connection with Regulation A. If you intend to qualify your offering of securities under SEC Regulation A using Model A as the disclosure document, you may be required to use Form U-7, Small Corporate Offering Registration, adopted April 29, 1989, appearing below.


Small Company Offering Registration Form (U-7) (Adopted April 29, 1989)
Issuer's Manual for Form U-7(Adopted April 29, 1989)
 

Some of the documents available on this page are in PDF format. If you do not currently have Adobe Acrobat you can download a free Adobe Reader to allow you to view and print the forms. It takes just a few minutes to download the free software and once it is installed you can use it to view any of the documents on our site.

If you would like copies of these materials in Microsoft Word, please e-mail Trang Pham at trang.pham@dfi.wa.gov. She can email word versions of these documents or send you our SCOR - Small Business Disk, which contains Word versions of these and other documents.