[Federal Register Volume 61, Number 203 (Friday, October 18, 1996)]
[Rules and Regulations]
[Pages 54509-54517]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-26561]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 210, 228, 239 and 249
[Release Nos. 33-7355; 34-37802; FR-47; International Series No. 1021;
File No. S7-19-95]
RIN 3235-AG47
Streamlining Disclosure Requirements Relating to Significant
Business Acquisitions
AGENCY: Securities and Exchange Commission.
ACTION: Final rules.
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SUMMARY: The Commission is adopting revisions to its rules that will
streamline requirements with respect to financial statements of
significant business acquisitions in filings made under the Securities
Act of 1933 and the Securities Exchange Act of 1934.
EFFECTIVE DATE: The rule revisions are effective November 18, 1996.
FOR FURTHER INFORMATION CONTACT: Douglas Tanner, (202) 942-2960,
Associate Chief Accountant, Office of Chief Accountant, or Walter Van
Dorn, (202) 942-2990, Special Counsel, Office of International
Corporate Finance, Division of Corporation Finance, U.S. Securities and
Exchange Commission, Washington, D.C. 20549.
SUPPLEMENTARY INFORMATION: The Commission is adopting amendments to the
following rules and forms under the Securities Act of 1933 (the
``Securities Act'') 1 and the Securities Exchange Act of 1934 (the
``Exchange Act'') 2 concerning financial statements of acquired
(or to be acquired) businesses: Rule 3-05 of Regulation S-X,3 Item
310 of Regulation S-B,4 Item 17 of Form S-4,5 Item 17 of Form
F-4,6 and General Instructions and Item 7 of Form 8-K.7
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\1\ 15 U.S.C. 77a et seq.
\2\ 15 U.S.C. 78a et seq.
\3\ 17 CFR 210.3-05.
\4\ 17 CFR 228.310.
\5\ 17 CFR 239.25.
\6\ 17 CFR 239.34.
\7\ 17 CFR 249.308.
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I. Introduction
On June 27, 1995, the Commission published for comment proposed
revisions to rules and forms that would streamline reporting
requirements concerning financial statements of acquired and to be
acquired businesses and require quarterly reporting of unregistered
equity offerings.8 The proposals were intended to reduce
impediments to registered offerings and address certain problematic
practices involving unregistered sales of equity securities of domestic
reporting companies purportedly in reliance on Regulation S.9 A
significant number of sales under Regulation S have been attributed to
the inability of issuers to meet the registration disclosure
requirement of providing audited financial statements of significant
businesses acquired or likely to be acquired.10 The Commission is
today adopting amendments to those requirements. In a companion release
[[Page 54510]]
issued today, the Commission is also adopting certain amendments
regarding requirements for reporting unregistered sales of equity
securities, including sales made under Regulation S.11
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\8\ Securities Act Release No. 7189 (June 27, 1995) [60 FR
35656] (the ``Proposing Release'').
\9\ 17 CFR 230.901-904. Regulation S was adopted by the
Commission in 1990 to clarify the extraterritorial application of
the registration requirements of the Securities Act. See Release No.
33-6863 (Apr. 24, 1990) [55 FR 18306].
\10\ See ``Recent Problems Arising Under Regulation S,''
Insights, Volume 98, Number 8, August 1994.
\11\ Release No. 34-37801 (Oct. 10, 1996).
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The amendments adopted today will allow companies in most
circumstances to provide information about significant acquisitions in
Securities Act registration statements on the same basis as for
Exchange Act reporting. The amendments eliminate in most cases the
impediment of obtaining audited financial statements for a business
acquisition more promptly than otherwise would be required. That
requirement may have caused companies to forgo public offerings and to
undertake private or offshore offerings. As discussed more completely
in Section II, the amended rules provide that financial statements of a
business acquired within the preceding 74 days or expected to be
acquired in the future need not be furnished in connection with most
initial and repeat offerings under the Securities Act if the business
falls below a 50% significance level. Those financial statements will
continue to be required to be filed in most cases on Form 8-K
subsequent to the offering. In addition, as discussed more completely
in Section III, the Commission is raising the thresholds of
significance that determine whether financial statements of an acquired
business must be provided in filings made under either the Securities
Act or the Exchange Act, and the number of years for which historical
financial statements must be furnished. Audited financial statements of
acquired businesses for one, two or three years were required under the
former rules for businesses significant at the 10%, 20%, and 40%
levels, respectively. The amended rules raise those thresholds to 20%,
40%, and 50%, respectively.
