June 9, 1997

Small firms score victory with new SCOR offering law

Law eases paperwork for stock offerings

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Tim Huber Staff Reporter

heoretically, raising capital is about to get much easier for small Minnesota corporations.

Legislation signed into law recently by Gov. Arne Carlson brings Minnesota into the fold with at least 43 other states that have embraced the Small Corporate Offering Registration (SCOR) program. Developed in 1989 by the North American Securities Administrators Association, SCOR is designed to ease the bureaucratic burden placed on small companies attempting to raise capital through stock offerings.

SCOR also is designed to make securities regulation for small companies uniform among the states. Under the program's rules, businesses can raise up to $1 million annually with a minimum of paperwork. Instead of hiring a lawyer or investment banker to write a prospectus, a company need only fill out a 50-question form, called a U-7, that serves as a prospectus.

"This is something that they've been trying to do for the last few years here in Minnesota," said Denise Dimler, spokeswoman for the state Department of Commerce. "What we're really trying to do here at the state is trying to promote it for smaller communities to use it as a tool for their economic development."

Dimler hopes small companies can attract investment from local economic development agencies interested in creating economic activity.

For early-stage companies, the SCOR legislation should be a big benefit, said Michael Schley, a partner in Larkin Hoffman Daly & Lindgren, a Bloomington-based law firm. "There has been a void in the ability of early-stage companies to raise funds," Schley said. "It opens up the door for financing to those people who do not have a lot of contacts who can afford to invest $25,000 and $30,000 each."

Larkin Hoffman already has three SCOR offerings in the works. "There has been some pent-up demand," Schley said.

Companies Schley expects to benefit have been unable to get money either from well-off contacts, friends and relatives or have lacked justification to raise enough money to interest a securities firm in underwriting a private placement of stock.

Though the SCOR bill essentially went through the Legislature unchallenged, not everyone likes it.

"The SCOR legislation that was adopted is of no use to SolarAttic," said Ed Palmer, president of the Elk River-based corporation. SolarAttic Inc., which makes solar heating devices, plans to take advantage of SCOR, but not in Minnesota. "We're getting ready to do a SCOR offering and we plan on totally going around Minnesota."

Palmer dislikes Minnesota's version of the SCOR law because it bars companies that use the program from splitting their stock or paying dividends for two years after an offering except in conjunction with subsequent offerings. Barring stock splits and dividends takes away important tools that companies can use if, for example, their stock value takes off.

"That ties our hands from a corporate standpoint. We don't even know what we're going to be up against 18 months down the road," Palmer said.

Despite disappointment with the details, Palmer is glad that Minnesota at least passed SCOR legislation. "It is good that Minnesota moved forward and got SCOR legislation on our books."

SCOR may be on the books, but it's not yet in force and won't be until the Commerce Department finishes writing rules governing its use, probably by next fall, Dimler said.

Once the rules are in place, however, small, privately held corporations will have to fill out a 50-question form, instead of filing a prospectus for private sales of securities. The form, which is used in all states that have SCOR laws on the books, does not have to be filed with the federal Securities and Exchange Commission either, Dimler said.

The law allows a company to raise up to $1 million a year and, at the discretion of the commerce commissioner, sell those securities to anyone. In a typical private placement, investors must be high net worth individuals who, at least in theory, can afford to lose money on a highly speculative new venture.

At this point, the law simply encourages investors to be careful and to understand the risks involved in investing in an unproven company, Dimler said. "Many start-up companies do fail."

© 1997, Minneapolis/St. Paul CityBusiness

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