FINAL REPORT OF THE SEC GOVERNMENT-BUSINESS FORUM ON SMALL BUSINESS CAPITAL FORMATION FEBRUARY 1995 PREFACE In 1994, the Government Business Forum on Small Business Capital Formation met in Washington, D. C. A determination was made to again hold the Forum in the Nation's Capitol in order to draw as wide a variety of participants as possible in hopes of developing as many influential recommendations for consideration at the 1995 White House Conference on Small Business as possible. While future Forums will again be held regionally, it was felt to be important that this year the Forum be organized with a view to having a significant impact upon the 1995 White House meetings. Convening the sessions in Washington, D. C. was thought to further this goal. The recommendations from the 1994 Forum follow. We believe that many thoughtful proposals are evidenced. The participants gave careful consideration to many issues in the hope that the capital-raising needs of small business might be accommodated, in balance with appropriate, and necessary governmental regulations to safeguard the public interest. We thank them for their efforts and are pleased to present this report. The Executive Committee for the Thirteenth Annual SEC Government-Business Forum on Small Business Capital Formation EXECUTIVE COMMITTEE Chair: Meredith B. Cross, Associate Director Division of Corporation Finance Securities and Exchange Commission John W. Ball Staff Director and Chief Counsel Senate Committee on Small Business Mary E. T. Beach Consultant Janice Booker Director, Customer and Industry Affairs Office of Comptroller of the Currency Victor Coppola Director, National Emerging Business Services Coopers & Lybrand Gregory Dean Assistant Chief Counsel for Advocacy U. S. Small Business Administration 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 Barry C. Guthary Director, Securities Division Commonwealth of Massachusetts John J. Huntz, Jr. Senior Vice President Vista Resources, Inc. Charles Ludlam Executive Director BioTechnology Industry Organization 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 Marc Morgenstern Kahn, Kleinman, Yanowitz & Arnson (Representative of the American Bar Association) John J. Motley, III Vice President National Federation of Independent Business Allen Neece Neece, Cator & Associates, Inc. (Representative of the National Venture Capital Association) Karen M. O'Brien General Counsel North American Securities Administrators Association, Inc. Douglas F. Parrillo Senior Vice President, Communications National Association of Securities Dealers William Provosty Manager, Small Business Banking Unit American Bankers Association Jeanne Roslanowick Staff Director House Small Business Subcommittee Martha Scanlon Assistant Director, Division of Research and Statistics, Board of Governors of the Federal Reserve System Herbert Spira Tax Counsel Independent Bankers Association of America Diane Thomas Vice President National Association of Investment Companies Wayne Upton, Jr. Project Manager Financial Accounting Standards Board September 8 and 9, 1994 OVERVIEW PRESENTATION Moderator : Herbert Spira Tax Counsel Independent Bankers Association of America One Thomas Circle Washington, D. C. 20005 Panelists : Bruce D. Phillips Director for Statistics and Research Office of Economic Research U. S. Small Business Administration 409 Third Street, S. W. Washington, D. C. 20416 Professor William E. Wetzel Wittemore School of Business and Economics University of New Hampshire McConnell Hall Durham, New Hampshire 03824 ***************************************************************** CORE PRESENTERS TAXATION ROUNDTABLE Moderator : Herbert Spira, Tax Counsel Independent Bankers Association of America One Thomas Circle Washington, D. C. 20005 John Cedarberg, CPA Cedarberg & Beckwith 760 NBC Center Lincoln, Nebraska 68508 Benson Goldstein, Tax Counsel National Association for the Self-Employed 1023 15th Street N. W., Suite 1200 Washington, D. C. 20005 William J. Dennis, Senior Fellow National Federation of Independent Businesses Foundation 600 Maryland Avenue, S. W., Suite 700 Washington,D. C. 20024 Robert Pavey, General Partner Morgenthaler Ventures 700 National City Bank Building Cleveland, Ohio 44114 Carl Kaplan, Esq. Fulbright & Jaworski 666 Fifth Avenue New York, New York 10103 Alan Sobba, Tax Director National Cattlemen's Association 1301 Pennsylvania Avenue, N. W., Suite 300 Washington, D. C. 20004 ***************************************************************** CREDIT ROUNDTABLE Moderator : E. Burns McLindon Councilor, Buchanan & Mitchell 7101 Wisconsin Avenue, Suite 1110 Bethesda, Maryland 20814 Frank Altman, President Community Reinvestment Fund 2400 Foshay Tower 820 Marquette Avenue Minneapolis, Minnesota 54402 James Hammersly, Deputy Director Office of Finance U. S. Small Business Administration 409 Third Street, S. W. Washington, D. C. 20416 Barbara K. Kravitz, Governor Societe BankHouse One International Place Boston, Massachusetts 02110 Bradford T. Nordholm, President Cooperative Funding Corporation 1401 Eye Street, N. W. Suite 700 Washington, D. C. 20005 Carolyn O'Leary, Executive Vice President Annapolis Bank & Trust P. O. Box 311 Annapolis, Maryland 21404 Robert J. Kaiser, Vice President (Marketing & Program Development) Export-Import Bank of the United States 811 Vermont Avenue, N. W. Washington, D. C. 20571 ***************************************************************** SECURITIES ROUNDTABLE Moderator : Marc H. Morgenstern Kahn, Kleinman, Yanowitz & Arnson The Tower at Erieview Suite 2600 Cleveland, Ohio 44114-1824 Mary E. T. Beach, Consultant 6543 Jay Miller Drive Falls Church, Virginia 22041 Frederic A. Rubinstein, Esq. Kelley Drye & Warren 101 Park Avenue New York, New York 10178 ***************************************************************** 1994 FORUM STAFF Richard K. Wulff Gerald L. Werner William E. Toomey Twanna M. Young Regina A. Baker Melissa L. Kimps TABLE OF CONTENTS I. SUMMARY OF FORUM RECOMMENDATIONS........................... 1 II. INTRODUCTION............................................... 15 III. TAXATION ROUNDTABLE........................................ 19 IV. CREDIT ROUNDTABLE.......................................... 28 V. SECURITIES REGULATION ROUNDTABLE........................... 38 VI. FORUM PARTICIPANTS......................................... 51 I. SUMMARY OF FORUM RECOMMENDATIONS TAXATION ROUNDTABLE The Securities and Exchange Commission should track data relevant to small business capital formation so this information is readily available to the appropriate governmental and private entities. The data should be included in an annual update of "Small Business Financing Trends" that is made available to Forum participants. The SEC should arrange with the IRS to include such data as gross revenue, net income and numbers of businesses by SIC code, in analyzable increments, regardless of business form. To better understand the numbers and trends of net new business formation, the Census Bureau should be encouraged to advance its work on analyzing and publishing a longitudinal data base for small business. Congress should provide legislative repeal of the Soliman decision -- home-based businesses should be entitled to a tax deduction as provided under the Code for all other businesses. Congress should codify current federal tax rules regarding limited liability corporations (LLC). LLC income should not be considered as self-employment income for those who work fewer than 500 hours per year at these businesses. Tax deductibility for health insurance should be 100 percent regardless of business form, retroactive to January 1, 1994. The net operating loss eligibility should be expanded to companies that maintain at least 20 percent continuity of ownership. The provision relating to capital gains on sale of small business stock that was inserted in 1993 should be expanded to include five additional step decreases of 10 percent each for each year in excess of five years that the stock is held. A preferential reduced capital gains tax treatment should be created for investments in qualified small businesses coupled with a deferral of taxes so long as the investment is in a small business. The tax ultimately would be paid when the investment funds are removed from a small business. There should be at least a 5 year holding period. All capital losses from the sale of small business stock should be treated as "ordinary," without limitation. Unused loss should be carried forward. Section 1244 should be amended to conform with this principle. The estate tax exemption should not be reduced. Estate tax rates should be reduced to a level consistent with individual and corporate rates for continually operated family-owned businesses. The alternative minimum tax on small business taxable income should be repealed. Congress should enact a growth tax credit based on increased revenue, but contingent upon capital investment or job creation. Withholding should be extended to all service workers who did not file a Form 941 in the prior quarter; a payer must withhold 35.2 percent (15.2 percent self employment; 20 percent backup withholding) and report the amount on Form 1099, or treat the worker as an employee. Congress should, as with other laws, alter the tax code as often as it deems necessary; however, the payer should not be penalized by attachment or interest and/or penalties based on retroactive application of such provisions. Fiscal year conformity should be repealed for S Corporations, partnerships, trusts and DISCs (Domestic International Sales Corporation), so long as there is no change in the tax revenues. Congress should reform the law relating to S Corporations by enacting legislation along the lines of S. 1690 of the 103d Congress. Effective action should be taken to encourage compliance with the existing taxpayer bill of rights. The value-added tax is not in the interest of small business and should not be enacted. Corporate tax rates should not be increased during the next several years, and should be reduced when circumstances permit. CREDIT ROUNDTABLE ERISA or applicable regulations governing pension plan investments should be modified to allow self-directed employee plans to invest in small businesses. Changes in existing laws and regulations that will provide additional incentives to financial institutions and pension funds to make investments in venture capital funds which make equity financing available to small businesses are supported. The SBA should increase the emphasis to make small business owners aware, through increased advertising and other methods, of the free or subsidized assistance of professional advisors, loaned executives, loaned MBAs, or other types of help, as well as capital available through various sources. SBA should also promote full utilization of electronic networks, i. e., Prodigy, Compuserv, etc. Government guarantee and direct lending programs are at risk when borrowers are not capable of planning for the loan approval, and more importantly the repayment of such loans. Loan program increases should be matched with proportionally increased investment by the government in educational programs that