FINAL REPORT OF THE SEC GOVERNMENT-BUSINESS FORUM ON SMALL BUSINESS CAPITAL FORMATION Prepared by the Staff of the Division of Corporation Finance U.S. Securities and Exchange Commission JUNE 1993 PREFACE In 1992, the Government Business Forum on Small Business Capital Formation again met regionally, this time in the southwestern portion of the United States, specifically Scottsdale, Arizona. This regional approach for Forum sessions was first tried in 1990 with satisfactory results. The 1992 Forum reemphasized the desirability and importance of frequent regional meetings. While the Executive Committee is committed to holding the Forum in the nation's capital regularly, the benefits which flow from regional sessions will continue to be a factor in the Committee's choice of the Forum's site location; the Committee is currently of the view that regular regional meetings should be continued. The recommendations from the 1992 Forum follow. As usual, many thoughtful proposals were developed. The participants gave careful consideration to the ideas encompassed there, in the hope that the needs of small business can be accommodated, with the recognition that limited, appropriate, and necessary governmental regulations in the public interest must be permitted. We thank them for their efforts and are pleased to present this report. The Executive Committee for the Eleventh Annual SEC Government-Business Forum on Small Business Capital Formation EXECUTIVE COMMITTEE Chair: Mary E. T. Beach Senior Associate Director Division of Corporation Finance Securities and Exchange Commission David G. Ball Assistant Secretary Pension and Welfare Benefits Administration U. S. Department of Labor John W. Ball Staff Director and Chief Counsel Senate Committee on Small Business Janice Booker Director, Customer and Industry Affairs Office of Comptroller of the Currency Victor Coppola Director, National Emerging Business Services Coopers & Lybrand Raymond J. DeAngelo Director of Professional Affairs Association for Investment Management and Research Jerry Feigen Adjunct Professor, Georgetown University, School of Business; President, Jerry Feigen Associates Seymour Fiekowsky Assistant Director (Business Taxation) Office of Tax Analysis, Department of Treasury John Paul Galles Executive Vice President National Small Business United Dee R. Harris Director, Arizona Securities Division (Representative of the North American Securities Administrators Association) J. Drew Hiatt Staff Director (Minority) Senate Committee on Small Business John J. Huntz, Jr. Noble Ventures International Stanley Keller Palmer and Dodge (Representative of the American Bar Association) Charles Ludlam Counsel, Senate Committee on Small Business E. Burns McLindon Councilor, Buchanan & Mitchell (Representative of the American Institute of Certified Public Accountants) Peter McNeish President, National Association of Small Business Investment Companies John J. Motley, III Vice President National Federation of Independent Business Allen Neece Neece, Cator & Associates, Inc. (Representative of the National Venture Capital Association) Douglas F. Parrillo Senior Vice President, Communications National Association of Securities Dealers William Provosty Manager, Small Business Banking Unit American Bankers Association Christine Russell Director, Small Business Center U.S. Chamber of Commerce Martha Scanlon Assistant Director, Division of Research and Statistics, Board of Governors of the Federal Reserve System Herbert Spira Counsel Economic Stabilization Subcommittee House Banking Committee Marti Sworobuk Executive Director Independent Bankers Association of America Donald F. Terry Staff Director House Committee on Small Business Diane Thomas Vice President National Association of Investment Companies Wayne Upton, Jr. Project Manager Financial Accounting Standards Board September 10, 1992 PANEL MEMBERS Moderator - Jean E. Harris, Esq. O'Connor, Cavanagh, Anderson, Westover, Killingsworth & Beshears One E. Camelback Road, Suite 1100 Phoenix, Arizona 85012-1656 Panelists - G. Robert Lucas II, Esq. Vorys, Sater, Seymour & Pease 52 Gay Street Columbus, Ohio 43216-1008 Mike Liles, Jr., Esq. Bogle & Gates Two Union Square 601 Union Street Seattle, Washington 98101-2346 Hugh H. Makens, Esq. Warner, Norcross & Judd 900 Old Kent Bank Building Grand Rapids, Michigan 49503-2489 SMALL BUSINESS "TESTIMONY" Gregory Petras National Health Enhancement Systems Inc. William B. McKee W. B. McKee Securities Inc. William Kemsley, Jr. AMG Energy, Inc. Steven I. Fried Western United National Bank September 11, 1992 PANEL MEMBERS Moderator - Jerry Feigen, Adjunct Professor Georgetown University, School of Business; President, Jerry Feigen Associates Columbia, Maryland Panelists - Henry ("Pete") Linsert Chairman of the Board Martek Corporation 6480 Dobbin Road Columbia, Maryland 21045 Lee Petillon, Esq. Gipson, Hoffman & Pancione 1901 Avenue of the Stars Suite 1100 Los Angeles, California 90067-6002 Bruce Shewmaker New Century Fund, Inc. 12 Briarwood Drive Short Hills, New Jersey 07078 E. Roger Novak Managing Director Grotech Capital Group, Inc. 9690 Deereco Road Timonium, Maryland 21095 SMALL BUSINESS "TESTIMONY" Bruce L. Davis Computers & Technology Ross M. Horwitz First Commerce & Loan L.P. Andrew Davlin The Davlin Corporation Quinn Williams, Esq. Snell & Wilmer Max Ramras Registered Capital Corporation 1992 FORUM STAFF Richard K. Wulff Gerald L. Werner A. Carr Conway Regina A. Baker Twanna M. Young TABLE OF CONTENTS I. SUMMARY OF FORUM RECOMMENDATIONS........................... 1 II. INTRODUCTION............................................... 14 III. SECURITIES REGULATION...................................... 17 IV. EDUCATION.................................................. 31 V. BANKS...................................................... 35 VI. SMALL BUSINESS ADMINISTRATION.............................. 37 VII. TAXATION................................................... 41 VIII. MISCELLANEOUS.............................................. 45 IX. FORUM PARTICIPANTS......................................... 47 I. SUMMARY OF FORUM RECOMMENDATIONS 1. SECURITIES REGULATION Securities Act of 1933 Proposed Form SB-1 should be available for transactions of up to $15 million. The holding period for Rule 144 stock should be reduced to one year. The amounts eligible for sale under Rule 144 should be reviewed and increased. Rule 147 should be amended to eliminate the requirement that the issuer be incorporated within the state where the offer is being made; that the residence of purchasers, not offerees, control the intrastate nature of the offering; reduce the 80% within the state use of proceeds requirement to permit the purchase of equipment from a business located in another state; and introduce a good faith and substantial compliance standard. Electronic filing, electronic reporting and electronic trading of securities issued pursuant to Rule 504 should be explored. The Rule 504 limit should be increased to $3 million and higher if the Section 3(b) limit is increased, with a condition of state registration. Rule 504 offerings which have been state registered should be exempted from the Commission's penny stock rules, if there has been no stock split of the shares since the registration event.Rule 504 should be revised to permit firm commitment underwritings. The definition of "accredited investor" contained in Regulation D should be amended to permit more individual investors to qualify under the definition. This might be accomplished by reducing the current standards for income and net worth for individuals. The definition of "accredited investor" should be amended to include sophisticated investors with a safe harbor description of such an investor. Additional objective tests for individual accredited investors should be developed such as having a college education, a CPA certificate or a license to practice law. General solicitations of accredited investors should be permitted under Rule 506. The number of permitted non accredited investors under Rules 505 and 506 should be increased to 100. The Regulation A offering ceiling should be raised to $10 million either through legislation or administratively if possible. Securities Exchange Act of 1934 The new SB reporting forms under the Exchange Act should be available for use on a non filed basis by Regulation A and SCOR offering issuers. The NASD should permit 7 year (rather than the current 5 year limit) underwriters warrants for emerging companies. Certain provisions of the "Penny stock rules" of the SEC and States should be amended to facilitate initial public offerings and secondary market trading. Registered broker-dealers should be required to underwrite offerings for small businesses, not unlike the requirements for banks under the Community Reinvestment Act. Investment Company Act Small Business Investment Companies (SBICs) should be exempted from the provisions of the 40 Act where they are raising less than $10 million if they have complied with the 33 Act. The conflicts between the 40 Act provisions covering Business Development Companies (BDCs) and other investment companies should be immediately reconciled where the issuer is an SBIC. The means for creating BDCs should be simplified and a mechanism should be established for trading among such funds (and other qualified institutional investors) in their portfolio securities in a manner similar to Rule 144A. The public resale of pools of collateralized bank loans to small businesses should be exempt from the 40 Act. A safe harbor should be provided for investment company directors in the valuing of non-market small business securities. The SEC should seek legislation to provide reduced exposure to federal securities laws liability for outside directors of SBICs, as well as for other public companies. A secondary market for SBIC securities should be developed. Federal/State Regulation The SCOR format should be expanded to include limited partnerships and limited liability companies. State and federal securities regulators should consider exemptions with no limits on the number of purchasers, but with restrictions on the amount invested by each such purchaser (for example $1,000), which exemptions would require disclosure comparable to that required by Regulation D in an offering involving non-accredited purchasers. The SEC should take a proactive role in achieving consensus amongst the states for greater uniformity in interpretation and implementation of the securities laws and encourage cooperation by the states in a regional approach as taken by the NASD. Securities registrations which meet SEC requirements should be preempted from state merit and disclosure requirements. Such preemption should not preclude a notice filing of any and all offering materials, a consent to service of process and a small handling fee ($100 maximum). There should be uniformity between the States SCOR or U-7 requirements and the federal Regulation A. States should adopt uniform requirements