FINAL REPORT OF THE SEC GOVERNMENT-BUSINESS FORUM ON SMALL BUSINESS CAPITAL FORMATION* MARCH 1996 * This report has been compiled by the staff of the Division of Corporation Finance, U. S. Securities and Exchange Commission. The views and recommendations in this report, however, are those of the Forum participants and not the Securities and Exchange Commission, the Commissioners or any of the Commission's staff members. PREFACE In 1995, the Government Business Forum on Small Business Capital Formation met in Providence, R. I. again demonstrating the Executive Committee's intention to meet with small businesses across the country frequently, making the Forum more accessible, and learning about the particular local problems being encountered with respect to capital formation. The recommendations from the 1995 Forum follow. We believe that many worthwhile proposals are evidenced. The participants gave careful consideration to a wide variety of issues, as well as to the preliminary recommendations of the 1995 White House Conference on Small Business. One purpose of the Forum is to give the capital-raising needs of small business greater attention, with the hope that these needs may be accommodated, in balance with appropriate, and necessary governmental regulations to safeguard the public interest. It is apparent from the following recommendations of the Forum participants, that this purpose has been well served. We thank them for their efforts and are pleased to present this report. The Executive Committee for the Fourteenth Annual SEC Government-Business Forum on Small Business Capital Formation EXECUTIVE COMMITTEE Chair: Albert S. Dandridge, III, Associate Director Division of Corporation Finance Securities and Exchange Commission Mary E. T. Beach Consultant E. Olena Berg Assistant Secretary, Pension and Welfare Benefits Administration, U. S. Department of Labor Janice Booker Director, Customer and Industry Affairs Office of Comptroller of the Currency Michael S. Caccese Senior Vice President and General Counsel Association for Investment Management and Research Gregory Dean Assistant Chief Counsel for Advocacy U. S. Small Business Administration Jerry Feigen Adjunct Professor, Georgetown University, School of Business; President, Jerry Feigen Associates John Paul Galles Executive Vice President National Small Business United Bruce Gamble President National Association of Investment Companies Bruce Goldberg Entrepreneurial Advisory Services Group Coopers & Lybrand 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 H. 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. Karen M. O'Brien General Counsel North American Securities Administrators Association, Inc. Douglas F. Parrillo Senior Vice President, Communications National Association of Securities Dealers Martha Scanlon Deputy Associate Director, Division of Research and Statistics, Board of Governors of the Federal Reserve System Herbert Spira Tax Counsel Independent Bankers Association of America Wayne Upton, Jr. Project Manager Financial Accounting Standards Board CORE PRESENTERS TAXATION ROUNDTABLE Moderator : Daryl Jackson Holt, Jackson & Thrasher 99 Canal Center Plaza Suite 230 Alexandria, Virginia 22314 Along with : Dennis J. Roberts Matrix Capital Markets Group 6701 Democracy Boulevard Suite 300 Bethesda, Maryland 20817 Russ Orban, Assistant Chief Counsel for Tax Policy Office of Advocacy U. S. Small Business Administration 409 Third Street, S. W. Washington, D. C. 20416 CREDIT ROUNDTABLE Moderator : Wayne Upton, Jr. Financial Accounting Standards Board 401 Merritt 7 P. O. Box 5116 Norwalk, Connecticut 06856 Changes in Traditional Credit Financing to Small Businesses -- William Gossett, President Liberty National Bank P. O. Box 9400 Longwood, Florida 32752-9400 Richard J. Delaney National Bank Examiner Comptroller of the Currency Boston, Massachusetts Joseph Loddo District Director U. S. Small Business Administration Providence, Rhode Island Financing High Technology and Innovation Small Businesses -- Peter Dorsey, Vice President Business Development Company of Rhode Island 40 Westminister Street Suite 702 Providence, RI 02093 Jonathan A. Barnes, Vice President Rhode Island Hospital Trust Providence, Rhode Island Pension Fund Investing in Small Businesses -- Moderator: Gregory Dean, Associate Chief Counsel for Banking and Finance Office of Advocacy U. S. Small Business Administration 409 Third Street, S. W. Washington, D. C. 20416 Thomas J. Skala Chairman Fleet Bank Rhode Island Providence, Rhode Island Nancy Mayer, General Treasurer State of Rhode Island State House, Room 102 Providence, RI 02903 Thomas W. Janes, Managing Director Triumph Capital Group, Inc. 60 State Street, 21st Floor Boston, MA 02109 Ivanhoe N. Smith, Managing Director Smith Whiley & Co. 242 Trumbull Street Hartford, CT 06103 Gregory A. White, Executive Director Pension Reserves Investment Management Board 200 State Street, 13th Floor Boston, MA 02109 SECURITIES ROUNDTABLE Moderator : Marc H. Morgenstern Kahn, Kleinman, Yanowitz & Arnson The Tower at Erieview Suite 2600 Cleveland, Ohio 44114-1824 Along with : Stanley Keller Palmer and Dodge One Beacon Street Boston, Massachusetts 02108 Charles H. B. Braisted Davis Polk & Wardwell 450 Lexington Avenue New York, NY. 10017 Barry Guthary Director Massachusetts Securities Division One Ashburton Place Room 1701 Boston, Massachusetts 02108 Karen M. O'Brien, General Counsel North American Securities Administrators Association, Inc. One Massachusetts Avenue, Suite 310 Washington, D. C. 20001 J. L. Stiegelmeier, PhD. 221 October Place Castle Rock, Colorado 80104 PANEL PRESENTATION: Patient Capital and Electronic Commerce Moderator : Professor Jeffrey Sohl Director Center for Venture Research Wittemore School of Business and Economics University of New Hampshire McConnell Hall Durham, New Hampshire 03824 Panelists : Professor William E. Wetzel, Jr. Director Emeritus Center for Venture Research Wittemore School of Business and Economics University of New Hampshire McConnell Hall Durham, New Hampshire 03824 Tom Bargsley Bargsley & Associates, CPAs 11940 Jollyville Road Ste. 210S Austin, Texas 78759 K. Robert Bertram Counsel, Division of Corporation Finance Pennsylvania Securities Commission 1010 N. Seventh Street Eastgate Office Building, 2d Floor Harrisburg, Pennsylvania 17102-1410 Twila L. Foster Jackson, Tufts Cole & Black 650 California Street, 32nd Floor San Francisco, CA. 94108 1995 FORUM STAFF Richard K. Wulff John F. Murphy Gerald L. Werner Twanna M. Young Jay Pitts TABLE OF CONTENTS I. SUMMARY OF FORUM RECOMMENDATIONS........................... II. INTRODUCTION............................................... III. RECOMMENDATIONS FROM THE WHITE HOUSE CONFERENCE............ IV. TAXATION .................................................. V. CREDIT .................................................... VI. SECURITIES REGULATION ..................................... VII. MISCELLANEOUS.............................................. VIII. FORUM PARTICIPANTS......................................... I. SUMMARY OF FORUM RECOMMENDATIONS RECOMMENDATIONS FROM THE WHITE HOUSE CONFERENCE The Forum especially endorses Recommendations 14, 20 and 286 of the White House Conference on Small Business: 14. To increase the availability of growth capital to invest in small businesses, Congress should: a) Further privatize the Small Business Investment Company (SBIC) program, now administered by the SBA, by creating a new, government sponsored, but privately managed, corporation named Venture Capital Marketing Association or "Vickie Mae" which would function similar to the Federal National Mortgage Association (Fannie Mae); b) Extend the capital gains tax deferment currently afforded investments rolled into Specialized Small Business Investment Companies (SSBICs) to include investments in SBICs to encourage more investment in new SBICs; c) Remove barriers to pension funds, foundations and endowments wishing to invest in SBICs and SSBICs; eliminate the "unrelated business taxable income" (UBTI) tax on all such activities; and d) Reduce the minimum capital size requirements for establishing SBICs owned by regulated financial institutions, thereby encouraging them to provide equity to small businesses provided that no leverage is utilized by such SBICs until current minimum capitalization for leverage is achieved. 20. Congress should support the investment in small businesses by: a) Establishing a tax free rollover provision for the gains on sale of assets or ownership interests in a small business that are reinvested or rolled over into another small business within one year. b) Congress should amend Code Section 1202, which is legislation excluding 50% of all capital gains from income, to extend its benefits to S Corporations and Limited Liability Companies by defining a "qualified small business" to include C Corporations and the other two entities, and extend the definition of a "qualified trade or business" under Section 1202 to all businesses. c) Congress should enact tax legislation to allow a tax deduction against ordinary income for investments in small business. 