II. Waiver of Financial Statements for Certain Pending and Recently
Completed Business Acquisitions in Registration Statements and Proxy
Statements
The amendments adopted today will eliminate in most circumstances
the requirement to include in Securities Act registration statements
audited financial statements for probable business acquisitions or for
business acquisitions that were consummated 74 or fewer days before a
registered offering of securities.12 Although the proposed rules
would have permitted omission of those financial statements in all
circumstances other than offerings by ``blank check companies,''
13 the rules as adopted provide that financial statements of
probable and recently consummated business acquisitions will continue
to be required in registration statements of any issuer if the
acquisition would be significant above the 50% level using the tests
that have been previously established.14 As was permitted prior to
today's amendments, registered offerings that are not primarily of a
capital raising nature and certain private placements may go forward
without financial statements of an acquired business, regardless of its
significance, until 75 days following the acquisition.15
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\12\ See revisions to Rule 3-05 of Regulation S-X and Item
310(c) of Regulation S-B [17 CFR 210.3-05 and 17 CFR 228.310(c)].
The date of an offering is specified as the date of a final
prospectus or prospectus supplement relating to the offering as
filed with the Commission pursuant to Rule 424(b) [17 CFR
230.424(b)] under the Securities Act.
\13\ A ``blank check company'' is defined in Sec. 230.419 of
Regulation C [17 CFR 230.419(a)(2)].
\14\ The significance of an acquired business is evaluated based
on: (i) the amount of the issuer's investment in the acquired
business; (ii) the total assets of the acquired business; and (iii)
the pre-tax income of the acquired business, all as compared to the
comparable items in the registrant's most recent audited annual
financial statements. [See 17 CFR 210.1-02(w) and 17 CFR
228.310(c)(2).]
\15\ See Instruction 2 to Item 7 of Form 8-K.
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The Commission received nineteen comment letters on the Proposing
Release, of which seventeen generally supported conforming the
disclosure requirements under the Exchange Act and the Securities Act
for significant business acquisitions. Although some commenters
recommended that offerings be allowed to proceed without limitation as
to the size of the business acquisition, most commenters favored
limiting the waiver of financial statements to acquisitions below some
particular significance level. Among the commenters supporting a limit,
the recommended thresholds for disclosure varied greatly, ranging from
10% to 80%.
As adopted, the amendments to Rule 3-05 of Regulation S-X and Item
310 of Regulation S-B require inclusion of the audited financial
statements in registration statements only if the pending or recent
acquisition exceeds the 50% significance level. The Commission believes
it is an appropriate policy to strive to remove obstacles to proceeding
with registered offerings despite pending or recent acquisitions, but
recognizes that an acquisition could be so large relative to an issuer
that investors would need financial statements of the acquired business
for a reasoned evaluation of any primary capital raising transaction by
the issuer. The selection of the 50% significance level reflects a
weighing of conflicting considerations in the light of comments
received on the proposal.
The amended rules do not require the financial statements of
businesses below the 50% significance level to be included in
registration statements until 75 days after consummation of the
acquisition, although registrants may choose to do so on a voluntary
basis. Under the proposal, the requirement to furnish financial
statements in registration statements would have been automatically
waived until the 75th day unless the financial statements were readily
available at an earlier time, which was similar to the requirement for
Exchange Act reporting purposes.16 Eight commenters criticized the
term ``readily available'' as vague and unworkable. In that regard,
several commenters observed that, although an acquired business's
financial statements may have been audited previously, filing of the
financial statements may be delayed while consents and representations
are obtained, due diligence procedures are performed, pro forma
information is prepared, and compliance with all filing requirements is
ascertained. While some issuers may choose to complete promptly all
steps necessary to file the financial statements well in advance of the
75th day deadline, others may schedule these activities solely to
ensure that the financial statements can be filed by the final date
due. Because of the discretion exercisable by issuers, the ``readily
available'' criterion would not appear to result in more prompt filing
of financial statements nor would it be interpreted consistently by
issuers. Accordingly, as adopted, the rule omits the ``readily
available'' criterion for presenting financial statements during the
75-day period. A conforming change to the requirements of Form 8-K also
has been adopted.17
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\16\ A Form 8-K reporting a significant acquisition is required
to be filed within 15 days of consummation of the acquisition. If
financial statements of the acquired business are not available,
they are required to be filed by amendment to the Form 8-K as soon
thereafter as practicable, but not later than 60 days after the
initial report is filed. See General Instructions and Items 2 and
7(a)(4) of Form 8-K.
\17\ See revisions to Item 7 of Form 8-K.
