Frequently Asked Questions

FREQUENTLY ASKED QUESTIONS

INTERNET DIRECT PUBLIC OFFERINGS AND
OTHER CAPITALIZATIONS PROGRAMS

What's the difference between a Direct Public Offering and an Initial Public Offering?
How long have DPOs been around?
What is a Regulation D Offering?

SCOR
SEC Filing (U-7)
"Blue Sky" State Filing (SCOR)
SB-1
SB-2

REG A
SEC Filing (Reg-A)
"Blue Sky" State Filing
Qualified Candidates
Test the Waters

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.

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.

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.

Previously, 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.

In May, 1995, the Pacific Stock Exchange received approval from the SEC to list SCOR and Regulation A securities. This action is anticipated to create a market for "listed" SCOR and Regulation A securities, providing liquidity to shareholders.

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 $5,000,000 million).

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 Group’s 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.

SCOR

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.

A DPO candidate may 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.

While a SCOR offering does not warrant the substantial costs usually associated with larger public offerings, it is a prime candidate for an Internet DPO which typically costs much less and provides a small company with an effective means by which to raise capital. 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.

SEC Filing (U-7)

DPO candidates are required to complete and file a FORM U-7 which has been designed for easy completion; nevertheless, it will most likely require expert assistance. Furthermore, in some cases, 2 years of audited financial statements may be required in some states which you file, (although typically not required for SCOR offerings under NASAA's SCOR Statement of Policy) these should be included with the Form U-7 filing.

"Blue Sky" State Filing (SCOR)

Both federal and state levels of regulations must be complied within a SCOR-based DPO as well as with any IPO. State regulations are called Blue Sky laws. Blue Sky laws were designed to protect investors from "unscrupulous" issuers of stock. 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.

SB-1

SB-1 is the Federal form for offerings and sales of securities in which the maximum offering is $10 million dollars. The offering is 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.

SB-2

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.

REG A

Regulation A is designed to assist small companies in their capitalization by issuing stock directly to the public. This process is called a Direct Public Offering since the offering is usually not underwritten by an Investment Banker. A Regulation A filing is an ideal way to raise capital as an Internet DPO. A DPO Candidate may raise as much as $5 million within a 12-month period.

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.

Regulation A can provide a small company with an effective means by which to raise capital. The 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.

SEC Filing (Reg-A)

DPO 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.

"Blue Sky" State Filing (Reg-A)

Both federal and state levels of regulations must be complied within a DPO as well as an IPO. State regulations are called "Blue Sky" laws. Blue Sky laws were designed to protect investors from "unscrupulous" issuers of stock. Regulation A filings are not exempt from state Blue Sky securities laws and some states require that the DPO candidate produce 2 years audited financial statements. Filing requirements as well as fees can differ from state to state.

Qualified Candidates

The 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. Important to note is that the SEC reserves the right to waive certain circumstances if there are grounds for acceptance.

Test the Waters

A unique feature of a Regulation A is the "Test The Waters" component. As the name implies, a DPO candidate can test the interest of investors before investing time and financial resources of preparing a DPO. Part of The Virtual Capital Group 's "Test The Waters" strategy will be the use of on-line surveys and graphical meters while ensuring that SEC compliance is followed, including full disclosure that the information is not a solicitation to sale but rather an indication of interest.