Capital Formation Alternatives for Small Business in Virginia
INDEX
WELCOME
THE FUND RAISING PROCESS
- Develop a business plan.
- Determine if a securities offering is appropriate for your business.
- Select the most appropriate security type and offering exemption or registration.
THE SECURITIES REGULATION PROCESS - FEDERAL AND STATE SECURITIES
LAWS
EXEMPTIONS FROM SECURITIES REGISTRATION IN VIRGINIA - PRIVATE
OFFERINGS AND PUBLIC OFFERINGS
TESTING THE WATERS
THE SECURITIES OFFERING PROCESS
- Direct public offerings
- Registration by Qualification
- Small Company Offering Registration (SCOR)
- Small Company Offering Registration, Mid-Atlantic Region (CR-SCOR-MAR)
BORROWING RESOURCES
- Lenders
- Small Business Administration (SBA)
- Virginia Department of Business Assistance (VDBA)
SUMMARY / THANK YOU
EXHIBIT A - KEY TERMS
EXHIBIT B - EXEMPTIONS FROM REGISTRATION IN VIRGINIA
EXHIBIT C - NASAA POLICY STATEMENT SUMMARY
EXHIBIT D - OTHER INFORMATION RESOURCES
WELCOME
The Virginia State Corporation Commission ("SCC") through it's Division
of Securities and Retail Franchising (the "Division") determines what
is required under the Virginia Securities Act to register public offerings and to
conduct private security offerings, reviews offering documents, and approves offers
and sales of securities in Virginia. The Division also registers the professionals
in the securities industry and investigates complaints about particular securities,
practices, or events.
Securities regulation is a highly complex area of the law. Many small securities
offerings are exempt from federal regulation and fall under the jurisdiction of
the states in which the securities are offered or sold. State statutes and regulations
are known collectively as "Blue Sky Laws."
This guide has been prepared by the Division to assist small businesses, their attorneys
and accountants to understand the different financing options and processes available
to them. It contains significant regulatory and statutory changes made by the State
Corporation Commission and the General Assembly of Virginia which were adopted in
July 1999. Listings of key terms (Exhibit A) and other information resources (Exhibit
D) are provided at the end of this document. This guide is designed to provide accurate
and authoritative information, but it is not intended to be a substitute for legal,
accounting, or other professional advice.
You may get answers to your questions by contacting the Division at (804) 371-9051
or toll free in Virginia (800) 552-7945 and facsimile (804) 371-9911. Persons with
a hearing impairment may use the SCC's Telecommunications Device for the Deaf (TDD)
by calling (804) 371-9206 or the toll free number. You may write the Division at
P.O. Box 1197, Richmond, VA 23218. Appointments may be made to meet with the staff
at 1300 East Main Street, 9th Floor, Richmond, VA 23219.
The Virginia Securities Act, rules and most forms can be found on the
SRF website. Laws, rules, and regulations cited in this guide may be reviewed
at the applicable internet sites listed throughout the guide which are summarized
in the Information Resources Section (Exhibit D).
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THE FUND RAISING PROCESS
1. Develop a business plan.
Before you attempt to obtain any type of financing, you should formulate a needs
analysis which is used to develop a factual and realistic business plan. A draft
business plan should outline the financial history and current status of the organization,
the product or service you sell, who your customers and competitors are, how much
money you will need to fulfill the development/ marketing plan, identify a prioritized
allocation of the funds to be raised, and a comprehensive analysis and disclosure
of the risks facing the organization.
The final business plan and your financial statements will be carefully reviewed
by regulators, lenders and investors. In order to be ready for this scrutiny, you
should evaluate your creditworthiness and the investor appeal of your business as
you develop the plan.
The Small Business Administration (SBA) offers a tutorial on how to prepare a solid
plan with all its essential ingredients at www.sba.gov
. You should consider using the professional advisory services
of a securities attorney and an independent Certified Public Accountant (CPA) at
this stage. On-line E-mail assistance is available from volunteer business counselors
through the Service Corps of Retired Executives (SCORE) Program at
www.score.org.
2. Determine if a securities offering is appropriate for your business.
It is clear that a business needs money to operate. How much money a company needs
and where to get this money are strategic decisions to be carefully considered.
The Commerce Clearing House "Business Owner's Toolkit" is available at
www.toolkit.cch.com
and selecting "Getting Financing for Your Business."
The SOHO Guidebook covers a range of strategic business issues from organization
type and developing the business plan, to financing in a manner that addresses practical
considerations of the alternatives.
Debt: There are numerous sources of money. If your company is in the very early
stages of development, it may be better to seek loans from friends, commercial lenders,
and loans from government agencies such as the SBA www.sba.gov. Lenders will want collateral, personal guarantees, and
a business plan that demonstrates that the cash flow from the business will permit
the timely repayment of principal and interest.
By borrowing money, you are obligating your company to pay fixed amounts of interest
as well as repaying the amount borrowed. Although the lenders do not own any portion
of the business, they may have certain rights to financial or other information
from your company. In the case of bankruptcy, bondholders and secured lenders have
preference over shareholders when the assets of the company are liquidated.
Equity: When your company needs additional capital, selling stock may be the right
choice, but you should weigh the options carefully. By selling equity, you are selling
some of the ownership interests in the business. The new shareholders will also
be owners of the company. There are benefits and new obligations that come from
raising capital through an equity offering. While the benefits are attractive, be
sure you are ready to assume these new obligations:
Benefits
- Your access to capital will increase, since you can contact more potential investors.
- Your company may become more widely known.
- You may obtain financing more easily in the future if investor interest in your
company grows.
- Your company may be able to attract and retain more highly qualified personnel if
it can offer stock options and other equity incentives.
New Obligations
- You must continue to keep shareholders informed about the company's business operations,
financial condition and management, incurring additional cost and new legal obligations.
- You may be liable if you do not fulfill these new legal obligations.
