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Frequently Asked Questions About Raising Investor Capital and Going Public

Frequently Asked Questions About Raising Investor Capital and Going Public:

Q#1: What is public solicitation and what is the downside of violating the rules? 
A: Read a short explanation from a securities attorney by clicking here. Note however that the Jumpstart Our Business Startups Act modifies these prohibitions. The SEC was charged with issuing by September 2012 the new regulations governing the exemption for certain Regulation D Rule 506 private offerings from the prohibition against general solicitation and advertising. Proposed regs have been out for sometime and as written suffice; however, as not uncommon delayed issuance or overly cumbersome regulatory action is preventing realization of the benefits of this Jobs Act first step toward modernizing the USA's antiquated 80 year old restraint on freedom of commercial investment and business development speech (the 1933 Securities and Exchange Act). Today's restraints on freedom of investor solicitation and the public's right to learn about and participate in business development financing is simply due to the continued fear, power & job maintenance based paternalistic "command and control" nature of bureaucratic regulatory staff and perhaps well minded but confused supporters of government over-regulation verses stricter penalties and enforcement for false, misleading and materially omiscient disclosures.

Q #2: What are private offering exemptions for soliciting US investors? 
A: Click here for SEC information on the most popular and powerful private offering exemption. The Jumpstart Our Business StartUps Jobs Act, signed into law April 5, 2012, creates new rules for "emerging growth companies" and others that allows use of public media and general advertising in connection with private offerings provided only qualified investors are permitted to invest. More info below.

Q #3: What is the easiest manner to meet requirements for public offering in the USA? 
A: Click here for SEC advisory.

Q #4: Where can I find a good overview from the SEC discussing public and private offering rules? 
A: Click here.
 And see below.

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Q: What are the main benefits of going public?
A: The main benefits of taking your company public include:
  • Raising capital at good valuations;
  • Raising capital without losing control;
  • Creating liquidity for shareholders;
  • Creating a new source of income for founders by selling small pieces of their holdings under Rule 144 which allows for the sale of unregistered stock publicly;
  • Creating sophisticated wealth accumulation and transfer strategies;
  • Creating a "currency" to incentivize employees;
  • Creating a "currency" to grow by cost effective stock acquisitions with little or no cash needed to buy accretive target companies.
Q: Can I take my company public without doing an IPO?
A: Yes. You can do it by an Initial Public Registration and finding a sponsoring market maker to file a Form 211 and assist with opening trading in a company's stock. You can also directly file for a public offering without a managing underwriter. These public offerings are referred to as a "DPO," or Direct Public Offering.  A Direct Public Offering is an offering conducted without the help of an underwriter. The issuing company sells its stock directly to the prospective shareholders on a "best efforts" basis, including using Internet social media and network sites targeting angel and penny stock investors looking to get in on an investment opportunity not yet on Wall Street's radar screen. The DPO combined with the Internet provides an inexpensive and viable method to conduct a public offering today for small companies.

Q. What's the difference between a Direct Public Offering and an Initial Public Offering (or an IPR - Initial Public Registration)?

A.  Usually an Initial Public Offering (IPO) is underwritten, usually by an Investment Banking firm. Usually only larger offerings which have gained tremendous publicity in the public eye, qualify for an IPO. Registrations such as SCORs, Reg As, SB-1, and SB-2 are normally too small to attract the attention of national underwriting investment bankers.

Q. How long have DPOs and IPRs been around?

A. Until recently, Small Businesses have been prevented from access to the strongest and most vital capital finance resource--the public financial market. Historically, initial public offerings ("IPOs") have required extensive and complicated federal and state registration compliance. Underwriting discounts and commissions and other offering expenses, such as legal and accounting fees, printing costs, transfer agent fees, stock exchange listing fees, and blue sky expenses, for an IPO typically start between $250,000 and $500,000. Typically, upon completion of an underwritten IPO, the issuer would immediately become a "reporting company" subject to the periodic reporting and certain other requirements of the Securities and Exchange Commission. Compliance with these reporting requirements result in significantly increased administrative costs to the issuer.