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As contemplated by the proposal, today's amendments provide that
the pro forma financial information required by Regulation S-X to
depict the effects of a business acquisition need not be furnished
unless the financial statements of the acquiree are furnished. Article
11 of Regulation S-X is amended to conform the significance threshold
for providing pro forma financial statements in connection with
[[Page 54511]]
business acquisitions to the minimum 20% significance level in Rule 3-
05 and Item 310 of Regulation S-B.18
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\18\ See revisions to Rule 11-01 of Regulation S-X and Item
310(c) of Regulation S-B [17 CFR 210.11-01 and 228.310(c)].
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Other than the changes described herein affecting the financial
statements and pro forma information required pursuant to Rules 3-05
and Article 11 of Regulation S-X and Item 310 of Regulation S-B, the
amendments do not change the information required in filings with
respect to significant acquisitions. For example, likely effects of a
probable or recently consummated business combination are required to
be discussed in Management's Discussion and Analysis, to the extent
material.19 In addition, an issuer's financial statements must
include disclosures regarding the terms and effects of material
business combinations to the extent required by generally accepted
accounting principles.20
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\19\ See Item 303 of Regulations S-K and S-B [17 CFR 229.303 and
228.303].
\20\ Material terms, significant accounting policies applied,
and certain summarized pro forma information must be included with
respect to material business combination in a note to financial
statements for the period in which the transaction occurs. See
paragraphs 95 and 96 of Accounting Principles Board Opinion No. 16,
``Business Combinations.'' Comparable summary disclosure is required
in interim financial statements pursuant to Rule 10-01(b)(4) of
Regulation S-X [17 CFR 210.10-01(b)(4)].
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The Commission recognizes the difficulty in determining the
disclosure to be made regarding significant transactions and events
that occur in proximity to an issuer's capital raising activities
before complete and reliable information becomes available. Issuers may
conclude in some cases that an offering must be delayed until
significant uncertainties are resolved, or at least until they are
identified fully, while in other cases no delay is necessary because
adequate disclosure can be furnished. One commenter recommended that a
safe harbor be provided for disclosures pertaining to significant
acquisitions until audited financial statements are available. Since a
business acquisition is not fundamentally different from other
significant events affecting issuers and requiring careful
consideration of the appropriate disclosure to be made in Management's
Discussion and Analysis and the financial statements, the Commission
believes it is not appropriate at this time to address separately the
need for a safe harbor.
A domestic company may proceed with a registered offering of
securities without financial statements of a recent or probable
acquiree in the circumstances described above, but it is required by
Form 8-K to file financial statements of each significant acquired
business within 75 days of consummation of the acquisition.21
Although the amended rules apply to offerings of domestic and foreign
issuers alike, foreign private issuers are not subject to quarterly or
Form 8-K reporting rules. Several commenters believed that foreign
issuers should be required to file the financial statements within some
specified time after completion of a business acquisition as a
condition for omission of the acquiree's financial statements in a
registration statement under the new rules. However, a requirement to
furnish those financial statements would modify significantly the
foreign private issuer's interim and current events reporting
requirements, which rely generally on home country standards and
already contemplate that investors in securities of foreign private
issuers will not necessarily receive the information customarily
provided by domestic issuers regarding significant business
acquisitions. Consequently, no amendment to require a special report by
foreign private issuers is adopted.
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\21\ See Item 2 and Item 7 of Form 8-K [17 CFR 249.308]. Also,
under the rules as revised, an issuer, other than a foreign private
issuer, that omits financial statements of a recently consummated
business combination from its initial registration statement in
reliance on the new rules must furnish those financial statements,
and related pro forma information, within 75 days of the
consummation of the acquisition under cover of Form 8-K.
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The Commission also had proposed to eliminate the requirement that
issuers provide in registration statements audited financial statements
of recently acquired businesses that, in the aggregate, but not
individually, are significant at the 20% level.22 Although a
number of commenters supported elimination of the requirement, several
commenters observed that individually insignificant businesses could be
so numerous as to become material, or could be components of a broader
acquisition plan that is material.
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\22\ Under the former rules, if the businesses in aggregate
exceeded the 20% level under the tests for significance, the issuer
was required to furnish audited financial statements of the most
recent fiscal year for a majority of the individually insignificant
businesses. See Rule 3-05(b)(i) of Regulation S-X.
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To address these concerns, the amendments adopted today provide
that the acquisition of ``related businesses'' should be treated as a
single business combination for purposes of determining the
transaction's significance under Rule 3-05 and the periods for which
financial statements of those businesses are required. The amendment
codifies present staff interpretive practices concerning acquisitions
of related businesses. The amended rule defines related businesses as
businesses under common ownership or management or whose acquisitions
are conditional on each other or on a single common condition.23
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\23\ See revisions to Rule 3-05(a)(3).
