RELAXED SECURITIES LAWS AID SMALL BUSINESSES

BY DAVID GROSSACK

Financing a new or existing business is often a painful exercise. Approaching a bank is only helpful when a entrepreneur can show he has sufficient collateral to prove that no risk is involved in the bank lending him money.

This leaves many entrepreneurs or would be entrepreneurs out in the cold. Many new companies are never founded, products never brought to market, and inventions never made because the money was not there to make the project work. Thus the importance of seeking investors from the public.

The agencies which regulate the sale of investments to the public, such as the Securities Division of the Massachusetts Secretary of State and the Securities and Exchange Commission are confronted with conflicting missions. On one hand they wish to protect investors by requiring extensive disclosures from entrepreneurs who wish to raise money, yet on the other hand they want to avoid hamstringing the economy by making the process so cumbersome no new businesses are formed.

The Massachusetts Secretary of State's office has adopted a program promoted by the North American Securities Administration Association known as SCOR (Small Corporate Offering Registration). The SCOR program allows a simplified securities registration process which allows small businesses to go public by selling up to one million dollars worth of securities every twelve months. The program allows an entrepreneur to begin his or her company from ground zero using investor's capital contributions or permits an existing company to raise money for expansion, research or other purposes, so long as the uses of the money are disclosed fully.

Registration of stock through a SCOR offering is through a question and answer format; there are 57 questions asking about every conceivable matter which an investor would want to know, ranging from the job experience of the Board of Directors to the time period it will take for company operations to become profitable.

Audited financial statements to the extent available must be produced as part of the entrepreneur's disclosure package. Each time a SCOR offering is filed, the issuer (the company selling the stock) must file a 4 page Form D with the regional office of the Securities Exchange Commission which merely puts the SEC on notice that the offering is being made. No formal SEC registration is required even if you decide to sell shares outside of Massachusetts. However, you must send copies of your SCOR registration filing to the state securities administrators of each state in which you plan to sell shares.

So far, thirty-seven states permit sales of stock under this program. The program also sets a minimum price of $5.00 per share for each share of common stock sold in a SCOR offering. No stockbrokers are required to sell the shares. The Company may do it itself using the mails or periodical advertising.

The entrepreneur who decides to use this program to raise money should use capable lawyers and accountants to prepare the disclosure package (called a U-7). The risks of a mistake in the disclosure could precipitate suits by disgruntled investors or even criminal prosecution if the disclosures are misleading.

Despite the expense and risk of offering securities, the "going public" alternative is the only way many businesses will ever have of getting off the ground. Most people, of course, do not have access to a million dollars as risk capital. However, laws such as those that permit a SCOR offering make it possible to build a company accessing investors' funds with the hope that everybody will win.