Private Placement Advisors LLC 





advising on exempt offerings to find investors.  

Rule 504/Small Company Offering Registration (“SCOR”)

The Small Company Offering Registration (“SCOR”) offers an optional method of registration that uses a question and answer disclosure document. It enables corporations and limited liability companies to raise up to $5 million during a period of up to 12 months. 


There are several advantages to a SCOR registration.  The question and answer disclosure document utilized in a SCOR offering was designed so that it may be completed without the expertise of attorneys and accountants. The form may be completed electronically and is used as the prospectus in soliciting investors.


"Merit" standards used by the Securities Division to review these registrations are somewhat more relaxed than those applied to larger public offerings.


SCOR offerings are designed to be exempt from registration under federal securities laws by virtue of Securities and Exchange Commission (SEC) Rule 504 of Regulation D or Section 3(a)(11) of the Securities Act of 1933 and Rule 147 promulgated thereunder, so registration with the SEC is not required.


Companies may use commissioned selling agents or sell the securities to the public themselves through classified ads or other means of mass solicitation, such as online. Investors are not limited as to number or type, nor is there any restriction on the amount that may be sold to any one person.


The Disclosure Document


The core of the SCOR registration is the Form SCOR Disclosure Document, Form U-7, which is presented in an easily understandable question and answer format. The form is designed for use by small and emerging businesses whose principals may prepare the form themselves without the expertise of attorneys and accountants experienced in securities laws. The questions presented in the form are designed to elicit specific types of information of special relevance to small businesses. These requests for information are more detailed than on general registration forms, so that persons using Form SCOR can more easily understand what information is being sought. Because a registration is involved, examiners from the Securities Division will comment on the disclosure provided and request different or more detailed disclosure if the answers are not sufficiently responsive.


Because investors can read the questions contained in the form, a "no" or "inapplicable" answer may itself convey information about the offering to the investor. Also, the form contains a number of notes directed to investors, indicating how they may use or interpret answers to certain questions. This approach is unique to Form SCOR and enhances disclosure to investors.

Another unusual aspect of the form is that its questions present issues that a small business should address to become successful. Thus, in providing satisfactory answers, a company is compelled to create a business plan describing, systematically, its anticipated steps to success. If the form is filled out properly, the assumptions and weaknesses in the plan should be evident, and these should be prominently disclosed in the order of their importance as risk factors in the offering.


The SCOR registration form may also be utilized for federal registration under Regulation A.


Relaxed Merit Review Standards


Because of the restrictions on the use of Form SCOR and the nature of the capital structure of small businesses, the Securities Division has relaxed certain of the tough merit review standards it usually imposes on registered offerings (please see WAC 460-17A-070). One of the merit standards that is applied is a modified version of the state's promotional stock rules. The formula for determining "promotional shares" is complex. From those shares issued to founders, management, or major owners of the corporation, a determination is made of those deemed "fully paid" shares. This is determined by dividing the amount of consideration paid in past purchases of the shares by 85% of the proposed public offering price in the offering. Tangible property used as payment in past purchases is counted at its fair value, if that is readily and objectively ascertainable.


As applied to SCOR offerings, there may be an unlimited number of promotional shares. However, those in excess of 60% of the shares to be outstanding after the offering must be in escrow for a certain period of time, usually four years, or until the company satisfies other release provisions in the escrow agreement. In lieu of an escrow, the company may enter into a lock-in agreement that does not involve the expense of a third party escrow agent. Shares held in escrow or lock-in are still outstanding and may be voted by their owners to retain control. All dividends and other distributions upon securities held in escrow, and any substitute securities or property received upon any merger or reorganization, must also be placed in escrow. The State of Washington Division of Securities has sample promotional shares escrow agreement and model promotional shares lock-in agreement.


Registration of the Offering


All offers and sales of securities must be registered or exempt from registration under both state and federal securities laws.


State Registration


Registration by qualification requires the filing of the SCOR form and other documents with the state for review prior to commencing the offering. 