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In addition, the amended rules require one year of audited
financial statements of a majority of individually insignificant
businesses acquired subsequent to the issuer's latest audited balance
sheet date if, in the aggregate, the businesses are significant at a
level exceeding 50%.24 Accordingly, the amendment raises the
threshold for the requirement to furnish financial statements of
individually insignificant businesses from the present 20% level to
50%.
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\24\ Instructions to Item 2 of Form 8-K are amended to clarify
that acquisitions of individually insignificant businesses do not
result in a reporting requirement under that item unless the
businesses are related businesses, as defined. See revisions to
Instruction to Item 2 of Form 8-K.
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Although there may be other circumstances in which investors would
want audited financial statements of individually insignificant
businesses to be provided, the Commission believes that extending the
requirement to other circumstances would unintentionally impose a
costly and unnecessary burden. Existing rules permit the staff to
exercise appropriate discretion where warranted in determining that
financial statements in addition to those expressly required by a form
should be provided for an adequate presentation of an issuer's
financial condition, as well as to permit the omission of required
financial statements where consistent with investor protection.25
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\25\ 17 CFR 210.3-13.
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Consistent with the proposal, the amendments do not modify the
requirement to furnish audited financial statements of a business to be
acquired if securities are being registered in connection with the
acquisition of that business.26 In such a registration statement,
however, the issuer may rely on the amended rules with respect to
omission of other pending or recently completed acquisitions. The
amended rules apply to proxy statements and registration statements
under the Exchange Act, but do not change the proxy statement
requirement of Item 14 of Schedule 14A to provide financial statements
of a business to be acquired.27 Accordingly, the financial
[[Page 54512]]
statements of the acquiree will continue to be required in registration
statements and proxy statements delivered to shareholders in connection
with the solicitation of their approval of the acquisition transaction
or other investment decision.28
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\26\ Forms S-4 and F-4 do provide certain accommodations with
respect to acquirees that are not reporting companies under the
Exchange Act. See Item 17 in each Form [17 CFR 239.25 and 34].
\27\ If action is to be taken with respect to a merger,
consolidation, acquisition or similar matters, financial statements
of an acquired business that is the subject of the action are
required pursuant to Item 14 [17 CFR 240.14a-101.14].
\28\ The Commission may consider in the future certain
recommendations to modify requirements for financial statements of
nonreporting companies in registration statements relating to
exchange offers. See Section VI.B.2 of the Report of the Task Force
on Disclosure Simplification, published by the Commission on March
6, 1996.
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The revisions adopted today do not effect Rule 3-14 of Regulation
S-X governing financial statements required for acquired operating real
estate properties.29 Several commenters expressed the view that
clarification or modification of that rule was needed. In the future,
the Commission may address generally disclosure requirements applicable
to real estate partnerships, real estate investment trusts, and similar
types of businesses. Because Rule 3-14 is intended to address unique
features of that industry, such as the ``blind pool'' type of offering
frequently used in the industry, the Commission has decided to consider
revision of Rule 3-14 in the context of its evaluation of a more
comprehensive disclosure scheme.30
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\29\ Audited income statements of significant acquired or to be
acquired operating real estate properties are required to be
furnished pursuant to Rule 3-14 of Regulation S-X and Item 310(e) of
Regulation S-B [17 CFR 210.3-14 and 228.310(e)]. The income
statements are required to be presented only for the most recent
fiscal year, regardless of significance, if the property is not
acquired from a related party and the registrant is not aware of any
material factors relating to the specific property that would cause
the reported financial information not to be necessarily indicative
of future operating results. The income statements may exclude items
not comparable to the proposed future operation of the property,
such as mortgage interest, leasehold rental, depreciation, corporate
expenses and federal and state income taxes.
\30\ See Section IX.E. of the Report of the Task Force on
Disclosure Simplification, published by the Commission on March 6,
1996, which discusses recommendations to streamline and update
requirements of Industry Guide 5 pertaining to partnerships and
REITs.
