Crowdfunding v. SCOR

Crowdfunding v SCORThe word is now out – Title III equity crowdfunding under the JOBS Act is not going to work very well.  The problem?  It is going to be way too expensive.  Estimates to do an equity raise pursuant to Title III range between $140,000-$250,000 for a million dollar raise.

See these two posts on this topic:

Crowdsourcing a Title III Crowdfunding Cost Model

“Death by Expense” of Crowdfunding?

This is simply too steep for it to make any sense except for companies that have a business purpose other than just raising money to do such an offering (e.g., encouraging patronage by turning patrons into stockholders as well).

But here is something interesting to consider.  Years ago state and federal securities regulators constructed something called a Small Company Offering Registration, or a SCOR. If you read the description of a SCOR offering on the Washington State Department of Financial Institution’s website (see here: http://www.dfi.wa.gov/sd/scor.htm), you will notice something somewhat remarkable: it looks even better than a Title III equity crowdfunding.  Let me show you how they compare.

 Title III CrowdfundingSCOR (“Small Company Offering Registration”)
Fund raise limit$1M during any 12 months$1M during any 12 months
Required to use an intermediary?Yes (and look for a fee of about 8-10% of the gross proceeds to be paid to the intermediary).No.
Advertisement allowed?Yes, but subject to limitations.Yes. But there are no specific advertising limitations as there are in the draft crowdfunding regulations.
Investor limitationsYes; individual investor caps.No.  “Investors are not limited as to number or type, nor is there any restriction on the amount that may be sold to any one person.” See the following link: http://www.dfi.wa.gov/sd/scor.htm
Requirement of audited financials?Yes, if raising more than $500,000.No, if you only raise money from Washington residents.
Geographic availabilityNot limited to specific states in which the issuer has gone through the registration process.The geographic availability of a SCOR offering is limited to the states in which a company has gone through the registration process.

Will the SCOR come back into popularity now that Title III equity crowdfunding has not turned out as crowdfunding advocates had hoped? It is possible. It will be fun to watch and see. But let’s be honest – there are problems with SCOR offerings, which is the reason they are not very popular. What problems am I referring to? In general just the complexity of an offering that requires you to either register securities with state securities regulators (like a SCOR offering), or go through a difficult and burdensome process (like that described in Title III of the JOBS Act).

The truth is—Congress needs to revisit the crowdfunding provisions of the JOBS Act and simplify those provisions substantially. I am afraid Title III crowdfunding is going to go the way of SCOR—it will be scarcely used, and ultimately forgotten.

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About Joe Wallin

Joe Wallin focuses on emerging, high growth, and startup companies. Joe frequently represents companies in angel and venture financings, mergers and acquisitions, and other significant business transactions. Joe also represents investors in U.S. businesses, and provides general counsel services for companies from startup to post-public.
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  • http://wac6.com/ William Carleton

    Joe, you’re right – SCOR only looks attractive because Title III is so ugly!

    Personally, I think non-accredited crowdfunding advocates should forget about lobbying Congress for a better law, and go to the various states and get intrastate exemptions on the books, experiment with those. I know you are a leader on this in WA state for example. I think states are the way to go.

    • Ann

      Then you would have to include any or all states that you think one of your funders might come from?

      • http://wac6.com/ William Carleton

        Not sure I completely understand your question, but I think you would have to think in terms of limiting your investors to people residing within the four corners of a single state.

        • Ann

          As an example, …. did O’bama need all his supporters with $20.00 to be an accredited investor?
          With an AoN goal is met, non-accredited investors would limit to collect only $2,000 – $100,000. That seems unlikely such a small company would have any stock to sell.
          You are limited to $100,000 in a 12 month period with non-accredited investors according to Bill Beatty,Director of Securities,Dept. of Financial Institutions. Not common yet, but he said it is so that a fly by night ‘funding portal’ could just take the money in overnight, and he said they could just not give the little guy the money to start up their business.
          Bait and switch must be something they are just waiting to happen. Like a hacker, they are global and they can disappear anywhere.

          That is their greatest fear right now…..

          • http://startuplawblog.com/joewallin Joe Wallin

            Political contributions are subject to different rules.

      • http://startuplawblog.com/joewallin Joe Wallin

        No. Founder shares are issued under a different securities law exemption than the one you use to raise money from investors.

  • lunarmobiscuit

    Joe, what are the top three issues with SCOR that make it so uncommon? And how uncommon is uncommon? Given these shares are registered, is there a registry of issuance which we could mine to publish some metrics?

    • http://startuplawblog.com/joewallin Joe Wallin

      I think it is rare because it costs quite a bit to go through the process. Quite a bit more than a Reg D offering. I think only a handful of companies do SCOR offerings in our state every year. I don’t know an easy way to get the data you are asking for but you might call the DFI. It might be willing to share some.