SCOR and Startups
Article on Securities Law
A series of articles provided by Michael T. Raymond, a securities attorney with the Detroit, MI, law firm Raymond & Walsh, and an Adjunct Professor at the Wayne State University Law School.
The purpose of this series is to acquaint readers with the basics of securities law. Securities law governs the raising of capital for business purposes.
9. SCOR Registration
The author recently had the good fortune of participating as a panelist at the Midwest Securities Institute in Dearborn, MI. Among the other panelists was Mr. Charles L. Tyson, Director of the Michigan Corporation and Securities Bureau. Among other things, Mr. Tyson reported on the Bureau’s initiative towards adopting Rule 803.11, which provides an optional method of registration for small corporate offerings in Michigan.
Although it may not be readily apparent to the untrained eye, this rule change, once adopted, should benefit entrepreneurs and small businesses in their capital formation efforts.
Readers may recall our previous discussion of Regulation D and, in particular, the availability of an exemption from federal registration under Rule 504 for offerings which did not exceed $1 million. As a result of the SEC’s recently adopted small business initiatives, Rule 504 now effectively permits a “public” offering to an unlimited number of investors, generally without any federally-imposed limitations or requirements (other than an information filing with the SEC and anti-fraud considerations).
The corollary, however, is that these offerings must find an exemption, or be regulated, at the state level.
Most states offering exemptions (including Michigan) impose conditions which limit the maximum number of investors, mandate certain disclosures, require investor suitability or sophistication levels, and/or prohibit general solicitations. The result, of course, is that a true “public” offering cannot be conducted in reliance upon these state exemptions.
Therefore, the most likely mechanism for a small business to conduct a “public” offering of $1 million or less will be a Rule 504 federal exemption working in tandem with an effective state registration.
At present, Michigan requires the filing of a comprehensive registration packet (known as Form U-1) which must be declared effective by the Bureau in order to obtain clearance. The Form U-1 registration package is no different than that required for multi-million dollar public offerings by large companies.
With the adoption of proposed Rule 803.11, a company would be allowed to use an alternate and more simplified form of registration (known as Form U-7) for Rule 504 offerings.
This alternative form of registration would incorporate a disclosure/registration format (known as SCOR) which was jointly developed by the American Bar Association and the North American Securities Administrators Association, Inc. The SCOR disclosure form consists of fifty relatively straight-forward questions and answers. Accordingly, the regulatory level of compliance for SCOR registrations will not be as demanding (and costly) as that applicable to Form U-1 registrations.
In sum, the Michigan Corporation and Securities Bureau has responded to a portion of the SEC’s small business initiatives by proposing a rule change which would ease the state registration requirements for Rule 504 small corporate offerings. This is a positive development for small businesses in Michigan. The author encourages readers to seek additional information.