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III. Increased Significance Thresholds for Acquiree Financial
Statements
The rules amended today raise the thresholds at which an acquired
business will be considered significant enough to require the provision
of its audited financial statements in filings made under either the
Exchange Act or the Securities Act. Issuers are required to report
under Form 8-K the acquisition of a significant business within 15 days
of consummation of that transaction. Prior to today's amendments,
issuers were required to furnish audited financial statements of the
acquired business as soon as practicable thereafter, but no later than
60 days after the initial report on Form 8-K. Audited financial
statements for one, two or three years were required if the acquired
business was significant at the 10%, 20% or 40% levels,
respectively.31 A small business issuer could omit audited
financial statements of an acquired business falling below the 20%
level if they were not readily available, and could omit under similar
circumstances the first of two years of financial statements required
if the acquired business was between the 20% and 40% significance
level. Financial statements for periods preceding the two most recent
fiscal years are not required in filings by small business
issuers.32
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\31\ See General Instructions and Items 2 and 7 of Form 8-K.
\32\ See Item 310 of Regulation S-B [17 CFR 228.310].
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As originally proposed, the rules applicable to businesses acquired
by small business issuers would be extended to all issuers, except that
the present requirement applicable to all issuers other than small
business issuers--that three years of audited financial statements must
be furnished for acquirees exceeding the 40% significance level--would
be retained.33 The Commission requested comment as to the
appropriate significance threshold for determining when financial
statements that are not readily available should be waived.
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\33\ See old Item 310(c) of Regulation S-B [17 CFR 228.310(c)].
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As discussed above, many commenters criticized the ``readily
available'' criterion because of the possibility of different
interpretations and, therefore, different levels of disclosure based on
factors such as an issuer's discretionary scheduling of activities
necessary to furnish the financial statements. In addition, several
commenters favored raising the significance thresholds for required
financial statements and believed that a requirement for readily
available financial statements at lower thresholds was unnecessary.
Several commenters expressed the view that imposition of the costs of
providing financial statements of acquired businesses was justified
only at thresholds higher than those in place currently.
The amendments to Rule 3-05 of Regulation S-X and Item 310 of
Regulation S-B adopted today do not include a ``readily available''
criterion, and provisions of Item 310 of Regulation S-B are amended in
a conforming fashion to eliminate requirements to furnish financial
statements based on availability.34 The amended rules provide that
audited financial statements of an acquired business should be
furnished for the most recent fiscal year if the significance of the
acquiree exceeds 20%, for the most recent two years if significance
exceeds 40%, and, except with respect to issuers making offerings under
Regulation S-B and acquired businesses reporting annual revenues of
less than $25 million, for the latest three years if the significance
exceeds 50%. No financial statements will be required for acquisitions
below the 20% significance threshold.35
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\34\ See revisions to Item 310(c) of Regulation S-B. Also, a
technical correction revises a reference in Form 8-K to paragraphs
of Item 310 of Regulation S-B. See revisions to the General
Instructions to Form 8-K.
\35\ See revisions to Rule 3-05 of Regulation S-X and Item
310(c) of Regulation S-B.
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The threshold at which audited financial statements of an acquired
business are required for three years, as required for the issuer
itself (except for small business issuers), has been raised from 40% to
50% in recognition of the significant burden imposed by the lower
threshold. In addition, consistent with the criteria for small business
issuers, financial statements for periods preceding the most recent two
fiscal years would not be required for acquired businesses reporting
revenues below $25 million.36
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\36\ See Item 10 of Regulation S-B [17 CFR 228.10].
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The revised rules are expected to be less subjective in their
application. Also, they will accomplish the goal of reducing the burden
of providing audited financial statements of acquired businesses,
thereby increasing issuers' flexibility to make registered offerings
without jeopardizing investor protection. Although investors will
receive less information about some business acquisitions under the
revised rules, the Commission believes that the benefits of the
amendments outweigh that cost.
IV. Cost-Benefit Analysis
It is expected that the amendments will decrease registrants' costs
and compliance burdens because the instances in which financial
statements of acquired businesses and the number of years for which
such financial statements are required will be reduced, enabling
issuers to avoid the cost of preparing and auditing those statements.
The amendments also are expected to reduce impediments to sales of
securities in registered offerings, enabling companies the flexibility
to
[[Page 54513]]
raise capital at a lower cost that may be available through
unregistered sales.
V. Summary of Final Regulatory Flexibility Analysis
The Commission has prepared a Final Regulatory Flexibility Analysis
pursuant to the requirements of the Regulatory Flexibility Act,37
regarding the amendments to Rule 3-05 of Regulation S-X, Item 310 of
Regulation S-B, Form S-4 and Form F-4 and Form 8-K. The analysis notes
that these amendments relating to financial statement requirements for
acquired businesses will provide issuers greater flexibility and
efficiency in accessing the public securities markets.
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\37\ 5 U.S.C. 603 (1988).
