When raising money for the business, various securities law issues may come into play. You'll need to follow the rules carefully in order to preserve limited liability under the law.

Regulation A allows small business owners to use a simplified form to gain an SEC exemption when issuing securities. While Regulation A is technically an exemption, it is best thought of as a simplified registration because a filing must be made with the SEC before any offers to sell securities can be made (unlike Regulation D, Rule 504).

Registration A permits an issuer to raise up to $5 million in a 12-month period. However, because the state SCOR registration has a $1 million limit, Registration A effectively is limited to this same amount when it is combined with a SCOR registration in each state.

The most significant advantage of using Regulation A (rather than Regulation D, Rule 504) is that it allows issuers to test the waters for investor interest before undertaking the arduous and expensive process of preparing the required SEC documents for registration.

Work Smart Because of the expense of preparing federal and state documentation, testing the waters may be essential, if the small business owner intends to make a public offering of securities. Testing the waters is only available under Regulation A, which may make it a better alternative than Regulation D, Rule 504. The fact that an Internet site--using a coupon that can be e-mailed, or printed and mailed, to the issuer--can qualify under the rules also makes this option very attractive. The Regulation A form, designated Form 1-A by the SEC, can be prepared in several versions, including a simplified question-and-answer version that uses the SCOR Form U7. This simplified format, which is a recent option, overcomes what previously had been the biggest impediment to using Regulation A rather than Regulation D, Rule 504--the added complexity and expense of preparing the standard Form 1-A. Thus, if the offering is limited to $1 million, Regulation A can be coupled with a state SCOR filing, further simplifying the process of registration.

The SEC imposes strict requirements on an issuer who will be testing the waters under Regulation A. These rules dictate that:

• Solicitation of interest may take the form of written documents or scripted radio or television broadcasts (this would allow the use of a web site on the Internet as a means of determining whether there is sufficient interest to justify an offering).
• Solicitations of interest may not be made after the filing of the Regulation A Form 1-A offering statement.
• No offers, sales or exchange of consideration can take place during the testing process. Sales may not be made until 20 calendar days after the last publication or delivery of the document or radio/television broadcast.
• Any written document under this section may include a coupon, returnable to the issuer, indicating interest in a potential offering, revealing the name, address and telephone number of the prospective investor.
• On or before the date of its first use, the issuer must submit a copy of any written document or script of any broadcast to the SEC's main office in Washington D.C. (Attn: Office of Small Business Policy). Oral communications with prospective investors and other broadcasts are permitted, after this submission. Further, the rules require that the written document or broadcast must contain specific information, including:
  • the name and telephone number of a person able to answer questions about the document or broadcast
  • a statement that no money or other consideration is being solicited and, if sent in response, will not be accepted
  • a statement that no sales of securities will be made or commitment to purchase accepted until delivery of an offering circular that includes complete information about the issuer and the offering
  • a statement that an indication of interest made by a prospective investor involves no obligation or commitment of any kind
  • a disclosure of identity of the chief executive officer of the issuer, as well as a brief and general description of the business and its products

Warning Not all states have provisions that allow testing of the waters. However, the following states do allow issuers of Regulation A to gauge interest beforehand: States Allowing "Testing of the Waters" Colorado New York Vermont Illinois North Dakota Virginia Indiana Oregon Washington Iowa Pennsylvania Wisconsin Massachusetts South Carolina Wyoming Nevada Utah   The small business owner should limit testing of the waters to residents of these particular states. If an Internet web site is used, a disclaimer can be used to accomplish this objective. The following states are considering the adoption of such a provision: Arizona Maine Michigan Rhode Island It is possible other states may follow suit in the future.