New Program Helps Small Businesses Go Public : Investment: Eighteen states have approved a mechanism that lets firms raise up to $1 million a year by selling shares for a minimum price of $5 each.

Like many small-business owners, Elizabeth Gillenwater-Gould relied on family funds to launch her children’s designer-clothing business. But when her brothers were no longer able to support the venture, she knew she had to look beyond her kin for capital.

“Our business started going crazy, but we ran out of money to grow,” said Gillenwater-Gould, whose Designs by Egg Inc. is based in Phoenix.

At first, she turned to a local underwriter to raise $100,000 through a private placement offering. A few months ago, she dropped that idea in favor of a public stock sale--an undertaking that a recent innovation has put within the reach of small businesses in many parts of the country.

The new mechanism--known as the Small Corporate Offering Registration--lets companies raise up to $1 million a year by selling shares for a minimum price of $5 each.

Notice of the offering must be filed with the federal Securities and Exchange Commission. Beyond that, the federal government is not involved in the review or registration process. Instead, the 18 states that have approved the program--among them Arizona, Washington, North Dakota and Texas--handle the regulatory aspects.

Advocates say these state-approved securities are less risky than traditional private placement offerings--or the penny-stock offerings frequently employed by small firms--because companies must provide investors with more detailed information about the risks involved.

“Investors can feel more confident because these securities have been subject to scrutiny by the state,” said Fred Schaffer, the Phoenix attorney who helped draft the offering for Designs by Egg.

For business owners, state-by-state registration is designed to reduce the steep costs of public stock offerings, according to its supporters.

“Many companies are far too small to go to a big securities house and do a Securities and Exchange Commission-approved public offering,” said Dee Harris, director of the Arizona Corporation Commission’s securities division. “This allows a company to have a public offering but not spend a third of the gross proceeds on the expenses involved.”

The 30-page disclosure form, which must be reviewed and approved by state securities officials, serves as a detailed business plan. By answering the questions, corporate executives explain exactly how they plan to spend the money that they raise.

“Over time, we expect to see very widespread use of this program,” said Scott Stapf, investor education adviser for the North American Securities Administrators Assn. in Washington, which developed the mechanism. “This is an effort by the states to come up with a simplified and streamlined way for small companies to raise capital.”

Although dozens of small corporations have applied for permission to sell stock, Stapf said securities administrators are now adding up exactly how much money has been raised.

To qualify for the program, companies must have fewer than 500 individual stockholders and assets below $3 million. Although an offering can be registered in several states, shares may only be purchased by investors living in states where the offering is registered.

California state legislators and a group of their financial advisers recently reviewed the concept. But so far, no one has drafted a bill to allow the registration or sale of such stock in California, officials say.

“We haven’t had any stock issuers come to us and ask for this program,” said Jerry Baker, assistant commissioner in charge of securities regulation for the California Corporations Commission. Baker said that may be because California already has several programs that allow small-business owners to raise capital from insiders and other qualified investors.

Washington state is credited with pioneering the small-corporate-offering concept about three years ago. Of the 36 filings reviewed by state officials, 25 have been approved.

“We are pleased with the number and quality of applicants we’ve had,” said Deborah Boartner, assistant securities commissioner for the state. “We’ve dealt with wineries, title companies, mortgage pools, a garbage recycling center and land development companies.” Although the offering process is simplified, it appears that small corporations are still struggling to raise funds. The handful of Washington state companies that have sold stock so far have raised about $2.5 million, according to Greg Toms, an analyst for the state securities division.

Meanwhile, Arizona, which adopted the program last May, has approved two offerings so far. One was for a computer software firm and the other for Designs by Egg. As of last week, underwriters handling the Designs by Egg offering had raised about $250,000 toward the firm’s goal of $350,000. The company’s sales last year were about $90,000, according to Gillenwater-Gould; she hopes for revenue of $250,000 this year.

Mark Howells, the broker selling the Designs by Egg stock, said most of the shares have been purchased by wealthy individuals in blocks of $3,000 to $5,000.

Gillenwater-Gould said she is anxious to get the money, which will provide working capital and pay advertising and marketing expenses.

Her baby, toddler and children’s clothes sell in better department stores across the country. Gillenwater-Gould, who started the business in the basement of her Colorado Springs home four years ago, designs all the clothes. Her younger brother handles the sales and marketing efforts, leaving her to concentrate on the fashion end of the business.