provide such technical assistance, such as the SBA's Small Business Institutes, Small Business Development Centers, and SCORE Chapters. SBA should facilitate the identification of small business consortiums, trade associations and affinity groups for the purpose of expanding the potential for financing enterprises on a group basis with the Cooperative Funding Corporation. To provide greater access to relevant data relating to small businesses, and foster expanded research and economic analysis, the SBA should be authorized to compile and distribute the aggregate balance sheet, income statement and other key financial data from program applicants. Such data would be assimilated on an anonymous basis, and categorized by Standard Industrial Category (SIC) Codes. Credit unions should be authorized to amend their charters in order to extend micro loans of up to $50,000 to businesses domiciled in the area where the credit union operates. Banking regulations currently frustrate banks in the area of small business lending. Government regulation, including necessary loan documentation and auditing, should be directly proportional to the size of the loan or the risk associated with that loan. This recommendation assumes that lending will occur when the underlying economics justifies the loan absent any unreasonable paperwork and oversight costs. In anticipation of interstate banking and the rapid consolidation of hundreds of banks and in order to protect and foster growth in the existing Community Bank sector (those with few branches and less than $100 million in assets), Congress should amend current regulations to provide incentives for investors, depositors and borrowers of community banks. Such incentives may be to provide for lower Fed window rates, tax incentives for targeted lending income (i. e., small business loans) and reduce unnecessary regulatory burdens. Changes in existing laws and regulations that will allow banks to receive additional Community Reinvestment Act credit for commitments made by their affiliates to venture capital funds that make equity investments in areas consistent with CRA including investments in small minority and female-owned ventures are supported. The Small Business Administration should withdraw the bank service provider regulation procedural notice until a comprehensive review can be made and accompanying regulations can be considered and promulgated. The SBA should insure that there is a uniform application of all its procedures and policies in the District Offices with regard to: (1) central approval of participant lenders; (2) permitting access of all SBA approved lenders in any SBA District; and (3) recognizing and permitting the appropriate participation of borrower and lender intermediaries in the loan approval process. The SBA should review its regulations in order to simplify applications, eliminate duplicative and superfluous information from said applications and from financial documentation required from its clients when applying for a loan. The new simplified forms should be reviewed by a panel of small business owners and financial institutions prior to implementation. The SBA should explore the use of electronic means for generating and transmitting SBA loan applications. The SBA's Small Loan Express Program should be expanded to include a greater number of participating banks. The SBA should examine whether or not there is adequate capital available for medium-sized businesses, and if so, develop cost efficient and effective mechanisms for disseminating credit information to these businesses. The SBA should explore ways to provide credit enhancement programs through cooperative funding and if necessary develop legislative action to bring about the credit enhancement opportunities. To promote parity and uniformity in the administration of the SBA 7(a) and related loan guaranty programs, and in anticipation of interstate banking and recognition of the mobility of licensed non-bank lenders, the SBA should permit approved participant lenders and designated certified loan program and preferred loan program lenders to have universal access to all SBA districts without additional registration required in each district. In recognition of the expanding needs of, and to foster expansion in capital resources available to, the small business sector, Congress should increase the maximum guaranty of the SBA 7(a) program to at least $1 million and increase the guarantees of related programs proportionately. To foster continued growth in the SBA 7(a) and related loan guaranty programs, and to encourage the access of qualified applicants to the benefits available to them, the SBA should instruct each District Office to cooperate with independent loan originators and packagers, as authorized by participant borrowers and lenders. The District Offices should recognize the role of these originators and permit their assistance to coordinate and expedite the loan approval process. Further: (a) Fees paid by applicants for loan packaging services should be disclosed on Form 159 supported by a detailed invoice provided at the conclusion of their engagement; and (b) Form 159 should be amended to include a check-off box to be used to disclose to the applicant whether the subject professional may receive additional compensation from the participating lender. In order to expand the leverage of the SBA 7(a) appropriations, and to give participating lenders incentives to accept a greater share of loan risk, the 7(a) program should be amended to provide for graduated levels of higher interest rate ceilings coupled with proportional reductions in the level of guaranty. For example on a 5 year loan term, if a 75% guaranty is limited to a rate of 2.75% over prime - a 65% guarantee might raise the ceiling to prime plus 3% - a 55% guarantee - prime plus 3.25% and so on. Congress should authorize all federal agencies which fund economic development revolving loan funds, e. g., HUD, EPA, FmHA, to sell or permit the sale of loans at market values in order to reinvest capital into small businesses. In order to provide accurate and timely data, all federal lending programs should determine who they are serving. Specifically, federal programs should identify loan size, ethnic and gender information on program beneficiaries to better target which groups continue to need assistance. The Ex-Im Bank should be more proactive in disseminating information to small business with respect to programs of finance available to these businesses that are in the export/import business. The Ex-Im Bank should expand the number of banks, trade associations, and small business associations that are knowledgeable and capable of processing Ex-Im Bank loans. To eliminate overlapping regulatory requirements and to encourage more bank participation in the SBIC program, a lower level of SBA regulations in simplified provisions should be developed by the SBA for bank-owned SBICs. A new investment vehicle called SBA Series Bonds (modeled after Series E Savings Bonds) should be created that allows the general public to invest in an SBA program that loans these funds to approved SBA micro-loan intermediary organizations. SECURITIES REGULATION ROUNDTABLE Securities Act of 1933 A new Form SB-3 should be created by the Commission which would permit shelf registrations by small business issuers that are reporting companies under the Exchange Act. Warrants issued in connection with a registered offering should be resalable by means of a post-effective amendment to the initial filing which incorporates by reference Exchange Act documents, thus keeping the information in the prospectus current. The requirement to file a Form 10-C with the Commission by issuers of securities quoted on NASDAQ whenever there is a 5 percent increase or decrease in the amount of its outstanding securities should be eliminated or at a minimum, its late filing should not be a basis for the loss of eligibility of Commission short-form registration statements. The Commission's tombstone ad rule should be reviewed and revised to permit additional information about the issuer's business. The holding periods under Rule 144 should be reduced from 3 years to 2 years with respect to the elimination of most of the rule's restrictions as to resale, and from 2 years to 1 year for the initial resale of restricted securities. 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, for example, the purchase of equipment from a business located in another state; and introduce a good faith and substantial compliance standard. The Commission should use its section 3(b) exemptive authority to create a regional offering exemption which would permit an intrastate type exemption even though the offering crosses state lines. The Commission should not amend Regulation S to regulate the sales price or discounts for purchase. The Commission should address the causes of the practice of short sales in offerings under Regulation S and evaluate the impact of this practice on the securities markets, investors and in small businesses ability to raise capital. In such deliberations it should be recognized that Regulation S offerings have become an important source of small business capital in the absence of other alternative domestic sources of capital. Therefore, any resulting reductions in the availability to small businesses of capital by restrictions on the use of Regulation S issues must be offset by improvements in other sources of capital for small business, including establishment of a secondary market for such securities. Regulation A should be available to reporting companies. Regulation D's restrictions on general solicitation should not apply where sales are limited to accredited investors alone. General solicitation restrictions under Regulation D should not apply to some limited type of tombstone advertisement. Regulation D should be amended to permit general solicitations of up to 100 investors and sales to up to 50 unaccredited investors. Institutional accredited investor status should be attainable with assets of $1 million. Additional individual accredited investors should be permitted on the basis of the ability of such persons to sustain the complete loss of an investment but not tied to net worth or income. The Commission should establish minimal disclosure levels which would establish a safe harbor under exemptive provisions such as Rule 504 of Regulation D. In order to facilitate the access of issuers of securities to accredited investors in Rule 505 and 506 transactions, general solicitations through advertisements and investor forums restricted to such offerees should be permitted. The Financial Accounting Standards Board (FASB) proposed rule to require companies to expense the value of stock options should not be adopted. Legislation penalizing frivolous securities fraud lawsuits by raising standards of proof and shifting legal costs to unsuccessful litigants should be adopted. Damages in securities cases should be based on separate and proportionate liability. Proportional liability should be the rule as a means of limiting the risks of the professional advisor acting in good faith. Securities Exchange Act of 1934 A