This article is from the Investing Articles: Public Offerings: IPO and DPO series.
If you want to raise equity capital and take your company public, filing a SCOR (Small Corporate Offering Registration) or a Private Placement are both relatively low-cost alternatives to filing a traditional IPO. While both can help you raise equity by selling securities (usually in the form of stock), there are some major differences to know. To avoid wasting time and money, read up on the four major differences in these programs:
Private Placement Securities purchased in a private placement are subject to stringent resale restrictions. This is especially true in established secondary markets controlled by the various exchanges (NYSE, NASDAQ, ASE, PSE, etc.) This creates an illiquid investment for those buying securities, especially when buying into privately held companies that may never become publicly traded.
Because so many US businesses are privately held, formation and equity capital have traditionally been denied to all but a few privileged companies. This was a primary motivation for the deregulation of small securities offerings under SCOR.
SCOR Stock sold under a SCOR can be freely traded in the secondary market, making the investments more liquid and thereby appealing to investors. While companies filing a SCOR are subject to some requirements and an application process, SCOR securities can be resold into established secondary markets. Until recently, however, this was unlikely because most of the companies were too small to meet listing requirements on any of the exchanges.
The Pacific Stock Exchange has created special rules and a review process for SCOR securities that will hopefully improve the secondary market for these offerings. In addition, various bulletin boards have been established on the Internet for SCOR securities, adding to the potential liquidity of these investments. As the Internet grows, so should the secondary market for securities in smaller companies.
Private Placement Raising money in a private placement means that you can't solicit to investors via standard marketing methods like advertising and direct mail. Additionally, you can't sell to anyone without having a pre-existing relationship with him. Clearly, this significantly limits your ability to raise business capital.
SCOR Under a SCOR offering, a company can advertise for investors, and sell securities to anybody who expresses an interest. Obviously, this gives businesses a much-needed tool for raising capital.
Private Placements Private placements allow companies to sell securities to 35 nonaccredited investors and an unlimited number of accredited investors. Usually, an accredited investor is defined as someone with $2 million in assets, $1 million net worth, or an annual income of at least $250,000. This group comprises less than 1% of the US population. Your investors must also qualify under certain sophistication requirements. The burden is on the company to find out if each investor has enough investment savvy to know what he is getting into. If this provision seems somewhat arbitrary, it is. Unfortunately, both of these provisions can severely hamper a small company's ability to raise significant equity capital.
SCOR SCOR permits the sale of securities to an unlimited number of investors, accredited or nonaccredited. For this reason SCOR is known as a REGISTRATION BY EXEMPTION because it is basically a hybrid between a public offering and a private placement. SCOR was based on ULORE (Uniform Limited Offering registration) provisions used in the state of Washington. ULORE was a way for small companies to avoid the costs and complexity of public offerings by selling their securities only in their own state.