for the use of the SCOR format, such as the type of eligible security, transfer restrictions, financial criteria etc. NASAA should revise the $5 per share requirement in SCOR to $2 or $3. If NASAA does so, the SEC should reduce the $5 per share limit in Rule 15c2-6. Qualification by coordination at the state level with federal Regulation A filings should be permitted. The SEC should work with the states to improve federal state relations. The SEC should work with NASAA to develop a uniform Regulation A (including test the waters) to be adopted by the states. For purposes of state securities regulation, test the waters material may be required to be filed with the regulatory authority up to 5 days prior to use as long as it may be deemed acceptable for publication should the authority raise no objection within such time frame. Exemptions and registration should be coordinated among the states and the federal systems. The merit states should develop uniform flexible standards directed toward early stage offerings. There should be interstate coordination in the application of these standards through the home state where appropriate. Studies and Task Forces The SEC should exert leadership in the furtherance of establishing a task force comprised of securities specialists from each of the 50 states to determine the differences and similarities among the state securities systems with a view to having consistency among their regulatory systems, for the protection of their citizen investors and which will assist the capital formation efforts of small businesses. A task force with representatives from the SEC, NASAA and the ABA should be formed to review regulatory impediments to public financing of SBICs. Regulators should conduct an economic analysis of the dollar limitations and number of purchaser limitations set forth in the small offering registrations and exemptions, reviewing whether or not such numbers are sensible and bear an actual relationship to reality. Liquidity issues under SCOR should be studied to determine if other alternatives are available such as establishing a small capital formation marketplace - electronic like NASDAQ, and defined safe harbors for private transfers similar to Rule 144A. A joint study by the NASD, NASAA, SBA, SEC and private industry groups should be commissioned to determine the proper definition of accredited investor. The SEC should study the liability provisions and their impact on the small business initiative and make rule and legislative changes. A study should be made of the localization of capital raising to determine if incentives might be developed for local investment. For example, if out of state investment banking houses were to insure that a minimum portion of any monies raised from a community would be reinvested in that community, could not specific exemptions from securities laws or tax incentives be developed. 2. EDUCATION A securities law outreach/education program should be implemented on a state and/or federal level to inform the business and financial community of the availability of SCOR and other similar securities registration/issuance avenues. Innovative means to finance such programs should be considered such as using moneys received as fines for securities violations or filing fees. Regulators should publish the fact that when capital is scarce more businesses will be approached by unscrupulous persons promising (usually for up front fees) to raise capital for such businesses; regulators should be available to assist such businesses in determining whether or not such person is unscrupulous. The formation of efficient information dissemination mediums that would provide issuers with a comprehensive data base of financial service intermediaries (i. e., broker/dealers, banks, audit companies) that are active and interested in providing capital to small businesses should be encouraged. The use of Royalty Revenue Financing Investments by small businesses should be encouraged. This security provides a return to investors which is tied directly to an identifiable source of revenue from a business-line in a company. It gives an investor a priority on the cash flow of the business line which is paid out before the cash flow is accounted for on the company's income statement. A forum where small businesses can be exposed to financial intermediaries that would be interested in selling the securities of a small company, or would be interested in providing capital to small businesses in the form of loans, factoring receivables or otherwise should be provided or facilitated. An "educational forum" that would provide the SBA with an opportunity to inform banks and companies of the importance of the provisions of the recently enacted legislation which benefits small businesses (HR 4111) should be encouraged. An education program should be developed to advise bankers that the Community Redevelopment Act governs loans to small businesses as well as for low and moderate income housing. The Import Export Bank should increase its public awareness by initiating an educational outreach program through the Department of Commerce. The establishment of "business incubators" that would provide a focal point for government, major corporations, and universities and colleges to support small businesses through joint venture opportunities, business-vocational training, and general mentor activities should be authorized. 3. BANKS At present, of the 14,000 U. S. banks, 11,000 are signed up with the SBA, but only 1,000 are active in its programs. Further, SBA loss rates are less than 3% of guarantees on over $3 billion. Therefore, it would appear that the success of this program needs to be more widely disseminated in order to dispel the preconceived notion that the SBA guarantee process is not successful. Banking regulations that inhibit loans to small business should be reduced. The definition of nonperforming loans should be made more understandable for bankers and less subjective to bank regulators. Bank examiners should elevate bank small business lending activities to the same level of importance as mortgage lending activities in the annual examination. A credit card type of revolving credit should be developed for use as an asset based loan by small business with a cap of $10,000 to $20,000. When packaged properly, such credit could be sold in a secondary market. 4. SMALL BUSINESS ADMINISTRATION The guarantee authority of the SBA should be amended to increase its maximum limit from $750,000 to $1.5 million. The creation of a joint venture loan program between a federal agency (e. g. SBA) and state or local agencies to target microloans (loans of less than $50,000 to $100,000) to small businesses that can be used to finance operations or inventories, provide working capital, or for asset purchases should be authorized. The micro-loans should be targeted to businesses through the state or local agencies and be repayable on terms similar to medium term notes or revolving credit facilities. Alternatively, the funding could be provided by local institutions with a joint federal and state guarantee of all or a portion of the principal and interest. Models for this program currently exist. The SBA should accept applications from non regulated lenders since the banking industry is under intense regulatory pressure and have curtailed small business lending. Enhancements should be developed to the interbank, intrabank and securitization programs for risk sharing of small business loans using the SBA section 7(a) loan guarantee program as a model. The ability of SBICs and BDCs should be leveraged to make investments (equity and debt) in new and seasoned small business by establishing innovative mechanisms for individual investors to invest in SBICs and BDCs along with proper incentives for maintaining appropriate risk return trade offs. Examples would include SBIC investment pools focused on specific industry clusters. New exemptions under existing securities laws which would recognize that SBICs are themselves small businesses which need flexibility in raising capital. The establishment and licensing of additional SBICs with full powers to exploit the features of the new SBIC programs preferred securities should be encouraged. The SBA in connection with licensing SBICs should encourage experienced and broad based boards and managements. The limit should be raised so that SBICs would not be taxed on accumulated earnings up to $2 million. The SBA should develop guarantees for asset based lending (accounts receivable, inventory, revolving credits). 5. TAXATION Pass through tax credits for employers who increase total employees should be established. Passive loss provisions to offset earned income or portfolio income for real estate dealers and professionals and high net worth individuals should be reintroduced. Tax incentives for major corporations and businesses to joint venture with small business should be expanded and established. The capital gains tax should be reduced for direct, long term investments made in the securities of start-up and expanding businesses. The capital gains tax relief should increase on the basis of the length of time the stock is held up to 100%. There should be allowed a tax free rollover of the proceeds from the sale of one small business into another small business. A one-time $125,000 capital gains exclusion for the sale of a small business for owners aged 55 or older should be adopted. The amount of stock qualifying for section 1244 treatment should be increased from $1 million to $5 million and this limit should be indexed to inflation. All losses on the sale of small business securities should be applicable to ordinary income under section 1244. Net operating loss carryforward rules (section 382) should be changed so that increases in paid in capital or defined "small business transactions" (such as mergers between small businesses) would not trigger "change in control" limitations on the use of n.o.l.s. The research and development tax credit should be partly refundable for research intensive small businesses that do not have sufficient tax liability against which to claim such credits. An immediate tax write off should be provided for investments in start up companies to be used for the purchase of equipment and inventory as well as working capital up to $50,000 per investment up to 5 investments per year; providing for roll over privileges if the funds are invested in another business within a one year period. To encourage liquidity in the secondary markets for small business securities and to aid capital formation for such issuers, broker dealers who make a market for a stated number of small business issuers should be given a tax break, by for example having the capital necessary for such market making activity not be considered taxable income. Under subchapter S, the number of shareholders should be increased to 50; corporations, partnerships and trusts should be permissible shareholders; subsidiaries should be allowed; and passive losses should not include operating S company losses. 