notice on Form 8-K should be filed for every Regulation S offering, regardless of its size. The ability for small cap corporations to raise capital in the United States is impaired by the lack of liquidity in the American capital markets for such stocks. Current government efforts to facilitate such initial capital development by small cap corporations are of minimal value because they do not adequately address the lack of a secondary market which would create liquidity for such low-priced stocks. While recognizing the objectives of legislation and regulations which cured the abuses of the so-called penny stock markets, a concerted effort by government and industry is required to create a viable, effective and efficient market to provide liquidity for such securities. This market would be subject to applicable regulatory authority, including reporting under the Exchange Act. Securities quoted on the NASD's OTC Bulletin Board should be subject to full surveillance and oversight. When this is accomplished, such securities should not be subject to the Commission's penny stock rules. The existing regulations governing sales techniques of broker dealers need to be more vigorously enforced in sales to non-institutional investors and registered representatives need better training. Since registered representatives are almost entirely dependent for the information they receive about their products on their broker dealers, the sales materials the registered representatives receive need better monitoring by the regulators. Registered representative compensation methods should be revisited since straight commission compensation entails an obvious conflict. On the other side, customers should be required to sign suitability disclosures of their financial condition and this should be done periodically since conditions change. The Commission should review the requirements of the Exchange Act with a view to establishing a special category of "small business broker dealer." These broker dealers could specialize in small business securities and solicit investors. Investment Company Act The Commission should establish valuation standards for the portfolio companies held by Business Development Companies (BDC). Small Business Investment Companies with less than $10 million of capitalization should be exempt from the Investment Company Act of 1940. Business Development Companies should be permitted to acquire assets from third parties in private transactions and be permitted to increase their leverage if they have sufficient income to service such leverage. Federal/State Regulation All of the states should adopt test the waters procedures. The Commission should cooperate with the states and NASAA to gather data on the use and either the success or failure of test the waters filings used by companies. The states should pursue developing a regional review system to process registration statements more efficiently using a lead jurisdiction to process, not clear, the registration statement. The per share dollar price for the use of the SCOR form should be reduced from $5 to $1. All the states should adopt the SCOR form. The states should be preempted from registering securities offerings but not from enforcing their antifraud rules. Merit review should be eliminated. 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 thirteen 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; in recent years, the Forum has typically included this feature. The Thirteenth Annual Forum was held in Washington, D. C. on September 8 and 9, 1994. 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. The White House Conference on Small Business has been calendared for June 11th through the 15th of 1995, with its series of state meetings to select regional delegates commencing in June of 1994 proceeding through mid-April of 1995; the regional conferences are scheduled to be held in May of 1995. Because of the White House Conference plan of activities, the Forum's Executive Committee decided that the Government-Business Forum in 1994 should play a defining role in molding the capital formation discussion for the impending national Conference and its local sessions. As in its prior meetings in 1980 and 1986, the White House Conference planners have targeted small business capital formation as one of the critical issues on its agenda. Therefore, the 1994 Forum offered the opportunity not only to articulate the views of small business, but also to help formulate the plan for discussion at the national conference. The topic areas of taxation, credit and securities were selected as the focus of the Forum. The Executive Committee determined that the format of the sessions would present each morning a variety of round-table discussions, each devoted to one of the three targeted disciplines. Each round table would highlight current issues in its targeted topic area. Each of the three round tables would be moderated by a member of the Forum's Executive Committee and have a core staff of presenters and commentators comprised of several experts in the particular discipline. Because all of the round tables would be offered concurrently, Forum participants would have to select the round- table discussion in which they wished to participate. As in prior years, each afternoon would be devoted to discussion in small interactive break-out groups in order to permit Forum participants sufficient time to develop thoughtful recommendations. These groups would be comprised only of participants who had attended a particular topic round table. The Executive Committee believed that this format would lead to the development of technical recommendations which in turn would be the best way to influence the developments at the White House Conference. Welcoming remarks were offered by Simon M. Lorne, General Counsel to the U. S. Securities and Exchange Commission, followed by a keynote opening address by Dr. Susan F. Krause, Senior Deputy Comptroller (Bank Supervision Policy), Office of the Comptroller of the Currency. An overview look at the Forum was then presented, followed by the scheduled round-table discussions. The luncheon addresses were presented by former Securities & Exchange Commissioner Edward H. Fleischman, currently practicing law with the firm of Linklaters & Paines in New York City, and Jere W. Glover, Chief Counsel for Advocacy of the U. S. Small Business Administration, respectively. The afternoon break-out sessions produced eighty-three recommendations, all of which were approved by the Forum participants and are highlighted in the following section of this report. While the U.S. Securities and Exchange Commission hosts this annual gathering 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. TAXATION ROUNDTABLE A. Statement of the Issues Tax policy can impose a heavy burden upon smaller businesses. Uncertainty as well as frequent changes in the rules further complicate the area for most small businesses that are already overburdened with demands upon time and resources. Tax policy also can be used in ways that encourage certain activities which could foster the successful operations of the smaller entrepreneur. B. Recommendations The Securities and Exchange Commission should track data relevant to small business capital formation so this information is readily available to the appropriate governmental and private entities. The data should be included in an annual update of "Small Business Financing Trends" that is made available to Forum participants. The SEC should arrange with the IRS to include such data as gross revenue, net income and numbers of businesses by SIC code, in analyzable increments, regardless of business form. Statistical information concerning the track record of initial public offerings of securities should be maintained and widely distributed. This repository of information is beneficial to small business by providing objective data as to the possibility of publicly selling securities as a capital formation mechanism. To better understand the numbers and trends of net new business formation, the Census Bureau should be encouraged to advance its work on analyzing and publishing a longitudinal data base for small business. The Census Bureau should be encouraged to coninue its research on job creation and to do so in a way that makes it possible to compare results from year-to-year (a longitudinal series) and thus discern job creation trends. The dynamics at the entry level and among fast growth enterprises are relevant to decisions about tax and other capital formation policies. Congress should provide legislative repeal of the Soliman decision -- home-based businesses should be entitled to a tax deduction as provided under the Code for all other businesses. In January of 1993, the U. S. Supreme Court in the Soliman decision determined that a taxpayer was not entitled to take the home-office deduction where the home office in question was not his principal place of business. The Court looked at the relative importance of the functions undertaken at the various locations where business was done and the amount of time the taxpayer spent at each location. Thus, a long-standing facts and circumstances test of principal place of business was changed in favor of a vaguer standard. Since many small businesses start as home-based operations, this change in tax policy needs to be clarified legislatively. Congress should codify current federal tax rules regarding limited liability corporations (LLC). Limited liability corporate status has been becoming a popular state organizational mechanism to achieve certain benefits unique to being a corporation and a limited partnership. It for tax purposes is being treated like an S Corporation or a partnership permitting a pass-through of tax liability to the shareholders. State statutes governing LLC organization are not uniform and there is no explicit authorization on the federal level for its tax attributes. Congress should take the lead in defining the federal rules applicable to taxation of these entities, in cooperation with the state governments concerned. LLC income should not be considered as self-employment income for those who work fewer than 500 hours per year at these businesses. Because a small business operation is not always the full- time occupation for the proprietor, a negative tax situation can result under current tax interpretations. Because of the benefits which flow to the economy from these operations, tax policy should encourage rather than restrict or inhibit the operation of these businesses. A "substantial participation" test similar in form and content presently applied, for example, in the case of the imposition of passive loss requirements would alleviate the problem. Tax deductibility for health insurance should be 100 percent regardless of business form, retroactive to January 1, 1994. The debate on health insurance has raised many important issues and concerns. Current tax policy permits the complete deductibility of the costs of providing health insurance by regular corporations. Individuals operating as proprietorships, partnerships or S Corporations were permitted to deduct 25 percent of health insurance expense