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As stated in the analysis, the amendments would eliminate certain
requirements that a company registering securities under the Securities
Act provide information, including audited financial statements, in the
registration statement about significant acquisitions from such time as
the acquisition is probable, and provide an automatic waiver in some
circumstances for such financial statements under the Exchange Act. The
reduction in expense, time and effort resulting from the elimination of
this requirement will benefit all entities that issue securities in the
United States, including small entities. An additional expected benefit
of the amendments would be that offerings may be registered for sale in
the United States in situations where hitherto investors in the United
States would have been excluded due to the time and expense involved in
registration. A resulting increase in registered offerings in the
United States by issuers could be expected to increase ease of
investment for small U.S. entities acting as investors.
As stated in the analysis, the proposed amendments would eliminate
certain requirements that a company registering securities under the
Securities Act provide information in a registration statement,
including audited financial statements, about significant acquisitions
from such time as the acquisition is probable, and would provide an
automatic waiver in some circumstances for such financial statements
under the Exchange Act.
It is expected that the new rules will decrease reporting,
recordkeeping and compliance burdens for persons that are small
entities, as defined by the Commission's rules. The Commission is aware
of approximately 1,100 reporting companies that currently satisfy the
definition of ``small business'' under Rule 157. With respect to the
amended Securities Act filing requirements, only small businesses that
undertake a registered offering during the pendency of an acquisition
will be affected. Of the above-referenced 1,100 companies, the
Commission staff estimates that a maximum of approximately 50 companies
will be affected in any single fiscal year. The Commission staff does
not believe any will be negatively affected by these amendments. With
respect to the amended Exchange Act reporting requirements, the
Commission staff does not believe the amendments will have any
significant effect on the such 1,100 companies. Therefore, the economic
impact of the proposed amendments would be only to lessen the
regulatory, reporting, recordkeeping and compliance burden on all
reporting entities, both small and large.
A copy of the Final Regulatory Flexibility Analysis may be obtained
by contacting Walter Van Dorn, Office of International Corporate
Finance, Division of Corporation Finance at (202) 942-2990, U.S.
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549.
VI. Paperwork Reduction Act
In June, 1995, the staff submitted to the Office of Management and
Budget (``OMB'') for review proposals to amend the following
information collections: Form 10, Form 8-K, Form S-1, Form S-2, Form S-
3, Form SB-1, Form SB-2, Form 20-F, Form F-1, Form F-2, and Form F-
3.\38\ These information collections display an OMB control number and
expiration date.\39\ The information collections are required to be
filed by companies registering securities under the Securities Act. The
Commission solicited comment on the compliance burdens associated with
the proposals but received no public comment on the burden estimates.
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\38\ There are no changes regarding the purpose, use or
necessity of the information collections for which OMB approval was
requested, nor are there changes to the estimates of reporting or
recordkeeping burden expected to result from adoption of the
proposed amendments. See the Proposing Release for estimates of
changes in reporting or recordkeeping burden.
\39\ Unless a currently valid OMB number is displayed, an agency
may not sponsor or conduct or require response to an information
collection pursuant to 44 U.S.C. Sec. 3506(c)(1)(B).
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As discussed in Sections II and III of this release, some changes
to the information collections are being adopted that differ from the
proposed changes to such information collections. Specifically, audited
annual and unaudited interim financial statements of business acquired
or to be acquired will no longer be required in filings made under the
Exchange Act or Securities Act with respect to individual acquisitions
below the 20% significance level or individually insignificant
acquisitions below the 50% significance level. Only one year of audited
financial statements, rather than two years, will be required for
acquisitions falling in the 20% to 40% significance levels; and only
two years, rather than three years, of audited financial statements
will be required for acquisitions falling in the 40% to 50%
significance levels. The amendments also permit omission of audited
financial statements of acquired businesses between the 20% and 50%
significance levels from registration statements and proxy materials in
certain circumstances, although those financial statements will be
required at a later date in a Form 8-K. Although some of the
differences will increase the total annual burdens estimated at the
proposing stage, other differences will decrease the burdens estimated
at the proposing stage. The overall effect is that the differences will
not result in any significant changes to the total burden estimates
that were submitted to OMB at the proposing stage.
VII. Statutory Bases
The foregoing amendments to the Commission's rules and forms are
being adopted pursuant to sections 2, 3, 4 and 19 of the Securities Act
of 1933 and 3(b), 4A, 12, 13, 14, 15, 16 and 23 of the Securities
Exchange Act of 1934.
List of Subjects in 17 CFR Parts 210, 228, 239, and 249
Accountants, Accounting, Reporting and recordkeeping requirements,
Securities, Small businesses.