- You may lose some flexibility and privacy in managing your company's affairs.
- Your private or public offering will take time and money to accomplish.
3. Select the most appropriate security type and offering exemption or registration.
If you decide to undertake a securities offering, the next step is to determine
the type of security and the offering exemption or registration that is most appropriate
for your needs. Your choice will be based on:
- The amount of money you need to raise
- The number of investors you think will be necessary to raise that amount
- How much time you can spare from running the business
- How much you can afford for the professional services of lawyers and accountants
- The type of investor that you wish to reach
- The affinity group(s) that would be interested in investing in your business
- The liability and management responsibilities to investors
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THE SECURITIES REGULATION PROCESS - FEDERAL AND STATE SECURITIES
LAWS
All issuers of securities must comply with both federal and state securities laws.
These laws are intended to protect investors while still providing a mechanism for
capital formation and economic growth. In Virginia, like many other states, a security
must be registered with the state securities division, exempt from registration,
or a federal covered security in order to be sold to investors in the state.
Some offerings are reviewed carefully by both the Securities and Exchange Commission
(SEC) and the states, while others are reviewed only at the state level, or not
at all. It is necessary for the sales representative, "agent of the issuer"
or broker-dealer that is conducting securities sales transactions in Virginia, to
be registered or qualify for an exemption from registration. The SEC small business
guide for capital formation is available at
www.sec.gov/smbus1.htm. The SEC guide describes
the different registration and exemption from registration options available at
the federal level.
In Virginia, the security examination process (registration or exemption) follows
a combination of approaches depending on the unique situation of each offering.
The first review is to verify that the filing qualifies for the type of filing or
exemption selected by the applicant. Another review may be made to determine that
all material facts investors would find important in making an investment decision
are fully disclosed. Additionally, the filing may be evaluated against certain merit
standards: financial condition, options and warrants, and underwriting and offering
expenses.
This guide contains the requirements of interest to most small businesses considering
an offering in Virginia. If you wish to sell in other states, you should contact
the securities divisions of the states in which you wish to conduct your offering
as well as the SEC. You can identify these contacts through the North American Securities
Administrators Association, Inc. (NASAA) web site www.nasaa.org.
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EXEMPTIONS FROM SECURITIES REGISTRATION IN VIRGINIA
Your securities offering may qualify for one of several exemptions from registration.
Some exemptions require only a notification filing. Others require the filing of
an application while others are self-executing, in other words, no filing or fee
is required. The most common ones available in Virginia are explained in Exhibit
B. The Federal Regulation D, Rule 504 Exemption must be supplemented at the state
level in Virginia with a registration filing or by qualifying for an exemption.
Each of these options should be considered before you proceed with an offering.
Registration or exemption from registration of the selling agent must also be considered.
You must remember; all securities transactions, even exempt transactions,
are subject to the anti-fraud provisions of securities laws.
Private Offerings
These securities are typically exempt from securities registration requirements,
and in some cases, the agents are exempt from agent registration provisions. No
general solicitation or advertising is permitted to market the securities, including
posting of notices on the internet. Private offerings can be difficult to sell.
The purchasers must:
- Have intimate knowledge of the issuer and/or enough knowledge and experience in
finance and business matters to evaluate the risks and merits of the investment
(a sophisticated investor) or be able to bear the economic risk
- Have access to the type of information normally provided in a disclosure document
- Agree not to resell or distribute the securities to the public, usually for 12 months
Public Offerings
Once the registration and in some cases, the exemption from registration process
for the securities and the sales representative has been completed, general solicitation
and advertising is permitted to market the securities, including seminars, sales
meetings, and posting of notices on the internet with certain restrictions.
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TESTING THE WATERS
Issuers should review the solicitation of interest rules in 21 VAC 5-40-70 of the
Virginia Administrative Code to see if they qualify to "test-the-waters"
to determine whether a market will exist for their securities once they are registered.
This process allows issuers to solicit indications of interest from potential investors
prior to the preparation and filing of a full disclosure document. By feeling out
prospective investors first, a company may avoid completing the registration process
only to find that they cannot sell their securities.
The Basics
Only issuers intending to utilize Regulation A or Rule 504 at the federal level
may test-the-waters. The procedure allows for offers only, not sales, and must be
accomplished prior to submission of an application for registration of the securities.
Sales can be made only after the securities have been registered in Virginia by
qualification, including the Small Company Offering Registration (SCOR) procedures
discussed below. Since testing-the-waters involves public solicitation, issuers
cannot test-the-waters and then decide to take advantage of private placement exemptions
such as those found in federal Regulation D Rules 505 or 506. Most private offerings
must wait at least six months after the last solicitation of interest. During the
solicitation of interest period, the offeror may not solicit or accept money or
a commitment to purchase securities.
Disclosure and Filing Requirements
The issuer must complete and submit a Solicitation of Interest Form along with any
other materials to be used to conduct solicitation of interest to the Division at
least ten business days prior to their use. There is no filing fee.
Delivery Requirement
Except for scripted broadcasts, there can be no communication with any prospective
investor about the contemplated offering unless such communication is preceded or
accompanied by a Solicitation of Interest Form or the form is delivered to the investor
within five days following the communication.
Reporting Requirements and Waiting Period
The offeror may begin to conduct solicitations of interest once the pre-filing requirements
have been satisfied, unless notified otherwise by the Division. A sale may not be
made until at least 20 calendar days after the last solicitation of interest and
until at least seven calendar days after delivery of the final approved prospectus
to the investor.
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THE SECURITIES OFFERING PROCESS
There are three methods of registering a public security offering in Virginia:
- Notification is reserved for "blue-chip" offerings with strong financial
background and a history of successful business operations. See § 13.1-508
of the Code of Virginia.
- Coordination is a process by which a company registers its offering with the SEC
and with the states simultaneously. See § 13.1-509 of the Code of Virginia.