6. MISCELLANEOUS Appropriate revisions should be made in ERISA to make it possible for pensions fund to invest a small percentage of their funds in small business issuers (using SEC definitions). It may be necessary to exclude such investments from the "prudent man" rule or to define prudent standards to allow for such investments. Limited liability companies should be permitted nationwide. Provide limited immunity from prosecution for lawyers and accountants for their services if performed in good faith. Institute award caps on damages resulting from successful litigation against professional service advisors. Agencies with jurisdiction over small business capital formation should actively coordinate overlapping regulations to eliminate conflicting regulation. II. INTRODUCTION The U. S. Securities and Exchange Commission is required by law to host an annual forum which focuses on the capital formation concerns of small business. Thus, and in furtherance of the mandate of the Small Business Investment Incentive Act of 1980, in each of the past eleven years, the SEC Government- Business Forum on Small Business Capital Formation has been convened. A major purpose of the Forum is to provide a platform for small business to highlight perceived unnecessary impediments to the capital-raising process. Numerous recommendations have been developed at these Forums seeking legislative and regulatory change in the areas of taxation, securities regulation, financial services and state and federal assistance. Participants at the Forum typically are small business owners, venture capitalists, government officials, trade association representatives, academicians and advocates of small business. While a number of different formats have been tried over the years, a very effective one for purposes of the development of recommendations for governmental action has included the use of small interactive participant groups; and in recent years, the Forum has typically included this feature. The Eleventh Annual Forum was held in Scottsdale, Arizona on September 10 and 11, 1992. The Forum is governed by an Executive Committee comprised of senior government officials and representatives of small business who have a strong interest and expertise with the issues and capital-raising problems of small business. The Executive Committee organizes, plans and implements the Forum. For the 1992 Forum, the Executive Committee determined that the format of the sessions would begin with a panel discussion each day addressing current small business issues as encountered by actual small business entrepreneurs. Each panel would be followed by the remarks of willing small business representatives concerning their experiences and concerns in the raising of capital and governmental impediments they may have encountered. The remainder of the sessions would be devoted to the small working groups comprised of the Forum participants with a view toward development of Forum recommendations for legislative and/or regulatory action. The Forum was opened with introductory remarks from SEC Commissioner J. Carter Beese, Jr. The respective morning sessions then proceeded with the scheduled panel discussion, followed by the "testimony" of small business representatives. A luncheon address was presented by Thomas P. Kerester, the Chief Counsel for Advocacy of the U. S. Small Business Administration. The afternoon break-out sessions produced many proposed recommendations for adoption by the Forum. Eighty-seven recommendations were approved by the Forum participants and are highlighted in the following section of this report. Eight proposed recommendations did not receive a plurality of favorable votes and thus do not constitute recommendations of the Eleventh Annual Forum. Those proposals were: "Stock acquired through the exercise of underwriter warrants should be saleable under Rule 144(k)." "The objective standards which govern individual accredited investors as well as sophisticated investors should be eliminated and replaced with disclosure requirements and an emphasis on the ability of the investor to understand such information." "The Regulation D exemptions should be eliminated and replaced with a registration system which gears required disclosure to the size of the offering." "In order to empower the investor, the SEC should encourage the development of a system to license purchasers for certain investments through state regulatory authorities." "The states should enhance enforcement provisions by increasing licensing fees on, e.g. broker dealers and registered representatives, to deal with revenue shortfalls." "States should accept without further review U-7 filings which have been qualified in another state." "Profits from sales of qualifying section 1244 stock should be exempt from capital gains tax." "The use of leased employees should be encouraged." While the U.S. Securities and Exchange Commission hosts this annual convocation of small business friends and advocates, and is pleased to serve as such, it in no way seeks to sponsor or influence any of the Forum's recommendations. While a number of these matters are of substantial interest to the Commission as an institution, it takes no position on any of the recommendations. The views in this report are those of the Forum participants. III. SECURITIES REGULATION A. Statement of the Issues Compliance with securities regulations may impose substantial costs upon issuers of securities. There is a geometric progression in the impact of such costs relative to the smallness of the issuer. Coordination of federal and state regulation continues to be needed and substantial relief from costs would flow from a more unified system of regulation. B. Recommendations Securities Act of 1933 Proposed Form SB-1 should be available for transactions of up to $15 million. The Securities and Exchange Commission has proposed to adopt a transitioning system of disclosure for small business issuers. For the registration of their securities, the form which has been proposed contains a dollar limitation of $5 million in a 12- month period. In order to be more useful, this ceiling should be increased to at least $15 million. The holding period for Rule 144 stock should be reduced to one year. Rule 144 is a Commission rule which, among other things, permits the sale of restricted securities (those acquired in a non-public offering and thus initially exempt from registration under the Securities Act) by persons that have held such securities for at least two years. This time limit was designed in order to show that the purchaser's investment intent had been fulfilled. It has been more than 20 years since this provision has been adopted. It is time to reduce the holding period to one year which is an adequate showing of investment intent. The amounts eligible for sale under Rule 144 should be reviewed and increased. Rule 144 permits the sale over a three month period of the greater of one percent of an issuer's outstanding securities or the average weekly trading volume in the security over the four week period preceding the sale. These allowable amounts for sale should be increased. Rule 147 should be amended to eliminate the requirement that the issuer be incorporated within the state where the offer is being made; that the residence of purchasers, not offerees, control the intrastate nature of the offering; reduce the 80% within the state use of proceeds requirement to permit the purchase of equipment from a business located in another state; and introduce a good faith and substantial compliance standard. The intrastate offering exemption from the registration requirements of the Securities Act is one of the more difficult provisions for an issuer to successfully lay claim. Rule 147 provides the Commission's guidance on some of the more difficult features of the exemption, but still much confusion remains. The recommended revisions would make the exemption more understandable as well as useful. Electronic filing, electronic reporting and electronic trading of securities issued pursuant to Rule 504 should be explored. The Commission's entry into the area of electronic filing should make it easier to develop helpful mechanisms to aid in the delivery of important information to the markets for Rule 504 securities. These markets will not become vital without current and accurate information about the issuers whose securities are traded there. The Rule 504 limit should be increased to $3 million and higher if the Section 3(b) limit is increased, with a condition of state registration. As the Commission gains experience with its recent changes to the Rule 504 exemption, permitting the public offer and sale of up to $1 million worth of securities by most issuers without any federal regulation beyond the anti-fraud provisions, it should consider increasing the area of non-federal compliance through an increase in the dollar ceiling available under the exemption. Rule 504 offerings which have been state registered should be exempted from the Commission's penny stock rules, if there has been no stock split of the shares since the registration event. The Commission's rules for brokers dealing in penny stocks impose significant additional compliance burdens upon them and thus discourage brokerage interest in handling these securities. Relief from these provisions for Rule 504 transactions would make the exemption more useful for small businesses. Rule 504 should be revised to permit firm commitment underwritings. Because the Regulation D exemptions are only available for issuer and not secondary transactions, firm commitment underwritings are not permissible under the exemption. The greater availability of public offerings allowable now under Rule 504 should encourage the Commission to at least permit firm commitment underwritings under this provision in recognition of the significant positive contribution professional involvement in the transaction would make. The definition of "accredited investor" contained in Regulation D should be amended to permit more individual investors to qualify under the definition. This might be accomplished by reducing the current standards for income and net worth for individuals. The Commission should consider broadening the definition of accredited investors for purposes of Regulation D. Particularly with respect to natural persons the income and net worth tests appear to be set at an artificially high level, which could be safely lowered without impairing the goals of the public interest and the protection of investors. The definition of "accredited investor" should be amended to include sophisticated investors with a safe harbor description of such an investor. Another approach to broadening the categories of natural persons who might qualify as accredited investors is to provide an objective definition of sophistication in terms of investor suitability or ability to fend for oneself and access to appropriate information, and