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| Sell to using a the SEC's SCOR |
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| Sometimes called the
"do-it-yourself" stock offering |
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#7 Sell to everyone and anyone
Transcript Segment - Exit Strategies &
Liquidity |
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| HATTIE: #7, sell it over time to the general
public through one of the direct public offering instruments. |
| HATTIE: (Voiceover) The people of Blue Whale
movers really move on the job, and that's one of the reasons this Austin,
Texas, company has been so successful. When the owners wanted to grow the
business, they needed additional money, and they raised it through a Small
Corporate Offering Registration. |
| DAVID PORTER: It cost them a lot of money.
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| HATTIE: (Voiceover) Stockbroker David Porter has
helped them. |
| DAVID: The company needs a very well-defined,
thought-out business plan that will enable people to look at the company and be
willing to put money aside for four years, five years, two years, whatever it
turns out to be, while they're waiting for that company to effectively employ
their money. That's generally the way it works. Generally, people are patient
and their reward comes at the end of some period of time. |
| RAY: An employee's stock ownership program is a
way to get employees engaged and involved in the company so they think and act
like owners. But also a way for the owner to sell the company in a very
effective way so he or she gets liquid as effectively as possible. So it helps
the founder, the original owner of the company, and if it's done right, it
helps the employees succeed as well. |
| HATTIE: All right. But with a SCOR offering, the
individual who bought into my business is going to hold onto those shares until
they find someone to buy it from them. |
| DAVID: Well, there are several reasons that they
want to do that, not the least of which is a tax reason. If you purchase most
of these small corporate offerings, the majority will qualify under Section
1202 of the tax code, which means that if you hold them for five years or more,
whenever you sell them, you get to exclude 50 percent of the capital gain from
taxation. |
| HATTIE: So that's a good reason to buy a SCOR.
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| DAVID: That's one good reason to buy a SCOR.
Another reason is, that the company may qualify under Sections 1244 or 1245,
which say that if you sell that stock and make an equal investment in another
qualified company, you at least defer that tax. You don't pay the tax on it
right now. Additionally, you have the ability, if things really go badly for
the company, that you may be able to write the entire investment off as a
direct write-off against your taxes, rather than have to take it as a capital
loss. |
| HATTIE: All right. So tell us why small business
deserves our investment? |
| DAVID: Small business deserves your investment
because it has the potential of making you more money with tax advantages that
are not available in large companies. |
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| Understanding wealth and capital formation |
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| Case Study
Guide |
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| The Initial Public Offering is relatively well
examined. Direct Public Offerings (DPO) are not. Little known among DPOs is the
Small Corporate Offering Registration, known as a SCOR. It is an option for any
small business owner who is willing to learn about it. It is a way to directly
offer ownership in your company to employees, family, friends and investors you
have never met. |
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Topic for Discussion: Since the United
States Congress and the Securities and Exchange Commission put the regulations
in place in 1982, then simplified them in 1989, followed by the emrgence
thereafter of the SCOR document, why are so few taking advantage of this
financial instrument? |
| Answer: Because it does take a little
effort to understand the process and most of us are not even aware that the
SCOR exists. |
| Brad Armstrong of Blue Whale Movers said the SCOR
is an option for him while organic growth, venture capital and banks are not
options because he has a big goal that would take a large amount of cash. He
and his partner had already exhausted their own cash reserves, the profits from
the Austin location were not great enough to take away and apply to another
location, the banks are too cautious and the venture capitalists and angels
wanted to own at least 40% of the company if they were to invest. By doing a
SCOR, Brad offered just 10% of equity in the company to a number of individual
investors. |
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Topic for discussion: Why would an investor
buy stock in a privately-held company? |
Answer: To make money and for a sweet tax
break. A big part of figuring out if the SCOR is the right vehicle for you is
determining if the investment would be attractive to others. Remember, there is
no secondary market for SCOR investments. If you buy stock in a publicly traded
company listed on a stock exchange, you can sell it when the price goes up or
down and you want to divest yourself of the investment.
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| Not so with investments made under a SCOR. There
have been several attempts to develop a secondary market based on SCOR
offerings, but they have all collapsed becase the numbers are too small --too
few businesses, too few brokers, and such little numbers -- the fellows in the
big market just think it's a waste of time. |
| Individually, it could work for you if you are
able to provide the investor with a return, e.g., a proposed dividend schedule
and an exit strategy. The investor's exit is tied to yours. Ultimately, do you
intend to sell the company? Go public? The investor will require answers to
these important questions and a timetable to evaluate the investment
opportunity. |
| Topic for discussion: What does it take to
execute a SCOR? |
| Answer: Unlike the initial public offering
(IPO) under the Securities and Exchange Commission (SEC), a complicated,
expensive process, the SCOR is under your state's Securities Commissioner; and
by comparison, it is a fairly inexpensive and straightforward way to go public.
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| David Porter said you need an attorney, an
accountant and a stock broker. Tom Stewart Gordon estimated a total cost of
about $30,000. The IPO process costs well over $1 million in underwriting,
legal and accounting fees. If you are interested in investigating a SCOR
further, start by obtaining the downloadable SCOR issuer's manual, SCOR, Small
Corporate Offering Registration, How to Complete the Question and Answer
Disclosure Document for Your SCOR or Reg. A Filing from the website of the
North American Securities Administrators Association at http://nasaa.org.
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| This 100+ page manual has a soup-to-nuts
description of what you need to know about the application process. Here's an
excerpt from the beginning of the issuer's manual: "Part I of this Manual
informs you of the general requirements to use and file the Form U-7, called
the "SCOR Form." |
| Part II of the Manual provides specific directions
on how to fill out the SCOR Form. Once completed, the SCOR Form may be filed as
the main disclosure document for offerings being registered in all states
accepting SCOR." Part II has a separate section for each of the 50 questions of
the Form U-7, making it a user friendly document when a number of different
people contribute to the preparation of the prospectus. You could answer some
of the questions yourself while employees and/or outside consultants answered
others. That way you could minimize your cost and still produce a high quality
disclosure document. At the same site, you can obtain the necessary forms for
filing in MS Word, further facilitating the document preparation. |
| You think about it: Can you imagine having
shareholders? What would you do with the money you could raise with a SCOR?
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