The Secret Traps in SCORs
In recent months there's been a lot of talk about SCORs -- small corporate offering registrations. SCORs, which have now been embraced by securities regulators in about half the states, permit companies to raise up to $1 million a year using disclosure statements that are substantially less complicated (and cheaper to prepare) than those required in more traditional public stock offerings. Given the number of states where the deals are permitted, there are no good numbers on how many SCORs are in the works. But it's already clear that SCORs aren't as simple as they look. Here are some pointers to keep in mind:
* It helps to have a ready group of investors. At the minimum, says Drew Field, a San Francisco securities lawyer, issuers should have customers who like the business and the management. "And ideally, you'll have a record of how to get in touch with them," he says. Real Goods Trading Co., a Ukiah, Calif., mail-order retailer of alternative energy products, for instance, had names, addresses, and phone numbers of more than 60,000 customers (and it eventually got more than 600 of them to buy stock). When Real Goods began selling its deal last winter, "it had a real advantage," says Field, who advised the company.
* The details usually take more time than you think. Even when you think you have prospects ready to write checks, the amount of organization and follow-up for SCORs is such, say people who have done them, that it can be hard to focus on anything else. Gail Yarnall, president of Dr. Cookie, a baked-goods business in Bothell, Wash., found she couldn't take charge of the company's offering and manage the business. "I didn't have a lot of time for the offering," she notes. Fortunately, she was able to delegate the SCOR-related responsibilities to her father-in-law, who is one of the company's directors; nevertheless, it took them a year to raise $189,250.
The more states you're offering in, the more complicated it gets. "While states are using uniform disclosure documents," Field notes, "they still require many different forms." And some states, including Texas and Arizona, require people selling SCORs to take courses and pass special exams.
* People ask lots of questions. Once prospective investors have the offering materials, don't expect the demands to ease up. "Somehow, you have to be able to respond to all kinds of investors' questions," says Mike Liles, a Seattle securities lawyer who is helping Dr. Cookie raise additional money. Some posers of questions ("Will the company pay dividends?") can be referred back to the offering materials. But answering others ("Is this a good way to save for my daughter's college education?") could get you into legal trouble. If you're doing a SCOR, advises Field, "you need somebody in place who can say to investors, 'I'm sorry, I can't answer that -- ask your accountant or your financial planner.' It's hard for CEOs to say that, but it's very important."
-- Researched by Karen E. Carney* * *
For those looking for more information on SCORs, Seattle law firm Bogle & Gates (206-682-5151) will send you a free collection of articles and documents. Also free: a package of materials on SCORs and investing in small companies from the state of Arizona's securities division (602-542-4242).