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Raising Small Money

By Marilyn J. Holt, Holt Capital
Money is the lifeblood of any company, but early-stage companies are too immature to generate their own, so they need infusions of capital from outside sources to survive. The ability to secure this quickly is vital.

You know that if people had invested in your company instead of Enron, they would be money ahead and singing your praises, not writing off the whole investment. You have a good idea, a great product, and a world-beating way to deliver it. However, your company does not fit the mold for venture capital:

* your company does not need very much money
* your product is still early-stage high-tech;
* your company is really Main Street,
* your company most likely will not attract later-stage venture capital.
* You still need money. Since there is little magic afoot for early-stage companies, you have to take positive steps.

If your best bet is OPM (other people’s money), and you truly believe that you can provide your shareholders with real value, then there are some avenues beyond friends and family investors available to you. Can you say “yes” to these two statements?

If we had $500,000, this company would be a success.

We could not justify investments of over $2,000,000 within the next two years.

If “yes” is the answer to both, then you probably should be considering using the small business, or small company offering.


While we usually think of state securities divisions as the regulators ready to jump on us if we step out of line (and they will), they have another “core mission”, and that “is to promote small business capital formation.” Yes, the states have programs to help you raise money. Since one of their other core missions is to protect unaccredited investors, the forms are cumbersome (they have gotten better over the years), and you have to prove that you are legitimate, which is why the forms are unwieldy. Nevertheless, these offerings provide small business a way to raise money legally. Sometimes these offerings are called “direct public offerings” (DPOs) or “self-underwritten” offerings, because the company itself, and occasionally a consultant, “sell” the stock.

All offerings are called “investment vehicles,” so let’s think of these in terms of cars. Initial Public Offerings are like Ferraris (and cost much more). Venture Capital is like a Mercedes limousine. The Reg D 506 offering is like a comfortable family sedan. Each of the small business offerings are more like a Neon, well-known as a starter car, although lots of folks buy them because they are inexpensive and fit their needs.


The 506 Reg D (more properly call Rule 506 under Regulation D) offering is federally regulated, and excludes the states from any real jurisdiction over them. This is the most common type of offering being done in the early-stage community, particularly when the company is aimed at venture capital investment. The 506 Reg D offering differs in several key ways from the state small business offerings. In some ways it is a very limited type of offering, since it cannot be advertised, and is limited in the number of unaccredited investors. However, it does not have as rigorous financial reporting requirements or the financing limits that characterize the small company offerings. The 506 Reg D offering gained popularity in the 1980s and 1990s because it simply worked the best. For companies that need to raise many millions of dollars from a few investors because of the venture capital investment firms’ preference for few early investors, it still works best.

However if your company can survive with only one million dollars within any twelve-month window, the state’s small business offerings may work best for you. If you or your advisors have not looked at the regulations for raising money in the past four years, you may be surprised by the changes.

The Small Company Offering Registration (“SCOR”) allows corporations and limited liability companies (LLCs) to raise up to $1 million during a period of up to 12 months through the sales of securities to the public. It is formed under the 504 Reg D (Rule 504 Regulation D) requirements.

These vary among states, and Washington State has become a leader both in programs offered and in helping companies in this process.

Some of the requirements are less rigorous than for the 506 Reg D. Advertising, or mass solicitation may be used, including public meetings, advertisements, and the Internet. You can use commissioned sales people or finders. Perhaps most important, any type of investor may be included, both accredited and unaccredited, and they can receive any amount of the company from their investment.

However, since unaccredited investors can participate, the reporting is more rigorous. The financials must be prepared to GAAP (generally accepted accounting practice) standards, and the type of information allowed with-in the offering document, which is in the form of a preset group of questions, is quite narrow.

Companies that have used the SCOR offering, complain that the vision for the company cannot be explained well because of the limitations of the form. The other complaint is one that is beyond state control, and that is the lack of qualified accountants to produce GAAP standard financials in a timely and cost-efficient manner. Unfortunately, most accountants and bookkeepers are not able to do this. Also, few attorneys have focused their practice on this area, which means that it is difficult to find good legal advice concerning the SCOR offerings.


There are several types of SCOR offerings. The simplest one is the SCOR offering outlined above, and it can only be done in one state.
If you have reason to believe that you can raise a substantial portion of your equity investment in other western states, the Coordinated Review — SCOR-West (CR-SCOR-West) should be considered. You would register in each state in which you want to make the offering, and one lead state coordinates the comments from all participating states regarding the offering. (There are other regional review programs.)

The participating western states are Alaska, Arizona, Colorado, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington, Wyoming. California does not participate. The coordination has the general affect of making your company conform to the most restrictive of the state regulations.

