Raising Small Money

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

By Marilyn J. Holt, Holt Capital

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

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

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

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

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

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: Regulations and forms are

Arizona Corporation Commission Securities Division, at

Colorado, State of Colorado, Division of Securities 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,; Regulations and forms
are on-line.

Oregon Dept. Of Consumer & Business Services, Div. of Finance &
Corporate Securities; the URL for SCOR is
Regulations and forms are on-line.

Utah Department Of Commerce, Division of Securities, the corporate
finance URL is
Regulations and forms are on-line.

Washington Dept. Of Financial Institutions Securities Division: 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

To find the securities divisions of the other states, go to SEC
Guide to State Securities Administrators, the URL is

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


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

*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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