- Qualification can be used to register any security at the state level. This process
is used to register most small business offerings that are exempt from federal registration
and is the only registration method detailed in this guide. See § 13.1-510
of the Code of Virginia.
Applications for registration of securities are reviewed for compliance with administrative
rules, disclosure requirements, and certain merit standards. Virginia has adopted
several North American Securities Administrators Association, Inc. (NASAA) statements
of policy which are summarized in Exhibit C. NASAA is a voluntary association of
the 50 state securities agencies responsible for investor protection and efficient
capital formation. The statements on Unsound Financial Condition, Options and Warrants
and the policy on Underwriting Expenses, Underwriter's Warrants, Selling Expenses,
and Selling Security Holders are of primary interest to all Virginia applicants.
The complete text of these statements can be reviewed at
www.nasaa.org
(select "nasaa library" from the Main Menu).
Under the umbrella of the qualification process, there are still more alternatives
to be considered. All qualification filings must satisfy the requirements of §
13.1-510 of the Code of Virginia. To facilitate small business capital formation,
Virginia has adopted the use of a question and answer registration using Form U-7
known as the Small Company Offering Registration (SCOR). To further assist small
businesses, Virginia supported development of and participates in the Small Company
Offering Registration, Mid-Atlantic Region (CR-SCOR-MAR) by which small companies
can register their offerings in up to seven jurisdictions simultaneously. These
small business options are detailed below.
Direct public offerings
In addition to registration of the securities, the persons selling the securities
must also be registered or exempted from registration. Registration of the security
does not automatically register someone to sell the security nor does registration
of the agent of the security issuer automatically register the securities. There
are two separate registration processes which are administered by the Division.
Because small offerings generally are not profitable to traditional broker-dealers
or underwriters, many small offerings, those less than $2,000,000, are sold directly
to the public. Virginia has modified its agent of the issuer rules to accommodate
direct security sales by small companies under the SCOR program. In certain cases,
it is now possible for the Division to waive the written examination requirements
for the agent of the issuer.
Registration by Qualification
Registration by qualification is governed by § 13.1-510 of the Code of Virginia
and 21 VAC 5-30-40 and 21 VAC 5-60-20 of the Virginia Administrative Code. If you
plan to use the SCOR Program, be sure to review the SCOR information which follows
this qualification filing discussion. SCOR filings are required to meet the standards
for registration by qualification and certain unique rules for the SCOR Program
which may be more restrictive.
The Basics
Any security may be registered by qualification in Virginia. There is no maximum
offering amount and there is no limit on the number of investors.
Disclosure Requirements
The disclosure document and the application must include the following information
as specified in the 16 subdivisions of § 13.1-510(b) of the Code of Virginia:
- The name and address of the issuer and significant subsidiaries, its form, state
and date of organization, and a general statement of the competitive conditions
in the business in which the issuer is engaged.
- The name, address, recent professional history, and ownership interest in the issuer
of each director, officer, or substantial owner (10% or more) of shares of the company.
- The payments made to each director and officer over the most recent 12 months and
to be paid during the next 12 months.
- The name, address, recent professional history and ownership interest of each promoter
of the company, and the offering and any payments made to, or to be made to each
promoter.
- Any beneficiary of the offering other than the company.
- The capitalization, long-term debt, and other securities (including options) of
the issuer outstanding before and after the offering.
- A description of the securities offered, an accounting of any securities transferred
or to be transferred for other than the face amount of the offering, and the estimated
underwriting and selling expenses. Also, the names of any commissioned selling agent.
- The estimated net proceeds (cash) to be received by the issuer and a prioritized
allocation of the uses of the proceeds.
- A description of any material contracts to which the issuer is or will be a party.
- A copy of the offering prospectus and other advertising or promotional materials.
- A sample of the security.
- A legal opinion stating whether the security will be legally issued, fully paid
and nonassessable, and, if debt, a binding obligation.
- Current audited financial statements.
Filing Procedures
The Offering Circular or Prospectus, a Uniform Application to Register Securities
(Form U-1), and the filing fee constitute the registration application. The filing
fee, payable to the Treasurer of Virginia, is calculated by multiplying the value
of the securities offered in Virginia by .001. The minimum fee is $250 and the maximum
fee is $500.
Selling Constraints
The securities can be sold by the issuer or a securities broker. An agent of the
issuer and any salesperson must be registered with the Division. The registration
process for an agent of the issuer requires filing of Form U-4, an Agreement for
Inspection of Records, evidence of passing a NASD examination, and a $30 filing
fee. Agent of the issuer registrations expire annually on December 31 and must be
renewed if the offering has not been completed. More detailed information can be
found in 21 VAC 5-20-160 through 21 VAC 5-20-220 of the Virginia Administrative
Code.
If the offering requires that a certain level of securities be sold before the proceeds
are released to the issuer, then all proceeds from Virginia investors must be placed
in escrow with a Virginia depository until that level of proceeds is reached. The
depository cannot release the funds until authorized to do so by the SCC.
Resale Restrictions
The security registration will remain effective until revoked by the Commission
or terminated at the request of the issuer with the consent of the Commission. No
renewal filings are required for secondary trading. All outstanding securities of
the same class shall be considered to be registered for the purpose of secondary
trading.
Reporting Requirements
Issuers are required to report material changes regarding the issuer or the terms
of the offering to the Division at six month intervals. A copy of the current financial
statements should be included.
Small Company Offering Registration (SCOR)
SCOR is a program for registration of a public offering by qualification under §
13.1-510 of the Code of Virginia and is administered under Subdivision 9 of 21 VAC
5-30-80 of the Virginia Administrative Code. Virginia has adopted the NASAA statement
of policy regarding Small Company Offering Registrations, the use of the Form U-7
and the set of instructions for Form U-7. Small businesses who qualify to use the
SCOR program will find it easier and far less expensive than a traditional initial
public offering.
