New stock rules of dubious worth to local business: tough state restrictions undermine feds' streamlining.

The Securities and Exchange Commission has handed down new regulations that ease the process by which small companies may make public offerings, but a securities expert says they will be of no help to small California companies.

The SEC adopted a new "transitional" registration form called SB-1, which can be used by small companies that have attained "transitional status."

Companies with that status are those that had revenues of less than $25 million during their most recent fiscal year and have less than $25 million worth of stock outstanding. These companies are also called small-business issuers.

The SB-1 form can be used for any type of securities offering of $10 million or less. The form basically outlines what companies need to furnish to make such an offering.

Until recently, the alternatives offered to companies making offerings of this size were the Small Corporate Offering Registration process, for offerings of up to $1 million; Regulation A, for offerings of up to $5 million; and the SB-2 form, for offerings of up to $25 million.

Thus, companies making offerings of between $5 million and $10 million can now choose between the SB-1 or SB-2 form.

The disclosure process for companies filing an SB-1 form is easier than the disclosure process for companies using the SB-2 form, said Lee Petillon, a securities attorney with the Century City-based law firm Gipson, Hoffman & Pancione. However, "as a practical matter, there is going to be zero benefit to California businesses" from this new SB-1 form, said Grover Wickersham, a securities attorney in Palo Alto.

Before making a public offering in California, companies must apply for a permit with the California Department of Corporations, as well as file with the SEC. But, "where small business is concerned, they (the Department of Corporations) have a 'use a security, go to jail' attitude," Wickersham said.

When the Small Corporate Offering Registration law, a state law, was passed last year to ease requirements of companies making public offerings of up to $1 million, the California Department of Corporations placed so many restrictions on it that companies were discouraged from using it, Wickersham said.

The Department of Corporations is apt to do the same with the SB-1 form, he said.

The Department of Corporations has no such intention, countered Jerry Baker, the department's assistant commissioner. The department is not planning to place any restrictions on the SB-1 form and will accept the forms as is, Baker said. Companies using an SB-1 form are allowed to file one of two disclosure documents along with it.

One is the U-7 form, used in many states by companies making smaller offerings under the Small Corporate Offering Registration process. The U-7 is written in a question-and-answer format and is easier to use than other disclosure processes, Petillon said.

Another choice is form 1-A, an "archaic" form which requires the company to write its own disclosure and probably requires the assistance of an attorney, Petillon said. Most companies typically choose the U-7 route, he said.

In contrast, companies using the traditional SB-2 form can only use a disclosure process specific to the SB-2, Petillon said.

In addition, companies using the SB-2 form are required to file audited financial statements with the SEC from their two most recent fiscal years. Those filing an SB-1 need to file only one year of such statements if prior years are unavailable. The types of audited financial statements required are those such as balance sheets, and profit-and-loss statements. Also, after going public, transitional companies that had filed an SB-1 form only need to send shareholders the financial statements contained in the their 10-KSB form, a shortened form used by small businesses instead of a 10-K.

In comparison, after going public, companies that used SB-2 forms typically have to provide their shareholders with quarterly financial data and a summary of sales and earnings for the most recent five years, among other things.

Aside from introducing the new SB-1 registration form, the SEC changed the disclosure requirements for all small-business issuers making an acquisition, Petillon said.

Previously, these companies didn't need to file audited financial statements with the SEC if the net income, revenues or assets of the company being acquired were only 10 percent or less of that of the company making the acquisition.

But if the net income, revenues or assets of the company being acquired were more than 10 percent but no more than 20 percent of the company making the acquisition, the acquiring company had to file one year's worth of audited statements with the SEC. Companies had to file two years of financial statements if those figures were greater than 20 percent.

Now the SEC has lowered the standards, Petillon said. Small-business issuers don't have to file any audited financial statements with the SEC if the net income, revenues or assets of the company being acquired is up to 20 percent of that of the acquiring company. For percentages greater than 20 but not more than 40, small-business issuers must file one year of audited financial statements, and two years if any one of those percentages is greater than 40.

The SEC also changed the rules for small-business issuers making private offerings, Petillon said. Under the new regulations, companies making private offerings are required to use the same disclosure forms they would be required to use if they were making a public offering of the same amount.

Previously, small-business issuers making private offerings of less than $2 million had to provide the same information as asked for in the SEC's form 1-A, the archaic form that requires companies to write their own disclosure. Companies making offerings of from $2 million to $7.5 million had to provide the same information asked for on the S-18 form, a simplified registration form that is no longer being used.

Small-business issuers making private offerings of more than $7.5 million previously had to supply the same information asked for on the S-1 form, a basic disclosure form that has been around for 25 years.