Direct Public Offerings (DPO) come in various formats that entrepreneurs can utilize to go public without broker dealers or costly compliance costs. It is worth it for entrepreneurs to learn about which are the two most common direct public offerings, as Ben & Jerry’s was one of these success stories. As opposed to Initial Public Offering, the DPO removes middlemen and allows issuers to sell stock directly to investors that may not be accredited investors.One DPO is the Small Business Offering Registration—SCOR—which was created 1980. It was 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 thereunder. It limits the raise to under $1 million and requires state merit based application.The merit based application state-by-state is one of the reasons that this option is in limited use. Yet again, the merit base was intended to relax the rules for this option. While Regulation D, 506 form-D is readily accepted by all states when doing an unlimited raise offering under 506, the DPO under 504 is limited to $1 million and needs each state to conduct the merit review. We interviewed experts who have confirmed that some states’ intern law students handling the merit review would reject an application for not having a lower case c in the wording of Company.
Another advantage with SCOR pursuant to SEC Rule 504 of Regulation D is that its application and private memorandum is shorter and would be able to be filled without the accountants and lawyers who normally represent the largest expense in an offering.
Another large advantage is that the offering can be sold to the general public in the registered states almost without restrictions.
Finally, you do not have to comply with the accounting and compliance costs associated with the 2002 Sarbannes-Oxley Act nor do you have to report 10K and 10Q reports under the SEC. This is a large reduction in overhead. Yet again, many firms will choose to comply with these rules to create more transparency and governance in their operation, especially should they want to have an exit or go IPO.
TWO DPOs are also possible under the SEC Regulation A exemption with a Federal application to do a more advance SCOR filing that would allow you to seek capital from potentially all 50 states. It was recently part of the JOBS Act Obama signed into law April 5, 2012. Unfortunately the many Congressional chefs in the kitchen failed to implement a deadline to the amended Regulation A+ that promises small businesses to will be able to raise $50 million instead of the current $5 million raise. SEC consequently have no pressure to pass it into law.
Yet again, it faces the same advantages but the multiple disadvantages of SCOR filings as you have to gain merit reviews from most if not all states. Regulation A is the current legal crowdfunding law of the US—allowing you to raise capital via general solicitation. Unfortunately, it is archaic, time consuming and highly misunderstood. The Soho Loft business intelligence division has deconstructed it and has an insight to what can be accomplished.
Head of Corporate Strategy at The Soho Loft Business Intelligence Enzo Villani, a former head of Corporate Strategy at Nasdaq, says that regulation A was part of the JOBS Act as an extension of SCOR. It allows for small businesses to get a light and less complicated and less expensive version to raise money from the general public versus a S-1 / IPO application that can run to several hundred thousands of dollars. David Weild, former Vice Chair of Nasdaq, was a sub congressional witness to have this Regulation A+ pass last fall and adds “Regulation A’s promise was to create capital for small enterprises. It is highly misunderstood and misplaced both by lawyers, broker dealers and regulators. By increasing a raise from $5 million to $50 million it allows it to become a financially viable alternative for crowdfunding. It seems to me The Soho Loft seem to have identified how to allow this play to flourish.”
Obviously one of the requirements would be for a firm to have audited financials, as the accounting costs are higher than the legal counsel for a Regulation A pursuit. Regulation A was created for firms to be able to do a direct public offering without lawyers and broker dealers.
A recent example of a regulation A offering is the Broadway show Godspell by Kevin Davenport. He used Regulation A to raise capital last July.
By deconstructing Regulation A we can potentially realize the promise of a crowdfunding financial tool alternative to crowdfunding for equity. And yes, there are other variances of Direct Public Offerings—the most famous being the Regulation A offering by Ben & Jerry Ice cream. Look to The Soho Loft to advise you about how to truly do a crowdfunding for equity offering in 2013— a financial tool that SEC already approved 30 years ago.