then categorize such persons as accredited. Additional objective tests for individual accredited investors should be developed such as having a college education, a CPA certificate or a license to practice law. Persons meeting certain high educational levels should be presumed to be financially sophisticated. The Commission should determine what educational requirements it feels comfortable with in this regard. It is important that more accredited investors be recognized as being within the scope of the Commission's exemptive provisions. General solicitations of accredited investors should be permitted under Rule 506. There does not appear to be a strong reason to impose the additional compliance proscription against general solicitations where the only investors are accredited. By definition, these persons are highly sophisticated and able to fend for themselves. Providing an issuer with a greater scope of opportunity to reach these investors would give small business a significant benefit, with no significant diminution of protection to the investors in question. The number of permitted non-accredited investors under Rules 505 and 506 should be increased to 100. Presently, Rules 505 and 506 limit the numbers of non- accredited investors to 35. This level was artificially set by the Commission when Regulation D was initially adopted. The number of permitted non-accredited investors could be safely increased at this time. The Regulation A offering ceiling should be raised to $10 million either through legislation or administratively if possible. The Commission should aggressively seek an increase in the section 3(b) exemptive authority under the Securities Act. The current dollar limit in Regulation A is too low to entice professional investment banker interest in most cases. Raising the dollar ceiling to $10 million would make the exemption very useful to smaller businesses. Securities Exchange Act of 1934 The new SB reporting forms under the Exchange Act should be available for use on a non-filed basis by Regulation A and SCOR offering issuers. The Commission should formally suggest that issuers that have used Regulation A to sell their securities, encourage markets for these securities by maintaining current information about themselves on the formats developed by the Commission for small business issuers and have this information available for requesting broker/dealers. The NASD should permit 7 year (rather than the current 5 year limit) underwriters warrants for emerging companies. The present duration limitation for underwriters warrants under the NASD's guidelines regarding underwriters compensation should be slightly modified to permit longer term warrants. Certain provisions of the "Penny stock rules" of the SEC and States should be amended to facilitate initial public offerings and secondary market trading. The new rules and regulations governing the trading of penny stocks has an unfortunate impact upon the marketing of initial public offerings of emerging issuers. Some accommodation for legitimate offerings by these small businesses needs to be developed by the Commission. Registered broker-dealers should be required to underwrite offerings for small businesses, not unlike the requirements for banks under the Community Reinvestment Act. A mechanism should be developed in the Commission's compliance regulations for registered broker dealers which would encourage them to underwrite a certain volume of small business offerings each year. Investment Company Act Small Business Investment Companies (SBICs) should be exempted from the provisions of the 40 Act where they are raising less than $10 million if they have complied with the 33 Act. SBICs were designed to encourage government and private individuals to act in partnership to provide a capital base which might be borrowed against - utilizing the borrowings for investment into small businesses in need of capital for growth. An SBIC is a federally funded, private venture capital firm. Compliance with the provisions of the 40 Act is more difficult and expensive than compliance with the Securities Act. The present system offered by the Commission offers some relief from the registration requirements of the Securities Act but not much relief from the 40 Act. Greater relief for SBICs which are licensed and regulated by the Small Business Administration would be appropriate. The conflicts between the 40 Act provisions covering Business Development Companies (BDCs) and other investment companies should be immediately reconciled where the issuer is an SBIC. BDCs are a kind of venture capital company which are subject to special provisions under the 40 Act. They are closed-end management investment companies whose securities are registered under section 12 of the Exchange Act, elect to be treated as BDCs and are operated for the purpose of making specific types of investments to small businesses and make available significant managerial assistance to the companies in which they invest. These BDCs are subject to provisions in the 40 Act which are somewhat different from those applicable to other investment companies, especially with respect to conflicts of interest, executive compensation and leverage. This same treatment should always be, but currently is not, an option for an SBIC regardless of its ability to meet the requirements for BDC status. The means for creating BDCs should be simplified and a mechanism should be established for trading among such funds (and other qualified institutional investors) in their portfolio securities in a manner similar to Rule 144A. The Commission should facilitate the creation of BDCs by having a simplified format for their creation as well as a simpler way for them to become qualified under the provisions of the 40 Act. Marketing the investments of such funds should be encouraged by the development of an approved "exchange" such as those that have been developed for the private resale among institutional investors of privately placed securities. The public resale of pools of collateralized bank loans to small businesses should be exempt from the 40 Act. While the Commission has recently provided some relief from the 40 Act provisions so that sales of securities collateralized by small business loans are now at least feasible and in fact some public offerings of these collateralized certificates have been registered under the Securities Act, the widest possible relief from the application of the 40 Act is recommended for these funding vehicles. The protections offered by the Securities Act alone are sufficient for the protection of investors in this area. A safe harbor should be provided for investment company directors in the valuing of non-market small business securities. The obligation of investment company directors to provide current valuations of the company's market portfolio is an important one; it is also extremely difficult with respect to the valuations of non-market securities. In view of the liabilities under the 40 Act, some protection should be afforded to conscientious directors. The Commission should develop a safe- harbor provision for this purpose. A possible side benefit would be a greater willingness of more capable people to become directors of small capitalization venture funds. The SEC should seek legislation to provide reduced exposure to federal securities laws liability for outside directors of SBICs, as well as for other public companies. Recommendations such as this one which seek relief from liability provisions are designed only for relief attributable to good faith but unsuccessful decisions. It is believed that this sort of protection will widen the field of willing capable people available to assist small business in their capital raising functions. A secondary market for SBIC securities should be developed. Liquidity for investments broadens the available source of capital. While there are some limited markets for some SBIC securities, wider and deeper markets would be very helpful to small business. Federal/State Regulation The SCOR format should be expanded to include limited partnerships and limited liability companies. The special question-and-answer format developed by the state securities administrators and representatives of the American Bar Association is very useful and helpful to corporate issuers planning to offer their securities for sale to the public. Other issuers such as limited partnerships and the new limited liability company are not eligible to use the SCOR form because they are not corporate issuers although they should have access to the same benefits offered by the format. Either new forms or instructions to the SCOR form should be developed to broaden the availability of the question-and-answer format to all issuers of securities. State and federal securities regulators should consider exemptions with no limits on the number of purchasers, but with restrictions on the amount invested by each such purchaser (for example $1,000), which exemptions would require disclosure comparable to that required by Regulation D in an offering involving non-accredited purchasers. The regulatory focus of investor protection should be redirected to the dollar amount of the investment put at risk. Thus, by correlating the need for disclosure to a small dollar amount invested, more small businesses could reach more potential investors under the exemptive formats currently in place. The SEC should take a proactive role in achieving consensus amongst the states for greater uniformity in interpretation and implementation of the securities laws and encourage cooperation by the states in a regional approach as taken by the NASD. The Commission should aggressively seek agreement among the states and itself on securities regulatory matters. The approach suggested would charge the Commission regionally with developing consensus among the states within the geographic region. Securities registrations which meet SEC requirements should be preempted from state merit and disclosure requirements. Such preemption should not preclude a notice filing of any and all offering materials, a consent to service of process and a small handling fee ($100 maximum). Filings made with the Commission which satisfy its disclosure requirements should be accepted without further consideration by state securities regulators. This recommendation does not preclude the state from imposing a modest handling fee. There should be uniformity between the States SCOR or U-7 requirements and the federal Regulation A. The usefulness of uniform forms is diminished by the imposition of myriad overlayments of particular special requirements which vary from jurisdiction to jurisdiction. The Regulation A model should be followed without variation at every state level. States should adopt uniform requirements for the use of the SCOR format, such as the type of eligible security, transfer restrictions, financial criteria etc. If uniformity with the federal example can not be accomplished, then conformity