The money game Featured

10:04am EDT July 22, 2002
David Neikrug wants to make his benefits agency a major player in the middle market of the benefits consulting industry, but needs an infusion of capital to establish the infrastructure of people and technology.

Neikrug is using a Small-Company Offering Registration, also known as a Regulation D or "Reg D" offering, to raise the $250,000 to $350,000 he needs.

A SCOR is a uniform registration that is allowed in almost every state. A company can raise up to $1 million by selling common stock directly to the public. Applicable regulations vary widely. Some states put qualifications on who can buy the stock, or establish minimum purchases, while others have little regulation at all. The cost of a SCOR can be as little as a few thousand dollars, compared with the $100,000 or more for a traditional IPO plus the extensive registration and filing requirements with the Securities and Exchange Commission.

When trying to raise money, it's often better to be a public company, because then you offer liquidity to the investors.

"Investors will be able to sell the investment on an exchange, in addition to the potential for a dividend or capital gains," says Stuart Katz, a consultant with Ploni & Associates, a Long Island, New York-based financial-consulting firm specializing in public offerings. "They have the potential to liquidate their investment. It makes it much more attractive to investors."

The length of time to raise money through a SCOR depends on how well connected the business owners are. If $300,000 is needed and there are 10 friends with $30,000 each, then it may only be a matter of weeks.

"The negative of doing a SCOR deal is that while you are raising money, you don't get any of it until after you break escrow, then you can find a brokerage house to market the shares," says Katz, who is advising Neikrug's offering. If a company decides $300,000 is the minimum amount of capital it needs for its purpose, then all money raised goes into an escrow account until the goal is met. If the company falls short, the money is returned to the investors.

Once the $300,000 is raised, the company can apply for listing on the Nasdaq OTC bulletin board, the trading place for young companies with low-asset values. Approval for trading can take weeks or even months, and the Nasdaq often will require additional information.

Currently, there are no reporting requirements for a SCOR by either the SEC or the National Association of Securities Dealers, but this is expected to change. With no requirements for financial disclosure, fraud has become a problem, and the SEC has proposed several changes that could require the same reporting requirements as an IPO. This means a company would have the added expense of being audited and issuing quarterly reports, making this type of offering less attractive.

"As soon as we close on the offering, David will start filing to become a reporting company with the SEC, even though it's not required," says Katz. "It shows the NASD we're trying to be legitimate, and we hope to qualify under whatever the new requirements may be."

Reporting gives both investors and regulators a clearer picture of the company's goals and financial structure.

"If people are interested in this type of offering, the window is closing," says Katz, referring to the probably changes in the securities laws. "There will be some kind of rule change along the way. The best advice is to talk to a professional and see what it would take to do an offering. You don't want to miss the boat on its way out."