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Last Update: Wednesday June 23, 2021

Key Idea: Study the Small Corporate Offering Registration Option

Brad Armstrong invested in Blue Whale and then used  the Small Corporate Offering Registration as a way to raise more cash.

Key Question:

A: 

Think about how to value your company.  What is the fair market value of your business.  Is it reflected within your Balance Sheet ?

Q: Since the United States Congress and the Securities and Exchange Commission put the SCOR in place in 1982, then simplified it in 1989, why are so few taking advantage of this financial instrument?

A:
Because it does take a little effort to understand the process and most of us are not even aware that the SCOR exists.

Q: Brad Armstrong of Blue Whale movers said the SCOR is an option for him while organic growth, venture capital and banks are not options. Why?

A:
The goal to expand to other cities will take a large amount of cash. He and his partner have already exhausted their own cash reserves, the profits from the Austin location are not great enough to take away and apply to another location, the banks are too cautious and the venture capitalists want to own at least 40% of the company if they invest. By doing a SCOR, Brad is offering just 10% of equity in the company to a number of individual investors.

Q:
Why would an investor buy stock in a privately-held company?

A: To make money! A big part of figuring out if the SCOR is the right vehicle for you is determining if the investment would be attractive to others. Remember, there is no secondary market for SCOR investments. If you buy stock in a publicly traded company listed on a stock exchange, you can sell it when the price goes up or down and you want to divest yourself of the investment.

Not so with investments made under a SCOR. You need to provide the investor with a return, e.g., a proposed dividend schedule and an exit strategy. The investor's exit is tied to yours. Ultimately, do you intend to sell the company? Go public? These are important questions that the investor will be very interested in as (s)he evaluates the investment opportunity.

Questions for this clip: 1 | 2

Think about it

A SCOR is not for everyone but we should all be aware of it. What would you do with a significant cash infusion into your business and can you make such an infusion attractive to outside investors over the life cycle of your business?

Clip from: Small Corporate Offering Registration (SCOR)

Austin, Texas:  The Securities Exchange Commission (SEC) instrument known as Small Corporate Offering Registration (SCOR), sometimes referred to as Reg D Rule 504, is a little-known, but important tool for small businesses.

Mandated by Congress, every year since 1982 the SEC has held an annual meeting for small business investors and owners called "Small Business Capital Formation Conference."   The first result of that conference was the Reg D Rule 504.

In 1992, ten years later, Deborah Bortner, the Securities Administrator for the State of Washington, led the way to simplify the registration by developing the SCOR document.

At that time Congress wanted to help small business owner who have a difficult time finding money.  Another aspect of the SCOR is use it as a liquidity model that forces a business valuation. It could also be used as an exit strategy.  The majority of small business owners do not have a succession plan and a SCOR would necessitate that such a plan be implemented.

Historically, out of every $100 in banks loan, small business gets about $7. Though contributing over 50% of the Gross National Product,  working capital is often difficult to obtain.

The SCOR has not caught on. There is very little publicity about it and just a few educational resources. It does require three years of audited financials. It does involve your CPA and a good securities lawyer. 

The SCOR could be used in the following ways:  (1)  A cornerstone of a succession plan and liquidity model for mature small businesses, (2) An alternative to an employee-stock ownership program, (3) A means for all those who already want to buy into a business to do so without going through an IPO and without necessarily being a qualified investor, and (3) An instrument to provide a conservative diversification strategy for pension funds, mutual funds, and private investors.

Because of the ubiquity of the web, Small Business School will promote any and all attempts to develop  mechanisms so the best small businesses are indexed against one another and the best among the best rise to the top and are immediately qualified to be selected by any investor to receive equity capital.

It will change business in America forever.  Small business can share equity,  learn about liquidity models,  understand our financials and key critical ratios, and then participate in the market just like any big business.

Go to all the key ideas and videos of this episode...

Blue Whale Moving Company, Inc.

Brad Armstrong, CEO

8291 Springdale Road
Suite 100
Austin, TX 78724
512-328-6688

Visit our web site: http://www.bluewhale.com/meet-our-crew.php

Office: 512-328-6688

Business Classification:
Moving/Storage/Relocation

Year Founded:

Study the Small Corporate Offering Registration Option

HATTIE: So the venture capitalists wanted controlling interest. With the SCOR, what are you giving up?

BRAD: Well, if we sell out the entire SCOR offering, we will give up 11 percent of the company.

HATTIE: OK. So that feels good to you?

BRAD: Yes. And in retrospect, I probably would have made it more.

HATTIE: So let's talk about limits that we can raise. So in Texas, it's unlimited.

DAVID PORTER: There is no limit. There is no upper limit.

HATTIE: But other states do have limits?

DAVID PORTER: But other states do have a $1 million limit, if the offering is done as an interstate offering; that is, more than one state involved, then you're limited to $1 million per year. A person who invests in the stock market can expect over very, very long periods of time to earn approximately a 10 percent to 12 percent rate of return. The data that would be corresponding for venture capital firms is that they expect approximately a 27 percent to 30 percent return on investment of a similar nature. If someone can get something in between, on the average, for a small corporate offering, that would make a lot of sense economically.

HATTIE: So between 12 percent and 27 percent return.

DAVID: There's quite a bit of room in between for somebody to make money on an offering that is a part venture and part stock vehicle.

HATTIE: (Voiceover) Stockbroker David Porter has helped Blue Whale and two other companies go public using the Small Corporate Offering Registration. One of the businesses is the legendary recording company, Sun Records. Sun raised $125,000 through the Small Corporate Offering Registration to help it expand its sales of artists like Johnny Cash, Jerry Lee Lewis and, yes, Elvis Presley. Sun tells its story to prospective investors in such a compelling way, what country music lover could resist making an investment.

DAVID: The company needs a very well-defined, thought-out business plan that will enable people to look at the company and be willing to put money aside for four years, five years, two years, whatever it turns out to be, while they're waiting for that company to effectively employ their money. That's generally the way it works. Generally, people are patient and their reward comes at the end of some period of time.

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