Text of Amendments
In accordance with the foregoing, title 17, chapter II of the Code
of Federal Regulations is to be amended as follows:
PART 210--FORM AND CONTENT OF AND REQUIREMENTS FOR FINANCIAL
STATEMENTS, SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF
1934, PUBLIC UTILITY HOLDING COMPANY ACT OF 1935, INVESTMENT
COMPANY ACT OF 1940, AND ENERGY POLICY AND CONSERVATION ACT OF 1975
1. The authority citation for part 210 continues to read as
follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77aa(25),
77aa(26), 78l, 78m, 78n, 78o(d), 78w(a), 78ll(d), 79e(b), 79j(a),
79n, 79t(a), 80a-8, 80a-20, 80a-29, 80a-30, 80a-37a, unless
otherwise noted.
2. By amending Sec. 210.3-05 by revising paragraphs (a)(3) and (b)
to read as follows:
[[Page 54514]]
Sec. 210.3-05 Financial statements of businesses acquired or to be
acquired.
(a) * * *
(3) Acquisitions of a group of related businesses that are probable
or that have occurred subsequent to the latest fiscal year-end for
which audited financial statements of the registrant have been filed
shall be treated under this section as if they are a single business
combination. The required financial statements of related businesses
may be presented on a combined basis for any periods they are under
common control or management. For purposes of this section, businesses
shall be deemed to be related if:
(i) They are under common control or management;
(ii) The acquisition of one business is conditional on the
acquisition of each other business; or
(iii) Each acquisition is conditioned on a single common event.
* * * * *
(b) Periods to be presented. (1) If securities are being registered
to be offered to the security holders of the business to be acquired,
the financial statements specified in Secs. 210.3-01 and 210.3-02 shall
be furnished for the business to be acquired, except as provided
otherwise for filings on Form N-14, S-4 or F-4 (Secs. 239.23, 239.25 or
239.34 of this chapter). The financial statements covering fiscal years
shall be audited except as provided in Item 14 of Schedule 14A
(Sec. 240.14a-101 of this chapter) with respect to certain proxy
statements or in registration statements filed on Forms N-14, S-4 or F-
4 (Secs. 239.23, 239.25 or 239.34 of this chapter).
(2) In all cases not specified in paragraph (b)(1) of this section,
financial statements of the business acquired or to be acquired shall
be filed for the periods specified in this paragraph (b)(2) or such
shorter period as the business has been in existence. The periods for
which such financial statements are to be filed shall be determined
using the conditions specified in the definition of significant
subsidiary in Sec. 210.1-02(w) as follows:
(i) If none of the conditions exceeds 20 percent, financial
statements are not required. However, if the aggregate impact of the
individually insignificant businesses acquired since the date of the
most recent audited balance sheet filed for the registrant exceeds 50%,
financial statements covering at least the substantial majority of the
businesses acquired shall be furnished. Such financial statements shall
be for at least the most recent fiscal year and any interim periods
specified in Secs. 210.3-01 and 210.3-02.
(ii) If any of the conditions exceeds 20 percent, but none exceed
40 percent, financial statements shall be furnished for at least the
most recent fiscal year and any interim periods specified in
Secs. 210.3-01 and 210.3-02.
(iii) If any of the conditions exceeds 40 percent, but none exceed
50 percent, financial statements shall be furnished for at least the
two most recent fiscal years and any interim periods specified in
Secs. 210.3-01 and 210.3-02.
(iv) If any of the conditions exceeds 50 percent, the full
financial statements specified in Secs. 210.3-01 and 210.3-02 shall be
furnished. However, financial statements for the earliest of the three
fiscal years required may be omitted if net revenues reported by the
acquired business in its most recent fiscal year are less than $25
million.
(3) The determination shall be made by comparing the most recent
annual financial statements of each such business, or group of related
businesses on a combined basis, to the registrant's most recent annual
consolidated financial statements filed at or prior to the date of
acquisition. However, if the registrant made a significant acquisition
subsequent to the latest fiscal year-end and filed a report on Form 8-K
(Sec. 249.308 of this chapter) which included audited financial
statements of such acquired business for the periods required by this
section and the pro forma financial information required by
Sec. 210.11, such determination may be made by using pro forma amounts
for the latest fiscal year in the report on Form 8-K (Sec. 249.308 of
this chapter) rather than by using the historical amounts of the
registrant. The tests may not be made by ``annualizing'' data.
