When the Securities and Exchange Commission enacted a new procedure for financing by small corporations, known as the Small Corporate Offering Registration (SCOR), it was designed to help small corporations raise capital.
In essence, it is a procedure designed by the SEC to enable smaller companies to raise capital, by making the process easier and cheaper, by using a shortened prospectus for registering offerings of up to $1 million.
Has the SCOR process been the boom to the small companies that it was hoped to be? Perhaps not. According to an article in the February 12, 1996 edition of Business Week, since 1992 there had been 547 SCOR offerings filed with the Commission, but only 25% of those offerings raised the full amount of capital that they sought.
While one might argue that the SCOR process has, according to those figures, enabled over 100 companies to effectively and inexpensively raise needed capital, the SCOR process has created as many, if not more, problems than it sought to solve.
Aside from the time and engergy that the various entrepuers in the unsuccessful 400 or so offerings virtually wasted in pursuit of “inexpensive and easier” corporate finance, abuses have crept into the process, as small companies move away from the use of established attorneys, accountants and underwriters, and into the world of “easier and cheap”.
With the requirement that the company itself find investors, rather than having an underwriter provide that function in a traditional offering, services have sprung up which offer to assist companies in finding those investors on their own, by non-traditional methods, such as by direct-marketing. Direct marketing to find investors in a offering of stock? Yes, incredibly so, this is sometimes the method used, despite the traditional rule of thumb for direct marketing, of expected sales of less than 2% of the mailed pieces.
Various financial publications have reported abuses in the SCOR process, by firms offering consulting services to small companies, to assist in the marketing effort of their underwriting. Sometimes it seems, the startup company winds up paying $50,000 or more in fees and expenses, not to mention an inordinate amount of time and energy, to raise what ultimately becomes a couple of hundred thousand, but no where near the $1 million that they sought. Often, companies find that the money they ultimately raised, after expenses, and a 6 month process, is nowhere near what they need, and in fact, the company is worse off than when it started the process, since it has continued to consume capital, and has forgone other financing projects, in pursuit of the “easier and cheaper” method.
That is not to say of course, that the SCOR offering should be ignored by the small company seeking financing of less than $1 million. It truly is a less expensive method of raising less than a million dollars. However, easier and cheaper does not mean that all of the traditional financing procedures should be disregarded. The issuer contemplating a SCOR registration should insure that it is represented by competent securities counsel, and that it is adequately protected from abuses in the system, from outside “counsultants”.
Similiar problems are being experienced by companies who are attempting to utilize the newest method of raising capital, the so called “Internet Offering”. These offerings, which have been sold through the World Wide Web, are sold pursuant to Regulation A, by the issuer itself, for less than $5 million. By now, most people are familiar with the press reports of the underwriting of the securities of Spring Street Brewing Co., which was a self-underwriting done by the issuer, over the Internet. For full details, and the SLHP commentary, see, The Internet Offering.
However, another issuer who is attempting an “Internet Offering”, Interactive Holdings Corp., is only having limited success with its offering. Since February, 1996, it has been posting a prospectus for 200,000 shares of an initial public offering.
The President of Interactive Holdings Corp. was quoted in the April 10, 1996 issue of Securities Industry Daily on the limited success of the offering as saying “It shows the need for traditional brokers…we have no experience selling securities and we’re not very good at it.”
While investment bankers might find other reasons for the lack of success of an Internet Offering by a startup company (or of any offering for a startup, for that matter), IHS’s experience with the Internet Offering is similiar to the experience that other small companies are going to find with the SCOR offering. Entrepuerners who are extremely successful at their business ventures are not necessarily able to convert their business acumen into the promotion and sale of the securities of that business. And hence, the continued need for experienced broker-dealers and registered representatives.
In the next installment, we will address the mechanics of the SCOR offering process itself, and walk through a hypothetical SCOR offering.
Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article.SECLaw.com was created by and is sponsored by Mark J. Astarita, Esq., a securities attorney and partner in the law firm of Sallah Astarita & Cox, LLC, who represents all participants in the financial markets. Mr. Astarita can be contacted by email at firstname.lastname@example.org.
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Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.
He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page - SECLaw.com, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.