286. The U. S. Small Business Administration is vital to the growth of small business in America. Efforts to make the SBA's programs more cost effective and efficient should be continued and encouraged. The SBA's "independent" agency role as the primary supporter of small business within the Federal Government should be enhanced by: a) Elevation of the U. S. Small Business Administration to a congressionally approved cabinet level position. b) Budget allocations to maintain, increase, and enhance the 7(a) Loan Guaranty Program. c) Budget allocations to maintain, increase, and enhance the 504 Loan Program. d) Budget allocations to make permanent the Small Business Development Center Program which provides business assistance to small businesses nationwide. e) Permanent maintenance of the "independent role" of the U. S. Small Business Office of Advocacy. f) All other SBA programs should be reviewed with substantial input from the private sector. Any programs deemed to be ineffective should be eliminated. TAXATION Preamble It is the consensus of the Forum that current tax law and regulations promulgated thereunder unduly hinder the ability of small business to attract and maintain the capital necessary for formation and growth. It is for this reason the Forum submits the following recommendations in an effort to provide fairness and ease of compliance within our current tax system. Capital Formation Capital Gains Congress should enact comprehensive policy on capital gains that encourages the long-term investment in productive assets. This policy should include the following provisions: A) A 50% capital gains exclusion on sales of capital assets held more than one year. B) A targeted capital gains exclusion of an additional 50% of the regular exclusion (total of 75% exclusion) for an investment in a qualified small business which should include all forms of business entities including pass-throughs. C) A maximum tax of 10% on the sale of a majority interest in a qualified small business held for more than 15 years. D) A deferral of the gain on the sale of an interest in a qualified small business if the gain is reinvested in another qualified small business within two years. E) The non-taxable portions of gains should be exempt from the alternative minimum tax calculations. F) The capital loss deduction limitation of $3,000 should be eliminated. G) Reinstate the "General Utilities Doctrine" to eliminate the double taxation of proceeds from the sale of a business. H) These provisions should be applicable to all sales after the effective date with original holding periods remaining intact. Amendments to Section 1244 A) Amend the section 1244 definition of a qualified small business corporation to be any sub-chapter C corporation with $5,000,000 or less, in capital. Loans from a greater than 10 percent shareholder are considered capital. B) Remove the requirements that qualified section 1244 issuances be original issue (thus eliminating burdensome requirements that the stockholder prove original issue). C) Include in the definition of qualified small business stock, corporate indebtedness to a 10 percent or greater shareholder. Small Business Investment Credit Congress should enact tax legislation to allow a tax credit for investment in a qualified small business. In the event that the investment is sold or liquidated at a gain in less than five (5) years, the credit will be recaptured on a pro-rata basis. In the event that the investment is sold or liquidated at a loss in less than five (5) years, the credit will be allowed in an amount not to exceed the loss. Gift and Estate Tax Raising capital is directly related to the rate of return computations. Expenditures that are directly related to estate and gift tax considerations have an adverse effect on rate of return computations and are not beneficial to the operations of small business. Therefore we are recommending that the value of small businesses should be excluded from the gross estate. Net Operating Loss Eligibility The net operating loss eligibility should be expanded to companies that maintain at least 20 percent continuity of ownership. Investment of Qualified Pension Funds Modify current law to allow an individual to invest, under current limits, his or her own self directed qualified pension or profit sharing plan(s) in his or her own small business. These funds could be used as a direct investment or as collateral to obtain debt financing. Officer or director self-directed IRAs should be authorized to make investments in the obligations and other securities of their own companies. Capital Retention Payroll Taxes A) Tax Burden Payroll taxes are regressive and discriminate against small businesses. Payroll taxes should not be raised in either rates or caps, and every effort should be made to lower the payroll tax burden on small business. B) Administrative Burden Compliance with payroll tax reporting is complex and burdensome to small businesses. Reporting requirements should be simplified and consolidated with state and local reporting requirements. Flexibility should be given to the regulatory agencies for waiving penalties for innocent mistakes. Corporate Dividend Deduction Create a deduction for all corporate dividends paid to non- management shareholders. Alternative Minimum Tax The alternative minimum tax should be repealed. Current Tax Proposals Costs of Complying with Regulations The costs of complying with regulations is a form of indirect taxation levied on business. Enforcement of regulations should be reasonable, flexible and subject to a cost/benefit analysis. Costs to defend against unreasonable positions or abusive actions taken by regulators should be reimbursed by the Government with the burden of proof being placed on the Government. Other Definition of Small Business A single definition of small business should be established. If a single definition is not possible, a specific business should only have to qualify once for all benefits available to small businesses. CREDIT To further expand the credit availability program of the SBA we recommend that a loan may be renewed without mandating a reappraisal if the loan is otherwise performing without default. The reach of and incentives for the SBA micro-loan program should be expanded. Whereas SBICs are a major source of early stage capital, the participating securities component should be retained and enlarged so that earlier stage companies will have access to this significant resource for longer term "patient" capital. The nature and character of long term technical assistance provided by the Women's Business Development Programs should be preserved and enhanced. The Department of Commerce's Export Assistance Program should not be limited to asset-based lenders. Regulations concerning credit and capital formation decisions should be discounted in cases where no action covenants, agreements not to sue, or enforcement waivers by state or federal EPA exist on Superfund, underground storage or brownfield liability. Commercial loans that require asset-based evaluations to secure the loan (e.g., debt to worth ratios) should be reevaluated to take into consideration the ability to repay the loan as a primary determining factor for approval. This recommendation identifies the specific needs of non-asset based businesses to access capital to finance their operations. A program should be developed by the SBA, the lending industry, the SEC and/or Congress that will further leverage the SBA Secondary Market by providing a mechanism for the pooled securitization of the unguaranteed portion of SBA loans. The availability and cost effectiveness of the SBA loan guaranty program should be enhanced by transitioning to a zero credit subsidy rate, in part through imputation of an experience rating charge that penalizes poor credit decisions but maintains the affordability of SBA lending. SECURITIES REGULATION The development of a simplified prospectus or disclosure document is encouraged. Companies and individuals should be protected against liability for forward-looking information. The statute of limitations in section 13 of the Securities Act should be reduced to one year for all exempt offerings. The SEC and the states should implement a national "test the waters" provision for small business offerings. A company, in contrast to transactional, registration process should be applied to all 1934 Act companies. The Rule 504 ceiling should be increased from $1 million to $5 million. The Commission should eliminate the general solicitation restriction