The Basics
This registration can be used by corporations or limited liability companies (LLC)
organized within the United States and Canada for common stock, preferred stock,
debt securities, and a variety of other types of securities. The maximum offering
amount is determined by applicable federal exemption, and the minimum share price
is $1 per share or unit of interest. There is no limit on the number of investors,
but a minimum dollar investment per investor should be carefully evaluated. The
maximum offering period is one year. Stock splits and dividends are not permitted
within two years of the registration if such action will lower the price below $1.00.
A SCOR registration cannot be used by development stage companies with no specific
business plan "blind pool companies," offerings involving oil exploration
or production, mining, or similar industries. If the issuer, any of its officers,
directors, ten percent or greater stockholders, promoters, selling agents, or officials
of the selling agent is the subject of a securities investigation, stop order or
felony conviction and other listed actions, the SCC may disqualify the issuer from
the SCOR Program.
Applicable Federal Exemptions
- SEC Regulation D, Rule 504 allows a company to sell up to $1 million worth of securities
without a review by the SEC. After registration with the Virginia Division of Securities
and Retail Franchising, a company may promote the offering through advertising or
other means of "general solicitation."
- SEC Regulation A expands the cap to $5 million, but the offering must be registered
with the Virginia Division of Securities and Retail Franchising and "qualified"
by the SEC.
- Section 3(a)(11) and SEC Rule 147 Section 3(a)(11) of the federal Securities Act
of 1933 doesn't set a cap on the amount of a registration, but the company must
be based and operate solely in Virginia, and the securities must be sold only to
Virginia residents. SEC Rule 147 requires that 80 percent of net proceeds be used
for a company's Virginia operations. No filing with the SEC is required.
Disclosure Requirements
The Form U-7 is used as the disclosure document. Superlatives, unsubstantiated statements,
and glossy opinions must be avoided. The Issuer's Manual prepared by NASAA provides
detailed guidance and sample answers to the questions on the SCOR Form. The Manual
should be carefully read from cover to cover before you begin the SCOR process.
The NASAA Statement of Policy regarding Small Company Offerings, Form U-7, and the
Issuer's Manual can be reviewed at www.nasaa.org
(select "corporate finance" from the Main Menu). Copies are available from the Division.
Reminder: The registration by qualification issues discussed in the previous section
must be covered in your SCOR Form responses, and the required documents must be
included in the application for registration.
Financial statements must be prepared in accordance with generally accepted accounting
principles. Interim financial statements may be unaudited. All other financial statements
must be audited unless the conditions in Subdivision 9 of 21 VAC 5-30-80 of the
Virginia Administrative Code are met. In those cases, reviewed statements may be
permitted.
Filing Requirements
The completed Form U-7, a Uniform Application to Register Securities (Form U-1),
and the filing fee constitute the registration application. The filing fee, payable
to the Treasurer of Virginia, is calculated by multiplying the face value of the
securities offered in Virginia by .001. The minimum fee is $250 and the maximum
fee is $500.
Selling Constraints
The securities can be sold by the issuer or a securities broker. Most SCOR filings
are direct public offerings with sales made by an agent of the issuer. An agent
of the issuer and any salesperson must be registered.
The registration process for an agent of the issuer requires filing of Form U-4,
an Agreement for Inspection of Records, and a $30 filing fee. The application must
include evidence that the agent passed the required NASD examination or a completed
Affidavit Regarding Offers of SCOR Securities By Issuer Agents by which the agent
represents that the person is an official of the issuer, will receive no sales related
compensation, and will deliver a copy of "A Consumer's Guide to Small Business
Investments" to each prospective purchaser. More detailed information can be
found in 21 VAC 5-20-160 through 21 VAC 5-20-220 of the Virginia Administrative
Code which is posted on the Division's website www.scc.virginia.gov/srf
along with the consumer's guide. Agent of the issuer registrations expire annually
on December 31 and must be renewed if the offering has not been completed.
Resale Restrictions
The security registration statement will remain effective until revoked by the Commission
or terminated at the request of the issuer with the consent of the Commission. No
security registration renewal filings are required for secondary trading.
Reporting Requirements
Issuers are required to report material changes regarding the issuer or the terms
of the offering to the Division at six month intervals. A copy of the current financial
statements should be included.
Small Company Offering Registration, Mid-Atlantic Region (CR-SCOR-MAR)
The CR-SCOR-MAR was established to assist small businesses that want to file a SCOR
or certain qualification registrations and to sell securities in several jurisdictions.
Participants include Virginia, Delaware, Maryland, New Jersey, Pennsylvania, West
Virginia, and the District of Columbia.
An issuer files an application with two or more states along with the fees applicable
to each of the registering states. In Virginia, the filing fee is the same as any
other SCOR or qualification application as shown above. A filing is also made to
the state of Maryland who acts as the program administrator. Maryland will designate
the lead jurisdiction (state) for the filing who will be the focal point for comments
among the examining states and the issuer. If the issuer is a Virginia business,
Virginia will most likely be the lead jurisdiction. When completed, the issuer will
receive individual clearance notifications from each state.
This program simplifies the administrative process for the issuer and imposes an
established time-line on the review states, but it also subjects the application
to broader range of state specific and NASAA statements of policy standards. CR-SCOR-MAR
program details on standards, forms, and filing requirements are published on the
Pennsylvania Securities Commission web site www.psc.state.pa.us
and can be viewed under "Corporation Finance."
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BORROWING RESOURCES
The alternatives for borrowing resources may appear sparse at first, but a further
review will reveal some options that must be considered. Keep in mind that loan
rejection is part of the process. Rejection by lenders one through five does not
mean that lender number six and you cannot reach agreement on a program that works
for both of you. Talk to others who may have already gone through the process. Someone
else's experience may help you to be successful. Do not ignore those truth-in-lending
disclosure documents. They are not just some more government forms. If you do not
understand them or the processor cannot explain them to you, get professional help
before signing up.
