An Offer You Can't Refuse

What's The Deal?

The exempt stock offering--also known as a Regulation D offering--Mocherniak utilized deals with state and federal securities laws. At the federal level, stock offerings to the public of $1 million or less in a 12-month period are exempt from these laws.

"The importance of this exemption cannot be underestimated," says Douglas Lurio, principal of Lurio & Associates, a Philadelphia law firm specializing in securities law. Specifically, he says, filing a registration statement to comply with stock sales under the Securities Act of 1933 and the periodic reporting associated with the Securities and Exchange Act of 1934 requires legal and accounting expertise (read: fees) that are unrealistic for most early-stage or smaller companies. To take advantage of the federal exemption for small offerings, companies only have to file a Regulation D Form, a simple fill-in-the-blanks affair that can be completed in 15 minutes.

Each state has securities laws, too. But like the feds, states also offer exemptions for small public offerings. By taking advantage of exemptions at the state and federal levels, companies like Lumion can raise capital directly from investors without the stifling demands of legal and accounting compliance that only larger enterprises raising a large amount of capital can reasonably afford and negotiate.

What's tricky is that while the federal exemption allows for the sale of up to $1 million of securities to an unlimited number of individuals, exemptions offered by the states are more restrictive regarding the number of investors who can buy shares and whether the company can advertise its offering, for example. (For more on state exemptions, visit, which contains an index of state Web sites you can search.)

According to Tom Stewart-Gordon, publisher of the SCOR Report monthly newsletter, there are several options companies can use for an exempt offering. Texas companies, for example, can take advantage of the federal exemption but can register their shares using a single uniform filing in 46 states with what is known as a SCOR (Small Company Offering Registration) form.

However, the SCOR form is just as complex as the federal registration, which many companies were seeking to avoid filling out in the first place. The best bet, according to entrepreneurs like Mocherniak, is to avoid registration in your state, if possible, and structure an offering that is compatible with whatever exemptions are offered by the states in which you plan to sell stock.

For instance, with Lumion, Mocherniak took advantage of the federal exemption, as well as the exemptions offered by Florida and New York, to raise $750,000 by selling common stock at $1 per share to investors in those states only. (Lumion also sold stock to foreign investors--sales that are also exempt from federal securities laws.) Contact an attorney well-versed in exempt stock offerings before attempting this option.

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This article was originally published in the April 1998 print edition of Entrepreneur with the headline: An Offer You Can't Refuse.

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