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Division of Securities & Retail Franchising


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.govExternal Link logo. 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.orgExternal Link logo.

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 External Link logoand 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.govExternal Link logo. 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.htmExternal Link logo. 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.orgExternal Link logo.


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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:

  1. 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.
  2. 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.
  3. 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.orgExternal Link logo (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.orgExternal Link logo (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.usExternal Link logo 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/External Link logo 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.govExternal Link logo.

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.govExternal Link logo.

  • 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.comExternal Link logo.

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.govExternal Link logo.

  • 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 ToolkitExternal Link logo, 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
External Link logo

Commerce Clearing House
www.toolkit.cch.comExternal Link logo
1-800-248-3248

North American Securities Administrators Association
www.nasaa.orgExternal Link logo
1-202-737-0900

Pennsylvania Securities Commission, Coordinated Review Program
www.psc.state.pa.usExternal Link logo
1-717-787-8061

SBA Franchise Registry
www.franchiseregistry.comExternal Link logo
1-800-793-8640

Service Corps of Retired Executives (SCORE)
www.score.orgExternal Link logo
1-800-634-0245

Small Business Administration (SBA)
www.sba.govExternal Link logo
1-800-8-ASK-SBA

U.S. Securities and Exchange Commission (SEC)
www.sec.gov/smbus1.htmExternal Link logo
1-202-942-2950

Virginia Department of Business Assistance (VDBA)
www.dba.virginia.govExternal Link logo
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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