Lenders
Companies that specialize in business lending and equipment leasing want you to
know what they have to offer. Many lenders have programs tailored to the needs of
specific business types or franchise systems. You can approach the problem from
two points of view. First, search the internet for venture capital "angels"
who are seeking small business investment opportunities. Secondly, you can post
or advertise your public offering on a matching service site. Beware of any offer
or guarantee of financing that requires payment of a finders fee before you receive
a loan commitment.
Your present bank or nearby "business bank" or community bank may be interested
in your business. The Office of Advocacy of the SBA has ranked nearly 10,000 banks
in the country on a state-by-state basis to determine which banks are "small
business friendly." You might locate such a bank in your area by reviewing
the directory at www.sba.gov/advo/research/
then selecting "Finance Banking Studies."
The Virginia Department of Business Assistance (VDBA) through its Virginia Capital
Access Program (VCAP) provides access to capital for Virginia businesses by encouraging
banks to approve loans that do not meet their usual criteria. Participating banks
are listed on the VDBA website www.dba.virginia.gov.
Small Business Administration (SBA)
The SBA was established to aid, counsel, and protect the interests of the small
business community. Working with banks, intermediaries, and other lending companies,
the SBA guarantees loans and makes loans to small businesses unable to obtain debt
financing through regular lending channels. The number and types of loan programs
is ever changing to meet the needs of business and the level of federal funding.
The following illustrate the variety of programs available. To obtain current and
more complete information on these and other loan programs, call the SBA at (800)
8-ASK-SBA or visit www.sba.gov.
- 7(a) Loan Guaranty Program - One of SBA's primary lending programs, it provides
loans to small businesses unable to secure financing on reasonable terms through
normal lending channels. The program operates through private-sector lenders that
provide loans which are, in turn, guaranteed by the SBA -- the Agency has no funds
for direct lending or grants. A maximum loan amount of $2 million has been established
for 7(a) loans. However, the maximum dollar amount the SBA can guaranty is generally
$1 million. Small loans carry a maximum guaranty of 85 percent. Loans are considered
small if the gross amount is $150,000 or less. For loans greater than $150,000,
the maximum guaranty is 75 percent.
- Microloan Program - Works through regional nonprofit intermediaries to provide small
loans from $100 up to $35,000. The average loan size is $10,500.
- LowDoc Program - Once a small business meets the lender's requirements for credit,
the borrower completes a one page application and the lender requests a LowDoc guaranty
from the SBA. The Program calls for a response from the SBA within 36 hours of receiving
a complete application. LowDoc allows for a SBA guarantee for loans up to $150,000.
- Certified Development Company (504 Loan) Program - A regional development company
makes long-term loans for purchasing land, buildings, machinery, and equipment.
These loans can be used for new construction, modernizing, or renovating facilities
and sites for up to $1 million.
- Franchise Registry - A process under which franchisor prepared documents are centrally
screened for eligibility in SBA loan programs. The Registry helps the SBA and lenders
make consistent eligibility decisions, streamline processing and recognize industry-specific
factors during the loan review process. Franchise Registry information, including
a list of SBA registered franchises, is at
www.franchiseregistry.com.
Virginia Department of Business Assistance (VDBA)
The VDBA offers a variety of services to business and industry including financing
assistance, counseling, and training. The staff has its headquarters in Richmond,
Virginia and conducts an active visitation program. It administers the programs
of the Virginia Small Business Financing Authority (VSBFA) by providing loans, guarantees,
insurance, and other assistance to small business. The VSBFA targets the financing
needs of businesses which are not being met by other public or private sector programs.
The following illustrate the types of programs available. To obtain current and
more complete information on their assistance and financing programs, call the VDBA
at (804) 371-8200 or visit www.dba.virginia.gov.
- Virginia Economic Development Loan Fund (VEDLF) - Provides loans up to $1 million
or 40% of project cost, whichever is less, to bridge the gap between private debt
and private equity for projects that will result in job creation or retention.
- Loan Guaranty Program - Designed to reduce the risk to lenders thereby increasing
the availability of short-term capital for small businesses. VSBFA guarantees up
to $300,000 or 75%, whichever is less, of a bank loan. Typical borrowings include
revolving lines of credit to finance accounts receivable and inventory and short-term
loans for working capital and fixed asset purchases.
- Virginia Capital Access Program (VCAP) - A loan loss reserve is established at each
participating bank financed by enrollment premiums paid by the borrower and matched
by the VSBFA. The reserve is available to offset potential loan losses. VCAP participating
banks are published on the VDBA website.
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SUMMARY / THANK YOU
We hope this document helps you better understand your options for growing your
business in Virginia. As discussed in the CCH Toolkit, the objective is to find "smart" money from
lenders and investors who can provide expertise and support for your business and
on terms that make sense for your situation, not just any money that may be available
on somebody else's terms.
Your comments and suggestions are welcome. Please let us know how we can make this
guide more useful to your small business.
You may get answers to your questions by contacting the Division at (804) 371-9051
or toll-ree in Virginia (800) 552-7945 and facsimile (804) 371-9911. Persons with
a hearing impairment may use the SCC's Telecommunications Device for the Deaf (TDD)
by calling (804) 371-9206 or the toll free number. You may write the Division at
P.O. Box 1197, Richmond, VA 23218. Appointments may be made to meet with the staff
at 1300 East Main Street, 9th Floor, Richmond, VA 23219.
The Virginia Securities Act, rules and most forms can be found on the internet at
www.scc.virginia.gov/srf
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EXHIBIT A - KEY TERMS
The following working definitions are provided to further your understanding of
the securities laws and rules. Some terms have precise definitions which are more
fully prescribed in the Code of Virginia.