Following the passage by Congress of the Small Business Investment Incentive Act of 1980, the Securities and Exchange Commission ("SEC") conferred to individual states the oversight of many securities offerings under $5 million. State securities regulatory agencies responded with a variety of rules and exemptions to assist small business in capital formation efforts. In Washington State, the Securities Division of the Department of Licensing developed an experimental program to simplify the process of public stock offerings for small businesses. The aim of the program was to streamline the application, information disclosure, and prospectus process into a single document which could be completed the limited professional assistance and at a low cost. Washington State's program proved successful, and in April of 1989, the North American Securities Administrators Association ("NASAA") adopted it as a model. Dubbed the Small Corporate Offering Registration ("SCOR"), the program (or its variations) has been adopted in more than 48 states. It accommodated the SCOR program by amending Rule 504(b)(1) of Regulation D to delete restrictions on general solicitation in any 504 offering and to remove the limitations on resale of securities sold in these offerings. Thus, by using the offering exemptions under the SCOR program, an issuer can conduct an interstate offering of non-restricted securities.

Initially, Regulation A permitted exemption from registration for public offerings up to $1.5 million. The SEC raised the exemption ceiling to $5 million, and provided for an alternative form of disclosure document similar to the SCOR document.

The SEC developed a new integrated registration and reporting system, known as Regulation S-B. The S-B series disclosure system includes Form SB1, which permits registration of up to $10 million, and Form SB2, which permits unlimited registration. 

Q: What are the main public stock trading exchanges and their basic listing requirements?

OTC BB listing criteria:

  • Two-year operating history
  • Two years of audited financial statements (GAAP)
  • Minimum of 50 shareholders

NASDAQ Capital Markets exchange listing criteria: 
  • Audited financials
  • $50 million minimum market capitalization
  • $5 million in stockholders' equity or $750,000 of net income from continuing operations

AMEX listing criteria: 
  • Pre-tax income of $750,000 in the latest year or two of the last three fiscal years
  • Shareholders’ equity of $4 million

Q. What is a Private Offering?

A: Private Offerings are known as Regulation D Offerings. Its against the law to sell stock unless you are licensed to do so or can qualify for an exemption from the pre-offering public registration SEC rules. For instance, section 5 of the 1933 Act clearly states that "it is unlawful for any person, directly or indirectly to sell a security unless a registration statement has been filed, or to sell a security or deliver a security after the sale unless a registration statement is in effect." The 1933 Act does, however, contain some exemptions, but they fall short of really helping small businesses.

It was this concern that prompted Regulation D, better known as "Reg D," which became effective April 15, 1982. Its not just another exemption but rather one of the key exemptions for small business that want to raise money by selling stock.

Regulation D consists of six main rules. The first three are basic rules concerned with definitions, conditions, and notification. Rule 501 covers the definitions of the various terms used in the rules. Rule 502 sets forth the conditions, limitations, and information requirements for the exemptions in rules 504, 505, and 506. Rule 503 contains the SEC notification requirements. The most commonly violated aspect of private offerings is failure to file required Form Ds. Read this article by Tom Cifelli at the end of the Private Offering page - "The Consequences of Failing to File Form D."

Rule 504 generally pertains to securities sales up to $1 million. Rule 505 applies to offerings up to $5 million (including those offerings less than $1,000,000). Rule 506 is for securities offerings with no limit or any dollar amount (including those offerings less than $5,000,000 million).

The JOBS ACT passed April 5, 2012 modifies Rule 506 by providing exemptions for qualified offerings from the general prohibition against public solicitation and advertising. The Title III section known as the "CROWDFUND Act" also allows public solicitation without prior registration for under $1,000,000 raises if its rules are followed. Click here to read these important new rules part of the Jumpstart Our Business Startups Act.

Q: What is SCOR?
Small Corporate Offering Registration, "SCOR," is designed to assist small companies in their capitalization by issuing stock directly to the public and was intended to be the main DPO method. 

SCOR allows a company to raise as much as $1 million within a 12 month period with a minimum stock price of $1. Typically, the prospective DPO candidate will set a minimum amount of capital to be raised to ensure that sufficient funds will be available for growth and development before any of the funds are accessible for company use. States vary on this "minimum offering" requirement. A

 SCOR offering is a prime candidate for an Internet DPO. The filing, which consists of a 30-page form called Form U-7, is exempted from the filing provisions of the SEC Act of 1933 which means that the DPO candidate will not have to file a registration statement with the SEC; however, as with any public company, compliance with antifraud and personal liability provisions of the SEC Act of 1933 is a requirement. 