among the states at least should be attainable. NASAA should revise the $5 per share requirement in SCOR to $2 or $3. If NASAA does so, the SEC should reduce the $5 per share limit in Rule 15c2-6. Small business would get greater benefit from the availability of the SCOR form if the artificial $5 offering price requirement were reduced. While the purpose of this provision is to keep questionable penny stock promotions off the format, this purpose could be accomplished by a reduction to $2 or $3. A comparable change to the Commission's penny stock sales practice rule for registered broker/dealers would establish a correlative benefit. Qualification by coordination at the state level with federal Regulation A filings should be permitted. While Regulation A filings which satisfy states qualification or registration standards is currently feasible, states laws should be revised to accept federal Regulation A filings according to federal terms which permits the use of unaudited financial statements. The SEC should work with the states to improve federal state relations. Duplication of effort is apparent in the dual system of securities regulation present in the United States. The relationship between the federal and states regulators should always place a premium upon cooperation toward a uniformity of regulatory system which will work to reduce duplication of effort and increased expense to persons subject to such regulation. The SEC should work with NASAA to develop a uniform Regulation A (including test the waters) to be adopted by the states. A uniform small business registration exemption with a provision which permits an issuer to gauge possible interest in the purchase of its securities is essential to making public securities sales a viable capital raising device for small business. Regulation A appears to be a device with elements that are satisfactory to federal and state regulators alike and thus could become a good model of uniformity. For purposes of state securities regulation, test the waters material may be required to be filed with the regulatory authority up to 5 days prior to use as long as it may be deemed acceptable for publication should the authority raise no objection within such time frame. It is essential that test the water type disclosure be acceptable to state securities regulators. Implementation of mechanisms which do not conflict with the federal system would be acceptable to small business if they do not present a heavy cost burden or eliminate the main benefit of the procedure which is to find out whether or not the issuer's securities are of interest for public investment. Exemptions and registration should be coordinated among the states and the federal systems. Uniformity of disclosure systems would save issuers significant amounts in non-productive overhead expense and provide the same important protections to investors. The merit states should develop uniform flexible standards directed toward early stage offerings. There should be interstate coordination in the application of these standards through the home state where appropriate. The lack of uniformity among the states which apply principles of "just fair and equitable" to citizen purchasers cause excessive and unnecessary costs to small businesses attempting to raise capital through the sale of their securities. The states should develop consistent interpretations of these standards, particularly with regard to early stage offerings. Studies and Task Forces The Forum participants suggested that a number of studies be undertaken by regulatory authorities to develop information which would be of inestimable value in the development of useful but not overly burdensome regulations. The requested studies and task forces in the recommendations appear to be self-explanatory. The SEC should exert leadership in the furtherance of establishing a task force comprised of securities specialists from each of the 50 states to determine the differences and similarities among the state securities systems with a view to having consistency among their regulatory systems, for the protection of their citizen investors and which will assist the capital formation efforts of small businesses. A task force with representatives from the SEC, NASAA and the ABA should be formed to review regulatory impediments to public financing of SBICs. Regulators should conduct an economic analysis of the dollar limitations and number of purchaser limitations set forth in the small offering registrations and exemptions, reviewing whether or not such numbers are sensible and bear an actual relationship to reality. Liquidity issues under SCOR should be studied to determine if other alternatives are available such as establishing a small capital formation marketplace - electronic like NASDAQ, and defined safe harbors for private transfers similar to Rule 144A. A joint study by the NASD, NASAA, SBA, SEC and private industry groups should be commissioned to determine the proper definition of accredited investor. The SEC should study the liability provisions and their impact on the small business initiative and make rule and legislative changes. A study should be made of the localization of capital raising to determine if incentives might be developed for local investment. For example, if out of state investment banking houses were to insure that a minimum portion of any monies raised from a community would be reinvested in that community, could not specific exemptions from securities laws or tax incentives be developed. IV. EDUCATION A. Statement of the Issues The small business entrepreneur spends most available time on the business. Government services and opportunities need to be more effectively brought to the attention of these business persons. Information in hand will lead to success in the business which in turn will help the economy. B. Recommendations A securities law outreach/education program should be implemented on a state and/or federal level to inform the business and financial community of the availability of SCOR and other similar securities registration/issuance avenues. Innovative means to finance such programs should be considered such as using moneys received as fines for securities violations or filing fees. Information about the available formats to sell securities as a capital-raising device, especially when special or simplified formats are available, needs to be more widely distributed within the small business community. Regulators should publish the fact that when capital is scarce more businesses will be approached by unscrupulous persons promising (usually for up front fees) to raise capital for such businesses; regulators should be available to assist such businesses in determining whether or not such person is unscrupulous. Many legitimate small businesses have been victimized by shell company promoters in the past. It is evident that new and more sophisticated schemes will continue to be devised in the future. A continuous information distribution system needs to be established so that small businesses contacted by such unscrupulous persons will not continue to be their prey. It is not only investors that need protection in this type of situation. The formation of efficient information dissemination mediums that would provide issuers with a comprehensive data base of financial service intermediaries (i. e., broker/dealers, banks, audit companies) that are active and interested in providing capital to small businesses should be encouraged. Sources which list professional capital-raising experts are not widely available. Some efficient, reputable system for this purpose needs to be established and effectively supervised. The use of Royalty Revenue Financing Investments by small businesses should be encouraged. This security provides a return to investors which is tied directly to an identifiable source of revenue from a business-line in a company. It gives an investor a priority on the cash flow of the business line which is paid out before the cash flow is accounted for on the companies income statement. Education about new and unique methods of capital-raising opportunities is sorely lacking. Some outreach program which would inform entrepreneurs of recent developments such as the Royalty Revenue Financing technique would be very worthwhile. A forum where small businesses can be exposed to financial intermediaries that would be interested in selling the securities of a small company, or would be interested in providing capital to small businesses in the form of loans, factoring receivables or otherwise should be provided or facilitated. Some type of meeting market needs to be developed for small businesses where they can become acquainted with all types of professional financiers. An "educational forum" that would provide the SBA with an opportunity to inform banks and companies of the importance of the provisions of the recently enacted legislation which benefits small businesses (HR 4111) should be encouraged. Public Law 102-366 (September 4, 1992), the Small Business Credit and Business Opportunity Enhancement Act of 1992, provides better access to credit under the general SBA guarantee program as well as the certified development lending program. Potential participants in these programs, both borrowers and lenders, need to be fully informed not only about the programs but also the availability of funding and guarantees. An education program should be developed to advise bankers that the Community Redevelopment Act governs loans to small businesses as well as for low and moderate income housing. In many cases, available assistance is not getting to the persons that could use it simply because its existence is not known by the most likely parties to a possible transaction. The parameters of the Community Redevelopment loan program is another case in point. Information about these programs needs to be widely distributed to both lenders and potential borrowers. The Import Export Bank should increase its public awareness by initiating an educational outreach program through the Department of Commerce. Most persons are unaware of the mission of the Export- Import Bank and in particular the assistance it can provide to the small business community. It is an independent agency of the United States dedicated to facilitating and providing aid in the financing of exports of U. S. goods and services. Part of the basis for its programs is to level conditions with other countries where the competition is government sponsored. The bank offers direct loans as well as guarantees for this purpose. This agency should devote more funds and time to making itself better known so that the benefits it offers can be more fully utilized. The establishment of "business incubators" that would provide a focal point for government, major corporations, and universities and colleges to support small businesses through joint venture opportunities, business-vocational training, and general mentor activities should be authorized. Small business