incurred on behalf of themselves and their families. This 25 percent deduction expired on December 31, 1993. The net operating loss eligibility should be expanded to companies that maintain at least 20 percent continuity of ownership. Under federal tax rules, a business generally is allowed to carry back a net operating loss to each of the preceding three taxable years, and forward to each of the succeeding 15 years. However, net operating loss carryforwards are limited in the event of certain changes in company ownership. In some cases of ownership change, the NOL may be completely lost. Changes in this tax provision may make the stock of small companies more attractive to investors. The provision relating to capital gains on sale of small business stock that was inserted in 1993 should be expanded to include five additional step decreases of 10 percent each for each year in excess of five years that the stock is held. The 1993 Budget Reconciliation Act provides a capital gains provision for original-issue stock of certain qualifying small businesses. It permits an exclusion of 50 percent of the gains realized upon disposition of the stock if held for at least 5 years. The proposal would build upon this foundation gradually reducing the capital gains tax to zero when the stock has been held for 10 years. A preferential reduced capital gains tax treatment should be created for investments in qualified small businesses coupled with a deferral of taxes so long as the investment is in a small business. The tax ultimately would be paid when the investment funds are removed from a small business. There should be at least a 5 year holding period. Tax policy should be used to encourage investments in small businesses. The suggested changes would make more monies available to finance the efforts of small business. All capital losses from the sale of small business stock should be treated as "ordinary," without limitation. Unused loss should be carried forward. Section 1244 should be amended to conform with this principle. Permitting these losses to be taken against ordinary income and then further to permit the carrying forward of unused losses would be a most effective incentive to invest in the securities of small businesses. The estate tax exemption should not be reduced. The current exemption may not be sufficient to cover the value of many family-owned businesses, which frequently must be liquidated in order to satisfy estate tax liabilities. Legislation in previous sessions of Congress have offered increases in the exemption. In any event, the present exemption should not be reduced. Estate tax rates should be reduced to a level consistent with individual and corporate rates for continually operated family-owned businesses. Federal estate taxes are graduated and run up to a maximum rate of 55 percent. The current estate tax exemption of $600,000 may be insufficient to cover the value of many family businesses. Making the taxing system comparable to that applicable to individuals or corporations might allow family businesses to stay in operation which in turn could be a benefit to the general economy. The alternative minimum tax on small business taxable income should be repealed. The alternative minimum tax is designed to prevent taxpayers from reducing or eliminating tax liability through certain tax preference items or adjustments. The liability from the alternative minimum tax imposes an additional amount when the taxpayer's taxable income exceeds a certain prescribed exemption amount. This penalty should not be applicable to income derived from a small business. Congress should enact a growth tax credit based on increased revenue, but contingent upon capital investment or job creation. A growth tax credit would allow a general credit based on a percentage rate of growth in sales over the prior year. The theory is that increased sales translates into new jobs and more capital expenditures which is beneficial to the overall economy. Such a credit would be an aid to a company's cash flow, possibly at a time when it would be of great benefit. Withholding should be extended to all service workers who did not file a Form 941 in the prior quarter; a payer must withhold 35.2 percent (15.2 percent self employment; 20 percent backup withholding) and report the amount on Form 1099, or treat the worker as an employee. Tax withholding requirements should be clear as to their applicability. The IRS uses wide latitude in determining independent contractor status. Small firms can be subject to back taxes and severe penalties if they are found to have misclassified personnel. Full withholding and reporting, including self-employment tax amounts, on personnel who could not produce a Form 941 that had been filed for the previous quarter should be prescribed, or permit treating that person as an employee. Such an approach would provide necessary certainty which in turn would save the business time, effort and unnecessary expense. Congress should, as with other laws, alter the tax code as often as it deems necessary; however, the payer should not be penalized by attachment or interest and/or penalties based on retroactive application of such provisions. In recent years, the Tax Code has been subject to a number of major revisions. While this activity makes it difficult for persons subject to the changes to engage in the most effective future tax planning and smaller businesses are more likely to be negatively impacted by this situation, it is even less desirable to have such changes applied on a retroactive basis. Fiscal year conformity should be repealed for S Corporations, partnerships, trusts and DISCs (Domestic International Sales Corporation), so long as there is no change in the tax revenues. The Tax Code requires that certain organizations have the same tax year as their principal owners. This position is designed to prevent the principals from deferring income. Subsequent Budget Acts have allowed some of these organizations to use a different tax year under prescribed restrictions which have discouraged the choice. The recommendation would simplify the matter by keying the choice to the impact upon tax revenues. Congress should reform the law relating to S Corporations by enacting legislation along the lines of S. 1690 of the 103d Congress. The S Corporation Reform Act, which was introduced in the 103d Congress, offered a number of substantive changes to S Corporations designed to accelerate capital formation. The shareholder limit would be increased from 35 to 50. Tax exempt organizations, financial institutions and non-resident aliens would be permitted to own S Corporations stock. Preferred stock might be issued and ownership of more than 80 percent of another company's stock be allowed. These and other changes should be made to broaden the appeal and eligibility for S Corporation status. Effective action should be taken to encourage compliance with the existing taxpayer bill of rights. The Taxpayer Bill of Rights was part of the Technical and Miscellaneous Revenue Act of 1988 and established for taxpayers a number of rights for them when dealing with the Internal Revenue Service; further making the IRS more responsible in dealing with taxpayer disputes. A number of changes make the government agency responsible for inaccurate advice it has provided, permitting taxpayers to recoup professional services fees in appropriate cases, slowing the seizure of property mechanisms and requiring detailed explanations in deficiency notices. This existing Bill of Rights should be fully implemented throughout the IRS. The value-added tax is not in the interest of small business and should not be enacted. A value-added tax is a general tax on consumption which is levied at various stages thoroughout the production and sale of goods and services. Such a new national program may involve creation of additional complex implementation and administrative systems which may involve more paperwork and other costly compliance burdens which will especially hurt smaller businesses. Corporate tax rates should not be increased during the next several years, and should be reduced when circumstances permit. Tax rate reductions for corporations should be a part of the national debate on cutting taxes. Circumstances may necessitate comparable cuts in spending as well, but the tax burdens of corporations should also be considered. IV. CREDIT ROUNDTABLE A. Statement of the Issues Access to capital is a critical concern for small business. Regardless of its location in the development cycle, a small business is in need of funds for its continuing operation. Typically, debt financing plays a central role in this recurring struggle to stay competitive. B. Recommendations ERISA or applicable regulations governing pension plan investments should be modified to allow self-directed employee plans to invest in small businesses. This recommendation would allow for more opportunity for both investors and small businesses. Investors through their retirement plans would be able to have a long range plan to take advantage of the future success of one or a number of small business opportunities; and small business by having access to a new pool of available funds. Changes in existing laws and regulations that will provide additional incentives to financial institutions and pension funds to make investments in venture capital funds which make equity financing available to small businesses are supported. Many dollars which could be available to assist small business operations are subject to fiduciary responsibility restrictions tied to the riskiness of investments. A number of creative solutions have been proposed to reduce such risk, such as pooling small business loans and adding credit enhancements. When such creative adjustments are made, fiduciaries could be enabled to consider such investments and free-up a significant source of funds for small business utilization. The SBA should increase the emphasis to make small business owners aware, through increased advertising and other methods, of the free or subsidized assistance of professional advisors, loaned executives, loaned MBAs, or other types of help, as well as capital available through various sources. SBA should also promote full utilization of electronic networks, i. e., Prodigy, Compuserv, etc. Educating small business about the many services, beyond its loan programs, available through the Small Business Administration should be a priority. The information highway should be used to its fullest possible extent in order to get the word around and into the hands of small business people everywhere. Government guarantee and direct lending programs are at risk when borrowers are not capable of planning for the loan approval, and more importantly the repayment of such loans. Loan program increases should be matched with proportionally increased investment by the government in educational programs that provide such technical assistance, such as the SBA's Small Business Institutes, Small Business Development Centers, and SCORE Chapters. Counselling and management assistance programs offered by the Small Business Administration are an essential complement