Tues, 26 Jun 2001, 10:19am EDT

SEC Hinders Small Companies' Stock Sales, Firms Tell Congress
By Neil Roland

Washington, June 26 (Bloomberg) -- The Securities and Exchange Commission has hindered small businesses from selling their own stock by imposing an array of bureaucratic requirements aimed at stopping fraud, small-company advocates told Congress.

``The SEC really needs to learn how to work with small businesses,'' Greg Halpern, chief executive of Circle Group Internet Inc., testified. ``We have a process that clearly doesn't work.''

Halpern and other small businessmen criticized as unwieldy the process by which small companies have to register for initial public offerings and other stock sales.

They also faulted the SEC's 1999 restrictions on Rule 504, a two-decade-old provision that seeks to make it easier for small companies to raise seed capital.

The hearing, by the House Financial Services subcommittee on oversight, is the first of several to be held on implementation of federal securities laws.

``I am greatly distressed by concerns that fundamental regulatory obstacles are inhibiting the flow of capital to, and investor participation in, the small- and middle-market business sector,'' said subcommittee chairman Sue Kelly, a New York Republican.

Neither Kelly nor any other lawmakers on the panel called for any changes in SEC rules, or for legislation. An SEC spokesman declined comment about the hearing.

Withdrawn IPO

Halpern said his closely held company, which offers funding to emerging technology companies, registered to file an IPO and then withdrew its application 14 months later when it still hadn't gotten SEC approval.

``The market had fallen during that time, and we were running a circular gauntlet through multiple SEC departments, answering endless rounds of questions,'' he said in an interview after the hearing.

SEC Regulations SB, for small business, and Rule 504 are intended to help small companies raise money by streamlining the requirements for selling stock that are normally applied to larger corporations. Small-business advocates today said those well- intended rules were getting bogged down in implementation.

In 1999, the SEC amended Rule 504, which exempted small companies from federal registration requirements, after some broker-dealers who had bought stock at a discount were charged with driving up the price by pressuring investors to buy it.

The new rules require companies that sell as much as $1 million a year in stock to register the sale with a state that requires companies to disclose information to investors before the sale. While most states required such registration, one important state -- New York -- did not.

When the regulatory changes were made in February 1999, then- SEC Chairman Arthur Levitt said, ``I believe we are striking a balance between capital formation and investor information.'' SEC Commissioner Isaac Hunt said he was ``pretty sure'' the proposal ``won't have adverse consequences for small technology companies.''

One small-business advocate today disagreed.

``The SEC and the press have created such a negative stigma, relating Rule 504 to fraud, that it might never be used again,'' said James Steinkirchner of the National Small Public Company Leadership Council, a small-business lobbyist in Washington.

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