from all Regulation D exemptions. In any event, the use of the Internet to locate investors in a Regulation D offering should not be deemed a general solicitation. The SEC and the states should allow general solicitation of accredited investors. The Commission should revise Regulation S to prohibit hedging transactions, (but not the discounting in such transactions or the 40-day provision for reporting companies), if an efficient method of enforcement can be developed. Enhance the growth of financial service intermediaries to meet the needs of small business issuers by establishing a "limited purpose" broker/dealer category with less burdensome regulations than now imposed upon registered broker/dealers. These broker/dealers should be required to demonstrate knowledge of the securities industry by successfully passing a standard examination and should be bonded as well but should not be subject to FOCUS Reports and net capital requirements for example, now imposed upon registered broker/dealers. Regulators should encourage the growth of broker/dealers raising capital for small business stocks. Investment in small businesses by the middle class through pools of professionally managed small business stocks should be encouraged. This will require amendments to the Investment Company Act of 1940 and should lead to the establishment of closed-end funds composed of small business stocks. Within the scope of its authority to do so, the SEC should take action to facilitate: -- the investment by mutual funds and public and private investment funds into investment grade securities of securitized small business loans; -- establishing a REMIC like treatment for tax pass through entities for small business loan securitizations; -- examining credit enhancement mechanisms to further facilitate small business loan securitization by public and private resources. Investment Advisers Act and Investment Company Act regulations imposed on managers of accredited investor accounts investing in private placements of small businesses should be reduced. Relief should be provided under the Investment Company Act and the Investment Advisers Act for businesses that raise money to invest in small businesses in which a state pension fund has already invested. The Commission should publicly state that the investment adviser regulations cover finders and financial public relations people and enforce the provisions in this regard. The SEC should publicize the availability of the BDC as an investment pool vehicle for venture capital and promote the concept. The SEC should adopt clear and specific guidelines for BDC evaluation of portfolio companies. Congress should adopt amendments to the BDC provisions of the 1940 Act and the SEC should issue regulations removing the liability of BDC directors for the evaluation of portfolio investments especially for non-control investments in private companies. The SEC should be urged to facilitate the use of the Internet for capital formation by small businesses. Encourage the states to adopt the Pennsylvania model with respect to the Internet for small business stock offerings and address the gun jumping issue so as not to preclude sales to investors contacted prior to an issuer filing with a particular state. The States should interpret their non-offer provisions which are currently limited to newspapers, television and radio to also apply to Internet listings. Establish uniform disclosure requirements in the states for offerings of $10 million or less and employ technology, such as the SRD system developed by NASAA, to simplify state securities filings. ULOE should be revised to eliminate its optional provisions and be simply conformed to the requirements of Rule 505 of Regulation D. SCOR and securities-related education should be promoted generally through business community organizations, economic development agencies and other similar organizations. With respect to federally-exempt offerings (under Regulation D or section 4(2)), issuer agent or similar state registration provisions should not be applicable. Finders of accredited investors who are local investors of local issuers and do not generally handle any funds or securities are exempt under the Exchange Act but not state laws, unless the offering is one prohibited under SCOR standards. States registering such persons should limit regulatory requirements to those that are relevant to this activity. The states should implement regional review of small business offerings and specifically states should coordinate their reviews and defer to a single regulator for each offering. MISCELLANEOUS Each state should require its pension fund to invest a percentage of its assets in small businesses. The Department of Labor should respond more quickly to requests for exemptions from the prohibited class restrictions, particularly with respect to asset-backed securities. Pension funds should be allowed to invest in funds of small business company stocks. Government regulations that impact capital formation should be revised to permit and encourage the use of the Internet and other technologies to promote access, reduce costs, provide education and information to business and the investor public. 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 fourteen years, the SEC Government- Business Forum on Small Business Capital Formation has been convened. A major purpose of the Forum is to provide a platform for small business to highlight perceived unnecessary impediments to the capital-raising process. Numerous recommendations have been developed at these Forums seeking legislative and regulatory change in the areas of taxation, securities regulation, financial services and state and federal assistance. Participants at the Forum typically are small business owners, venture capitalists, government officials, trade association representatives, academicians and advocates of small business. While a number of different formats have been tried over the years, a very effective one for purposes of the development of recommendations for governmental action has included the use of small interactive participant groups; and in recent years, the Forum has typically included this feature. The Fourteenth Annual Forum was held in Providence, R. I. on September 13 and 14, 1995. 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. Because the White House Conference on Small Business had been held the previous June, the 1995 Forum not only offered the usual opportunity to articulate the views of small business, but also to formulate technical recommendations based upon the recommendations from the White House Conference. The topic areas of taxation, credit and securities again were selected as the focus of the Forum. The Executive Committee had determined that the format of the sessions would present in the mornings 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, and be moderated by a member of the Forum's Executive Committee, with 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 had to select the round- table discussion in which they wished to participate. As in prior years, time would be devoted to discussion in small interactive break-out groups in order to permit Forum participants sufficient opportunity to develop thoughtful recommendations. These groups were to be comprised only of participants who had attended a particular topic round table. The Executive Committee believed this that format, because it encourages the development of technical recommendations, would be the most likely way to effectively further the efforts of the White House Conference. Welcoming remarks were offered by Albert S. Dandridge, III, Associate Director of the Corporation Finance Division of the U. S. Securities and Exchange Commission, and Chair of the Forum's Executive Committee. A keynote opening address was presented by Dr. Lynn E. Brown, Senior Vice President and Director of Research for the Federal Reserve Bank of Boston. A report regarding developments and helpful governmental initiatives for small business at the states and local levels was then presented by William Evers for the California Capital Access Forum, by Tom Bargsley of Bargsley & Associates, CPAs, Austin, Texas with respect to the State of Texas, and by Chip Cooper for the Missouri Innovation Center. This report was followed by the scheduled round-table discussions. The luncheon address was presented by Mark Schultz, Executive Director of The White House Conference on Small Business. Break-out sessions among the Forum participants were conducted throughout the afternoon. The second day's session commenced with an opening address by Jere W. Glover, Chief Counsel for Advocacy of the U. S. Small Business Administration. His remarks were followed by a panel presentation styled, "Patient Capital and Electronic Commerce." Round-table presentations were