New law loosens rules affecting private offerings.

California companies have a powerful weapon in their arsenal to raise capital, and they may not even be aware of it.

Under a little-publicized law that went into effect last June, companies can raise capital by advertising to the general public, while maintaining the status of a private offering.

This was accomplished with the passage of two exemptions - one state and one federal - to pre-existing laws.

For those looking to pursue this issue further, the state exemption is Section 25102(n) of the California Corporate Securities Law and the coordinated federal exemption is the Securities and Exchange Commission's Regulation CE, Rule 1001.

These two "limited public offering" exemptions seem to offer companies the best of all worlds. They can advertise like an initial public offering ("IPO"), but without all the restrictions.

The federal exemption works in conjunction with the state exemption to allow California companies (or those with certain minimum contacts or activities in California) to raise up to $5 million through a public solicitation.

Under these coordinated exemptions, companies do not have to go through the expensive and lengthy process of registering the securities with the SEC or under the California "blue sky" laws. As a result, California companies are poised to raise capital faster and at less expense.

Even in today's hot IPO marketplace, the investment banking community is taking a close look at the exemptions. Yon Friedmann, an investment banker-turned-entrepreneur, believes the exemptions may provide more flexibility than most private placement offerings because they allow a company to advertise.

"Under these exemptions, a company may pre-sell an offering," Friedmann says.

This pre-selling allows a company to appraise the marketplace and raise money faster than traditional private placements. Friedmann said the real advantage is that these exemptions substantially go beyond selling only to "friends, family and business contacts" allowed under most private placements.

Under the coordinated exemptions, companies with more than half of their business (property, payroll and sales) in California and more than half their voting securities owned by California residents may solicit to state residents through an announcement, similar to a tombstone ad.

The ability to advertise the offering allows a broker to "test the waters" and determine the possible success of an offering, says Friedmann.

Many brokers that specialize in raising private capital or bridge financing are interested in utilizing the new exemptions to raise financing for their small and middle-market business clients, says Joe Cerbone, executive vice president of Federated Broker Dealer Service Corp., which has more than 15 broker-dealer members in California, Colorado, Arizona, Texas and Massachusetts.

Financial consultants have also joined the limited-public-offerings bandwagon. Greg MacGanders, a financial consultant for 25 years, says his clients have already raised capital using the exemptions. MacGanders anticipates that in the future more California companies will opt for these limited public offerings over traditional private placements, as it provides companies with the benefit of raising capital directly from the marketplace through advertising. These benefits should translate into raising capital faster and at a lower cost to companies.

The following are highlights of the coordinated federal and state exemptions:

Offering limit. Businesses may raise up to $5 million, with some restrictions.

Number of investors. Companies may solicit and sell securities to an unlimited number of investors.

Type of investor. Investors must be "qualified purchasers," defined as high-net-worth individuals, certain institutional investors. pension funds, non-profits, directors, officers and promoters, as well as other qualified entities.

Disclosure requirements. Companies must provide a disclosure document to certain investors.

Coordination with other exemptions. A company relying on the exemptions for offers and sales of securities in California may also offer and sell securities in other states in reliance of a Regulation D exemption, providing the business complies with that state's securities laws.

Resale limitations. Securities issued under the exemptions have restrictions imposed on their resale.

Filing requirements. A company must file certain notices of transaction with the California Corporations Commissioner. Failure to file results in a loss of the state exemption.

Availability. The exemptions are not available for offers or sales of securities in any roll-up transaction, blind pool or an investment company subject to the Investment Company Act of 1940. The SEC, in a May 1, 1996 release, anticipates the new rule will facilitate companies' capital-raising ability and result in compliance cost savings.

Jeff Osheroff, president of California Economizer, an Orange County technology firm, concurs with the federal government's assessment. He is presently contemplating raising additional capital for a new product line through a limited public offering.

Osheroff believes the exemptions offer an alternative method for businesses to raise capital. "The exemptions enable a company to raise funds in the public arena without incurring the substantial cost of an IPO."

Technology is also increasing the speed with which securities may be sold by companies. With more broker networks and companies offering their securities over the Internet, it is anticipated by many in the investment banking community that these exemptions, with their less-stringent rules against public solicitation, will be used to effectively advertise securities to California residents.

As with all securities transactions, companies contemplating raising capital in reliance on the state and federal exemptions should seek legal counsel for information concerning their specific situation.

Elizabeth Brandon-Brown is an attorney practicing in the areas of securities and corporate law and is of counsel with the downtown Los Angeles law firm Sanchez & Amador.

Small Business is a regular column contributed by EC2, The Annenberg Incubator Project, a center for multimedia and electronic communications at the University of Southern California. Contact Dan Rabinovitch at [phone] with feedback and topic suggestions.