to its loan programs. Whenever appropriations are increased for one side of the equation, a similar increase should be made to the other. SBA should facilitate the identification of small business consortiums, trade associations and affinity groups for the purpose of expanding the potential for financing enterprises on a group basis with the Cooperative Funding Corporation. Developing sources of information is a hallmark of successful programs at the SBA. The information sought to be developed by this recommendation would utilize group power to increase effectiveness which in turn would eliminate waste through duplicative effort and lack of response. To provide greater access to relevant data relating to small businesses, and foster expanded research and economic analysis, the SBA should be authorized to compile and distribute the aggregate balance sheet, income statement and other key financial data from program applicants. Such data would be assimilated on an anonymous basis, and categorized by Standard Industrial Category (SIC) Codes. Compilation for purposes of statistical retrieval of the critical financial characteristics listed above of small business borrowers on the basis of business line would provide a worthwhile tool to determine small business borrowing needs by industry and make corrections and improvements in types and amounts of necessary governmental assistance. Credit unions should be authorized to amend their charters in order to extend micro loans of up to $50,000 to businesses domiciled in the area where the credit union operates. A micro-loan under the SBA Demonstration Program seeks to make directly funded loans through intermediaries to very small businesses in economically-depressed areas of the country. The Departments of Agriculture and Commerce offer similar programs through the Rural Development Administration and the Economic Development Administration respectively. The loans are short- term with fixed interest rates. The maximum loan is for $25,000. The program presents opportunities for low-income individuals who are otherwise unable to obtain private financing to fund their small businesses. Increasing the maximum loan levels, especially through credit unions, would benefit local communities. The numbers of qualified intermediary lending institutions should be increased. Banking regulations currently frustrate banks in the area of small business lending. Government regulation, including necessary loan documentation and auditing, should be directly proportional to the size of the loan or the risk associated with that loan. This recommendation assumes that lending will occur when the underlying economics justifies the loan absent any unreasonable paperwork and oversight costs. This proposal targets unnecessary regulatory overhead. Making the recommended adjustments to governmentally-dictated paperwork and other requirements will not have an adverse impact upon depositors, investors or governmental funds. In anticipation of interstate banking and the rapid consolidation of hundreds of banks and in order to protect and foster growth in the existing Community Bank sector (those with few branches and less than $100 million in assets), Congress should amend current regulations to provide incentives for investors, depositors and borrowers of community banks. Such incentives may be to provide for lower Fed window rates, tax incentives for targeted lending income (i. e., small business loans) and reduce unnecessary regulatory burdens. The reduction of small local banks, in favor of larger lenders that do not have strong ties to the community and its small businesses could have an adverse impact upon the availability of capital for small business. The recommendation posits a number of incentives which are designed to keep this lending stream strong. Changes in existing laws and regulations that will allow banks to receive additional Community Reinvestment Act credit for commitments made by their affiliates to venture capital funds that make equity investments in areas consistent with CRA including investments in small minority and female-owned ventures are supported. The Community Reinvestment Act of 1977 is designed to encourage financial institutions to invest in their surrounding communities. The proposed amendments by the banking regulators under the Community Reinvestment Act would provide greater access and information on loans made to small business; it would also permit bank affiliate activity to be credited against requirements of the CRA. The proposed revisions will further the goals of the statute which were to cement ties between lending institutions and their surrounding communities. The revisions may also encourage additional funding of small businesses especially those owned by minorities and women. The Small Business Administration should withdraw the bank service provider regulation procedural notice until a comprehensive review can be made and accompanying regulations can be considered and promulgated. Recently published SBA regulations were adopted on service providers without notice or opportunity to comment by those subject to the regulations. Because the term "service provider" can cover a variety of parties involved in identifying prospective SBA borrowers, counselling them, assisting with loan applications, follow-up with the SBA, and assisting at loan closings, consideration of public views could have benefited all concerned. The SBA should insure that there is a uniform application of all its procedures and policies in the District Offices with regard to: (1) central approval of participant lenders; (2) permitting access of all SBA approved lenders in any SBA District; and (3) recognizing and permitting the appropriate participation of borrower and lender intermediaries in the loan approval process. Inconsistent application of policies within a government program unnecessarily increase the costs of compliance to the effected person. A breakdown in internal communication is costly to borrower and lender as well. The recommended improvements in the current SBA program could work significant cost savings. The SBA should review its regulations in order to simplify applications, eliminate duplicative and superfluous information from said applications and from financial documentation required from its clients when applying for a loan. The new simplified forms should be reviewed by a panel of small business owners and financial institutions prior to implementation. Paperwork requirements continue to be a significant impediment to small businesses seeking government guaranteed funds. Consultation with user groups as well as lenders would lead to better and useful documents which would aid all parties to the transaction. The SBA should explore the use of electronic means for generating and transmitting SBA loan applications. The recent developments in information technology will insist that utilizing electronic means in business lending transactions will become commonplace. For the benefit of small business, this development should be explored sooner rather than later. The SBA's Small Loan Express Program should be expanded to include a greater number of participating banks. All possible increases in the numbers of participating lenders in SBA programs will have an obvious beneficial impact for small business. Especially in the area of smaller loans, such an increase in participating lenders would be welcome. The SBA should examine whether or not there is adequate capital available for medium-sized businesses, and if so, develop cost efficient and effective mechanisms for disseminating credit information to these businesses. Recent focusing on the smaller of small businesses is an important feature of the SBA's efforts, but it should not lose sight of the needs of other somewhat larger businesses. A study should be undertaken to ensure that all small businesses are fully informed and serviced through SBA programs. The SBA should explore ways to provide credit enhancement programs through cooperative funding and if necessary develop legislative action to bring about the credit enhancement opportunities. This recommendation is another designed to work as much liquidity out of small business loans as possible. Credit enhancers are important to any securitization proposals which in turn provides liquidity and additional availability of funds to needy small businesses. To promote parity and uniformity in the administration of the SBA 7(a) and related loan guaranty programs, and in anticipation of interstate banking and recognition of the mobility of licensed non-bank lenders, the SBA should permit approved participant lenders and designated certified loan program and preferred loan program lenders to have universal access to all SBA districts without additional registration required in each district. The central and most popular loan program offered by the Small Business Administration is the so-called 7(a) Guaranteed Loan Program. Its current standards allow for guarantees from 70 to 90 percent of a loan depending upon size and term with a maximum limit of $750,000. Recent legislation raised the appropriation for this program. Adding the recommended flexibility for participating lenders would make the program more valuable for small businesses in need of debt financing. In recognition of the expanding needs of, and to foster expansion in capital resources available to, the small business sector, Congress should increase the maximum guaranty of the SBA 7(a) program to at least $1 million and increase the guarantees of related programs proportionately. Another improvement to the program especially in conjunction with the enhanced funding would be an increase in the maximum available amount subject to guarantee for each small business borrower to $1 million. To foster continued growth in the SBA 7(a) and related loan guaranty programs, and to encourage the access of qualified applicants to the benefits available to them, the SBA should instruct each District Office to cooperate with independent loan originators and packagers, as authorized by participant borrowers and lenders. The District Offices should recognize the role of these originators and permit their assistance to coordinate and expedite the loan approval process. Further: (a) Fees paid by applicants for loan packaging services should be disclosed on Form 159 supported by a detailed invoice provided at the conclusion of their engagement; and (b) Form 159 should be amended to include a check-off box to be used to disclose to the applicant whether the subject professional may receive additional compensation from the participating lender. This flagship SBA program could be greatly enhanced through greater reliance upon the assistance of financial intermediaries who are expert in the intricacies of both the lending process and SBA policies and procedures. The recommendations offered would aid in this regard. In order to expand the leverage of the SBA 7(a) appropriations, and to give participating lenders incentives to accept a greater share of loan risk, the 7(a) program should be amended to provide for graduated levels of higher interest rate ceilings coupled with