For companies that may have already raised money, and are planning to be publicly traded on the OTCBB, NASDAQ Small Cap, Pink Sheets, or other exchange, the 40-state Coordinated Review-Equity (CR-Equity) may be most effective. While it coordinates the money raising blue-sky registration process in participating the states, the net affect has been to make the rules governing the offering conform to the most restrictive among the states. in which the issuer seeks to sell. The CR-Equity offering is designed to raise money in the range from $5 million to $20 million dollars.

The SCOR process is intended to be “low-cost”, however low-cost is a relative term. The largest single cost most likely will be your GAAP conforming financials. These have to be prepared basically back to day-one, although there are legal ways to reset day-one. Because Washington is a merit review state, legal review by your attorney may not be required, but it may be advised since mistakes you make on the disclosure forms will have to be corrected and reviewed by the state. The state will report its review of your documents in a comment letter. The process is designed to take no less than 30 days, so you should be prepared for three or four times as long, because there probably will be corrections and clarifications required. You will also have to maintain your financials, because as the process goes on so does you business, and the requirements for timely financial reporting move forward, too.


The best place to start considering the SCOR process is by visiting your state’s securities division web site. You need to closely study the forms and requirements before you make a decision. Before you commit to raising money, do your strategic planning, and determine how much money your company is going to burn through to get it to the corporate goals, or at least breakeven, which should be self-supporting. Think about the industry that you are in, the investors who will be attracted to your company, and how much time you need. You may find that a SCOR offering is right for you.

Further reading:

Securities Contacts For The CR-SCOR-West Participants

Alaska Dept. Of Community & Economic Development, Division of Banking, Securities & Corporations; URL: http://www.dced.state.ak.us/bsc/secur.htm. Regulations and forms are on-line.

Arizona Corporation Commission Securities Division, at

Colorado, State of Colorado, Division of Securities
http://www.dora.state.co.us/securities/u7off.htm: Regulations and forms are on-line.

Idaho, Idaho Dept. Of Finance Securities Bureau,
A form is available in Adobe Acrobat.

Montana Office Of The State Auditor, Securities Department, needs to be written at P.O. Box 4009, Helena, MT 59604, or call 406-444-2040 // Fax: 406-444-5558.

Nevada Office Of The Secretary Of State Securities Division, needs to be written at 555 E. Washington Ave, 5th Floor, Las Vegas, NV 89101, or call 702/486-2440 // Fax: 702-486-2452.

New Mexico Regulation & Licensing Dept., Securities Division,
http://www.rld.state.nm.us/sec/smallbus.htm; Regulations and forms are on-line.

Oregon Dept. Of Consumer & Business Services, Div. of Finance & Corporate Securities; the URL for SCOR is http://www.cbs.state.or.us/external/dfcs/securities/reg/registration.htm. Regulations and forms are on-line.

Utah Department Of Commerce, Division of Securities, the corporate finance URL is http://www.securities.state.ut.us/corpfin.htm. Regulations and forms are on-line.

Washington Dept. Of Financial Institutions Securities Division: http://www.dfi.wa.gov/sd/smallbusiness.htm Regulations and forms are on-line. You can also call Faith Anderson or Patty Loutherback at 360-902-8760 (ask for the Small Business Section), or send an e-mail from the web site for answers to your questions or, better yet, to arrange a meeting. Washington leads in state support of these programs by providing knowledgeable help.

Wyoming Secretary Of State, Securities Division; the corporate finance URL is http://soswy.state.wy.us/securiti/forms.htm.

To find the securities divisions of the other states, go to SEC LAW.com
Guide to State Securities Administrators, the URL is http://www.seclaw.com/stcomm.htm.

Marilyn J. Holt, CMC, CEO of Holt Capital, a Registered Investor Adviser, brokers debt and equity for small and medium sized businesses, and mergers and acquisitions. Holt Capital develops funding solutions for startup, expansion, turnaround, and exit stage companies. She may be reached at 206-676-3822, by e-mail at [email protected], or by visiting www.holtcapital.com.

Who is Marilyn Holt?

Marilyn Holt
Chief Executive Officer and Chairman of the Board
Holt Capital

Marilyn J. Holt, CMC, helps create innovative, high-performance, high-value organizations that improve every day life, and provide mental, spiritual, and financial value to all who are shareholders and stakeholders. Marilyn works with talented, creative associates who focus on small- to medium-sized businesses.

*CMC (Certified Management Consultant) is the certification mark awarded by the Institute of Management Consultants USA and represents evidence of the highest standards of consulting and adherence to the ethical canons of the profession. Fewer than 1% of all consultants have achieved this level of performance.

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