He SCORs!

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It was in March 1991 that Schaeffer, who owned 100% of the company, first began to weigh the idea, and by that October, Real Goods was mailing formal prospectuses. He offered 200,000 shares at $5 each for a total of more than 7% of the company. Here's what he did in the next seven months:

Schaeffer wrote the prospectus using a computer program to guide him through the highly formatted SCOR preparation. It asked questions about the risk factors, the competition, and how the proceeds would be used. "That one was real fun," Schaeffer says, "seeing how easy it is to spend a million dollars in a half hour." Most state securities agencies provide the software free or for a nominal price, and it's available for $10 from the North American Securities Administrators Association, in Washington, D.C. (202-737-0900).

As the document developed, he and his lawyer traded it back and forth to refine it. "It was the sword and the shield concept: I'd write with a sword to try to make sales, and he'd write with a shield to protect us from getting sued. You learn how to talk in bland terms like 'there can be no assurances that . . .' " Schaeffer estimates it took about 80 hours of his time over three weeks to produce the 55-page document. Legal fees cost about $50,000 -- compared with the $200,000 he believes lawyers would have charged him to prepare a standard offering.

He hired Deloitte & Touche to prepare an audit of the most recent year's financial statements. That cost $16,000. For a traditional offering, a company as old as Real Goods would have been required to provide three years of audited financials.

He assigned the company a value of $14 million. "That's one of the hardest things because it's inherently arbitrary," Schaeffer says. He settled on that figure -- three times present earnings, two times projected earnings -- by comparing Real Goods with other catalog companies, such as Lillian Vernon.

Schaeffer hired a Ukiah stockbroker to be the company's order-matching service. In effect, the broker was the stock exchange for the company, keeping the lists of people who wanted to buy and sell stock after the offering was closed.

The company registered in 11 of the 22 states that then allowed SCORs. The filing was the same from state to state, with the addition of a separate one- to two-page cover sheet. The states charged registration fees ranging from $50 to $2,000.

Schaeffer focused on how and to whom he should pitch the sale. He picked Real Goods customers residing in SCOR-processing states who had spent more than $75 in the two most recent years. To those 15,000 people, Real Goods mailed a tombstone -- a notice of the offering -- and a return envelope. Some 5,000 people requested a prospectus, and within six weeks Schaeffer had commitments for the first $400,000, the minimum for the offering to be a go. By the end of January 1992 it was fully subscribed by 750 new shareholders. He had to turn away $350,000.

Things have worked out quite satisfactorily. Fees totaled about $130,000 on the $1 million raised, or 13%, an amount he considers extremely efficient. The regulatory paperwork requirements have been negligible. He had to submit a filing with the SEC when the offering was completed but not much more. Although it's not mandatory, Real Goods issues quarterly stockholder reports as well as a company newsletter. "The time requirements have mostly been reading stockholders' letters and taking their phone calls of suggestions and ideas," Schaeffer says, "not a tremendous amount of time."

The payoffs of what Schaeffer calls "joint ownership," have been considerable. The $870,000 that Real Goods netted came essentially with no strings attached. Shareholders have become fiercely loyal zealots on behalf of the company. And the company's profile has heightened as Real Goods has become one of the most successful models of how a SCOR works.

Still, the company continues to grow, and so of course do its needs. Schaeffer has applied to the Pacific Stock Exchange and is in the process of filing a new stock offering, called a Regulation A offering, through the SEC. Recent changes in the Reg A procedures allow a company to raise up to $5 million, using the same simplified SCOR paperwork.

He can't talk much about his Reg A offering because of the SEC-mandated "quiet period." He does say, though, that he chose Reg A as the next step -- rejecting, again, a full-blown offering -- because of its lower costs and because he simply didn't want to use underwriters and get involved in "the hype-ishness of it all." Instead, he hopes to repeat "that certain magic of doing it in-house."

TO MARKET, TO MARKET TO BUY A FAT PIG (IN A POKE?)

Regulators persevere in trying to enable small businesses to raise money more easily without unduly jeopardizing the funds of unsophisticated investors. With those goals in mind, the Securities and Exchange Commission last summer adjusted its regulations in several ways:

Regulation A offerings may now raise as much as $5 million, up from $1.5 million.

Small-corporate-offering-registration (SCOR) documentation is acceptable for Reg A filings.

Rule 504 now permits SCOR companies to advertise their offerings.

Companies with revenues of less than $25 million may file offerings using a streamlined disclosure document, Form SB-2, that replaces the more exhaustive Form S-18.

The investor, however, had best beware. Directors of state securities agencies who belong to the North American Securities Administrators Association (NASAA) maintain that the changes go too far in opening up the process. In a letter to the SEC, NASAA charges, "You are embarking on an attempt to facilitate the sale of the riskiest securities in the market to the least sophisticated of buyers . . . . [W]e believe that the Commission has become too eager to favor small-business concerns over those of the small public investor."

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