designed to highlight and summarize some of the more important information of the offering, to wit: the company and its business, use of proceeds, the principal officers of the company and who is selling the securities. The Executive Summary must be completed as set forth on the form and not embellished in any way. Further, Form U-7 itself was reorganized. The form now contains the following required majoring headings:
Table of Contents (cross reference pagination to e-mail or web site page numbers)
Risk Factors
Business and Properties (with a significant number of enumerated sub-paragraphs)
Milestones
Use of Proceeds
Selected Financial Information
Management's Discussion and Analysis of Certain Relevant Factors
Description of Securities Offered
How These Securities will be Offered and Sold
Management (with a significant number of enumerated sub-headings)
Outstanding Securities
Principal Stockholders
Management Relationships and Transactions
Litigation
Tax Aspects
Other Material Factors
Additional Information
Signatures
Appendices
A world about the "Milestones" section of the SCOR Form U-7 is in order as it is a unique disclosure item in the securities registration process.
The Milestones section covers the 12 month period following receipt of the offering proceeds and asks for a description on how the company plans to achieve, maintain or improve its profitability with the offering proceeds. It is supposed to contain a step-by-step discussion of the events the company will have to achieve to meet its objectives, how management will complete those tasks, what happens if there is a derailment, how it will affect the process, etc. The information sought is essentially a blue print for the creation of a chronological business plan. The Milestone information is to be set forth in the following tabular format:
For businesses seeking public financing for the first time, completion of the Milestones section should be a positive, thought-provoking experience, where one truly puts "pencil to paper" to determine if the business will actually fly.
The "Question" format of Form U-7 has been changed to a specific "Item" format to parallel SEC registration and report forms. (See, e.g., SEC Form S-1 and SEC Regulation S-K [17 CFR 230.229.10, et seq.]).
The amendments also endeavor to make the Items of disclosure clearer, more concise and more relevant to a small business. Where appropriate, explanatory language is broadened to encourage broader disclosure.
Explanatory material, formerly on Form U-7, was moved to the SCOR Issuer's Manual. Footnotes that formerly appeared in the Issuer's Manual, now appear in the text of Form U-7.
The SCOR Issuer's Manual is 116 pages long. While it is very comprehensive, it is also "user friendly." The SCOR Form U-7 is 40 pages long and addresses 118 primary potential items of disclosure. The Issuer's Manual and SCOR Form U-7 can be found at NASAA Reports (CCH) ¶416 and ¶5057.
Tax bill hits seller financing
By A. Jay Goldstein, Esq., Johnson & Bell, and Loren R. Stone, Esq., Loren R. Stone & Associates, Chicago
Under a provision in the "Ticket to Work Incentives Improvement Act of 1999" (H.R. 1180), signed into law recently by President Clinton, accrual basis taxpayers using an installment method for asset sales will no longer be able to defer taxes on gains until payments are actually received. The change applies to all sales that close after December 17, 1999, regardless of when the contracts were actually signed.
Small and medium-sized businesses are those most likely to be affected because those are most likely to be seller financed. Until now, a seller could defer tax on the gain until they actually receive the money. See 26 U.S.C. §453. This bill, in essence, forces businesses to pay the tax on all gains the first year of the sale. This could obviously have a grave impact on someone who seeks to retire or get out of business.
An accrual basis taxpayer recognizes income when its due and expenses when they are incurred even if the income has not been received and the expenses not actually paid. This bill will not affect cash basis taxpayers, who recognize income only as it is received and expenses only after they have been paid.
The IRS requires certain businesses to use the accrual method such as "C" corporations with over $5 million in gross receipts, partnerships in which those corporations are partners, and other entities characterized as "tax shelters."
Taxpayers who close deals after December 17, 1999, may be surprised to find that their tax liability in the first year of the transaction exceeds the amount of cash actually received in the second year. As a result, blame may fall upon the attorneys for not structuring the deal differently.
Possible solutions to consider for dealing with this change:
1. Get more cash up front. The seller will need a larger down payment to cover the increased taxes.
2. Carefully consider "exit strategy" when forming a new business. Whenever there is any possibility that the business will eventually be involved in a deferred or contingent sale of its assets, it is critical to consider whether the selected entity will use a cash or accrual accounting method.
3. Sell ownership interests rather than company assets. The cash basis owner of an accrual basis company may still conduct an installment sale with deferred gains by selling his or her interest in the company rather than the company's assets directly.
4. Restructure the sale. A business may be able to structure a "like kind" exchange to avoid tax problems. See 26 U.S.C. §1031. This may be harder to do if the whole business is being sold as opposed to a major asset such as real estate.
5. Call it an "open transaction." A taxpayer may be able to defer gains where the value of the asset sold is "open" or "uncertain." This could be used where the sale price is contingent on future profits. However, IRS regulations only allow "open transaction" status in "rare and unusual" circumstances. See 26 CFR §15(a).453-1.
Practitioners should be aware of this new law which certainly could hurt small businesses on the block.
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