The state applies several statements of policy regarding corporate equity offerings adopted by the North American Securities Administrators Association (NASAA) in the substantive review of SCOR offerings. The NASAA statements of policy are uniform standards used by many state securities regulators and cover various aspects of the offering including loans and material affiliated transactions between the company and its officers and directors, the number of shares or options and warrants issued to the company’s promoters, and the intended use of proceeds of the offering, among others. In applying the NASAA statements of policy, the state looks at the offering overall and consideration will be given to special circumstances surrounding SCOR offerings.

In a SCOR registration, the SCOR Form, Form U-7, is the disclosure document used to convey all material information about the company and the offering. 


A company completing the SCOR form will provide answers to questions about the background of persons operating the company (including compensation paid, percentage ownership in the company and any transactions between the individuals and the company), intended uses of the proceeds of the offering, the terms of the offering and the type of security being offered, the assets, liabilities and cash flow of the company, and risks associated with investing in the company. Additionally, the SCOR Form requires the company to disclose all other information that is material and necessary for a reasonable person to make an informed investment decision.


Federal Exemptions


The SCOR registration is designed to be exempt from federal registration with the SEC pursuant to Rule 504 of Regulation D or Section 3(a)(11) of the Securities Act of 1933 and Rule 147 promulgated there under. Rule 504 is an exemption from federal registration for offerings of securities by non publicly-held companies in an amount up to $1 million. It permits a company to sell its securities by advertising or other means of general solicitation and does not impose resale restrictions on the securities if the offering is registered at the state level. Currently, the SEC does not review offerings made pursuant to Rule 504.


Section 3(a)(11) of the Securities Act of 1933 and Rule 147 promulgated there under provide an exemption from federal registration for offers and sales of securities in any amount, but all securities must be offered and sold to residents of a single state. Rule 147 provides that issuers relying on Section 3(a)(11) must also reside and conduct business in the state where securities are to be offered for sale. Corporations and limited partnerships are considered residents of the state in which they are incorporated or organized. An issuer is deemed to be doing business in a state if it derived at least 80% of its gross revenues and those of its subsidiaries from such state, at least 80% of its assets are located in such state, the issuer uses at least 80% of the net proceeds of the offering for business purposes in such state, and the principal office of the issuer is located in such state.


Selling the Offering


The overwhelming majority of SCOR offerings are sold directly by the company. These offerings are frequently called "self-underwritten" offerings or "direct public offerings" (DPOs). Commissioned selling agents or finders may also be used. Mass solicitation may be used, including public meetings, advertisements, and the internet. Any type of investor may purchase any amount in the offering.


Past regulatory problems by potential selling agents in the offering, the selling agents' management, or 10% or greater owners may result in the disqualification of the selling agents. Selling agents must sell only on behalf of the company and not on their own behalf. Accordingly, firmly underwritten offerings are prohibited.


A selling agent or finder engaged in the business of selling securities must be registered as a Broker-Dealer with the Securities Division. Individuals receiving commissions or other compensation for selling securities in the offering must be registered as securities salespersons and have passed appropriate examinations. If the corporation is selling the securities directly without paying commissions, officers and directors of the company may become registered to sell the offering without taking any examinations. In that instance, registration is accomplished by filing a completed Form U-4 salesperson application and paying the required $40 licensing fee.


Proceeds of the offering must be placed in an impound with an independent bank or similar institution until the minimum amount necessary for the company to achieve its stated objectives is raised. The company may raise additional funds so long as their anticipated use is clearly disclosed. 


SCOR Requirements


There are several requirements an offering must meet in order to qualify for SCOR registration. The general requirements for conducting a SCOR offering are detailed below.


Types of Companies


All American and Canadian corporations and LLCs may use Form SCOR, with certain exceptions. Specifically, the form may not be used:

  • To register securities for resale on behalf of anyone other than the issuer itself;
  • By partnerships;
  • By companies in the business of petroleum exploration or production, mining, or in other extractive industries;
  • By holding companies, portfolio companies, issuers with complex capital structures, commodity pools, equipment leasing programs, or real estate programs;
  • By "blind pool" offerings (for which the specific business or properties cannot be described);
  • If the company, any of the company's management, or 10% or greater stockholders, have had certain regulatory problems in the past;
  • By any type of company whose securities are subject to registration with a governmental agency other than the Securities and Exchange Commission or a state securities regulator. (For example, the securities of banks and other financial institutions are regulated by separate agencies);
  • By public companies that report to the SEC under Sections 12 or 15(d) of the Securities Exchange Act of 1934.