Accredited investor: As applied to a natural
person, is one whose net worth exceeds $1 million or one with income greater than
$200,000 in each of the two most recent years or joint income with that person's
spouse in excess of $300,000 in each of those years and has a reasonable expectation
of reaching the same income level in the current year. Also, the person individually
or together with a purchaser representative(s) has sufficient knowledge and experience
in financial and business matters to be capable of evaluating the merits and risks
of the prospective investment and be able to bear the economic risks. Other legal
entities such as banks, insurance companies, registered investment companies, and
trusts may qualify as accredited investors subject to certain conditions. Please
see 21 VAC 5-40-140 of the Virginia Administrative Code.
Agent of the issuer: Any individual who as a
director, officer, partner, associate, employee, or sales representative of an issuer
effects or undertakes to effect sales of securities on behalf of an issuer, usually
without any directly related sales commission.
Applicant:A person on whose behalf an application for
registration or a registration statement is filed.
Application: All information required by the forms
prescribed by the Commission as well as any additional information required by the
Commission and any required fees.
Blind pool: A company that has no specific business
plan or purpose or one that has indicated that its business plan is to engage in
a merger or acquisition with an unidentified company. Also, the company devotes
substantially all its efforts to establishing a new business whose operations have
not commenced.
Common stock:An ownership interest in a corporation.
Consent to service of process: A form submitted by
a foreign corporation or LLC that allows the Clerk of the State Corporation Commission
to be served with legal papers on the issuer's behalf.
Corporation: An entity with a legal existence apart
from its owners. A stock corporation is organized for profit and is authorized by
the State Corporation Commission to issue shares of stock to raise capital.
Debt security:A security in which the seller must repay
the investor's original investment amount plus interest. A company can offer debt
securities in Virginia only when it can demonstrate that it has the ability to repay
the debt.
Disclosure document:The offering circular, prospectus,
or SCOR Form U-7 distributed to potential investors to disclose all material facts
investors would find important in making an investment decision.
Domestic corporation:A corporation created under Virginia
law.
Division: The Division of Securities and Retail Franchising
of the Virginia State Corporation Commission.
Federal Covered Security: Those securities which the
National Securities Markets Improvement Act of 1996 (NSMIA) prohibits the states
from directly or indirectly requiring registration. The primary small business interest
is the classification of Regulation D Rule 506 offerings as "federally covered."
Foreign corporation:A corporation created under the
laws of another state or country which, after registration with the State Corporation
Commission, are authorized to transact business in Virginia.
Issuer:Any person who issues or proposes to issue a
security with certain exceptions listed in the Virginia Securities Act.
Limited liability company (LLC): A business entity
that is an unincorporated association of two or more members who own membership
interests based on their capital contributions. It is intended to be taxed as a
partnership while limiting the personal liability of all its owners. A LLC may be
domestic or foreign.
Offer:Includes every attempt or offer to dispose of,
or solicitation of an offer to buy, a security or interest in a security for value.
Person:An individual, partnership, corporation, unincorporated
association, LLC, government, subdivision of a government, or a trust in which the
interest of the beneficiaries are evidenced by securities.
Promoter:A person who took the initiative to found
or organize the issuer or is an officer or director of the issuer. Anyone who legally
or beneficially owns, directly or indirectly, 5% or more of any class of the issuer's
equity securities.
Promotional shares:Equity securities that were issued
within the last three years, or that are to be issued, to certain founders or organizers
of the issuer for less than 85% of the public offering price.
Sale:Includes every contract of sale of, contract to
sell, or disposition of, a security or interest in a security for value.
Selling expenses:May include but are not limited to:
cash payments of commissions, advisory agreements and expenses to underwriters or
broker-dealers, auditors' and accountants' fees, printing, transfer agent or other
experts, and the cost of authorizing and preparing the securities. Please see the
NASAA Statement of Policy Regarding Underwriting Expenses, Underwriter's Warrants,
Selling Expenses, and Selling Security Holders for the complete technical definition.
Secondary trading:Any transaction not directly or indirectly
for the benefit of the issuer or a "nonissuer distribution."
Sophisticated investor:A person, individually or together
with a purchaser representative(s), that has sufficient knowledge and experience
in financial and business matters to make them capable of evaluating the merits
and risks of the prospective investment.
Underwriting expenses:May include but are not limited
to: commissions, non-accountable fees or expenses paid to underwriters or broker-dealers,
underwriter's warrants, solicitation, financial consulting or advisory fees payable
to underwriters, underwriter's due diligence expenses, and other payments made six
months prior to or required to be paid six months following the offering to investor
relations firms designated by the underwriter. Please see the NASAA Statement of
Policy Regarding Underwriting Expenses, Underwriter's Warrants, Selling Expenses,
and Selling Security Holders for the complete technical definition.
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EXHIBIT B- EXEMPTIONS FROM SECURITIES REGISTRATION IN VIRGINIA
PRIVATE OFFERINGS
The following exemptions do not permit public solicitation to market your securities.
Federally Covered, Regulation D Rule 506
The standards for these securities are established at the federal level. Regulation
D Rule 506 offerings are federally covered transactions under NSMIA and are not
required to be registered at the state level. Also, the agent of the issuer is exempt
from registration. See 21 VAC 5-45-20 of the Virginia Administrative Code.
The Basics -There is no maximum offering amount. You
may sell to an unlimited number of accredited investors and up to 35 sophisticated
investors for investment only. The securities are "restricted securities"
which may not be resold for at least one year without registering the securities.
Disclosure Requirements- The issuer decides what information
is given to accredited investors. All other investors must be given the same information
as is required for registered offerings. The financial statements required vary
depending on the size of the offering. The issuer must be available to answer questions
from prospective investors
Filing Procedures- File Form D with the SEC within
15 calendar days of the first sale and send a signed copy of Form D to the Division
within 15 calendar days of the first sale in Virginia. Also send to the Division
a $250 filing fee payable to the Treasurer of Virginia.