Furthermore, in some cases, 2 years of audited financial statements may be required in some states (although typically not required for SCOR offerings under NASAA's SCOR Statement of Policy).

Q: What are "Blue Sky" laws?

A: State regulations are called Blue Sky laws. Blue Sky laws were designed to protect investors from "unscrupulous" issuers. Since its inception in 1987, SCOR filings have been adopted in 48 states. Some states may require minimum amounts to be raised before the DPO candidate may access the raised capital.

Q: What is Form SB-1?

A: SB-1 is the Federal form for offerings and sales of securities in which the maximum offering is $10 million dollars. It requires higher compliance standards then does SCOR ULOR filings or Regulation A filings., SB-1 offerings are available to DPO candidates that have no more than $25 million in sales or $25 million in publicly held stock. The type of disclosure required is the Model A, Form U-7 or Model B under Regulation A. The offering is an SEC registration and involves a detailed Prospectus. Blue Sky State filings are required within any state stock subscriptions are sold. The SB-1 filing requires audited financials, the last fiscal year's balance sheet and the last 2 fiscal year's income statements plus unaudited interim financials.

Q: What is Form SB-2?

A: SB-2 is the Federal form for offerings and sales of securities in which the maximum offering is unlimited. The offering is available to DPO candidates that have no more than $25 million in sales. The SEC review is conducted centrally in Washington and must be filed electronically through EDGAR 3. The offering is considered a full-blown registration and involves a detailed Prospectus. Blue Sky State filings are required within any state in which stock subscriptions are sold. The SB-2 filing requires audited financials, the last fiscal year's balance sheet and the last 2 fiscal year's income statements plus unaudited interim financials. In our opinion an issuer should consider a full blown S-1 if they require an SB-2 for a planned offering.

Q: What is REG A?

A: Regulation A is designed to assist small companies in their capitalization by issuing stock directly to the public. We specialize in Reg A offerings. Some industry veterans affectionately refer to Reg A offerings as "Marley" offerings, a spin from Bob Marley's Reggae style music. Regulation A filing is an ideal way to raise capital as an Internet DPO. Reg A allows raising as much as $5 million within a 12-month period. New legislation increases the offering allowed. 

Regulation A filing is exempted from the filing provisions of the SEC Act of 1933 which means that the DPO candidate will not have to file a registration statement with the SEC although, as with any public company, compliance with antifraud and personal liability provisions of the SEC Act of 1933 is a requirement.

 Candidates are still required to make the same disclosures as if they had filed a registration statement. Reg A offerings require that the DPO candidate file an offering circular, otherwise known as prospectus, with the SEC which discloses potential risk factors, financial reports, use of the proceeds, backgrounds of the officers and directors, company history, marketing plans as well as products and services. The SEC does not currently require audited financial statements unless the Candidate had pre-existing ones at which point they must be included in the offering circular. State Blue Sky laws still need to be considered.

Q: Who are qualified DPO candidates?

A: Generally, a DPO candidate must not be a reporting company; must have developed a comprehensive business plan; may not be an Oil and Gas company or Investment company; and the Directors, Officers, controlling shareholders, and underwriters must not have been suspended from a securities association; convicted, during the last 10 years, of a securities violation; or subject to an injunction because of securities violations. 

Q: Why is Reg A so Exciting for Small Qualified Issuers?
Because of the "Test the Waters" provision of Reg A. 

Q: What is crowd funding?
A: Crowd Funding is using the Internet to raise capital. New legislation may allow certain issuers a simplified approach to raising funds over the Internet without filing with the SEC. Amount an investor could invest is limited to not more than $10,000 or 10% of their annual income, and the total raised may not exceed $2,000,000 in any year. Other limitations apply. Care must be taken in offerings avoiding any SEC filing as investor recourse and protections leave lots of room for mistakes and future litigation with personal liability and criminal prosecution potential if the deal violates complex rules. Doing this alone without experts is ill advised.
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