Smaller Firms Can Raise Public Sector Capital.

The SEC, apparently realizing that a gap existed in the financing opportunities for smaller businesses, under-took major new initiatives to zero in on the capital needs of smaller businesses. The efforts of the SEC culminated in final rules adopted in April, 1993.

The new rules and published forms should encourage many more companies, and especially those companies that felt precluded by the cost of public offerings, to address their capital needs. A small-business issuer is an entity other than an investment company that meets all of the following tests for each of its last two fiscal years:

* Annual revenues of less than $25 million.

* Aggregate market value of voting stock held by "the public" is less than $25 million.

* Is not a subsidiary of a company that does not qualify as a small- business issuer.

The most significant rule changes are:

* issuers, other than certain development-stage companies can raise up to $1 million in any 12-month period in a general solicitation without registering under the Securities Act of 1933 (amended Rule 504).

* The ceiling on an exempt small offering is raised from $1.5 million to $5 million and allows issuers to test the waters by soliciting indications of possible investor interest before incurring an offering circular's preparation costs (Reg. A amendments).

* The safe-harbor provisions for prospective information on trends and events that may affect operating results or financial condition were revised to apply to statements made in a Reg. A offering statement.

* A new disclosure system which permits an issuer to raise capital by using abbreviated disclosure documents and special "small business forms." The new rules and regulations (S-B) change the financial reporting requirements and reduce the cost of financial preparation and auditing. The financial statements must comply with GAAP, but do not require details on investments, valuation accounts, short-term borrowings, property and depreciation schedules. The small business financial statement requirements, are modeled after the old S-18 and included in a stand-alone package in item-310.

One refinement to the financial statement requirements for small-business issuers, provides an automatic waiver of the requirement for one year of a significant acquired business's audited financial statements, if they are not otherwise available, and the significance of the acquisition does not exceed 40% of the acquiring company. However, if an issuer has the acquirees unaudited financial statements or other financial information, the data must be provided. Small-business issuers engaged in operations involving real estate, mining, insurance banking, utilities and oil and gas should refer to applicable industry guides for disclosure requirements.

Amanda Bunn is an independent financial consultant based in Hermosa Beach.