Raising Capital in Missouri - Part I
Raising capital (money) is one of the most common challenges small
business owners and entrepreneurs will face in starting or running a
business. Generally, professional investors will not bother investing
in small companies because of their size and accompanying uncertainties.
Investment banks prefer not to underwrite an initial public offering
or an IPO for this small amount. Another common option for the small
business owner seeking to raise capital is to approach banks for a commercial
loan. Banks may approve loans but only if a business is fortunate to
be fully collateralized by company assets and the owner personally.
Bank loans are generally not offered in most cases, which creates a
dilemma for the small business owner.
One possible solution is to check out the Missouri Issuer Registration
(MIR) program offered by the Missouri Securities Division, a division
of the Office of the Secretary of State. This program is similar to
the Small Corporation Offering Registration program, or SCOR, offered
in several other states. MIR is an excellent vehicle to raise capital.
It is designed for a small business owner to raise up to $1,000,000
through a public securities offering. However, at least 80 percent of
the offering proceeds must be used in Missouri. The MIR program is far
easier and less complex than a full-blown IPO. Shares of stocks, bonds,
notes, investment contracts and membership interests are securities
available under the Missouri Uniform Securities Act. Because the securities
laws are complex, potential Missouri issuers are encouraged to seek
legal counsel and to contact the staff at the Missouri Securities Division
as well.
Preparing a traditional prospectus is an expensive process for a potential
Missouri issuer. The MIR process allows small business owners to use
Form U-7 or a fill-in-the-blank disclosure document. Form U-7 consists
of 50 questions and resembles a business plan including questions about
the business, its history, its plans for the future, the terms of the
securities offerings and the risks associated with investing. Completing
the Form U-7 allows the small business owner to take an active role
in assembling the necessary documents prior to seeking legal and accounting
advice and assistance. The inability to answer these questions indicates
that the small business owner is probably not ready to issue securities.
Samples of more traditional prospectus are available.
With persistence and perseverance, the regulatory hurdles of the Securities
Division can be overcome. However, the next challenge for the Missouri
issuer is how to market the new offering to prospective investors once
it is approved. The MIR program offers a unique opportunity to "test
the waters."
A Missouri issuer can determine whether or not there is enough interest
in its offering before the company invests in large legal and accounting
fees. To "test the waters," the Missouri issuer distributes
the company's business plan to prospective investors. A Missouri issuer
may raise up to $100,000 from investors to be held in escrow until the
registration process is complete. The business plan should not include
any promises of future growth of either the business itself or the value
of the securities to be issued. In addition, the Securities Division
may require that the business plan be modified to disclose risks associated
with the offerings.
When the Missouri Security Division receives an application to issue
securities in Missouri, it reviews it. Quite often, they will request
additional information. This additional information could pertain to
any area of the filing; however, most often it will reference financial
data.
When the securities regulators are satisfied with the SCOR offering
and approve the filing, the Missouri issuer may then begin selling the
securities described in their offering. Generally the Missouri issuer
will now attempt to break escrow in an effort to raise the amount of
capital (money) specified in the SCOR offering. The company may hire
a registered broker-dealer to sell the offering, or it may elect to
sell directly to the public. If the company elects to sell directly,
there are additional registration forms and requirements to be completed
by the company and provided to the state's Securities Division.
If the general public is interested in purchasing the new offerings,
there are financial guidelines or "suitability standards"
that apply to the prospective investors. First, a prospective investor
may not invest more than $500 unless his net worth is at least $30,000,
exclusive of home, home furnishings and automobiles. In addition, he
must have an annual income of at least $30,000; or have a net worth
of at least $75,000, exclusive of home, home furnishings and automobiles;
or the investor must be a director, officer or owner of 25 percent or
more of the securities of the issuer. These "suitability standards"
are in place to protect the investors and promote capital formation.
Contact the Missouri Securities Division for more information about
the Missouri Issuer Registration program. The Missouri Securities Division
registers securities offerings, licenses the individuals who sell securities,
grants exemptions from registration and issues opinions concerning the
legality of securities transactions. The Securities Division's website
is www.sos.mo.gov/securities/.
It provides information about investors education, licensing and registration
and enforcement services.
Source: Missouri Issuer Registration - A Guide for Small
Business. Published by Matt Blunt, Secretary of State, Revised 12/2000.
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Authored by: John Parfet, Business and Industry
Specialist, University of Missouri Extension
Source: Creating Quality Newsletter, Volume
12, Number 5, May 2003
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