Types of Securities


Form SCOR may be used to register common or preferred stock (including convertible preferred) and options, warrants, or rights, and membership interests in an LLC. If the company can show it will be able to meet debt service based on current earnings, Form SCOR may be used to register debt securities, including convertible debt. Common stock with lesser voting rights than other common shares may not be registered using Form SCOR.


Offering Size and Price


Up to $5 million may be raised each 12 month period using SCOR. In calculating this limit, sales in all jurisdictions must be included together with any other securities sold under SEC Rule 504 or under Section 3(b) of the Securities Act of 1933, or in violation of the registration provisions of federal securities laws. The offering price must be at least $1 per share (for LLCs, $1.00 per unit of interest), and the company may not split its stock or declare stock dividends for 2 years following effectiveness of the registration, except with the permission of the Securities Administrator or in connection with a subsequent registered public offering.

Securities sold in a SCOR offering are freely transferable. However, because of its small size, a public trading market is unlikely to develop following a SCOR offering. Thus, SCOR offerings are a form of early-stage venture financing, raising funds from investors solicited by means of advertising or other general solicitation, which, if appropriate, may be followed at a later stage by a more conventional public offering that would result in the development of a public trading market for the company's securities.


Financial Statements


Financial statements for the company's last fiscal year must be attached to Form SCOR. Financial statements must be prepared in accordance with generally accepted accounting principles (GAAP), complete with appropriate footnote disclosure. They need not be reviewed or audited by an accountant, though audited statements are strongly encouraged, especially if the company lacks qualified accounting knowledge. They also provide added comfort to prospective investors. Further, if you are planning to sell the offering in other states, you will need to comply with their requirements which often include reviewed or audited financial statements.


Other Programs of Interest


Coordinated Review-SCOR (CR-SCOR) is a coordinated review program available for companies that intend to conduct a SCOR offering in more than one state. This program streamlines the review process for the company, since the review of the offering is coordinated amongst the states in which the company desires to register. A lead review state is appointed to coordinate the review and a single comment letter is generated for all the states participating in the review. The company must work with only one state to resolve any registration issues, rather than having to deal with each individual state in which the issuer desires to register. For more information regarding CR-SCOR, please contact the Division or consult the CR-SCOR section of the Coordinated Review website at www.coordinatedreview.org.


Information on how to prepare a business plan may be available through Small Business Development Centers which are located throughout the state.


A nonprofit organization of retired business persons called SCORE often operates programs to assist entrepreneurs. Location of chapters around the state usually can be found in the white pages of the telephone directory. 


Prior to selling shares you need to complete the SCOR form and submit it to the various states where you plan on selling securities. 


Most states accept the SCOR Form. 


However, Alabama, Florida, Delaware, Hawaii, Kentucky, and New York do not accept the standard SCOR form; you need to contact each state’s Department of Financial Institutions to see what you need to file.  The purpose is to inform the state you are selling securities there.


Once you have sold your first security you need to file a Form D with the SEC within 15 days.

Rule 504 disclosure requirements are minimal. But it is important to note that specific states may have additional disclosure requirements and that you must give enough disclosure to avoid anti-fraud issues.


Re-sale restrictions:

  • If you sell securities in a state where you are registered, and follow their securities laws, re-sales are not restricted.  
  • If you register in a state requiring proof of disclosure, and then sell in another state that does not require it, your securities are unrestricted so long as you follow those same disclosures across all states.So it is easy to sell unrestricted securities if you follow the rules. Register with one state and keep to its’ standards in every other state. This can help reduce liquidity fears that a potential investor may have.  

Our Exempt Offerings Library includes books and audiobooks on crowdfunding, exempt offerings, and other topics.

Our monthly reporting service, Exempt Offerings Reporter, summarizes recent developments in the world of Blue Sky law and regulation. 

To get started or just to ask questions, email dslain@privateplacementadvisors.comDouglas Slain can be reached directly at 415-317-6130.