Limited Offering, Regulation D Rule 505
The standards for these securities are established at the federal level. A Uniform
Limited Offering Exemption (ULOE) for the securities may be filed under § 13.1-514
B 13 of the Code of Virginia and 21 VAC 5-40-30 of the Virginia Administrative Code.
The Basics - Offers and sales of securities up to $5
million are permitted in any 12-month period. You may sell to an unlimited number
of accredited investors and up to 35 other persons who do not need to meet any sophistication
or wealth standards. The securities are "restricted securities" which
must be sold for investment only and may not be resold for at least one year without
registering the securities. An agent of the issuer who receives no direct or indirect
compensation is exempt from registration.
Disclosure RequirementsThe issuer decides what information
is given to accredited investors. All other investors must be given the same information
as is required for registered offerings. If you provide information to accredited
investors, you must make the same information available to the other investors.
The financial statements need to be certified (audited) by an independent CPA and
at least the balance sheet must be dated within 120 days of the start of the offering.
The issuer must be available to answer questions from prospective investors.
Filing Procedures- File Form D with the SEC within
15 calendar days of the first sale and send a signed copy of Form D to the Division
within 15 calendar days of the first sale in Virginia. Also, send to the Division a
$250 filing fee payable to the Treasurer of Virginia.
35 Security Holder Exemption
This exemption is provided by § 13.1-514 B 7(a) of the Code of Virginia. There
is no corresponding administrative rule.
The Basics - There is no maximum offering amount. The
number of security holders after the sale is limited to 35 investors in total and
it includes all investors, not just Virginia residents. An agent of the issuer is
exempt from registration.
Disclosure Requirements - The issuer decides what information
is given to all investors, so long as it does not violate the antifraud prohibitions.
Filing Procedures- This exemption is self-executing.
Domestic Issuer Limited Transactional Exemption
This exemption is provided by § 13.1-514 B 7(b) of the Code of Virginia and
is covered by 21 VAC 5-40-100 and 21 VAC 5-40-130 of the Virginia Administrative
Code.
The Basics- The maximum offering is $2 million. The
issuer must have its principal place of business in Virginia, and sales in Virginia
are limited to no more than 35 persons, who are sophisticated investors, within
any 12 month period. Accredited investors and certain other persons are excluded
from the 35 limit. This exemption is not available to Federal Regulation A and D
Rule 505 or 506 offerings. An agent of the issuer who receives no direct or indirect
compensation is exempt from registration.
Disclosure Requirements- The issuer must provide Form
VA-1 or a disclosure document containing Form VA-1 information to each prospective
investor. Under certain conditions Form VA-1 parts 1 and 2 are required.
Filing Procedures - File with the Division 15 calendar
days prior to the first sale, Form VA-1 Parts 1 and 2 (if applicable) or a disclosure
document containing the information required by the Form. Also send to the Division
an undertaking to promptly provide, upon written request, the information furnished
to the offerees, an executed consent to service of process (Form U-2) appointing
the Clerk of the State Corporation Commission as the agent, and a $250 filing fee
payable to the Treasurer of Virginia. A Form U-2 is not required if a currently
effective appointment is on file or the issuer is a Virginia entity.
Corporate or Institutional Investor
This exemption is provided by § 13.1-514 B 6 of the Code of Virginia. There
is no corresponding administrative rule.
The Basics - There is no maximum offering amount. Offers
or sales may be made to a corporation, investment company, pension or profit-sharing
trust, and to a broker-dealer.
Disclosure Requirements - The issuer decides what information
is given to all investors, so long as it does not violate the antifraud prohibitions.
Filing Procedures- This exemption is self-executing.
Offers to Existing Security Holders
This exemption is provided by § 13.1-514 B 8 of the Code of Virginia. There
is no corresponding administrative
The Basics - There is no maximum offering amount. Transactions
are limited to existing security holders including those holding certain transferable
warrants.
Disclosure Requirements- The issuer decides what information
is given to all investors, so long as it does not violate the antifraud prohibitions.
Filing Procedures - If a commission or other remuneration,
other than a standby commission, is paid or given directly or indirectly for soliciting
any security holder in Virginia, the issuer must make prior notification of the
terms of the offering to the SCC who may by order disallow the exemption within
five business days after the receipt of the notice. Otherwise, this exemption is
self-executing.
PUBLIC OFFERINGS
The following exemptions permit public solicitation to market your securities.
Bonds Secured by Real Estate
This exemption is provided by § 13.1-514 B 11 of the Code of Virginia. There
is no corresponding administrative rule.
The Basics - The maximum debt offering is $150,000
which may be sold to a maximum of 30 persons who are residents of Virginia. The
bonds must be secured by a first lien deed of trust on Virginia realty. An agent
of the issuer is exempt from registration.
Disclosure Requirements- The issuer decides what information
is given to all investors, so long as it does not violate the antifraud prohibitions.
Filing Procedures- This exemption is self-executing.
Virginia Residential Housing
This exemption is provided by § 13.1-514 B 12 of the Code of Virginia. There
is no corresponding administrative rule.
The Basics - There is no maximum offering amount. An
interest in any partnership, corporation, association, or other entity created solely
to provide residential housing in Virginia. Offers or sales must be made by an agent
of the issuer or by a Virginia licensed real estate broker or real estate agent.
Disclosure Requirements- The issuer decides what information
is given to all investors, so long as it does not violate the antifraud prohibitions.
Filing Procedures - This exemption is self-executing.
Accredited Investor Exemption
This exemption is provided by § 13.1-514 B 19 of the Code of Virginia and is
covered by 21 VAC 5-40-140 of the Virginia Administrative Code. An agent of the
issuer is exempt from registration in a transaction which meets the requirements
of this section.
