Long Beach forum addresses issues related to capital formation.

LONG BEACH - Raising capital is no easy matter for small businesses in California, and a group of people from the state's financial community got together last year to do something about it. The result was the first-ever California Capital Access Forum, held February 1995 in San Francisco.

The organizers were so pleased with the results of last year's meeting that they came south to convene the forum a second time earlier this month in Long Beach. The 1996 meeting covered a number of key issues, including use of the Interact to market small-business offerings, ways to expedite government approval of small-business offerings, and how to make small-business shares more accessible to small investors.

The 1996 forum attracted a number of big names from the national financial world, including Securities and Exchange Commission Chairman Arthur Levitt, North American Securities Administrators Association President Dee Harris and Charles Bennett, director of corporate financing at the National Association of Securities Dealers.

One central topic at this year's forum was how small businesses can use the Internet as a low-cost way to attract investment dollars, said Clay Womack, president of Santa Monica-based The Direct Stock Market Inc. and president of this year's forum.

"At the forum, one of the issues we talked about was ... using the Interact to publicize small (public) offerings," he said. He added that The Direct Stock Market, on the World Wide Web at http://www.scor-net.com, is developing as one site where small businesses can promote their offerings and publicize company news. The site currently contains listings for some 500 small companies, he said.

Paring out merit

Before a small-business offering can be publicized on the Internet or anywhere else, however, it must first be approved by California's Department of Corporations and/or the SEC. To speed up this process, the 1996 forum addressed two major issues that have historically impeded the flow of small-business offerings through state and federal agencies.

The larger of the two issues involves a fundamental difference between state government regulators and small-company officials in their attitudes toward investors. State regulators are focused on shielding investors from offerings they consider unsound. Meanwhile, small-company officials assert that investors should be allowed to decide for themselves where to invest their money, provided they are given complete financial information on the companies in which they are investing.

At the heart of this ideological divide lies the issue of merit review - the procedure used by the DOC to determine which state-filed public offerings are approved. Under the present system of merit review, DOC officials may veto any state-filed public offering they feel is not "fair, just and equitable," even if the filer has complied with all disclosure requirements.

"One of our goals was to see if we could eliminate or abrogate merit review for small-company offerings (in California)," said Lee Petillon, vice chairman of this year's forum and a partner at Torrance-based securities law firm Petillon & Hansen.

To address this issue, some participants of last year's forum were instrumental in getting Jan Goldsmith, R-Poway, to introduce AB 2465 in the Assembly several months ago. The statute has currently passed out of the Assembly Banking Committee and is awaiting action in the Assembly Appropriations Committee.

"(AB 2465) would eliminate merit review. We're absolutely enthralled with it," said Petillon.

In place of merit review, AB 2465 would introduce a full disclosure system in California, whereby the DOC would be required to approve any public offering if the filer complied with all disclosure requirements.

The second impediment to small-company offerings discussed at this year's forum comes at the federal rather than state level. On that matter, attendees at this year's forum encouraged SEC Chairman Levitt to name an ombudsman at the SEC to act as point man on small businesses' capital-formation issues, according to Jim McCall, a partner at Solana Beach, Calif.-based Capital Access Partners and a past president of the forum.

"(Levitt) said, at the foram, they'd take (the ombudsman issue) under consideration. Since then, he's called back and said they're acting to create the position," McCall said.

Improving investor access

After an offering is approved by the DOC or SEC, marketing shares to investors is the next step where many small California companies encounter obstacles. On that front, this year's capital access forum addressed two specific areas where the flow of small-company offerings is often impeded.

The first involves state-imposed suitability requirements for all would-be investors in small-company issues. Under current regulations, only investors with high net worth and/or high income can invest in small-company offerings, because the DOC deems such issues too risky for small investors. Thus, the vast majority of Californians are prohibited by suitability requirements from investing in small-company offerings.

To change that situation, members of this year's forum threw their weight behind SB 261, which was recently signed into law by Gov. Pete Wilson.

The new law allows for two classes of investors in small companies, explained McCall of Capital Access Partners. Like before, the first class consists of high-net-worth and/or high-income individuals, who may invest in small companies at their own discretion. Meanwhile, the new law creates a new class of small investors, who can invest up to $2,500 in a small-company offering without being subject to any suitability requirements.

Lastly, this year's forum also raised the issue of recognizing and regulating a new class of broker/dealers who market small-company shares to investors.

"These (broker/dealers) work in a gray area right now, so we think they need a new kind of license to legitimize (and regulate) them. We want to bring them into the spectrum of recognized financial activities," said McCall.

To address the issue, he said, the SEC may soon announce new guidelines that would define and regulate this new class of broker/dealers. After the guidelines are set, certifying and regulating the new class of broker/dealers would be the NASD's responsibility, he added.