proportional reductions in the level of guaranty. For example on a 5 year loan term, if a 75% guaranty is limited to a rate of 2.75% over prime - a 65% guarantee might raise the ceiling to prime plus 3% - a 55% guarantee - prime plus 3.25% and so on. This recommendation has a monetary appeal that could get lenders to be more willing to assume more of the lending risk in connection with SBA loans. It would also create a situation where the government guarantee could be extended to more loans and thus in concept free up more funds for loan to small businesses. Congress should authorize all federal agencies which fund economic development revolving loan funds, e. g., HUD, EPA, FmHA, to sell or permit the sale of loans at market values in order to reinvest capital into small businesses. Formulating a procedure to permit the resale of discounted government loans in all its lending programs would provide liquidity, enhance the likelihood of securitization proposals and free-up more funds for small business. In order to provide accurate and timely data, all federal lending programs should determine who they are serving. Specifically, federal programs should identify loan size, ethnic and gender information on program beneficiaries to better target which groups continue to need assistance. Duplication of opportunities, and non-use of available opportunities can be just as problematic as wasting opportunities where they are not needed insofar as government-sponsored lending programs are concerned. The recommended study and analysis could be of substantial assistance in targeting assistance where needed with greatest positive impact and lowest cost to the government. The Ex-Im Bank should be more proactive in disseminating information to small business with respect to programs of finance available to these businesses that are in the export/import business. The Bank helps to finance the overseas sales of U. S. goods and services; thus, it seeks to create jobs through exports. Its programs include working capital guarantees, export credit insurance, guarantees of commercial loans to foreign buyers as well as direct loans to such buyers. These programs should be made more widely-known to small businesses. The Ex-Im Bank should expand the number of banks, trade associations, and small business associations that are knowledgeable and capable of processing Ex-Im Bank loans. While the regional offices of the Ex-Im Bank, as well as U. S. Export Assistance Centers, are able to provide help with the programs, a wider network of information, assistance and participating lenders would be beneficial to small business. To eliminate overlapping regulatory requirements and to encourage more bank participation in the SBIC program, a lower level of SBA regulations in simplified provisions should be developed by the SBA for bank-owned SBICs. The SBA's Small Business Investment Company program provides a source of investment capital to small growing companies through a system of private capital investment and matching SBA funds. Companies that qualify to be SBICs are licensed by the SBA and are subject to regulatory controls. Bank-owned SBICs should be subject to simplified provisions because of the extensive regulatory controls already placed on the bank. Such an approach would encourage more banks to establish their own SBICs. A new investment vehicle called SBA Series Bonds (modeled after Series E Savings Bonds) should be created that allows the general public to invest in an SBA program that loans these funds to approved SBA micro-loan intermediary organizations. Creation of a government-sponsored bond serviced with the repayment of proceeds from SBA loans could be a very attractive and secure investment if properly collateralized. Keying the instrument off of smaller loans could make repayment experience more reliable. V. SECURITIES REGULATION ROUNDTABLE 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 A new Form SB-3 should be created by the Commission which would permit shelf registrations by small business issuers that are reporting companies under the Exchange Act. A parallel provision should be created for small business issuers similar to that available for other companies. Under Form S-3 registration, incorporation by reference to information contained in a Company's Exchange Act reports is permitted. A similar procedure should be available for small business issuers. Warrants issued in connection with a registered offering should be resalable by means of a post-effective amendment to the initial filing which incorporates by reference Exchange Act documents, thus keeping the information in the prospectus current. Registered warrants should be exercisable on the basis of a company's reports filed under the Exchange Act without further amendment to the original registration statement. This approach would save an issuer considerable amounts of money by only having to do its normal Exchange Act reports and not bother with the paperwork involved with filing revised prospectuses. The requirement to file a Form 10-C with the Commission by issuers of securities quoted on NASDAQ whenever there is a 5 percent increase or decrease in the amount of its outstanding securities should be eliminated or at a minimum, its late filing should not be a basis for the loss of eligibility of Commission short-form registration statements. Even though the Commission's staff will consider waiver of this type of deficiency for purposes of eligibility for the use of short-form registration statements, this technical requirement should be revised to eliminate the harsh consequences which result from the mere inadvertent failure to make a filing on a timely basis. An even better approach would be to eliminate this particular requirement. The Commission's tombstone ad rule should be reviewed and revised to permit additional information about the issuer's business. A review by the Commission of the current tombstone rules which permit certain limited announcements of proposed offerings would be desirable. The result of that review could permit a wider application of the provision which would benefit small business. At a minimum, a more detailed description of the company's business should be permitted in the advertisement. The holding periods under Rule 144 should be reduced from 3 years to 2 years with respect to the elimination of most of the rule's restrictions as to resale, and from 2 years to 1 year for the initial resale of restricted securities. The selection of the 2-year holding period before restricted securities might be resold by investors was an arbitrary one by the Commission. A reduction in that period to one year would be beneficial to small business because there could be more potential investors interested in purchasing if they could see the future liquidity of their investment, because one year is a sufficient period to show investment intent and it is long enough so that there would not be an adverse impact upon investor protection. 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, for example, the purchase of equipment from a business located in another state; and introduce a good faith and substantial compliance standard. Rule 147 provides, among other things, definitional guidance to the intrastate offering exemption provided in section 3(a)(11) of the Securities Act. This exemption is a very difficult one to sustain due to the necessity of maintaining the local character of the offering through both local offers as well as sales and the local nature of the issuer's business. The proposal would lend additional helpful guidance to issuers relying upon the exemption and also permit a defense against third party suits for inconsequential deviations from the terms of the exemption, a process that has been acknowledged in recent Commission rulemakings. The Commission should use its section 3(b) exemptive authority to create a regional offering exemption which would permit an intrastate type exemption even though the offering crosses state lines. Issuers that are geographically located in proximity to state lines should be permitted, due to the local natures of their businesses and the familiarity local citizens have with their businesses, the use of the intrastate exemption, even though investors may live on both sides of a state boundary line. This result is not possible under the terms of section 3(a)(11) of the Securities Act. However, it is a desirable result and would assist many local small businesses with their financings and could be accommodated pursuant to the Commission's "small issues" authority in section 3(b) of the Securities Act. The Commission should not amend Regulation S to regulate the sales price or discounts for purchase. Sales of securities to overseas purchasers have become an important source of capital to small business. If the Commission revises Regulation S, it should not add a restriction against sales at a discount. The Commission should address the causes of the practice of short sales in offerings under Regulation S and evaluate the impact of this practice on the securities markets, investors and in small businesses ability to raise capital. In such deliberations it should be recognized that Regulation S offerings have become an important source of small business capital in the absence of other alternative domestic sources of capital. Therefore, any resulting reductions in the availability to small businesses of capital by restrictions on the use of Regulation S issues must be offset by improvements in other sources of capital for small business, including establishment of a secondary market for such securities. It is recognized that on occasion safe harbor exemptive provisions may be misused; this is not a reason to unreasonably restrict or eliminate provisions which have become useful to small business. Abuses should be clearly determined and then the provisions which have been causing problems carefully refined. Regulation A should be available to reporting companies. Prior to the adoption of the Commission's small business initiatives in 1992, Regulation A was available to reporting companies. Utilization of the exemption would increase should such a provision be reinstated. While it is true that not many reporting companies were using the exemption prior to the initiatives, it is also true that not many companies in total were using it. The revisions by making the exemption more attractive have caused an increase in its use. Reporting companies should be able to have this option as well. Regulation D's restrictions on general solicitation should not apply where sales are limited to accredited investors alone. Issuers should be permitted to locate accredited investors by any means and still be able to rely upon Regulation D exemptions which do not permit general solicitations. These types of investors are recognized as not needing the protections of registration under the Securities Act. The way in which such investors are located makes no difference in this regard. General solicitation restrictions under Regulation D should not apply to some limited type of tombstone advertisement. An advertisement that specifies very limited information, such