Capital Offensive Is Scoring in the Capitol : Legislators, Officials Are Taking Notice of Forum Trying to Change State Securities Laws

A handful of California investment attorneys, concerned about the lack of capital for small companies, is gaining influence as a lobbying voice for small business.

The 3-year-old California Capital Access Forum can already tally far-reaching changes in securities law that it helped put into effect this year. It has the ear of such notables as Securities and Exchange Commission Chairman Arthur Levitt and Jere Glover, head of the Small Business Administration’s Office of Advocacy.

Last month, the group scored a victory with House passage of a measure that would ease restrictions on small-company stock offerings. With support from Gov. Pete Wilson and the head of the state Department of Corporations, the measure is expected to win state Senate approval this summer.

The bill “is our Holy Grail,” said San Francisco attorney William B. Evers, chairman of the forum. “But once we get it passed and get this state up and running for small business, then we’ll tackle the national scene.”

The forum has also set its sights on the federal Investment Company Act of 1940, which regulates mutual fund investments and restricts the flow of cash to risky start-up businesses. The forum wants to reform the law to allow mutual fund money to flow into venture capital accounts. Evers envisions a new class of brokers handling investment pools for middle-income clients, which would “change the whole nature of investment opportunities,” he said.

It may be strong language and a radical concept for a fledgling group wrestling with reforms in California’s arcane securities laws, but Evers, a 43-year veteran of corporate investment law, said he has been surprised at how speedily the group’s reforms have been embraced by government securities regulators.

The forum began as a nonprofit group after a handful of California securities lawyers discovered during a meeting in Washington that they all agreed that the state had the most onerous securities laws. For example, Evers said, because of strict California regulations, it’s easier for giant corporations to raise $25 million with federal SEC approval than it is for a small-business owner in California to get state approval to raise $3 million through a public offering.

In addition, although California businesses last year received $2.4 billion in venture capital funds, only $225 million was seed or start-up money, according to Price Waterhouse. The gap between what California gets in start-up capital and what it needs has been estimated at as much as $3 billion, said Lee Petillon, the forum’s vice chairman and a Torrance-based securities lawyer.

“We have a tremendous capability in California for economic growth, development of new technologies and creation of new jobs,” Petillon said. “We can’t do this without [venture] capital.”

To encourage the flow of more capital to small businesses, the forum first shepherded through a bill to allow small companies with SCOR offerings (the federally allowed small-corporate offering registration) to sell preferred stock along with common stock, and to sell it at prices as low as $2 per share, $3 lower than previously allowed.

The forum also counted a victory when the former commissioner of the state Department of Corporations, Gary Mendoza, pressed for a change in California’s securities laws to allow exemptions to the “suitability rule.” That rule specified that only investors with high net worth could buy stock. Now any investor, regardless of income or assets, can buy up to $2,500 worth of stock.

The rule change, which went into effect in January, is a “major, major breakthrough,” Evers said, because, although it exposes small investors to more risk, it also gives them the opportunity to receive the high returns enjoyed by wealthy investors.

The forum worked with Wilson administration staff members to devise the reform measure the House passed last month. If approved, the bill would drop the state’s merit-review process for small-company stock offerings and instead allow such companies to file stock disclosure statements directly with the SEC, Petillon said.

Last year, 1,010 companies received permission for public stock offerings in California, but 34,000 others pursued private offerings, a less complicated procedure but riskier for investors and harder for small companies when it comes to raise capital, Petillon said.

“What we have now is a permitting process that encourages issuers to rely on private placements, decreases liquidity by making it difficult to invest, concentrates risk in a small number of investors and [provides] not that much information,” said Keith Bishop, the new commissioner of the state Department of Corporations and a reform bill supporter. “To the extent we increase information and liquidity, those are risk-minimizing steps.”

The changes would allow businesses like Albert and Irene Clark’s Zoo-Phonics Inc., a reading materials publishing company, to expand, Petillon said.

Three years ago, the Clarks wanted to sell $1 million in stock to California investors because the little company in Groveland, near Yosemite, wasn’t ready to jump onto the giant New York Stock Exchange or Nasdaq Stock Market.

But the Clarks were denied permission by the Department of Corporations, which meant the company had to remain small for lack of venture capital, Irene Clark said.

“It’s limiting,” a still-disappointed Clark said. “We could have enlarged our scope tremendously if we had had the means.”