SUMMARY OF SPECIFIC RECOMMENDATIONS Tax Laws and Regulations Increase the corporate surtax exemption from the present level of $50,000 up to $100,000; Allow greater flexibility in depreciating the first $200,000 of assets; Permit investors in qualified small businesses to defer the tax on capital gains if the proceeds of the sale of a profitable small business investment are reinvested within a specified time in other qualified small business investments; Increase the deduction against ordinary income of capital losses in a small business investment made under Section 1244 of the Internal Revenue Code from $25,000 in annual deduction to $50,000, and increase the limit on an offering from $500,000 to $1,000,000 and on issuer size from $1, 000, 000 to $2, 000, 000 in equity capital; Permit underwriters of the securities of smaller businesses to deduct a loss reserve against the risks inherent in the underwriting and carrying of such securities; Revise methods by which revenue impact of tax changes are estimated to reflect revenue gains from the business use of tax savings and the stimulus to capital formation that tax incentives provide. Small Business Administration (SBA) Provide that some portion of the guaranteed borrowing available Immediately make a substantial increase in the size standards 98-762 0 - 78 - 3 SBA should require and encourage commercial banks to assume a larger portion of the risk in SBA loans and change its guarantee fee from a one-time fee of 1% of the amount of the guaranteed debt to an annual fee which more nearly reflects the value and cost of SBA's guarantee; Substantially expand SBA's Secondary Market Program by creation of a "Certificate" system for the sale of SBA-guaranteed loans. Institutional Investors/Employee Retirement Income Security Act (ERISA) Amend ERISA to declare a policy that pension funds may invest in a broad spectrum of American companies within the "prudent man" rule and that it applies to the total portfolio rather than any individual investment. Also create a "basket" of 5% of the assets of any plan within which investment managers can invest according to standards of prudence and liquidity appropriate to higher risk small business investments; The development of professionally managed pools of capital should be encouraged so that pension fund managers, otherwise constrained by time or expertise, may participate in the investment in new ventures and in growing smaller companies. These special funds should be specifically exempted from the provisions of the Investment Company Act of 1940; In cooperation with the SEC and other regulatory bodies, exempt the illiquid securities of small companies from "mark-to market" or "fair value" accounting treatment. Securities Laws and Regulations (SEC) Increase the small offering exemption from $500,000 to $3,000,000; Retain and simplify Rule 146; Amend Rule 144 to provide that the existing quantitative limits apply for only a three-month period rather than a six-month period. In addition, change those limits to one percent of outstanding shares or the average weekly volume, whichever is higher instead of whichever is lower; Develop procedures under which solicitation, with appropriate compensation to develop a market, may be undertaken if buyers are provided with copies of financial data and other disclosures regularly filed with the SEC along with a suplemental statement on mode of offering, identity of underwriters, price of securities offered, and information needed to update the data on file with the SEC. INTRODUCTION Small businesses comprise 97 percent of all unincorporated and incorporated businesses in the United States. More than half of all business receipts are generated by their operations. Perhaps more important, they employ more than half the U.S. business work force. It is a matter of acute concern that, in the face of clearly emerging needs and the documented benefits to the United States economy, a set of impediments have developed that are preventing smaller businesses from attracting the capital without which they cannot perform their traditional function of infusing innovation and new competition into the economy. Unless these impediments are overcome, the ability of the economy to compete in the world and meet the needs of the American public will be seriously eroded. It is alarming that venture and expansion capital for new and growing small businesses has become almost invisible in America today. In 1972 there were 418 underwritings for companies with a net worth of less than $5,000,000. In 1975 there were four such underwritings. The 1972 offerings raised $918 million. The 1975 offerings brought in $16 million. Over that same period of time, smaller offerings under the Securities and Exchange Commission's (SEC's) Regulation A fell from $256 million to $49 million and many of them were unsuccessful. While this catastrophic decline was occurring, new money raised for all corporations in the public security markets increased almost 50 percent from $28 billion to over $41 billion. A public policy that discourages the public from investing approximately $1 billion a year of its savings in economic innovation, growth, and the creation of jobs while it encourages the public to risk $17 billion a year in Government-sponsored lotteries, requires close and serious reexamination. Impediments to Small Business Growth In this context, the Task Force sees in the American business and financial scene today the following characteristics: 1. A public policy that tilts sharply towards encouraging consumption and discouraging savings and investment. 2. 3. 4. 5. 6. An increasing and dangerously high ratio of debt to equity arising in part from artificial tax advantages extended to debt financing. Distinct impediments to raising equity and other forms of risk capital. Savings gravitating towards larger institutions that are discouraged from investing those savings in smaller and new businesses. Well-intentioned efforts to protect investors which inadvertently place small businesses at a disadvantage in competing for available funds. Attrition and concentration in the network of financial institutions and firms that has served our economic needs well by mobilizing capital. A recent study by the Massachusetts Institute of Technology Development Foundation has arresting data on the importance of new companies and new technologies to property and jobs in America. It compares the performance of six mature companies, five innovative companies, and five young high-technology companies. From 1969 to 1974, the average annual contributions of these companies in jobs and revenues shaped up as follows: Although these young companies are not only growing faster but actually creating more new jobs and tax revenues than the giants of American industry, we see increasing impediments to this same opportunity for other new companies. - - Recent economic trends have caused all investors institutional, large nonfinancial companies, venture capitalists, individuals and local bankers to become more conservative in their investment policy. Recent legislation and regulation, however well intentioned, has added to that conservatism by cutting incentives to take risks. Savings and other financial resources, so desperately needed by small companies to finance their growth, have become concentrated in larger financial institutions. For example: Since 1962, deposits in the ten largest banks have increased from 20 to 33 percent of all deposits. Pension funds assets have tripled since 1962 and it is estimated that by 1985 more than half of all equity capital will be in the hands of pension fund managers. Mutual funds assets have doubled in the same time period. Institutions now account for 70 percent of the volume of trading on the New York Stock Exchange (NYSE). As assets have concentrated, access to them has become more difficult, particularly for small businesses. In the past 5 years, the number of registered securities broker/dealer firms has declined 35 percent, and the number of registered representatives has declined as well. The Task Force has found that this shrinkage of the securities industry has compounded the problem of providing smaller companies with access to capital. Large institutional investors handling pension funds, wary of standards set forth in the 1974 Employee Retirement Income Security Act (ERISA), are concentrating their funds in larger companies with proven earnings records to avoid possible lawsuits and liabilities under |