then continued. The Forum was concluded with a final session of participant break-out groups. The Forum participant break-out sessions produced sixty-two recommendations, sixty of which were finally endorsed and are highlighted in the following section of this report. Two recommendations did not receive a plurality of the votes cast and therefore are not recommendations of the Forum. These proposals were: "The 1996 Forum should be held in California"; and "A monitoring process to evaluate the equitability of distribution of private placement investor funding of small business ventures across gender, race and ethnic groups to determine the necessity of legislative action akin to other equal access opportunity laws such as exist in credit, employment and real estate transactions, should be established." While the U.S. Securities and Exchange Commission hosts this annual convocation of small business friends and advocates, and is pleased to serve as such, it in no way seeks to sponsor or influence any of the Forum's recommendations. While a number of these matters are of substantial interest to the Commission as an institution, it takes no position on any of the recommendations. The views in this report are those of the Forum participants. III. RECOMMENDATIONS FROM THE WHITE HOUSE CONFERENCE The Forum especially endorses Recommendations 14, 20 and 286 of the White House Conference on Small Business: 14. To increase the availability of growth capital to invest in small businesses, Congress should: a) Further privatize the Small Business Investment Company (SBIC) program, now administered by the SBA, by creating a new, government sponsored, but privately managed, corporation named Venture Capital Marketing Association or "Vickie Mae" which would function similar to the Federal National Mortgage Association (Fannie Mae); b) Extend the capital gains tax deferment currently afforded investments rolled into Specialized Small Business Investment Companies (SSBICs) to include investments in SBICs to encourage more investment in new SBICs; c) Remove barriers to pension funds, foundations and endowments wishing to invest in SBICs and SSBICs; eliminate the "unrelated business taxable income" (UBTI) tax on all such activities; and d) Reduce the minimum capital size requirements for establishing SBICs owned by regulated financial institutions, thereby encouraging them to provide equity to small businesses provided that no leverage is utilized by such SBICs until current minimum capitalization for leverage is achieved. This recommendation would increase the availability of growth capital to small business which is a very desirable goal. It specifies a number of areas where governmental regulations could be developed or revised in order to increase not only access to but also the availability of capital for the use of small business. 20. Congress should support the investment in small businesses by: a) Establishing a tax free rollover provision for the gains on sale of assets or ownership interests in a small business that are reinvested or rolled over into another small business within one year. b) Congress should amend Code Section 1202, which is legislation excluding 50% of all capital gains from income, to extend its benefits to S Corporations and Limited Liability Companies by defining a "qualified small business" to include C Corporations and the other two entities, and extend the definition of a "qualified trade or business" under Section 1202 to all businesses. c) Congress should enact tax legislation to allow a tax deduction against ordinary income for investments in small business. These proposals require amendments to the tax laws, but if implemented would encourage further investments in small business which would be an important and useful development. Using tax policy as expressed in the tax code is a common method of encouraging behaviors. The recommended revisions would be helpful to small business which in turn could benefit the nation's economy through increased productivity and employment, among other things. 286. The U. S. Small Business Administration is vital to the growth of small business in America. Efforts to make the SBA's programs more cost effective and efficient should be continued and encouraged. The SBA's "independent" agency role as the primary supporter of small business within the Federal Government should be enhanced by: a) Elevation of the U. S. Small Business Administration to a congressionally approved cabinet level position. b) Budget allocations to maintain, increase, and enhance the 7(a) Loan Guaranty Program. c) Budget allocations to maintain, increase, and enhance the 504 Loan Program. d) Budget allocations to make permanent the Small Business Development Center Program which provides business assistance to small businesses nationwide. e) Permanent maintenance of the "independent role" of the U. S. Small Business Office of Advocacy. f) All other SBA programs should be reviewed with substantial input from the private sector. Any programs deemed to be ineffective should be eliminated. The continuing operation of the Small Business Administration and its programs is important to the small business community. The significance of the U. S. Small Business Administration and the programs it operates to small businesses in this country can not be underestimated. Serious efforts should be undertaken to preserve this governmental function and enhance its utility. IV. TAXATION 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 Preamble It is the consensus of the Forum that current tax law and regulations promulgated thereunder unduly hinder the ability of small business to attract and maintain the capital necessary for formation and growth. It is for this reason the Forum submits the following recommendations in an effort to provide fairness and ease of compliance within our current tax system. Capital Formation Capital Gains Congress should enact comprehensive policy on capital gains that encourages the long-term investment in productive assets. This policy should include the following provisions: A) A 50% capital gains exclusion on sales of capital assets held more than one year. B) A targeted capital gains exclusion of an additional 50% of the regular exclusion (total of 75% exclusion) for an investment in a qualified small business which should include all forms of business entities including pass-throughs. C) A maximum tax of 10% on the sale of a majority interest in a qualified small business held for more than 15 years. D) A deferral of the gain on the sale of an interest in a qualified small business if the gain is reinvested in another qualified small business within two years. E) The non-taxable portions of gains should be exempt from the alternative minimum tax calculations. F) The capital loss deduction limitation of $3,000 should be eliminated. G) Reinstate the "General Utilities Doctrine" to eliminate the double taxation of proceeds from the sale of a business. H) These provisions should be applicable to all sales after the effective date with original holding periods remaining intact. Tax policy should be used to encourage investments in small businesses. The tax differential for capital gains encourages the investment of risk capital, especially in small and development-stage companies. The suggested changes would modernize our tax policy with respect to this important issue and make it more consistent with the policies of other industrialized countries. Importantly, if implemented, more monies would become available to finance the efforts of small business as a result of such changes. Amendments to Section 1244 A) Amend the section 1244 definition of a qualified small business corporation to be any sub-chapter C corporation with $5,000,000 or less, in capital. Loans from a greater than 10 percent shareholder are considered capital. B) Remove the requirements that qualified section 1244 issuances be original issue (thus eliminating burdensome requirements that the stockholder prove original issue). C) Include in the definition of qualified small business stock, corporate indebtedness to a 10 percent or greater shareholder. The provisions of the tax law allow for a favorable treatment of certain transactions in the stock of small business corporations. These provisions permit individuals to deduct under specified conditions losses attributable to these holdings. The recommendations would increase the applicability of the favorable tax treatment and in turn make investment in qualifying small businesses more attractive. Small Business Investment Credit Congress should enact tax legislation to allow a tax credit for investment in a qualified small business. In the event that the investment is sold or liquidated at a gain in less than five (5) years, the credit will be recaptured on a pro-rata basis. In the event that the investment is sold or liquidated at a loss in less than five (5) years, the credit will be allowed in an amount not to exceed the loss. Utilizing the tax policy to encourage investments in small businesses could pay larger dividends to the overall economy that outweigh the short-run cost in lost tax revenues. The development of a dollar-for-dollar tax credit would have the fastest and most far reaching impact of such a change in the tax code. Gift and Estate Tax Raising capital is directly related to the rate of return computations. Expenditures that are directly related to estate and gift tax considerations have an adverse effect on rate of return computations and are not beneficial to the operations of small business. Therefore we are recommending that the value of small businesses should be excluded from the gross estate. 