Stock offerings prospect not so hot for small firms; regulations hamper efforts to bolster small businesses.

A new state law originally intended to make stock offerings easier for small companies is being dunked in a restrictive regulatory soup, sources say. And now a bill designed to make stock offerings even more attractive is in trouble.

The Small Corporate Offering Registration, or SCOR law, passed by lawmakers last September, allows small companies wanting to make public offerings of up to $1 million to streamline legal costs by filing a standard disclosure statement with the state Department of Corporations.

Previously, companies were required to submit a costly, tailor-made disclosure statement or prospectus to the department that was responded to with additional questions. That process often cost as much as $200,000.

But the Department of Corporations has handed down regulations that restrict the SCOR program's effectiveness, sources say, noting that not one California company has filed to complete a SCOR offering.

The controversial SCOR regulations were put out for public comment last November and were sharply criticized. The comment period ended in mid-January. Now the department is reviewing the comments and expects to reveal revised regulations this week, said Jerry Baker, assistant commissioner of the securities regulation division at the state Department of Corporations.

But the regulations are riddled with problems, sources say.

"Oh, they are terribly restrictive," said one attorney close to the issue.

For one, the regulations would require small companies to file a disclosure form in California that is different from those filed under similar laws in other states, said attorney Twila Foster, a member of the State Bar's business law section's corporations committee.

In the other states where similar laws are effective, small companies are required to file a Form U-7 disclosure document, also known as the Small Corporate Offering Registration form, developed for small companies by the North American Securities Administrators Association.

But the Department of Corporations is mandating that California companies instead file a Form C-7 document, California's version of the U-7 SCOR form that contains some different questions.

Thus, small companies filing offerings in more than one state have to fill out two different forms, which costs both time and money, Foster said.

Furthermore, these companies could run into sticky situations regarding liability because they would be liable for information disclosed on one document and not on the other.

The pending regulations also present a major problem, Foster said, because they require an attorney to sign the C-7 document certifying the attorney made a diligent effort to determine there were no inaccuracies and the form is complete.

The attorney's signature could prompt investors to think the attorney did more than he or she actually did, Foster said, adding that in California attorneys are not now required to sign even larger, multimillion-dollar offerings.

In addition to the controversial regulations, a new SCOR-related bill, S.B. 115, introduced last month by Senator Robert Beverly, R-Long Beach, is attracting problems. The bill would increase the amount of money a company could raise under SCOR from $1 million to $5 million. But at least one attorney close to the bill charges that this increase may violate Securities and Exchange Commission rules which exempt companies from registering with the SEC for filings of $1 million or less.

"I'm getting conflicting information here," said Terry Miller, director of staff for the Senate Banking Committee, where S.B. 115 has been assigned. "What I need to do is cut through this and figure out whether, if we pass $5 million, we lose exemption from the feds."

William Kenefick, assistant commissioner at the department, pointed out the SEC passed new rules last year increasing the registration exemption to $5 million, but agreed that "there could be a problem" with the bill's wording. He said amendments could still be made to the bill as it was just introduced.

The Pacific Stock Exchange filed last year with the SEC to begin trading SCOR offerings, but has not yet heard whether the SEC approves.

"Our filing is still in the hands of the SEC," said Dale A. Carlson, spokesman for the PSE. He said stock exchange officials recently traveled to Washington D.C. to talk to SEC officials.

"I think that they came away feeling that the SEC was favorably disposed and that approval could be expected in a reasonably short time," Carlson said.