Raising Up to $5 Million With an Internet Direct Public Offering
This handout discussess direct public offerings, SCOR offerings, 25102(n) offerings and is intended to be a primer only: it does not cover all of the
many details concerning these exemptions and it generalizes in many places. Visit our Securities Section for more information.
Why do a DPO (Direct Public Offering)?
Venture capital firms increasingly do not want to handle
fund- raising of less than $5 million. In addition, the price of venture
capital is often loss of control of the business. With DPO's, the founders
can frequently retain control.
IPO's (Initial Public Offerings) are very expensive
and time consuming because the securities must be fully registered on
the state and federal levels. (Often it takes two years or more and the
costs frequently exceed $250,000.) It IS possible to sell stock if the
offering falls within an exemption to the registration requirements. The
problem is that exemptions to registration generally don't allow any advertising.
The primary exceptions are two types of DPO's:
- SCOR, the Small Corporate Offering Registration exemption (also known
as the Uniform Limited Offering Registration or ULOR), and
- The California 25102(n) exemption, which does
not have a catchy name, but which might be called the Qualified Purchaser
SCOR Offerings for California Companies
- The company can raise up to $1 million in 12
- Limited public advertising is permitted, but
caution should be used.
- There is no limit on the number or qualification
- If the offering is "open" resale is
not restricted. (A limited qualification is restricted to specified
Restrictions on types of companies
- The company cannot be a "blind pool"
or "blank check" company (basically a company that has no
specific business plan or purpose or that intends to merge with or acquire
- The company cannot be an investment company (primarily
engaged in investing in securities of other companies or with 40% of
assets invested in other companies).
- Certain oil, gas or mineral companies cannot use the exemption.
- The minimum price is five dollars ($5) per share.
- Only one class of stock is permitted.
- There can be no stock splits, stock dividends,
spinoffs, or mergers for a period of two years from the close of the
- The net proceeds from the offering must be expended in the operations
of the business (not, for example, for retirement of debt).
- Financials must be audited and unqualified for
an open qualification. (Again, a limited qualification is restricted
to specified qualified investors.)
- However, small business issuers (revenues of
less than $12.5 million with more than half of the shareholders in California
and meeting certain financial formulas) selling not more than $500,000
worth of stock may be able to use financials that are merely reviewed,
even with an open qualification.
25102(n) Offerings for California Companies
- The company can raise up to $5 million.
- Unaudited financials are permitted.
- There is no minimum share price.
- There is no limit on the number of investors.
- The company can use "test the waters" advertising with little
restriction prior to an offering to gauge interest.
Restrictions on types of companies
- "Blind pool" ("blank check") companies and investment
companies and certain oil, gas or mineral companies cannot use the exemption.
- Only one class of stock is allowed.
- An announcement (tombstone) of the offering may be publicly advertised.
However, only a brief description of the business of the issuer is allowed.
(No financials, projections etc.) More specifically the following items
(1) The name of the issuer of the securities.
(2) The full title of the security to be issued.
(3) The anticipated suitability standards for prospective purchasers.
(4) A statement that: (a) no money or other consideration is being solicited
or will be accepted; (b) an indication of interest made by a prospective
purchaser involves no obligation or commitment of any kind; and (c)
no sales will be made or commitment to purchase accepted until five
business days after delivery of a disclosure statement and subscription
information to the prospective purchaser in accordance with the requirements.
(5) The following legend: "For more complete information about
(Name of Issuer) and (Full Title of Security), send for additional information
from (Name and Address) by sending this coupon or calling (Telephone
Number)." In addition, the announcement may also provide the following
(6) A brief description of the business of the issuer.
(7) The geographic location of the issuer and its business.
(8) The price of the security to be issued, or, if the price is not
known, the method of its determination or the probable price range as
specified by the issuer, and the aggregate offering price.
- Actual sales (and telephone or other contact) may only be made to
"Qualified Purchasers" or to officers, directors and their
spouses. Qualified Purchasers are businesses with more than $5 million
dollars in assets, and individuals with either: (a) a minimum net worth
(in conjunction with their spouses) of $250,000 and gross income in
excess of $100,000 or (b) a minimum net worth of $500,000.
The value of the home must be excluded in both cases.
Moreover, the amount of the investment of each individual cannot exceed
10 percent of the net worth of the individual.
Unaudited financials are allowed only for a limited
(vs. an open) offering.
Selling across state lines
- Generally you have to file forms in each state
where you make sales.
Regional registration of SCOR is possible.
- If sales in another state are minimal, you may
be able to get a waiver from the securities administrator.
Federal filing is required if you sell across state
- For less than $1 million, Regulation D (Rule
504; Form D) is often used.
- For less than $5 million Regulation A (Form 1-A)
is often used.
Electronic delivery of the prospectus
You must obtain the investor's informed consent that
the investor wishes to receive the document electronically and be able
to prove that the investor in fact has successfully received it.
Audited financials may be needed to attract qualified
investors, to allow the shares to be freely traded or to allow listing
on a stock exchange.
Ways to get word out on the offering (where the securities
laws allow them):
- Electronic press release companies, such as Business
Wire and PR Wire, can issue a press release listing the offering Web
- ACE-net (operated by the Small Business Administration)
charges only $450 per year to list a SCOR offering http://acenet.csusb.edu/.
Mail can be sent to customers, vendors, potential joint
Brokers can be used; they will charge 7 to 20 percent
How long does it take to do the paperwork and get
It varies, but generally four to six weeks on the paperwork,
and 90 to 120 days to raise the money.
How easy is it to trade DPO stock?
It depends, but investors need to understand that it
is nowhere near as easy as selling stock in a publicly traded company.
What's the cost?
This depends greatly on whether the amount is less than
$1 million or less than $5 million, on the state where the company is
located, on the states where sales will be made, etc. However figure $10,000
to $30,000 in attorneys' fees and filing costs. (Accounting fees are extra.)
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Copyright 2004 Bruce E. Methven, All Rights Reserved.
The foregoing article constitutes general information only and should not be relied upon as legal advice.