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. The overhang of this taxing system, and the gift tax system as well has a particularly harmful and negative effect upon the valuation of small businesses. Excluding the value of such businesses for purposes of calculating estate and gift tax could have an overall beneficial impact on the general economy. Net Operating Loss Eligibility 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. Investment of Qualified Pension Funds Modify current law to allow an individual to invest, under current limits, his or her own self directed qualified pension or profit sharing plan(s) in his or her own small business. These funds could be used as a direct investment or as collateral to obtain debt financing. This recommendation would allow for additional funding opportunities for the small business, while reducing the individual's tax liability. Owner/operators should be allowed to invest through their retirement plans to take advantage of the future success of their business. Officer or director self-directed IRAs should be authorized to make investments in the obligations and other securities of their own companies. Similar adjustments to the provisions governing Individual Retirement Accounts should be made to permit entrepreneurs to reap the benefits of their contributions to their own businesses. Capital Retention Payroll Taxes A) Tax Burden Payroll taxes are regressive and discriminate against small businesses. Payroll taxes should not be raised in either rates or caps, and every effort should be made to lower the payroll tax burden on small business. B) Administrative Burden Compliance with payroll tax reporting is complex and burdensome to small businesses. Reporting requirements should be simplified and consolidated with state and local reporting requirements. Flexibility should be given to the regulatory agencies for waiving penalties for innocent mistakes. Meaningful revisions in an effort to simplify the mechanics of overseeing this tax by the businesses charged with its collection would save considerable amounts of time and effort. Reducing the impact of the tax itself could, in addition to simplifying the actual oversight, cause additional moneys to be available for employment and investment into the operation of the business, which in turn would have a beneficial impact on the general economic situation. Corporate Dividend Deduction Create a deduction for all corporate dividends paid to non- management shareholders. The inequity of the double taxing of corporate dividends has been frequently identified as discouraging investments. Permitting the company to deduct such dividends would give a boost to corporate investments and free up additional capital for the operation of the business in turn helping the general economy. Alternative Minimum Tax The alternative minimum tax 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. Persons subject to the alternative minimum tax appear to be likely investors and interested in the risk capital situations which exist in small and developing businesses. Repealing this tax could open an important financing source for small business. Current Tax Proposals Costs of Complying with Regulations The costs of complying with regulations is a form of indirect taxation levied on business. Enforcement of regulations should be reasonable, flexible and subject to a cost/benefit analysis. Costs to defend against unreasonable positions or abusive actions taken by regulators should be reimbursed by the Government with the burden of proof being placed on the Government. This self-evident recommendation if effectively implemented would save considerable expense to small business. Since it is premised on unreasonable regulatory behavior, it is a recommendation that would be a benefit to the regulator and the regulatory system as well since it would contribute to the sense of its integrity and fairness. Other Definition of Small Business A single definition of small business should be established. If a single definition is not possible, a specific business should only have to qualify once for all benefits available to small businesses. Definitional inconsistency throughout and even within governmental departments and agencies causes tremendous confusion and increases the costs of regulation. One controlling concept of a qualifying small business should be established for purposes of federal regulations and benefits. V. CREDIT 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 To further expand the credit availability program of the SBA we recommend that a loan may be renewed without mandating a reappraisal if the loan is otherwise performing without default. The costs of paperwork and other overhead attendant upon a loan application should not be underestimated. Where a loan has been appropriately approved under current regulatory and other lending guidelines and provisions, and is current in its payment, it should be subject to prompt renewal with a minimum of additional paperwork and without a formal reappraisal. The reach of and incentives for the SBA micro-loan program should be expanded. 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. Whereas SBICs are a major source of early stage capital, the participating securities component should be retained and enlarged so that earlier stage companies will have access to this significant resource for longer term "patient" capital. 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. Funding for this program which is keyed to the issuance of preferred securities and current-pay debentures to the Small Business Administration should be increased. The nature and character of long term technical assistance provided by the Women's Business Development Programs should be preserved and enhanced. Small businesses headed by women are a rapidly expanding group and important part of the nation's entrepreneurial system. These businesses face special problems in addition to the typical ones encountered by new companies. For this reason, the SBA established a special counselling and assistance program for businesses operated by women. This program is of great value and should be continued. The Department of Commerce's Export Assistance Program should not be limited to asset-based lenders. Federal assistance should be available to businesses that are based on softer assets than physical plants and equipment, such as accounts receivable. The collectibility of such accounts can be determined and allowance made for doubtful receivables so that there can be sufficient comfort that loans can be repaid. Regulations concerning credit and capital formation decisions should be discounted in cases where no action covenants, agreements not to sue, or enforcement waivers by state or federal EPA exist on Superfund, underground storage or brownfield liability. Compliance with environmental regulations can be a significant expense to a business. Compliance difficulties are compounded where there is significant uncertainty about a violation of applicable rules and regulations and the governing authority has not taken a position with respect to the particular conduct. Where the agency has taken a favorable stand from the businesses position, the matter should be excludable from further consideration insofar as its financial standing is concerned. Commercial loans that require asset-based evaluations to secure the loan (e.g., debt to worth ratios) should be reevaluated to take into consideration the ability to repay the loan as a primary determining factor for approval. This recommendation identifies the specific needs of non-asset based businesses to access capital to finance their operations. The ability to repay a loan should always be the critical determinant with respect to authorizing such a loan. Whether the business is one with hard assets subject to quick liquidation or otherwise should only be a part of the overall assessment as to whether the loan will or will not be repaid. A program should