State goofs up small biz plan.

In 1992, Gov. Pete Wilson signed California's Small Corporate Offering Registration law, designed to help fledgling businesses raise capital through state-regulated public offerings of $1 million or less.

More than three years later, however, only one California company has made a successful SCOR offering, and many securities lawyers and consultants who specialize in public offerings say they actively discourage small business clients from using SCOR.

However, change is on the way. The department is easing up some rules, and the state Legislature is considering a bill that would lower some ceilings on SCOR offerings, hopefully encouraging more small firms to jump into the market.

Where did a program designed to help small companies - a key factor in L.A.'s economic growth prospects - go wrong?

Most sources say the biggest problem lies in Sacramento. They say the California Department of Corporations - the agency that oversees SCOR offerings - has resisted the SCOR program, primarily because it wants to shield investors from the high-risk nature of SCOR issues. In effect, sources say, the DOC has fiddled the process with bureaucratic obstacles.

"The way California is trying to make SCOR safe (for investors) is by not approving any SCOR offerings. It's like solving the problem of traffic accidents by getting rid of all the cars," said Rinaldo Brutoco, president of Red Rose Collection Inc., a national mail order catalogue firm in Burlingame, Calif.

Red Rose is California's only company to make a significant SCOR offering since the program went into effect. "It took me more time to do SCOR than to do (other kinds of bigger) public offerings," said Brutoco, adding that he would never do another SCOR offering in California.

Brutoco and other small business leaders say DOC slows the SCOR process with nitpicking questions and sluggish responses to their applications. In addition, the DOC has been accused of doing little to help potential SCOR offerers through the application process itself.

"I think the DOC has a bit of a paternalistic attitude towards (SCOR) offerings, because they've had bad experiences with these kinds of (small company) offerings in the past," said Leonard J. McGill, senior associate at the Irvine office of corporate law firm Jones Day Reavis & Pogue. "There are a lot of unsophisticated investors out there, and if you throw someone sharp out there with (high-risk) stock for sale, it's a recipe for disaster."

Added Twila Foster, a partner at San Francisco-based Jackson Tufts Cole & Black, a law firm that specializes in corporate litigation, "Let's face it - these are high-risk investments." But Foster also pointed out that the state should provide information - not barriers - to potential small investors interested in higher-risk start-up companies.

"The Department of Corporations always wants to protect the investor, but people should still be allowed to make decisions for themselves," she said.

Tom Stewart-Gordon, publisher of the Dallas, Texas-based monthly newsletter "SCOR Report," in a recent issue called the DOC and the state Assembly "the real parents of SCOR failure in California." He cited how long it takes companies to register and California's tough suitability standards as the two most frequently mentioned obstacles facing would-be SCOR offerers in the state.

Successful states

He also pointed out that, while SCOR has all but ground to a halt in California, it has been more successful in the 40-plus other states with SCOR laws - often by directly helping small businesses through the process.

The Washington State Securities Division, with a staff of 32, has two people who work with small business questions full-time, while Utah, with a state securities division of 21 staffers, recently increased its SCOR examiners from one to four.

But in California, the DOC has "strongly resisted the (SCOR) legislation" from the very beginning, according to Lee Bennett, chief assistant to Sen. Robert Beverly, R-Long Beach, who sponsored the original SCOR bill in the state Senate in 1992.

Bill Kennifick, one of the DOC's assistant commissioners, claimed the department - with 425 employees - lacks the resources to promote SCOR. While the DOC has far more personnel than its counterparts in other states, it also handles a broader range of responsibilities than they do.

"Most of our annual funds go to support of individual laws. We're a special fund agency, not a general fund agency," he said, explaining that most DOC funds are earmarked for administration of major securities laws, but not the SCOR law.

Foot-dragging

Still, Gregory McAndrews, chairman of Rhodes Capital Inc., a capital market advisory firm in Marina del Ray, characterized the DOC's role as "obstructionist."

McAndrews, who has helped several companies attempt SCOR offerings, said, "California takes about six months (to do a SCOR registration). You can do the same thing in Nevada in 10 days, and Seattle is just a little longer."

McAndrews, whose first SCOR client was Seaborn Beverages Inc. in Newport Beach, said the DOC sent back his Seaborn SCOR application at least three times before finally approving the registration. Furthermore, he said, the DOC examiner used "improper" and "abusive" language in explaining why Seaborn's applications were returned.

After the application was finally approved, Seaborn managed to raise $445,000 in escrowed funds. They were returned to investors when Seaborn terminated its SCOR offering in February in favor of a different kind of offering.

RELATED ARTICLE: State strives to bolster SCOR

Some recent developments in Sacramento may eventually help the Small Corporate Offerings Registration process, according to Lee Petillon, partner at Torrance-based securities law firm Petillon & Hansen and author of the original SCOR bill.

On one front, the state Department of Corporations instituted rule changes in January after some strong pressure from the capital formation community. The major changes included an easing of suitability standards for investors, and an outright exemption from any suitability standards for investors of $2,500 or less.

In addition, the new rules specified that SCOR offerers could use up to 20 percent of funds from their offerings to cover selling expenses, compared with a previous ceiling of 15 percent.

Also, companies planning offerings of less than $500,000 no longer need to submit audited financial information on their applications, but instead may send information prepared by an independent certified public accountant.

On the legislative front, Petillon said, SB261 - which passed in one Senate committee in late July and is currently pending in an another Senate committee should help activate the SCOR process if it passes into law.

Its main provisions include: reducing the minimum price for SCOR shares from $5 per share to $2; allowing SCOR offerings to include both preferred and common stock (offerings now can contain only common stock); and allowing SCOR applications to proceed if a simple majority of the applicant company's directors is in favor of the offering (at present, companies can apply to make SCOR offerings only if all of their directors are in favor).

- Douglas Young