as the name and location of an issuer and where more detailed information can be acquired, should be permitted without running afoul of the general solicitation proscription in Regulation D. Regulation D should be amended to permit general solicitations of up to 100 investors and sales to up to 50 unaccredited investors. Regulation D should permit without restriction offers to no more than 100 persons without triggering a general solicitation. Such a small number of potential investors is sufficiently limited to stay in keeping with the limited nature of the transaction exempt under Regulation D. The number of unaccredited investors permitted to participate in offerings under either Rule 505 or 506 should be increased to 50. Institutional accredited investor status should be attainable with assets of $1 million. More institutional accredited investors could be safely reached by simply lowering the asset test from 5 to 1 million dollars. This action would be beneficial to small businesses and have little impact upon the protection of investors because the types of investors would still be able to fend for themselves and get the protections registration delivers without further assistance. Additional individual accredited investors should be permitted on the basis of the ability of such persons to sustain the complete loss of an investment but not tied to net worth or income. Adding investors to the list of accrediteds based upon their ability to sustain a complete loss of investment makes sense and would make available more risk-based capital for small business investment. The Commission should establish minimal disclosure levels which would establish a safe harbor under exemptive provisions such as Rule 504 of Regulation D. Safe harbors provide the objectivity which small business needs to determine whether or not exemptions are available without incurring costly professional advice. While no specific disclosure is required under Rule 504, it is believed to be prudent practice to provide some disclosure in order to satisfy the anti-fraud requirements of the federal securities law. By dictating that minimum level of appropriate disclosure for the smallest exemption, small business would get a greater utility out of the so-called "seed capital" exemption. In order to facilitate the access of issuers of securities to accredited investors in Rule 505 and 506 transactions, general solicitations through advertisements and investor forums restricted to such offerees should be permitted. Offerings are limited under Regulation D through its prohibition on general solicitations and advertising. The Commission should provide more comprehensive guidance on the issue of when an issuer may be involved in a general solicitation and set "safe harbors" so that issuers may proceed in confidence that the claimed exemption will not be lost because of activities which involve a general solicitation. The Financial Accounting Standards Board (FASB) proposed rule to require companies to expense the value of stock options should not be adopted. Small businesses would be especially hurt by this new accounting standard. Compensating employees with stock options and other securities-based benefits is a popular way to reward the efforts of the companies workers without having to divert cash which is needed for the business. The accounting change will make the financial condition of the company appear worse than it is which will make investors less likely to participate in the business opportunity. Legislation penalizing frivolous securities fraud lawsuits by raising standards of proof and shifting legal costs to unsuccessful litigants should be adopted. The costs connected with the defense of a securities fraud lawsuit can be substantial and are particularly burdensome to a small business. When these claims are frivolous, the claiming parties should be penalized for their actions. The ease with which such frivolous lawsuits may be pursued also makes it appropriate that the standards of proof be raised to protect companies from abuse of process. Damages in securities cases should be based on separate and proportionate liability. Proportional liability should be the rule as a means of limiting the risks of the professional advisor acting in good faith. A corollary to frivolous lawsuits is the negative impact such a possibility has upon availability of and the reasonableness of the charges by professional advisers in connection with securities offerings. This situation has a particularly bad impact upon smaller businesses. If concepts of proportional liability, rather than joint and several responsibility, were introduced into the damages system, more professional advisers at a reasonable cost would be available to the small businesses seeking to offer their securities for sale. Securities Exchange Act of 1934 A notice on Form 8-K should be filed for every Regulation S offering, regardless of its size. Public notification of every offering made outside of the United States which is not registered under the Securities Act is important for both the markets for securities as well as potential investors. Utilizing the current reporting structure under the Exchange Act would be a simple way to provide this information to the public. The ability for small cap corporations to raise capital in the United States is impaired by the lack of liquidity in the American capital markets for such stocks. Current government efforts to facilitate such initial capital development by small cap corporations are of minimal value because they do not adequately address the lack of a secondary market which would create liquidity for such low-priced stocks. While recognizing the objectives of legislation and regulations which cured the abuses of the so-called penny stock markets, a concerted effort by government and industry is required to create a viable, effective and efficient market to provide liquidity for such securities. This market would be subject to applicable regulatory authority, including reporting under the Exchange Act. In order for securities sales to be a meaningful option for small businesses seeking to raise capital, investors must be offered a liquidity option, that is a means to sell their purchased securities when they want to take a profit or limit a loss. Governmental agencies should take the lead in developing a viable market for the resale of the securities issued by small companies. At the least, their regulatory efforts should not impede markets which develop in the natural course of events. Securities quoted on the NASD's OTC Bulletin Board should be subject to full surveillance and oversight. When this is accomplished, such securities should not be subject to the Commission's penny stock rules. Liquidity in the securities of small businesses is essential to the viability of using securities sales as a method of small business financing. A special market within NASDAQ dedicated to these issuers would be of tremendous value to small business and provide significant safeguards to the investing public. The existing regulations governing sales techniques of broker dealers need to be more vigorously enforced in sales to non- institutional investors and registered representatives need better training. Since registered representatives are almost entirely dependent for the information they receive about their products on their broker dealers, the sales materials the registered representatives receive need better monitoring by the regulators. Registered representative compensation methods should be revisited since straight commission compensation entails an obvious conflict. On the other side, customers should be required to sign suitability disclosures of their financial condition and this should be done periodically since conditions change. Small businesses selling their securities frequently are burdened by the excesses and improper conduct of uninformed or unscrupulous sales agents who are supposed to be regulated by not only governmental authorities but also their employers. More emphasis should be placed upon this important regulatory effort which would in the long run provide a benefit to small business. The Commission should review the requirements of the Exchange Act with a view to establishing a special category of "small business broker dealer." These broker dealers could specialize in small business securities and solicit investors. A special category with special requirements and benefits should be introduced into the Commission's system of registering and regulating broker/dealers. By establishing an experience level for these broker/dealers who would specialize in the securities of small businesses, certain accommodations could be made in the regulatory system to the benefit of both the broker/dealers as well as the investing public. Investment Company Act The Commission should establish valuation standards for the portfolio companies held by Business Development Companies (BDC). The Commission should establish objective guidelines which indicate the acceptable methods for valuing the securities of companies for which there exists no active trading markets. By doing so, more BDCs will be willing to invest in the securities of small companies and in particular those that have offered their securities under the SCOR program of disclosure. Small Business Investment Companies with less than $10 million of capitalization should be exempt from the Investment Company Act of 1940. The smallest of the SBICs should be exempted from both the registration requirements of the Securities Act as well as the regulatory requirements of the Investment Company Act. It is noted that these companies are subject to licensing and regulation by the Small Business Administration. The elimination of the duplication in oversight would work substantial benefits to the regulated entity and also provide additional sources of needed capital for small business. Business Development Companies should be permitted to acquire assets from third parties in private transactions and be permitted to increase their leverage if they have sufficient income to service such leverage. The Commission's BDC program would be more effective and better served by relieving these companies from regulatory requirements of this nature. The benefits that would come from more sources of venture capital for small business would outweigh any risks to the investors in these entities. Federal/State Regulation All of the states should adopt test the waters procedures. The device which permits an issuer to gauge potential investor interest in a possible securities offering prior to the compilation of detailed compliance materials works significant cost savings. It should be allowed under the laws and regulations of all of the states. The Commission should cooperate with the states and NASAA to gather data on the use and either the success or failure of test the waters filings used by companies. The test the waters procedure promises much in the way of cost savings and ability to determine whether securities sales are a viable way to finance an operation. Statistical information, either way, in support or against the proposition should