be developed by the SBA, the lending industry, the SEC and/or Congress that will further leverage the SBA Secondary Market by providing a mechanism for the pooled securitization of the unguaranteed portion of SBA loans. The availability and cost effectiveness of the SBA loan guaranty program should be enhanced by transitioning to a zero credit subsidy rate, in part through imputation of an experience rating charge that penalizes poor credit decisions but maintains the affordability of SBA lending. The active secondary market in the guaranteed portion of SBA loans could be effectively complemented by such a market in the remaining part of such loans. While the risks are somewhat greater since the government guarantee does not attach, there should be greater confidence that the entire amount of such loans will ultimately be fully repaid. Enhancements could be offered as well. Development of such a market would make more capital available for the use of small businesses. VI. SECURITIES REGULATION A. Statement of the Issues Compliance with securities regulations may impose substantial costs upon issuers of securities. There is a geometric progression in the impact of such costs relative to the smallness of the issuer. Coordination of federal and state regulation continues to be needed and substantial relief from costs would flow from a more unified system of regulation. B. Recommendations The development of a simplified prospectus or disclosure document is encouraged. Complicated disclosure documents are costly for an issuer to produce and of questionable utility to an investor who may be confused by its complexity. Brief and simple prospectuses written in clear and understandable language would benefit issuer and investor too. Companies and individuals should be protected against liability for forward-looking information. Financial forecasting is an important feature in investment analysis that is typically required by professional investors and lenders. The prohibitions against providing this sort of information with suitable caveats to every investor disadvantages such investors. Nonetheless, good faith and reasonable projections should be protected so that the issuer is not liable to a dissatisfied investor when the projection does not come to fruition. The statute of limitations in section 13 of the Securities Act should be reduced to one year for all exempt offerings. Reducing the length of time that issuers are exposed for technical violations of the securities offerings requirements would save substantial amounts of time and money without impacting the protection of investors. Appropriate suits could still be pursued, but they would have to be pursued promptly. The numbers of frivolous suits also might be reduced. The SEC and the states should implement a national "test the waters" provision for small business offerings. Permitting issuers to gauge the potential investor interest in a possible securities offering before the preparation of costly compliance documents makes sense for the issuer and investor alike. Issuer costs can be substantially reduced with this process and investor protections are not compromised. A company, in contrast to transactional, registration process should be applied to all 1934 Act companies. The idea of "company" registration for all reporting companies should be implemented by the Commission. This system will take advantage of the substantial amounts of company information already available to the market and investors and save issuers time and money by utilizing the Commission's information systems to keep the investor informed. The Rule 504 ceiling should be increased from $1 million to $5 million. The Commission's registration exemption which requires essentially only compliance with the anti-fraud provisions of the federal securities laws should be increased in amount from $1 million in a 12-month period to $5 million. The Commission should eliminate the general solicitation restriction from all Regulation D exemptions. The Commission should modernize its approach to exempted transactions by focusing on the purchase or sale portion of a transaction and remove the offer from regulatory requirements. In any event, the use of the Internet to locate investors in a Regulation D offering should not be deemed a general solicitation. Modern technology necessitates a fresh analysis of the way "offers" are regulated under the Commission's exemptive scheme, if they are to be subject to continuing regulation at all. One intermediate approach to the issue would be to permit free use of the electronic media to offer securities for sale and then to have strict requirements about the numbers and types of investors permitted to purchase in the offering. The SEC and the states should allow general solicitation of accredited investors. Another approach which would constitute an intermediate step in revamping the "offer" analysis under the Commission's exemptive regulatory system would be to permit open offerings to those highly sophisticated investors which the Commission has characterized as "accredited." The Commission should revise Regulation S to prohibit hedging transactions, (but not the discounting in such transactions or the 40-day provision for reporting companies), if an efficient method of enforcement can be developed. Sales of securities to overseas purchasers have become an important source of capital to small business. The Commission should not make any, except the most essential, changes in furtherance of investor protection to Regulation S, its safe- harbor provision for these transactions, and then only such changes which it intends to enforce. Enhance the growth of financial service intermediaries to meet the needs of small business issuers by establishing a "limited purpose" broker/dealer category with less burdensome regulations than now imposed upon registered broker/dealers. These broker/dealers should be required to demonstrate knowledge of the securities industry by successfully passing a standard examination and should be bonded as well but should not be subject to FOCUS Reports and net capital requirements for example, now imposed upon registered broker/dealers. The establishment of a category of broker/dealer specializing in the securities of small business issuers would be of substantial benefit to small businesses. Inducements to enter into the field such as lower net capital requirements and reporting provisions could be developed. Regulators should encourage the growth of broker/dealers raising capital for small business stocks. Any encouragement through regulatory accommodation or otherwise that could be developed to increase the numbers of brokers interested and able to assist small business in their capital-raising ability would be worthwhile. Investment in small businesses by the middle class through pools of professionally managed small business stocks should be encouraged. This will require amendments to the Investment Company Act of 1940 and should lead to the establishment of closed-end funds composed of small business stocks. The Commission should amend its regulations to facilitate the development of investment companies that specialize in illiquid securities which frequently are issued by smaller businesses. Within the scope of its authority to do so, the SEC should take action to facilitate: -- the investment by mutual funds and public and private investment funds into investment grade securities of securitized small business loans; -- establishing a REMIC like treatment for tax pass through entities for small business loan securitizations; -- examining credit enhancement mechanisms to further facilitate small business loan securitization by public and private resources. The Commission should review its regulatory requirements with a view to eliminating obstructions and accommodating investments in small business loans. Investment Advisers Act and Investment Company Act regulations imposed on managers of accredited investor accounts investing in private placements of small businesses should be reduced. Greater reliance under these regulatory acts should be placed upon the sophistication of "accredited investors" and their chosen fiduciaries so that more investments in the securities of small businesses will be possible. Relief should be provided under the Investment Company Act and the Investment Advisers Act for businesses that raise money to invest in small businesses in which a state pension fund has already invested. Reliance should be placed upon the exercise of fiduciary responsibility evidenced by the trustees of a state pension fund in investing in the securities of particular small businesses, so that the regulatory provisions of the 1940 Acts can be relaxed. The Commission should publicly state that the investment adviser regulations cover finders and financial public relations people and enforce the provisions in this regard. Provisions of the Commission's Investment Adviser Act regulations are being avoided by persons that need to be subjected to such regulations in the public interest and the protection of the nation's investors. Resources should be devoted to this important priority. The present situation penalizes the careful businessman interested in fully complying with the federal securities laws. The SEC should publicize the availability of the BDC as an investment pool vehicle for venture capital and promote the concept. The simplified compliance requirements of the Investment Company Act for business development companies needs to be publicized by the Commission. The use of the abbreviated regulatory system has never reached its full potential in part because of the lack of knowledge about the program. The SEC should adopt clear and specific guidelines for BDC evaluation of portfolio companies. 