incubators offer shared services at low rates and flexible terms. This approach curbs overhead expense for a start-up company and helps keep its emphasis on the business. University and government projects have shown the success and desirability of this approach. These programs should be revitalized and new ones encouraged to develop. V. BANKS A. Statement of the Issues A prime source for small business capital has always been the commercial lender. Unfortunately, too heavy of a dependence upon this source leads to problems when general economic conditions are not strong. Changes in the lending system would lead to a steady availability of commercial loans for small business and this would be a desirable situation. B. Recommendations At present, of the 14,000 U. S. banks, 11,000 are signed up with the SBA, but only 1,000 are active in its programs. Further, SBA loss rates are less than 3% of guarantees on over $3 billion. Therefore, it would appear that the success of this program needs to be more widely disseminated in order to dispel the preconceived notion that the SBA guarantee process is not successful. It is believed that the full benefits of the available SBA loan authority is not being utilized by small business due to ignorance about the program and its positive attributes. The SBA needs to educate both banks and the small business community about their excellent lending programs. Banking regulations that inhibit loans to small business should be reduced. Unnecessary regulatory overhead reduces efficiency at many levels. Many of the banking regulations are causing banks to restrict perfectly reasonable loans to small businesses without a corresponding benefit to depositors, investors or the public interest. Relaxation of the bank examiner standards would go a long way to ease the difficulties many small businesses have been experiencing in getting the funds which are needed to keep their businesses healthy. The definition of nonperforming loans should be made more understandable for bankers and less subjective to bank regulators. A subjective definition of this category of loans has a negative impact upon small borrowers because it makes the lender less likely to make what might be considered to be a riskier loan. In commercial transactions this type of subjectivity has a disproportionate impact upon smaller businesses. A specific definition of nonperforming loans would give lenders the assurance they need to assess risk and it is believed, free up more funds for small business. Bank examiners should elevate bank small business lending activities to the same level of importance as mortgage lending activities in the annual examination. It is believed that bank examiners have a prejudice against small business loans, thinking them to be substandard and therefore not as valuable as residential realty loans. This is not universally true; in fact many small commercial loans are more creditworthy than residential loans. The bank examiners should keep this in view in the course of their examinations. A credit card type of revolving credit should be developed for use as an asset based loan by small business with a cap of $10,000 to $20,000. When packaged properly, such credit could be sold in a secondary market. The home equity line of mortgaging has become very popular and useful for personal lines of available credit. A similar product should be developed by the banks for small businesses utilizing their commercial properties as collateral. VI. SMALL BUSINESS ADMINISTRATION A. Statement of the Issues The U. S. Small Business Administration provides financial and other assistance, as well as advocacy service for the nation's small businesses. This agency as conceived by Congress is an important instrument in furthering and assisting the nation's small companies, and recognizes the role which such businesses play in the success of our overall economic picture. B. Recommendations The guarantee authority of the SBA should be amended to increase its maximum limit from $750,000 to $1.5 million. It is believed that a doubling of the guaranteed loan authority at this time is appropriate given the mandatory participation of independent lenders in the program, and a satisfactory debt collection experience. The creation of a joint venture loan program between a federal agency (e. g. SBA) and state or local agencies to target microloans (loans of less than $50,000 to $100,000) to small businesses that can be used to finance operations or inventories, provide working capital, or for asset purchases should be authorized. The micro-loans should be targeted to businesses through the state or local agencies and be repayable on terms similar to medium term notes or revolving credit facilities. Alternatively, the funding could be provided by local institutions with a joint federal and state guarantee of all or a portion of the principal and interest. Models for this program currently exist. A joint federal/local loan program which would offer small loans for working capital and other current transactional needs should be developed. Such a program is necessary and would be a great aid in getting small businesses through temporary cash flow difficulties. The SBA should accept applications from non regulated lenders since the banking industry is under intense regulatory pressure and have curtailed small business lending. Broadening the lender base beyond banks would be beneficial to borrowers, and also make the banks more competitive. Institutional type lenders willing to participate in the program should be given the opportunity. There is no reason to believe that their loans would be any riskier than those made by banks, since they would be placing their own funds at risk and would be utilizing the same type of borrower risk analysis as a bank lender. Enhancements should be developed to the interbank, intrabank and securitization programs for risk sharing of small business loans using the SBA section 7(a) loan guarantee program as a model. The risk of repayment from a small business loan has historically been a cause for the lack of investor interest in these opportunities. When credit enhancements have been added, investors become interested. The SBA loan program has been successful in the secondary marketing to private investors of the guaranteed portion of such loans. Other enhancements besides government guarantees are available such as over-collateralizing pools of loans and letters of credit. Commercial institutions should make such enhancements available which would in turn make the enhanced portion of the small business loans more liquid and more likely to be attractive to private investors. This development in turn would make more lendable capital available for small business from the commercial lender. The ability of SBICs and BDCs should be leveraged to make investments (equity and debt) in new and seasoned small business by establishing innovative mechanisms for individual investors to invest in SBICs and BDCs along with proper incentives for maintaining appropriate risk return trade offs. Examples would include SBIC investment pools focused on specific industry clusters. New exemptions under existing securities laws which would recognize that SBICs are themselves small businesses which need flexibility in raising capital. The usefulness of the SBIC as a venture capital source will be increased by introducing innovative features to the SBIC vehicle. The dedication of an SBIC to a single industry segment would be appealing to some investors. Higher dollar exemptions should be available under both the Securities Act and the Investment Company Act in view of the SBA's licensing of these companies. As previously noted some of this relief can be accomplished within the SEC's current administrative authority. Some changes could require legislative action. As an incentive to causing the SEC to initiate relief of this nature, it may be necessary from the SBA to demonstrate that their licensing procedures are an adequate safeguard for the interests of investors as well as the government. The establishment and licensing of additional SBICs with full powers to exploit the features of the new SBIC programs preferred securities should be encouraged. The recent revitalization of the SBIC program and in particular its emphasis upon equity investments needs to be more widely disseminated through advocacy presentations throughout the country. The SBA in connection with licensing SBICs should encourage experienced and broad based boards and managements. The effectiveness of the new SBIC program will be enhanced through the introduction of not only highly experienced business persons but also community leaders and others into the SBIC boardroom. The limit should be raised so that SBICs would not be taxed on accumulated earnings up to $2 million. Special tax treatment would further enhance investor interest in the SBIC financing vehicle. A modest change such as that proposed would produce significant benefits for small businesses through increased availability of potential borrowings which in turn could be of substantial benefit to the economy and outweigh any present loss to the Treasury. The SBA should develop guarantees for asset based lending (accounts receivable, inventory, revolving credits). Guaranteed small business loans should be offered on softer assets such as accounts receivable. While not as apparent as a building or piece of machinery, these assets are real, valuable and just as adequate for collateral. It is believed that the existence of the guarantee would not make lenders less careful in their assessment of the risk of loans so collateralized. VII. TAXATION A. Statement of the Issues Tax policy has a heavy impact upon smaller commercial enterprises. In some cases, costs of compliance with federal taxing authorities means the difference between success and failure. Tax law should always provide relief for the smallest of affected entities. B. Recommendations Pass through tax credits for employers who increase total employees should be established. In view of the importance to the economy of having as close to full employment as possible, the utilization of national tax policy to reach such goal is recommended highly. Rewarding those that increase the numbers of persons employed is a good starting point. Passive loss provisions to offset earned income or portfolio income for real estate dealers and professionals and high net worth individuals should be reintroduced. It would be an aid to the real estate markets, should the tax policy introduced in 1986 with devastating impact on such investments be reversed. The abuses addressed and eliminated by that legislative action had the probably unintended effect of working unnecessary harm to many viable, honest business transactions. Tax incentives for major corporations and businesses to joint venture with small business should be expanded and established. Big business can be and has been a very helpful partner to small business. It should be a part