Genovation SCORs Under New State Law : Stock: Computer firm in Irvine to be first small company in California to make public offering without usual red tape.
An Orange County computer company will be the first in California to sell stock under a new state law designed to make it cheaper and easier for small firms to tap the equity markets, state officials said.
Genovation Inc. of Irvine, which makes specialized computer products such as key pads and keyboards, is expected to start selling 195,000 shares of stock for a minimum price of $5 each as early as today after receiving approval from the state on Oct. 28.
The law, called the small corporate offering registration law, or SCOR, allows small businesses to raise as much as $1 million annually through a public offering without filing many of the complicated, costly forms usually required for a stock sale.
Though the SCOR law became effective on Jan. 1, no California company has yet to complete a SCOR offering, and Genovation is the first even to get the go-ahead from the state.
“Genovation really kept at it. They worked constructively with people in the department who were reviewing their applications, and as a result, they got permission,” said Gary Mendoza, commissioner of the state Department of Corporations.
“We have a keen interest in making it easier for small businesses in the state to raise money. We have a responsibility to protecting investors, but we share the Administration’s goal of trying to reinvigorate the California economy,” he said.
Genovation was founded by Leonard Genest, an inventor who holds 75 patents, including one for the electronic key card, now used in hotels around the world.
During its four years in business, Genovation has made such custom computer products as a credit verification terminal, an aircraft-based satellite navigation control panel and a highway patrol drunk-driving tester.
Its clients have included IBM, Westinghouse and Hughes Aircraft, according to its state filing.
Genovation, a profitable company with $706,460 in assets, is developing an ergonomic keyboard to help people who suffer from the painful carpal tunnel syndrome, which affects wrist movement.
The keyboard can be placed at various angles and beeps at certain intervals to remind the user to shift angles.
Signed by Gov. Pete Wilson last year, the SCOR law allows the Department of Corporations to qualify small California companies to offer securities to the public without being listed on stock exchanges such as the New York, American or Nasdaq.
Under the law, companies must meet various conditions: They must be based in California, cannot be a fully reporting public company that already makes quarterly filings with the federal Securities and Exchange Commission, and cannot be investment firms, such as a mutual fund.
Also, they cannot be involved in the mining or oil industries.
The SCOR regulations that took effect in January were eased by the state later in the year after some companies complained that a section requiring an attorney’s signature on the stock offering forms would cost too much money and keep people from using SCOR.
“We’re going down a path that hasn’t been fully blazed,” Mendoza said. “What’s new is the absence of lawyers in the process.”
Mendoza said the state is conducting an internal review to see if the SCOR requirements could be streamlined even further, paving the way for more eligible companies to sell stock.
So far, he said, only five companies have asked permission from the state to make SCOR offerings.
At least 26 other states, including Arizona and Washington, have similar SCOR programs. Though a notice of the offering must be filed with the SEC, the federal government does not handle the review or registration process. All that is done by the state.
“SCOR was designed for emerging growth companies who can’t afford to go the traditional route,” said Lee Petillon, a Torrance attorney who drafted the California SCOR legislation. “For a typical $1-million offering through the SEC, a company is going to pay at least 33% in offering costs. That’s just too much for a small company.”
A California company can sell SCOR securities in other states, with that government’s approval.
To sell SCOR stock in California, an approved company can either pay an underwriter to make the offering or sell stock directly to investors and advertise the securities in newspapers, said Petillon.
Officials at the Pacific Stock Exchange had hoped this year to begin listing new stock offerings from SCOR companies, but the SEC has not yet approved that proposal.
“From a practical standpoint, one of the problems is that trading these securities will be difficult,” Petillon said.
Critics have raised concerns that unsophisticated investors may face high risks by putting money in such small companies. Others have questioned whether the SCOR market will attract scam companies.
“Absolutely, this is a concern,” Petillon said. “But if you look at the frauds and investments in California that have hurt small investors, the largest have been big companies like Executive Life Insurance and Prudential. . . . If you’re a crook, do it big with a large public company.”
SCOR offerings require that a company offer shares at no less than $5 apiece in order to avoid some of the dramatic price volatility associated with penny-stock offerings, the $1-and-under share offerings that proliferated in California, Colorado and Florida in the early 1980s.
But given the risk involved in any small business, it’s not clear how safe SCOR offerings will be for investors.
Because of the “quiet period”--when the SEC bans promotional publicity before a stock offering--Genovation officials could not comment on their plans.
However, Genovation’s state filing shows that despite the statewide economic downturn, the company’s sales have grown about 50% each year and reached $1.8 million last year.
Proceeds from the stock offering will be used to finance future growth, including increasing the company’s staff from 15 employees to 30, according to the filing.