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. Congress should adopt amendments to the BDC provisions of the 1940 Act and the SEC should issue regulations removing the liability of BDC directors for the evaluation of portfolio investments especially for non-control investments in private companies. The BDC program would be more attractive if liability provisions were relaxed with regard to the valuation requirements of illiquid investments. Clearer guidelines with regard to such valuations would ease the impact of such a provision as well. The SEC should be urged to facilitate the use of the Internet for capital formation by small businesses. The Commission should expand its authorization of the use of electronic media with respect to the marketing of securities to the public as well as other capital formation devices. Encourage the states to adopt the Pennsylvania model with respect to the Internet for small business stock offerings and address the gun jumping issue so as not to preclude sales to investors contacted prior to an issuer filing with a particular state. Because use of electronic technology may cause an offer of securities to occur in a state where there is no intention to sell securities in violation of law, reasonable procedures should be developed to avoid such problems. The States should interpret their non-offer provisions which are currently limited to newspapers, television and radio to also apply to Internet listings. Broadening the scope of available exemptive authorities in state law to permit the use of electronic technology would be a creative, sensible resolution to an issue that has a limited, if any, negative impact upon the protection of investors. Establish uniform disclosure requirements in the states for offerings of $10 million or less and employ technology, such as the SRD system developed by NASAA, to simplify state securities filings. Developing a SCOR-like disclosure model for offerings of up to $10 million even if it did not follow a question-and-answer format would present a significant opportunity to save small businesses money in the preparation of disclosure documents for the sale of their securities. Utilization of electronic technology to simplify state filing requirements also is a very desirable development. ULOE should be revised to eliminate its optional provisions and be simply conformed to the requirements of Rule 505 of Regulation D. The numerous optional provisions in the Uniform Limited Offering Exemption should be eliminated and simply provide for a coordinating exemption with Regulation D. SCOR and securities-related education should be promoted generally through business community organizations, economic development agencies and other similar organizations. Educating small business about the many beneficial accommodations already available for them under federal and state securities laws is an important project. The use of available electronic technology should be used to its fullest possible extent in order to inform small business people everywhere. With respect to federally-exempt offerings (under Regulation D or section 4(2)), issuer agent or similar state registration provisions should not be applicable. Local broker/dealer regulations should be inapplicable where a transaction is undertaken in reliance upon a federal exemption from securities registration. Such independent local registration requirements for persons placing the securities beyond federal broker/dealer requirements are costly and unnecessary. Finders of accredited investors who are local investors of local issuers and do not generally handle any funds or securities are exempt under the Exchange Act but not state laws, unless the offering is one prohibited under SCOR standards. States registering such persons should limit regulatory requirements to those that are relevant to this activity. The states should limit their oversight of placement agents and other marketers of securities in order to permit small business the fullest advantage of the accommodations provided for them under state and federal securities laws for their capital formation needs. The states should implement regional review of small business offerings and specifically states should coordinate their reviews and defer to a single regulator for each offering. Multiple reviews and comments from regulatory authorities places a heavy burden and additional costs upon small businesses trying to sell their securities to the public. Designation of one such local authority to issue and negotiate comments would work significant savings for issuers. VII. MISCELLANEOUS Each state should require its pension fund to invest a percentage of its assets in small businesses. The States should have their employees trust funds investable in the securities of small businesses. This action would make significant amounts of capital available to small business and under appropriate circumstances offer the trust funds a secure and generous return on their investment. The Department of Labor should respond more quickly to requests for exemptions from the prohibited class restrictions, particularly with respect to asset-backed securities. Exemptive applications should be given a fast-track priority so that persons subject to regulations will have certainty as to the application of the particular provisions. This principle is particularly important with respect to the implementing provisions of the Employee Retirement Income Security Act. Pension funds should be allowed to invest in funds of small business company stocks. Revisions to provisions of the ERISA law relating to the "prudent investor" standards would permit qualifying pension plans to invest their funds in small businesses. Government regulations that impact capital formation should be revised to permit and encourage the use of the Internet and other technologies to promote access, reduce costs, provide education and information to business and the investor public. Electronic technology will impact the way all business is transacted from now on. Modernizing the regulatory system to take advantage as well as to implement the important goals of such regulation should be a number one priority of the government. VIII. FORUM PARTICIPANTS Martin Abo Abo, Uris & Altenburger 3003B Greentree Executive Campus Marlton, NJ. 08053 Clifford J. Alexander Kirkpatrick & Lockhart 1800 M St., NW Ste. 900, South Lobby Washington, DC. 20036 Cora Alston Tennessee Securities Division 500 James Robertson Parkway Suite 680 Volunteer Plaza Nashville, TN 37243 Jeffrey B. Bailey Locke Reynolds Boyd & Weisell 1000 Capital Ctr. South 201 North Illinois St. Indianapolis, IN. 46204 Tom J. Bargsley Bargsley & Associates, CPAs 11940 Jollyville Road, Ste. 210S Austin, TX 78759-2325 Andrew Beck Haythe & Curley 237 Park Avenue New York, NY. 10017 William I. Belk Belk Group of Stores 6100 Fairview Rd., Ste. 640 Charlotte, NC. 28210 Charles L. Bennett NASD 9513 Key West Avenue Rockville, MD. 20850-3389 Robert L. Bevill Nevada Securities Division 555 E. Washington Avenue 5th Floor Las Vegas, NV 89101 Terry Bibbens U.S. Small Business Administration Washington D. C. 20416 Keith Paul Bishop California Business Transp. & Housing Agency 801 K Street, # 1918 Sacramento, CA 95814 Charles H. B. Braisted Davis Polk & Wardwell 450 Lexington Avenue New York, NY. 10017 Irving H. Bowen J. Michael Reisert, Inc. 2455 E. Sunrise Blvd. Ste. 609 Ft. Lauderdale, FL. 33304 Alan P. Brigham Maine Dept. of Economic & Community Development 59 State House Station Augusta, ME. 04333 Eugene Buchanan, Jr. NASD 9513 Key West Avenue Rockville, MD. 20850-3389 Joseph B. Buonanno Thacher Proffitt & Wood Two World Trade Center New York, NY. 10048 S. James Chiswell Continental Coin Processors, Inc. 150 Myrtle Ave. Buffalo, NY. 14204 John Cogliano, Jr. The Sullivan & Cogliano Companies 230 Second Ave. Waltham, MA. 02154 Zane M. Cohn Zane