The Basics- There is no maximum offering amount and
there is no limit on the number of investors. Must be sold only to accredited investors
who meet the federal definition in 17 CFR 230.501(a), as summarized in Exhibit A,
and are sophisticated investors. The securities are "restricted securities"
which must be sold for investment only and may not be resold for at least one year
without registering the securities. This exemption is not available to an issuer
who is in the development stage and could be considered a "blind pool."
Disclosure Requirements- A general announcement of
the proposed offering shall include only the information specified by the Division
which identifies the company, its business, the securities being offered and information
that sales will only be made to accredited investors. Additional information may
be distributed through an electronic database or by telephone if the prospective
investor has pre-qualified as an accredited investor or the issuer reasonably believes
the investor is an accredited investor.
Filing Procedures- File with the Division, no later
than 15 calendar days after the first sale in Virginia, the Model Accredited Investor
Exemption Uniform Notice of Transaction form, a consent to service of process (Form
U-2) appointing the Clerk of the State Corporation Commission as the agent, a copy
of the general announcement, and a $250 filing fee payable to the Treasurer of Virginia.
A Form U-2 is not required if a currently effective appointment is on file or the
issuer is a Virginia entity.
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EXHIBIT C - NASAA POLICY STATEMENT SUMMARY
NASAA and the State of Virginia have determined that the following guidelines are
consistent with public investor protection and are in the public interest. An application
for registration may be denied if the SCC determines that the application is not
in compliance with these guidelines.
Unsound Financial Condition
- A company is deemed to be in "unsound financial condition" if it has a
"going concern" opinion or footnote and one of four other factors: accumulated
deficit; negative shareholder equity; inability to satisfy current obligations as
they become due; or negative cash flow.
Options and Warrants
- The total number of options and warrants issued or reserved for issuance is limited
to 15% of the post-offering shares to be outstanding. Excluded from the 15% figure
are options and warrants: issued to non-promoters pursuant to incentive option plans;
options and warrants with exercise prices in excess of the public offering price;
options and warrants granted to unaffiliated institutional investors in connection
with loans under certain conditions; and options and warrants granted in connection
with acquisitions, reorganizations, consolidations, or mergers.
- Options and warrants have and will not be granted at an exercise price less than
85% of the fair market value of the issuer's underlying shares of common stock on
the date of the grant.
- Options and warrants, excluding those issued to non-promoters pursuant to incentive
stock option plans, must be exercised no later than five years from the effective
date of the offering.
- If the number of options and warrants that are issued and outstanding and/or reserved
for issuance is material, the potential dilutive impact must be disclosed.
Underwriting Expenses, Underwriter's Warrants, Selling Expenses, and Selling Security
Holders
- Underwriting expenses calculated in accordance with this policy must not exceed
17% of the gross proceeds of the offering after the minimum number of shares are
sold.
- Cash selling expenses calculated in accordance with this policy must not exceed
20% of the gross proceeds of the offering after the minimum level is sold.
- The number of underwriters warrants must not exceed 10% of the shares sold in the
public offering, transfer of the warrants must be restricted, and the warrants must
be exercised only within five years of completion of the offering.
- Selling security holders, other than the issuer, selling more than 10% of the shares
to be sold must pay a pro rata share of all selling expenses, exclusive of legal
and accounting fees. Above 50%, selling security holders must pay a pro rata share
of all selling expenses.
Small Company Offering Registrations (SCOR) - See the
more detailed discussion of SCOR under the Securities Offering Process section in
this document.
- Available for offerings which are exempt from federal registration under Rule 504
of Regulation D, Regulation A, or Section 3(a)(11) and Rule 147 of the Securites
Act of 1933.
- Initial public offerings that do not exceed the limits applicable to the preceding
federal exemptions with an offering price of at least $1.00 per share or unit of
interest.
- Financial statements must be prepared in accordance with generally accepted accounting
principles.
Real Estate Programs Primarily designed for public
real estate syndications and partnerships which invest in real estate.
Oil and Gas Programs - Applied to limited or general
partnerships for the primary purpose of exploring for oil, gas, and other hydrocarbon
substances or investing in or holding any property interests which permit the exploration
for or production of hydrocarbons.
Cattle- Feeding Programs - Consist of interests in
cattle feeding ventures which must be limited partnerships or such other form of
entity which limits the liability of public investors to the amounts of their respective
investments.
Real Estate Investment Trusts - Entities which are
engaged primarily in investing in equity interests in real estate or in loans secured
by real estate or both.
Church Bonds - Provides guidelines to aid churches
and non-profit organizations to offer and sell securities under federal and state
exemptions from registration.
Viatical Investments - Applied to certain life insurance
settlement arrangements.
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EXHIBIT D - OTHER INFORMATION RESOURCES
- The Virginia Securities Act, Title 13.1, Chapter 5 of the Code of Virginia
- Virginia Securities Act Rules and Forms, Title 21, Chapters 10-80 of the Virginia
Administrative Code
Internet sites of interest
Securities Lawyer's Deskbook, University of Cincinnati, College of Law
http://taft.law.uc.edu/CCL
Commerce Clearing House
www.toolkit.cch.com
1-800-248-3248
North American Securities Administrators Association
www.nasaa.org
1-202-737-0900
Pennsylvania Securities Commission, Coordinated Review Program
www.psc.state.pa.us
1-717-787-8061
SBA Franchise Registry
www.franchiseregistry.com
1-800-793-8640
Service Corps of Retired Executives (SCORE)
www.score.org
1-800-634-0245
Small Business Administration (SBA)
www.sba.gov
1-800-8-ASK-SBA
U.S. Securities and Exchange Commission (SEC)
www.sec.gov/smbus1.htm
1-202-942-2950
Virginia Department of Business Assistance (VDBA)
www.dba.virginia.gov
1-804-371-8200
Virginia Division of Securities and Retail Franchising
www.scc.virginia.gov/srf
1-800-552-7945 / 804-371-9051
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