of the national tax policy to encourage this sort of joint venturing and networking. Tax breaks offered to big business to do this task could continue to, as it has in the past, lead to bigger dividends to all parties, including the Treasury, involved in the effort. The capital gains tax should be reduced for direct, long term investments made in the securities of start-up and expanding businesses. The tax differential for capital gains encourages the investment and risking of capital in small and developing businesses. Because such investment leads to more and better jobs, a substantial differential should be a centerpiece of the nation's tax policy. The capital gains tax relief should increase on the basis of the length of time the stock is held up to 100%. Several of the industrialized nations have a more generous tax policy with respect to the treatment of capital gains than the United States; up to and including complete relief from taxation. A graduated system of relief based upon the length of time the investment has been held would be an enlightened approach to this issue. There should be allowed a tax free rollover of the proceeds from the sale of one small business into another small business. A limited relief should be established for the continuous investment of capital in small business. The fact that the particular business changes from time to time and ultimately is not the one initially invested in, should make no difference for purposes of capital gains tax relief. A one-time $125,000 capital gains exclusion for the sale of a small business for owners aged 55 or older should be adopted. An exemption similar to that available for the sale of a principal residence should be established for a small business owner. The amount of stock qualifying for section 1244 treatment should be increased from $1 million to $5 million and this limit should be indexed to inflation. Certain transactions in the stock of qualifying small business corporations are treated specially under the Internal Revenue Code. In general, these corporations are companies with capital and paid in surplus of under $1 million. Raising this level to $5 million and having it track future inflationary activity would provide a more realistic picture of the small business corporation deserving of the benefits of section 1244 tax treatment. All losses on the sale of small business securities should be applicable to ordinary income under section 1244. Individual taxpayers may deduct as ordinary losses up to $50,000 in any one year ($100,000 on a joint return) attributable to sales, exchanges or worthlessness in a section 1244 situation. No dollar limit should apply in a qualifying transaction. Net operating loss carryforward rules (section 382) should be changed so that increases in paid in capital or defined "small business transactions" (such as mergers between small businesses) would not trigger "change in control" limitations on the use of n.o.l.s. As noted in a prior year's recommendation, restrictions in these n.o.l. carryforward rules have a disproportionate negative impact upon transactions involving small businesses. The restrictions should be relaxed for small business transactions. The research and development tax credit should be partly refundable for research intensive small businesses that do not have sufficient tax liability against which to claim such credits. Small businesses typically can not get the full advantage of this type of tax credit. Modification to permit better utilization for qualifying businesses is recommended particularly in this area where research and development can produce greater revenues subject to future federal taxation. An immediate tax write off should be provided for investments in start up companies to be used for the purchase of equipment and inventory as well as working capital up to $50,000 per investment up to 5 investments per year; providing for roll over privileges if the funds are invested in another business within a one year period. Providing this type of tax advantage to potential investors will increase investments in small businesses. To encourage liquidity in the secondary markets for small business securities and to aid capital formation for such issuers, broker dealers who make a market for a stated number of small business issuers should be given a tax break, by for example having the capital necessary for such market making activity not be considered taxable income. Liquidity in a potential investment will make the investment more attractive and saleable. Encouraging broker-dealers through this modest tax benefit to hold open markets for small business securities greatly outweighs the loss in tax revenues, which is believed to be small, this recommendation would involve. Under subchapter S, the number of shareholders should be increased to 50; corporations, partnerships and trusts should be permissible shareholders; subsidiaries should be allowed; and passive losses should not include operating S company losses. As presently structured, each of the above recommendations would prevent a company from qualifying for S company status. These companies do not pay income tax, rather they divide and pass along income and expense to their shareholders. This tax device is very useful to small businesses. The recommended qualification changes would make the status more widely available to clearly small businesses. VIII. MISCELLANEOUS Recommendations Appropriate revisions should be made in ERISA to make it possible for pensions fund to invest a small percentage of their funds in small business issuers (using SEC definitions). It may be necessary to exclude such investments from the "prudent man" rule or to define prudent standards to allow for such investments. Providing the recommended revisions to the controlling provisions of the Employee Retirement Income Security Act would permit qualifying pension plans to invest funds in small business. This development would be good for small business offering it another source of funding, and good for the pension plan and ultimately the participating employee by offering an investment that could pay off with steady, yet increasing benefits. Limited liability companies should be permitted nationwide. This business format is new; it is a creature of local law which offers benefits of both partnership and corporate status. It is an organizational format which is attractive to small business on a number of levels, including possible taxation advantage. All states should offer this form of business organization. Provide limited immunity from prosecution for lawyers and accountants for their services if performed in good faith. High costs of hiring professional advocates and auditors are in part attributable to the possibility that such professionals may in the future be subjected to lawsuits, and in some cases frivolous ones, concerning the matters of service they have provided to their clients. Good faith actions should be exempted from such attack. A corresponding benefit would be a reduction in the costs of such professional services to clients including small businesses. Institute award caps on damages resulting from successful litigation against professional service advisors. An alternative to the prior recommendation would be to institute reasonable limits upon the judgment amounts attainable from these professional advisers. Agencies with jurisdiction over small business capital formation should actively coordinate overlapping regulations to eliminate conflicting regulation. This recommendation addresses the impact of duplicative governmental regulations and their onerous and unnecessary costs upon persons subject to such regulation. Particularly in the area of regulating capital formation, such duplicative regulation should be eliminated and a single regulator appointed to administer the remaining provisions. IX. FORUM PARTICIPANTS James L. Adler, Jr. Thomas Alberts Squire, Sanders & Dempsey Securities Bureau 40 N. Central Avenue, Suite 2700 Des Moines, IA. 50319 Phoenix, AZ. 85004 Cary R. Alburn III Pamela Allman Cary R. Alburn III, Attorney at Law Pamela Allman, CPA A Professional Corporation 1805 E. Cabrillo 319 South 5th Street Suite C Laramie, WY. 82070 Santa Barbara, CA. 93108 Cora Alston Esperanza Guerrero-Anderson Securities Division Milestone Growth Fund Nashville, TN. 37243-0485 2021 E. Hennepin Avenue N. Minneapolis, MN. 55422 Michael L. Atkinson E. C. (Carl) Bails, Jr., C.F.O. Stanford Capital Partners Isley's R V Service Center, 325 S. First Street 2225 W. Main Street San Jose, CA. 95113 Mesa, AZ. 85201 Alexander P. Bardy Tom Bargsley Tubby's Inc. Tommy J. Bargsley, CPA 34500 Doreka 13809 Research Boulevard Fraser, MI. 48026 Suite 705 Austin, TX. 78750 Rick Barker Barry H. Barnett Frederick C. Barker, CPA Attorney at Law 13819 Apache P.O. Box 6584 Tustin, CA. 92680 Albuquerque, MN. 87197-6584 James A. Barrett Donald R. Bays Midwest Ore Processing Co. Inc. Donald R. Bays, C.P.A. RR1 -Box 117A 10407 N. 22nd Street Plainville, IN. 47568 Phoenix, AZ. 85028 Linda Becker Philip Bell, CPA Becker & Noble, P.C. Franklin Institute 1130 E Missouri, Suite 402 1511 Metairie Road Phoenix, AZ. 85014 New Orleans, LA. 70005 Brenda Benham Burton M. Bentley Securities Commission Lawyer Vancouver, British Columbia 14441 N 28 Street V6Z 2H4 Canada Phoenix, AZ. 85038 Brett Berri K. C. Blair, Jr. Office of the Secretary of State Circle Transport, Inc. Jefferson City, MO. 65101 11330 Kinsman Road Newbury, OH. 44065 Mr. F. Lynn Blystone Charles H. B. Braisted Tri-Valley Corporation Davis Polk & Wardwell 2001 Westwind Drive, Suite 14 450 Lexington Avenue Bakersfield, CA. 93301 New York, NY. 10017 Dave C. Bromund Nancy Burke Barnes & Thornburg Securities Section 1313 Merchants Bank Building Salem, OR. 97310 11 South Meridian Street Indianapolis, IN. 46204 Gavin M. Chen Frank Childers U.S. Department of Commerce/MBDA Securities Division H5092 Charleston, WV. 25305 Washington, DC. 20011 Steve Clark Zane Cohn LaVoie, Clark, Charvoz & May, P.C. Zane M. Cohn & Associates, P.C. 3320 N. Campbell, Suite 200 3500 Three First National Plaza Tucson, AZ. 85719 Chicago, IL. 60602 J. Robert Columbus Tom Cowan Corporate Capital Resources Securities Division 301 E. Armour Street Cheyenne, WY. 82002 Kansas City, MO. 64111 Roy E. Crocker Bruce Davis Roy E. Crocker, CPA Computers & Technology P.O. Box 2459 P.O. Box 7237 Ruidoso, NM. 88345 Menlo Park, CA. 94026 Howard Davis Andrew Davlin, Jr., President Chadwick Securities, Inc. The Davlin Corporation 21550 Oxnard Street #760 P.O. Box 800 Woodland Hills, CA. 91367 Pauma Valley, CA. 92061-0800 James H. Dayley Scott DeWald Resource Recovery and Manufacturing Lewis and Roca Corporation 40 North Central Avenue 9844 W. Main Street Phoenix, AZ. 85004-4429 Belleville, IL. 62223 Timothy Jay Draper Johanne Duchesne Radix International Corporation Securities Commission 4855 Wiley Post Way Montreal, Quebec Salt Lake City, UT. 84116-2875 H4Z 1G3 Canada L. N. Duryea Michael R. DuVall, CPA VR Business Brokers Michael