M. Cohn & Associates Three First Nat'l Plaza, Ste. 4000 Chicago, IL. 60602 Chip Cooper Missouri Innovation Center 5650A South Sinclair Rd. Columbia, MO. 65203-9496 Tim Cox Maryland Division of Securities 200 St. Paul Place, 20th Floor Baltimore, MD 21202-2020 Leonard S. DeFranco DeFranco & Associates, Ltd. 2311 West 22nd St., Ste. 217 Oak Brook, IL. 60521-1227 Ralph Victor De Martino De Martino Finkelstein Rosen 1818 N Street, N.W., Ste. 400 Washington, DC. 20036 Mark S. Deion Deion Associates & Strategies 106 Tyler St. Warwick, RI. 02888-2704 Gerard S. DiFiore Herten, Burstein, Sheridan, Cevasco, Bottinelli & Litt 25 Main St., Court Plaza North Hackensack, NJ. 07601 Nina Laserson Dunn Hannoch Weisman 4 Becker Farm Rd. Roseland, NJ. 07068 Ernest Ernswiler W. Va. Securities Division WW 118 State Capitol Bldg. Charleston, WV 25305 William D. Evers Sullivan, Roche & Johnson 333 Bush Street, 18th Floor San Francisco, CA. 94104 J. Marvin Feigenbaum Nu-Tech Bio-Med, Inc. 55 Access Road Warwick, RI. 02886 Marsha Firestone Women Incorporated 125 Park - 8th Floor New York, NY. 10028 William J. Flynn Flynn Financial Group 174 Bellevue Avenue Newport, RI. 02840 Twila L. Foster Jackson, Tufts Cole & Black 650 California Street, 32nd Floor San Francisco, CA. 94108 Richard C. Fox Microterra, Inc 206 S. Detroit Street Los Angeles, CA. 90036 Peter H. Friedman 366 Captain Clark Wilton, NH. 03086 Harry A. Garfield, II Berman DeValerio & Pease One Liberty Square Boston, MA 02109 Stephen I. Glover Fried, Frank, Harris, Shiver & Jacobson 1001 Pennsylvania Avenue, NW Washington, DC. 20004 Joseph Golemme 145 Cross St. Hanover, MA. 02339 W. Clark Goodwin Berkowitz, Lefkovits, Isom & Kushner 1600 SouthTrust Tower Birmingham, AL. 35203 Allen F. Grum Rand Capital Corporation 1300 Rand Bldg. Buffalo, NY. 14203 Earl Hall Parkway Enterprises, Inc 831 Parkway Ave., B-9 Trenton, NJ. 08618 Tammy G. Harthcock Mississippi Securities Division P. O. Box 136 Jackson, MS 39205 Mark Hayward U.S. Small Business Administration Boston, MA Kevin M. Hedley 433 River Street Troy, NY. 12180 Joel Held Hill, Held, Metzger, Lofgren & Peele, L.L.P. 3878 Oak Lawn Avenue, Fourth Floor Dallas, TX. 75219 Victor Hollander Hollander, Gilbert & Co. 15260 Ventura Blvd., Suite 940 Sherman Oaks, CA. 91403 J. Craig Huff, Jr. Hayes Pump, Inc. 66 Powder Mill Road West Concord, MA. 01742-4696 Harlan T. Jacobs Genesis Business Centers, Ltd. 3989 Central Ave. N.E., Suite 620 Columbia Heights, MN. 55421 Steven Kagan R. I. Division of Securities 233 Richmond Street, Suite 232 Providence, RI 02903-4232 James M. Kanski Coopers & Lybrand 1301 Avenue of the Americas New York, NY. 10019 Philip G. Kass TLC Funding Corp. 660 White Plains Road Tarrytown, NY. 10591 Paul M. Kelley Zero Stage Capital 101 Main Street 17th Floor Cambridge, MA. 02142-1519 Thomas O. Kellogg Business Lenders Inc. 15 Lewis Street Hartford, CT. 06103 Floyd W. Kephart Ventura Entertainment Group 11466 San Vicente Blvd. Los Angeles, CA. 90049 Eliott Klein Pa. Securities Commission 1109 State Office Building Philadelphia, PA 19130 Stephen A. Klein 10409 Englishman Drive Rockville, MD. 20852 Stanley J. Knox Natl Assn of Water Cos. 1725 K Street, N. W. Suite 1212 Washington, D. C. 20006-1401 Barbara K. Kravitz Societe BankHouse One International Place Boston, MA. 02110 Morris Landau Tennessee Dept. of Commerce Volunteer Plaza, Suite 680 500 James Robertson Pkwy. Nashville, TN 37243-0485 Diahann W. Lassus Lassus Wherley & Associates 1 Academy Street New Providence, NJ. 07974 Gary S. Lavado Cornerstone Professional Park B-201 Woodbury, CT. 06798 Francis W. Lee Boston College SBDC 96 College Road Chestnut Hill, MA. 01760 Mary Lou Leggett CNL Group, Inc 400 E. South Street, #500 Orlando, FL. 32801 Harry Letaw, Jr. Essex Corporation 9150 Guilford Road Columbia, MD. 21046-1891 Henry Lew California Dept. of Corporations 3700 Wilshire Blvd., #600 Los Angeles, CA 90010 Mark M. Little Waterhouse Fin. Mgnt. Group 12042 Blanco Road, Suite 330 San Antonio, TX. 78216 John P. Lowe, Jr Adair Law Firm 30 Corporate Woods, #280 Rochester, NY. 14623 Marc Lumer Marc Lumer & Company 200 California Street 4th Floor San Francisco, CA. 94111 David McCary McCary Stevens Associates, Inc. City Place II, 15th Flr. Hartford, CT. 06103 Mildred McIntyre P.O. Box 124 Boston, MA. 02199-124 Jeffrey D. Marshall Marshall Associate/Technalysis 18 Mitchell Rd. Ipswich, MA. 01938 Paul M. Mathews NASD 9513 Key West Avenue Rockville, MD. 20850-3389 Aimee' Mejia EduQuest 1047 E. 29th Street Brooklyn, NY. 11210 Nicholas J. Moceri Regional Investment Bankers 17 Church Street Charleston, SC. 29401 Richard J. Moriarty Moriarty & Primack 1350 Main St., 3rd Floor Springfield, MA. 01103 Faye Morton Oklahoma Dept. of Securities Journal Record Bldg. 621 North Robinson, #400 Oklahoma City, OK 73102 David H. Murphree Brown Rudnick Freed & Gesmer One Financial Center Boston, MA 02111 Martin Mushkin 470 Park Avenue South New York, NY. 10016-6820 Lawrence S. Nannis Levine, Zeidman & Daitch Two Sun Life Executive Park Wellesley Hill, MA. 02181 John W. Nelson, III 16 Park Street Newport, RI. 02840-2104 Daniel J. Nemes Nemes Allen & Co. 30200 Telegraph, Ste. 165 Bingham Farms, MI. 48025 Hugh C. Neville Richmond Graphic Products 51 Worthington Rd. Cranston, RI. 02920 Jay D. Newman Los Angeles Business Capital 121 South Elm Drive, #2 Beverly Hills, CA. 90212 Judith H. Obermayer Obermayer Associates 239 Chestnut St. W. Newton, MA. 02165 Richard E. Omohundro, Jr. Prospect St. Inv. Mgmt. 53 State Street, Exchange Place, 37th Floor Boston, MA. 02109 Dennis O'Connor O'Connor, Broude & Aronson 950 Winter Street, Ste. 2300 Waltham, MA. 02154-1233 John Perkins Perkins & Associates 1426 Inglenoor Jefferson City, MO. 65109 Roger O. Peterkin, III Moors & Cabot, Inc. 111 Devonshire St. Boston, MA. 02109 Irwin Pomerantz Irwin Pomerantz & Associates 7700 Sunset Blvd., Ste. 205 Los Angeles, CA. 90046 H. Boone Porter, III Lewis, Rice & Fingersh, L.C. 1010 Walnut, Ste. 500 Kansas City, MO. 64129 William M. Prifti 220 Broadway, Ste. 204 Lynnfield, MA. 01940 Robin F. Risser Picometrix, Inc. P.O. Box 130243 Ann Arbor, MI. 48113-0243 Irwin M. Rosenthal Rubin Baum Levin Constant 30 Rockefeller Plz., 29th Flr. New York, NY. 10112 Alfred J. T. Rubega 77 S. State St. Concord, NH. 03301-3521 Bill Ruff Wisc. Securities Commission P. O. Box 1768 Madison, WI 53719 Bonnie Russell Maine Securities Division State House Station 121 Augusta, ME 04333 John Sheehan Rhode Island Economic Development Corp. 7 Jackson Walkway Providence, RI. 02903 Eugene Singer Singer & Associates 605 Washington Avenue North Haven, CT. 06473 Bradley W. Skolnik Ind. Securities Commission 302 West Washington St. Indianapolis, IN. 46204 Joseph N. Sladek GE Capital Small Business College 2 Corporate Drive - Ste. 206 Trumbull, CT. 06611-1376 Brendan P. Smith One Turks Head Place Providence, RI. 02903 Jocelyn Smith-Whittey N. D. Securities Commission 600 East Boulevard Bismarck, ND 58505 Ernest M. Stern Venable, Baetjer, Howard 1201 New York Avenue, N.W. Ste. 1000 Washington, DC. 20005-3917 Tom Stewart-Gordon Scor Report P.O. Box 781992 Dallas, TX. 75378-1992 Thomas E. Stitzel Boise State University Dept. of Finance 1910 University Drive Boise, ID. 83706 S. Anthony Taggart Utah Securities Division P. O. Box 45808 Salt Lake City, UT 84145-0808 Fred Tarpley U.S. Small Business Administration Washington, D. C. Brice E. Tarzwell McAfee & Taft Two Leadership Square 10th Flr. Oklahoma City, OK. 73102 John J. Tollefsen Tollefsen & Company 16212 Bothell Way SE, Ste. F Mill Creek, WA. 98037 Juliette Tracey Nat'l Women's Business Council Boston, MA James F. Twaddell Schneider Securities 2 Charles Street Providence, RI. 02904 Patrick Valenzuela California Trade & Commerce Agency Office of Small Business 801 K Street, Ste. 1700 Sacramento, CA. 95814 Garrett Vogel Code Rite Inc. 7400 Pebble Drive Fort Worth, TX. 76118 Donald A. Wagley G & W Asset Management, Inc. 1800 Lake Park Dr. #100 Smyrna, GA. 30080 Deborah Clark White Florence Crittenton Services 100 E. Valley View Dr. Fullerton, CA. 92632-0919 Neil Whittey LAS International 3811 Lockport Street Bismarck, ND. 58501 Grafton H. Willey, IV. Rooney, Plotkin & Willey 10 Dorrance Street Providence, RI. 02903 Thomas Willoughby G & W Asset Management, Inc. 1800 Lake Park Dr., #100 Smyrna, GA. 30080 Henry Withers Colorado Securities Division 1580 Lincoln Street, #420 Denver, CO 80203 Kenton E. Wood D. H. Blair & Co. Inc. 44 Wall St. New York, NY. 10005 John F. Woyke Towers Perrin 100 Summit Lake Dr. Valhalla, NY. 10595 Frederick H. Young Salem State College Small Business Dev. Ctr. 197 Essex Street Salem, MA. 01970 Mike Young University of Houston/SBDC 1100 Louisiana, Ste. 500 Houston, TX. 77002 Maurice Zeitler Comptroller of the Currency Washington, D. C. Patricia S. Zimmerman Norwalk Health & Homecare 137 East Avenue Norwalk, CT. 06851