be developed to determine whether more effort should be devoted to having the system in place in all of the states. The states should pursue developing a regional review system to process registration statements more efficiently using a lead jurisdiction to process, not clear, the registration statement. The goal of uniformity between federal and state regulation of securities matters would be greatly enhanced if the system offered greater uniformity of regulation between a number of states. The Federal system has essentially deferred to state regulation with respect to the small offerings subject to Rule 504 of Regulation D. This situation offers the states the opportunity to unify their regulation of these small offerings by getting together and designating a lead state for the review of and responsibility for offerings which touch one or more states. The per share dollar price for the use of the SCOR form should be reduced from $5 to $1. The $5 levels for use of the SCOR form and the application of the Commission's cold-call rule (Rule 15g-9) were both selected before comprehensive federal/state enforcement efforts were undertaken and federal penny stock laws and rules were adopted. Several years have now passed and the abuses in the penny stock area have been significantly reduced and continue to be subject of serious federal/state oversight. The proposed limited changes to $1 can be safely taken at this time because of the other provisions which are now in place. All the states should adopt the SCOR form. Availability of the special state registration form in all of the states would create the kind of uniformity which would cut costs significantly for a small business faced with paperwork requirements associated with its attempt to raise a small amount of capital through the sale of its securities. The states should be preempted from registering securities offerings but not from enforcing their antifraud rules. The federal system of registering and exempting securities and transactions from registration is sufficient in the public interest and to protect investors; the state presence in this activity is duplicative and unnecessary. Significant savings, cost and otherwise, would result if the states did not register securities and transactions involving securities sales. Merit review should be eliminated. State reviews which seek to determine which offerings are "fair, just and equitable" to the citizens of their jurisdictions should be abandoned in favor of a disclosure system which gives investors the opportunity to make up their own minds as to whether or not a particular investment is suitable for them. VI. FORUM PARTICIPANTS Martin Abo Abo, Uris & Altenburger 3003B Greentree Executive Campus Marlton, NJ. 08053 Clifford J. Alexander Kirkpatrick & Lockhart 1800 M Street, NW Washington, DC. 20036 Pamela Allman Pamela Allman, CPA 1805 E. Cabrillo, Suite C Santa Barbara, CA. 93108 T. Bryan Alu Data Display Corporation 1500 Cherry Street Louisville, CO. 80027 Tom Bargsley Bargsley & Associates, CPAs 13809 Research Boulevard Suite 705 Austin, TX. 78750 Barry H. Barnett Barnett and Allison 7304 Guadalupe Trail NW Albuquerque, NM. 87107-6614 Peter A. Basilevsky Satterlee Stephens Burke & Burke 230 Park Avenue, Suite 1130 New York, NY. 10169 William J. Bavis Clifton, Gunderson & Co. 1122 Kenilworth Drive, Suite 412 Baltimore, MD. 21204 Ed Bell Ed Bell & Associates 116 Dugas Street Morgan City, LA. 70380 Philip Bell Franklin Institute 630 S. Carrollton Avenue New Orleans, LA. 70118 Luis R. Crespo Bello Universidad De P.R. Colegio Regional De Aguadilla P.O. Box 250160 Ramey, PR. 00604-0160 Kenneth C. Blair, Jr. Circle Transport 11330 Kinsman Road Newbury, OH. 44065 Brian T. Borders Association of Publicly Traded Companies 1200 19th Street, NW, Suite 300 Washington, DC. 20036 Irv Bowen J. Michael Reisert, Inc. 2455 E Sunrise Boulevard Suite #609 Ft. Lauderdale, FL. 33301 Dr. Don Bradley, III University of Central Arkansas UCA Box 5018 201 Donaghey Avenue Conway, AR. 72035-0001 Julius J. Brecht Wohlforth, Argetsinger, Johnson & Brecht 900 W. Fifth Avenue, Suite 600 Anchorage, AK. 99501 Joseph D. Carney Cohn, Carney, Feuerstein & Co. 2601 Crocker Road, Suite 440 Westlake, OH. 44145-1954 Robert Carton Credit Depot Corporation 700 Wachovia Center Gainesville, GA. 30501 Stuart R. Chalfin Fishbein & Company, P.C. Suite 200, Elkins Park Square Elkins Park, PA. 19117 Dr. Santosh Choudhury 4761 Cranbrook Court Virginia Beach, VA. 23464 Mary A. Cole Mayer, Brown & Platt 2000 Pennsylvania Avenue, NW Washington, DC. 20006 Pedro Gonzalez Cordero Universidad De P.R. Colegio Regional De Aquadilla P.O. Box 250160 Ramey, PR. 00604-0160 Leslie M. Corley LM Capital 152 West 57th Street New York, NY. 10019 Edward C. Delk Kirkpatrick & Lockhart 1800 M Street, NW South Lobby, 9th Floor Washington, DC. 20036-5891 Ralph V. De Martino De Martino Finkelstein Rosen & Virga Suite 400, 1818 N Street, NW Washington, DC. 20036-2492 Marc B. Dorfman Freedman, Levy, Kroll & Simonds 1050 Connecticut Avenue, NW #825 Washington, DC. 20036 William D. Evers Sullivan, Roche & Johnson 333 Bush Street, 18th Floor San Francisco, CA. 94104 S. Brian Farmer Mezzullo & McCandlish 1111 E. Main Street, Suite 1500 Richmond, VA. 23219 Stan Fendley U.S. Senate Small Business Committee 428A Russell Building Washington, DC. 20510 Gerald Forg‚t The Forg‚t Group 8712 W. Dodge Road, Suite 204 Omaha, NE. 68114 Twila L. Foster Jackson, Tufts, Cole & Black 650 California Street San Francisco, CA. 94108 Richard C. Fox Microterra, Inc. 621 NW 53rd Street, Suite 370 Boca Raton, FL. 33445 Barbara A. Frantz Law Office of Barbara A. Frantz 1250 Sixth Street, #203 Santa Monica, CA. 90401 J. Douglas Frazer Small Business Institute Directors Association Millersville University Millersville, PA. 17551 David D. Gatchell Spencer Fane Britt & Browne 1000 Walnut Street Kansas City, MO. 64106 A. Richard Gerber Pennsylvania Securities Commission 1010 N. 7th Street Eastgate Office Building Harrisburg, PA. 17102-1410 Jeffrey Gilbert Hollander, Gilbert & Co. 15260 Ventura Boulevard Suite 940 Sherman Oaks, CA. 91403 Tom Stewart-Gordon SCOR Report P.O. Box 781992 Dallas, TX. 75378-1992 Charles H. Green Southeast Capital Associates, Inc. 5600 Roswell Road, Suite 210 Atlanta, GA. 30342 Richard Hart Harrington Gordon, Harrington & Osborn, PC 630 Turnpike Street North Andover, MA. 01845 John M. Harris Clemson University 314 Sirrine Hall Clemson, SC. 29634 Richard S. Heller Shustak Jalil Sanders & Heller 545 Madison Avenue New York, NY. 10022 Victor Hollander Hollander, Gilbert & Co. 15260 Ventura Boulevard Suite 940 Sherman Oaks, CA. 91403 William C. Hunter Federal Reserve Bank of Atlanta 104 Marietta Street, NW Atlanta, GA. 30303 Fred C. "Ted" Jans SBTDC/UNCW 601 South College Road Wilmington, NC. 28403 Leroy A. Johnson Rutgers Small Business Development Center 180 University Avenue Newark, NJ. 07102 Richard Kalin Micronetics Inc. 26 Hampshire Drive Hudson, NH. 03051 Michael I. Keller Michael I. Keller Enterprises, Ltd. 1935 Hawthorne Avenue Alexandria, VA. 22311 Alfred F. Kenrick Transition Capital 260 Sheridan Avenue, Suite 412 Palo Alto, CA. 94306 Eliott Klein Pennsylvania Securities Commission 1109 State Office Building Philadelphia, PA. 19130 Stephen A. Klein Stephen A. Klein, Esq. 10409 Englishman Drive Rockville, MD. 20852 Frank E. Lawatsch, Jr. Crummy, Del Deo, Dolan, Griffinger & Veechione One Riverfront Plaza, 15th Floor Newark, NJ. 07102 Harry Letaw, Jr. Essex Corporation 9150 Guilford Road Columbia, MD. 21046 Terry L. Lister Peper, Martin, Jensen, Maichel and Hetlage 720 Olive Street, 24th Floor St. Louis, MO. 63101 Marc Lumer Marc Lumer & Company 200 California Street 4th Floor San Francisco, CA. 94111 Joseph Lunin Pitney, Hardin, Kipp & Szuch P.O. Box 1945 Morristown, NJ. 07962-1945 Paul R. Madden Chapman and Cutler 2 North Central Avenue Suite 1100 Phoenix, AZ. 85004 Joel E. Marks JW Charles/CSG 1117 Perimeter Center West Suite 500E Atlanta, GA. 30338 Ralph L. McNeal, Sr. The Small Business Stock Exchange of America, Inc. 521 Fifth Avenue, 17th Floor New York, NY. 10175 Aimee Mejia EduQuest 1047 East 29th Street Brooklyn, NY. 11210 Fredrick M. Miller Dykema Gossett PLLC 400 Renaissance Center Detroit, MI. 48243-1668 Alfred Morgan 235 East 62nd Street New York, NY. 10021 James E. Murray Brown & Wood 815 Connecticut Avenue, NW Suite 701 Washington, DC. 20006 Martin Mushkin Law Offices of Martin Mushkin 470 Park Avenue South 2nd Floor South New York, NY. 10016 Bernard Myers U.S. General Accounting Office 820 First Street, NE, Suite 150 Washington, DC. 20002 Jim Oakley Continental Commercial Funding 341 North D Street Porterville, CA. 93257 Michael D. O'Brien CFO to Go 1021 New Dawn Lane Odenton, MD. 21113 Dennis O'Connor O'Connor, Broude & Aronson 950 Winter Street, Suite 2300 Waltham, MA. 02154-1233 Charles Ou U.S. Small Business Administration 409 Third Street, SW Washington, DC. 20416 Anthony B. Petrelli Neidiger, Tucker, Bruner, Inc. 1675 Larimer Street, #300 Denver, CO. 80202 Irwin Pomerantz Irwin Pomerantz & Associates 7700 Sunset Boulevard, Suite 205 Los Angeles, CA. 90046 H. Boone Porter, III Lewis, Rice & Fingersh One Petticoat Lane 1010 Walnut Street, Suite 500 Kansas City, MO. 64106 William J. Ransom Ransom & Associates 106 E Pacemont Road Columbus, OH. 43202-1225 B. J. Rone AdvaCare, Inc. 9696 Skillman, Suite 325 Dallas, TX. 75243 John A. Ronzetti National Retail Federation 325 7th Street, NW Suite 1000 Washington, DC. 20004-2802 Richard D. Rowland Delaware Delegation WHCSB 42A Reads Way New Castle, DE. 19720 Manuel Saenz New York State Department of Economic Development 1515 Broadway New York, NY. 10036 Katherine Samolyk Federal Reserve Board 20th & C Streets, NW Washington, DC. 20551 John R. Sarkisian Ram Investment Co. P.O. Box 60373 Pasadena, CA. 91106-0373 John J. Shoults The Forg‚t Group 8712 W. Dodge Road, Suite 204 Omaha, NE. 68114 Roberta Skebo University of Houston Small Business Development Center 1100 Louisiana, Suite 500 Houston, TX. 77002 Jeffrey P. Somers Gadsby & Hannah 125 Summer Street Boston, MA. 02110 James Stanker Aurtex, Inc. One California Street Suite 2509 San Francisco, CA. 94111 Richard J. Stapleton Georgia Southern University Department of Management Statesboro, GA. 30460 Ernest M. Stern Graham & James 2000 M Street, NW, Suite 700 Washington, DC. 20036 Robert Stevens Michigan Small Business Development Center 2727 Second Avenue, Suite 107 Detroit, MI. 48201 Thomas E. Stitzel Boise State University Department of Marketing & Finance Boise, ID. 83725 Vaughn Thomas Ashford & Thomas, P.A. 500 Copper Square NW Albuquerque, NM. 87102 John J. Tollefsen Tollefsen & Company P.C. 16212 Bothell Way S.E. Suite F Mill Creek, WA. 98012 James F. Twaddell Barclay Investments, Inc. 66 S. Main Street Providence, RI. 02902 Patrick Valenzuela California Office of Small Business Trade & Commerce Agency 801 K Street, Suite 1700 Sacramento, CA. 95814 Garrett Vogel Code Rite Inc. 7400 Pebble Drive Fort Worth, TX. 76118 Angela Crump-Voley U.S. General Accounting Office 820 First Street, NE, Suite 150 Washington, DC. 20002 Daniel Weston League of American Investors 2416 Oakshore Drive Westlake Village, CA. 91361