R. DuVall & Company, 1151 Dove Street, Suite 100 5221 E. Arbor Road, Suite 2 Newport Beach, CA. 92660-2805 Long Beach, CA. 90808 Gregory B. Dwight John A. Eckstein Founders Bank of Arizona Chair, Colorado Advanced 7335 E. Doubletree Ranch Road Technology Institute Scottsdale, AZ. 85258 633 17th Street #1950 Denver, CO. 80202 Joe Evers William D. Evers Evers & Company, Ltd. Sullivan, Roche & Johnson 1440 E. Missouri, Suite 175 333 Bush Street, 18th Floor Phoenix, AZ. 85014 San Francisco, CA. 94104 Irving Faught Ronald L. Fein Department of Securities Stotman, Treister & Glatt Oklahoma City, OK. 73152 3699 Wilshire Boulevard #900 Los Angeles, CA. 90010 Drew Field Twila L. Foster 534 Pacific Avenue Jackson, Tufts, Cole & Black San Francisco, CA. 94133 650 California Street San Francisco, CA. 94108 Barbara A. Frantz Owen O. Freeman, Jr. Business Advisement Center Commonwealth State Bank 1250 Sixth Street, Suite 203 3 Friends Lane Santa Monica, CA. 90401 Newtown, PA. 18940 Steven I. Fried Joseph P. Galdo Western United National Bank Clark, Ladner, Fortenbaugh 11318 National Boulevard & Young Los Angeles, CA. 90064 2005 Market Street One Commerce Square Philadelphia, PA. 19103 Charlie Van Gerpen Gary L. Gethmann South Dakota Division of Securities Gary L. Gethmann, CPA, Ltd. 910 East Sioux 4858 East Broadway Pierre, SD. 57501 Tucson, AZ. 85711 Jeffrey S. Gilbert Reid A. Godbolt Hollander, Gilbert & Co. Jones & Keller, P.C. Certified Public Accountants 1625 Broadway, Suite 1600 15260 Ventura Boulevard, Suite 940 Denver, CO. 80202 Sherman Oaks, CA. 91403 Maurice Goff Robert B. Gooden Securities Division Gooden Industries, Inc. Washington, DC. 20001 5129 N. Via Velazquez Tucson, AZ. 85715 Maurice Goodgaine Stephen M. Goodman Colorado Invesco, Inc. Pryor Cashman Sherman & Flynn 4845 Pearl East Circle 410 Park Avenue Suite 300 New York, NY. 10022 Boulder, CO. 80301 Robert B. Grant Theodore W. Grippo Philadelphia Stock Exchange Grippo & Elden 1900 Market Street 227 W. Monroe Street, Philadelphia, PA. 19103 Chicago, IL. 60606 Jelean Hale Richard Hart Harrington, CPA Securities Bureau Gordon, Harrington & Osborn, PC Boise, ID. 83720 630 Turnpike Street No. Andover, MA. 01845 Geraldine Harrison Lawrence M. Hecker Division of Securities Greater Tucson Economic Council Tallahassee, FL. 32399-0350 Hecker, Phillips & Zeeb 405 W. Franklin Tucson, AZ. 85701 Frederick G. Hersh Mark Heuerman McDaniel & Gan, P.C. Division of Securities 3636 N. Central #990 Columbus, OH. 43215 Phoenix, AZ. 85012 Catherine Hiscock Victor Hollander Division of Securities Hollander, Gilbert & Co. Baltimore, MD. 21202 Certified Public Accountants 15260 Ventura Boulevard Suite 940 Sherman Oaks, CA. 91403 Ross M. Horwitz Tommy D. Hughes First Commerce and Loan, Inc. Hughes & Strumor, Attorneys 2806 N. Camino Principal 320 Gold SW, Suite 1000 Tucson, AZ. 85715-3138 Albuquerque, NM. 87102 William C. Hunter Joseph Janocko Federal Reserve Bank of Atlanta Division of Securities 104 Marietta Street Tallahassee, FL. 32399-0350 Atlanta, GA. 30303 Fred C. "Ted" Jans, Jr. Gwenolyn Johnson SBTDC/UNCW Office of the Secretary of 601 South College Road State Wilmington, NC. 28403 Atlanta, GA 30334 Ron Jones Troy Jones, Jr. Securities Division Governor's Office of Economic Lansing, MI. 48910 Development 711 East Wells Avenue Pierre, SD. 57501 Mary Jurta William Kemsley Bureau of Securities Regulation AMG Energy, Inc. Concord, NH. 03301-4989 15 Worth Street So. Hackensack, NJ. 07606 Alfred F. Kenrick Marshall King Transition Capital Field, Sarvas & King, P.C. 260 Sheridian Avenue 3101 N. Central Avenue Suite 218 Suite 1100 Palo Alto, CA. 94306 Phoenix, AZ. 85012 Stephen A. Klein, Esq. Harold Kocher Attorney Office of the Securities 10409 Englishman Drive Commissioner Rockville, MD. 20852 Bismarck, ND. 58505 Paul S. Kosacz Barbara K. Kravitz Direct Equities, Inc. Bankhouse International Limited 11300 West Olympic Boulevard 50 Rowes Wharf, Suite 240 Suite 730 Boston, MA. 02110 Los Angeles, CA. 90046 Jeffrey W. Lantz Alan B. Levenson Snell & Wilmer Fulbright & Jaworski One Arizona Center 801 Pennsylvania Avenue, NW Phoenix, AZ. 85004 Washington, DC. 20004 Mike Liles, Jr. Terry L. Lister Bogle & Gates Peper, Martin, Jensen, Maichel Two Union Square & Hetlage 601 Union Street 720 Olive Street, 24th Floor Seattle, WA. 98101-2346 St. Louis, MO. 63101 Marc A. Lumer, CPA Charles Lyle Antonini Professional Corporation Securities Division 1700 Montgomery, Suite 225 Richmond, VA. 23209 San Francisco, CA. 94111-1079 Paul R. Madden F. Howard Mandel Beus, Gilbert & Morrill Thompson, Hine and Flory 3200 North Central Avenue 1100 National City Bank Bldg. Suite 1000 Cleveland, OH. 44114 Phoenix, AZ. 85012 John Martinez Mike Marusich Securities Division Management Counseling, Inc. Santa Fe, NM. 87501 301 E. Virginia Avenue Suite #4020 Phoenix, AZ. 85004 Daniel Matter Burnet Maybank Daniel Matter & Co. Department of State 23123 Ventura Boulevard Columbia, SC. 29201 Suite #210 Woodland Hills, CA. 91364 Margaret M. McCreary Donald E. McGhie Pleasant View Lodge, Inc. McGhie Consulting P.O. Box 36248 100 California Avenue, Suite 1 Indianapolis, IN. 46236 Reno, NV. 89509 Howard A. McKenna Blythe McLaughlin Senior Vice President Department of Securities M&I Thunderbird Bank Montpelier, VT. 05602 One East Camelback Road Phoenix, AZ. 85012 Larry McLinden Stephen T. Meadow Direct Equities, Inc. Stephen T. Meadow, P.C. 11300 West Olympic Boulevard 5611 N. 16th Street Suite 730 Phoenix, AZ. 85257 Los Angeles, CA. 90046 Marvin Mears Cary J. Meer Corporate Capital Resources, Inc. Kirkpatrick & Lockhart 2219 E. Thousand Oaks Boulevard 1800 M Street, NW Suite 337 Washington, DC. 20036 Thousand Oaks, CA. 91362 Frank X. Mendoza, V.P. Gloria A. Merrell, Director M&I Thunderbird Bank Small Business Institute One East Camelback Road Incarnate Word College Phoenix, AZ. 85012 4301 Broadway San Antonio, TX. 78209 Jim Miles Leon Minka Secretary of State Securities Division Columbia, SC. 29201 Wilmington, DE. 19801 Professor Alfred D. Morgan Frank E. Morgan, II So. Connecticut State University Mayer, Brown & Platt Crescent Street 787 Seventh Avenue New Haven, CT. 06515 New York, NY. 10019 Patrick Nelson Steve Nielsen Department of Commerce Division of Securities St. Paul, MN. 55101 Salt Lake City, UT. 84145- 0808 H. William "Bill" Nordyke Bill Olesky Nordyke & Associates Securities and Business 1650 University NE., Suite 200 Investments Division Albuquerque, NM. 87102 Hartford, CT. 06106 Terri Orton Gregory J. Petras Securities Division National Health Enhancement Santa Fe, NM. 87501 Systems, Inc. 3200 North Central, Suite 1750 Phoenix, AZ. 85012 Greg Phipps James F. Polese Stanford Capital Partners Polese, Hiner & Nolan, P.A. 325 S. First Street 3003 N. Central #1900 San Jose, CA. 95113 Phoenix, AZ. 85012 Mr. Irwin Pomerantz, CPA Dr. Robert Premus Irwin Pomerantz & Associates Wright State University 7700 Sunset Boulevard, Suite 205 Department of Economics Los Angeles, CA. 90046 Dayton, OH. 45435 Joseph S. Radovsky, Esq. A. Max Ramras Greene, Radovsky, Maloney & Share Registered Capital Corporation One Market Plaza, Suite 42000 7373 N. Scottsdale Road San Francisco, CA. 94105 Suite D-115 Scottsdale, AZ. 85253 Don Raschke Wayne Redwick Securities Board Securities Commission Austin, TX. 78711-3167 Vancouver, British Columbia V6Z 2H4 Canada Donald C. Reinke, V.P. Mark N. Rogers Pezzola & Reinke Fennemore Craig 1999 Harrison Street 2 North Central Avenue Suite 1300 Suite 2200 Oakland, CA. 94612 Phoenix, AZ. 85004 Henry I. Rothman Mark D. Rothschild Parker Chapin Flattau & Klimpl 3803 N. 26th Street 1211 Avenue of the Americas Boulder, CO. 80304 New York, NY. 10036 Diane M. Russo G. Philip Rutledge Diane M. Russo, CPA Securities Commission 1901 Avenue of the Stars, #370 Harrisburg, PA. 17102-1410 Los Angeles, CA. 90067 Dennis Salveson John R. Sarkisian Alaska Securities Division RAM Investment Co. P.O. Box 110807 P.O. Box 60373 Juneau, AK. 99811-0807 Pasadena, CA. 91106-0373 Charles A. Schaffer Greg Scharlau Minnesota Small Business Assistance Conner & Winters Office 2400 First National Tower 900 American Center Building Tulsa, OK. 74103 150 E. Kellogg Boulevard St. Paul, MN. 55101 Fred V. Schiemann Michael William Schley Schiemann & Machen, CPA's Larkin Hoffman Daly & Lindgren 1465 Terminal Way, Suite 4 Ltd. Reno, NV. 89502 1500 Norwest Financial Center 7900 Xerxes Avenue So. Bloomington, MN. 55431 Edward C. Schmidt David P. Semak, V.P. Alpha Solarco Inc. Regulation, Pacific Stock 11534 Gondola Drive Exchange Incorporated Cincinnati, OH. 45241 301 Pine Street San Francisco, CA. 94104 Paul Serotkin, V.P. Jared Silverman Business Development Bureau of Securities Pacer Systems, Inc. Newark, NJ. 07102 900 Technology Park Drive Billercia, MA. 01821 James H. Stenerson Neal Sullivan Stenerson Lumber Deputy Secretary of State 1702 First Avenue No. Boston, MA. 02108 Moorhead, MN. 56560 Carter Summers, CPA, CMA Brice E. Tarzwell Accounting Systems, Inc. McAfee & Taft 9012 So. 1620 East 10th Floor Sandy, UT. 84093 Two Leadership Square Oklahoma City, OK. 73102 John J. Tollefsen Michael J. Tucker Tollefsen & Company, P.C. Polese, Hiner & Nolan, P.C. 16212 Bothell Way SE, Suite F 3003 North Central Avenue Mill Creek, WA. 98012 Suite 1900 Phoenix, AZ. 85012 Steven M. Vakula Charlie Van Gerpen Steven M. Vakula, CPA Division of Securities 2729 W. Butler Drive Pierre, SD. 57501-3940 Phoenix, AZ. 85051 Garrett Vogel James P. Ward Code Rite Inc. B. D. Ward & Company 7400 Pebble Drive 2929 N. 44th Street, Suite 400 Ft. Worth, TX. 76118 Phoenix, AZ. 85018 Steve C. Wassom Robert C. Weaver, Jr. Office of the Securities Law Office of Robert C. Commissioner Weaver, Jr. Topeka, KS. 66603-3804 4475 Mission Boulevard #215 San Diego, CA. 92109 Harry H. Weinberg Richard S. Weinman Nevada State Development Battelle & Battelle Corporation 3400 S Dixie Drive 350 S. Center Street, Suite 310 Dayton, OH. 45439 Reno, NV. 89501 Henry Welt, Esq. Felicia West Kronish, Lieb, Weiner & Hellman Securities Department 1345 6th Avenue Little Rock, AR. 72201 New York City, NY. 10105 Daniel Weston Deborah White League of American Investors Deborah Clark White, CPA 23 Easy Street #201 1009 Loma Vista Place Simi Valley, CA. 93065 Fullerton, CA. 92633 Craig Willett Quinn Williams Willett & Associates Snell & Wilmer 15 North 100 East #201 One Arizona Center Provo, UT. 84606 Phoenix, AZ. 85004-0001 Terry E. Winters Henry Withers The Columbine Venture Funds Securities Division 8711 E. Pinnacle Peak Road #183 Denver, CO. 80203 Scottsdale, AZ. 85255 Floyd I. Wittlin Kenton E. Wood Richards & O'Neil D. H. Blair & Co. Inc. 885 Third Avenue 44 Wall Street New York, NY. 10022 New York, NY. 10005 Bernard Worrell John F. Woyke Metrowest Broadcasting Corporation Towers, Perrin 529 14th Street, N.W., Suite 975 100 Summit Lake Drive Washington, DC. 20045 Valhalla, NY. 10595 Russel Yamashita Mike Young Department of Commerce & Consumer University of Houston Affairs Small Business Development Honolulu, HI. 96810 Center 601 Jefferson, Suite 2330 Houston, TX. 77002