October 1991
Eighteen states, including Massachusetts, have now adopted the Small Corporate Offering Registration (SCOR) Form (Form U-7) as a standard disclosure filing and offering document for small public offerings of securities exempt from federal registration under Rule 504 of Regulation D. Developed through a joint effort by members of the American Bar Association and the North American Securities Administrators Association (NASAA), Form U-7 is intended to replace (or at least satisfy) the patchwork registration requirements that currently exist from state to state.
Unlike the federal qualification requirements under Rules 505 and 506 of Regulation D (which provide exemptions from registration for larger private offerings), Rule 504 allocates primary responsibility for the regulation of small offerings to the states. Rule 504 provides an exemption from federal registration for offers and sales of up to $500,000 of securities in any twelve month period, or up to $1,000,000 of securities if the securities are registered under the securities laws of the state in which they are being offered.
Although Rule 504 was intended to enable small placements of securities to get to market without overly burdensome regulation, until recently, few states had appropriate small offering provisions to allow offerors to take full advantage of this exemption. Often, the state registration requirements proved to be too extensive and the limited offering exemptions too restrictive for small companies to benefit from Rule 504.
Form U-7, as promulgated by NASAA and adopted by Massachusetts, is a thirty page, fill-in-the-blank questionnaire designed to be completed by a company, without the need for a securities law specialist. Its use will be available to most private companies. Upon registration with a state, the securities covered by the Form may be offered publicly within the state (that is, certain types of advertising will be permitted). Unfortunately, the registration will not permit purchasers of such stock to freely resell their securities in the open market, as they can with stock purchased in the more usual type of public offering.
Despite the standardized form, registration under Form U-7 still is not be simple. The Form is extensive and requires significant input by the company’s accountant. For example, audited financial statements are required for offerings over $500,000. Additionally, it remains to be seen how much disclosure the Massachusetts Securities Division will require from an issuer in responding to the questions posed in Form U-7.
TLB Comment : Despite its shortcomings, SCOR may prove to be a useful alternative for small businesses in raising capital. Form U-7 establishes very useful parameters for disclosure, which has always been an area of concern for small offerings. Furthermore, if adopted by more states, SCOR may provide small businesses the ability to effectively conduct regional public offerings under Rule 504.
Although SCOR should not be viewed as a replacement of the other exemptions from registration, its adoption represents a useful step in assisting local companies to secure the funds they need to fuel their growth.