More Frequently Asked Questions
Q. What's the difference between a Direct Public Offering and an Initial Public Offering?A. Usually an Initial Public Offering (better know as an IPO) is an underwritten public offering. This means that an underwriter, usually an Investment Banker, believes in the offering so much that they will prepay the issuer for the stock, then go out to the public market and sell it. 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 underwriters. A Direct Public Offering is an offering conducted without the help of an underwriter. The DPO candidate company "bootstraps" itself by selling its stock directly to the prospective shareholder through direct mail, to underwriters on a "best efforts" basis, and now through the Internet. The DPO combined with the Internet provides an inexpensive entre into the public offering sector for small companies seeking capitalization. Back to Top Q. How long have DPOs 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 average between $250,000 and $500,000 for an offering of between $5 million and $20 million. Furthermore, upon completion of an 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.
Q. WHAT IS A REGULATION D OFFERING?
The Private Placement
Simply stated, its against the law to sell stock unless you are licensed to do so or can qualify for an exemption from the 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. It is also considered to be a form of taking a company public without the burden and expense of a full registration with the SEC.
Regulation D consists of six basic rules.
The first three are basic rules. The first three are 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 last three rules deal with the specifics of raising money. 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
Regulation D contains the kind of exemptions that many small business persons have been looking for. These exemptions can easily be used in private or limited offerings. Thus the Regulation D private place document, better known as the Private Placement Memorandum, has been considered to be one of the most workable exemptions for small offerings.
While Regulation D offerings can provide a financial solution for a small business it does have limitations. There are strict limitations in general solicitation of stock sales as well as suitability standards for investors. These limitations drastically reduce the number of private placements, which are successful. It is Virtual Capital Groups opinion that a Regulation A offering has a higher probability of success based on a more dynamic SEC exemption rules.
In the event that you wish to proceed with
a Regulation D Private Placement Memorandum, Virtual Capital Group can assist you with
this filing and document production.
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Small Corporate Offering Registration, better known as SCOR, is designed to assist small companies in their capitalization by issuing stock directly to the public. This process is called a Direct Public Offering or DPO since the offering is usually not underwritten by an Investment Banker. A SCOR offering is an ideal format for executing a limited Internet DPO.
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