(4) Financial statements required for the periods specified in
paragraph (b)(2) of this section may be omitted to the extent specified
as follows:
(i) Registration statements not subject to the provisions of
Sec. 230.419 of this chapter (Regulation C) and proxy statements need
not include separate financial statements of the acquired or to be
acquired business if it does not exceed any of the conditions of
significance in the definition of significant subsidiary in Sec. 210.1-
02 at the 50 percent level, and either:
(A) The consummation of the acquisition has not yet occurred; or
(B) The date of the final prospectus or prospectus supplement
relating to an offering as filed with the Commission pursuant to
Sec. 230.424(b) of this chapter, or mailing date in the case of a proxy
statement, is no more than 74 days after consummation of the business
combination, and the financial statements have not previously been
filed by the registrant.
(ii) An issuer, other than a foreign private issuer required to
file reports on Form 6-K, that omits from its initial registration
statement financial statements of a recently consummated business
combination pursuant to paragraph (b)(4)(i) of this section shall
furnish those financial statements and any pro forma information
specified by Article 11 of this chapter under cover of Form 8-K
(Sec. 249.308 of this chapter) no later than 75 days after consummation
of the acquisition.
(iii) Separate financial statements of the acquired business need
not be presented once the operating results of the acquired business
have been reflected in the audited consolidated financial statements of
the registrant for a complete fiscal year unless such financial
statements have not been previously filed or unless the acquired
business is of such significance to the registrant that omission of
such financial statements would materially impair an investor's ability
to understand the historical financial results of the registrant. For
example, if, at the date of acquisition, the acquired business met at
least one of the conditions in the definition of significant subsidiary
in Sec. 210.1-02 at the 80 percent level, the income statements of the
acquired business should normally continue to be furnished for such
periods prior to the purchase as may be necessary when added to the
time for which audited income statements after the purchase are filed
to cover the equivalent of the period specified in Sec. 210.3-02.
(iv) A separate audited balance sheet of the acquired business is
not required when the registrant's most recent audited balance sheet
required by Sec. 210.3-01 is for a date after the date the acquisition
was consummated.
* * * * *
3. By amending Sec. 210.11-01 by revising paragraphs (b) and (c) to
read as follows:
Sec. 210.11-01 Presentation requirements.
* * * * *
(b) A business combination or disposition of a business shall be
considered significant if:
(1) A comparison of the most recent annual financial statements of
the business acquired or to be acquired and the registrant's most
recent annual consolidated financial statements filed at or prior to
the date of acquisition indicates that the business would be a
significant subsidiary pursuant to the conditions specified in
Sec. 210.1-02(w),
[[Page 54515]]
substituting 20 percent for 10 percent each place it appears therein;
or
(2) The business to be disposed of meets the conditions of a
significant subsidiary in Sec. 210.1-02(w).
(c) The pro forma effects of a business combination need not be
presented pursuant to this section if separate financial statements of
the acquired business are not included in the filing.
* * * * *
PART 228--INTEGRATED DISCLOSURE SYSTEM FOR SMALL BUSINESS ISSUERS
4. The authority citation for part 228 continues to read as
follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s,
77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77jjj, 77nnn, 77sss,
78l, 78m, 78n, 78o, 78w, 78ll, 80a-8, 80a-29, 80a-30, 80a-37, 80b-
11, unless otherwise noted.
5. By amending Sec. 228.310 by revising paragraphs (c) and (d)(1),
removing paragraph (d)(2), and redesignating paragraph (d)(3) as
paragraph (d)(2), to read as follows:
Sec. 228.310 (Item 310) Financial Statements.
* * * * *
(c) Financial Statements of Businesses Acquired or to be Acquired.
(1) If a business combination accounted for as a ``purchase'' has
occurred or is probable, or if a business combination accounted for as
a ``pooling of interest'' is probable, financial statements of the
business acquired or to be acquired shall be furnished for the periods
specified in paragraph (c)(3) of this Item.
(i) The term ``purchase'' encompasses the purchase of an interest
in a business accounted for by the equity method.
(ii) Acquisitions of a group of related businesses that are
probable or that have occurred subsequent to the latest fiscal year-end
for which audited financial statements of the issuer have been filed
shall be treated as if they are a single business combination for
purposes of this section. The required financial statements of related
businesses may be presented on a combined basis for any periods they
are under common control or management. A group of businesses are
deemed to be related if:
(A) They are under common control or management;
(B) The acquisition of one business is conditional on the
acquisition of each other business; or
(C) Each acquisition is conditioned on a single common event.
(iii) Annual financial statements required by this paragraph (c)
shall be audited. The form and content of the financial statements
shall be in accordance with paragraphs (a) and (b) of this Item.
(2) The periods for which financial statements are to be presented
are determined by comparison of the most recent annual financial
statements of the business acquired or to be acquired and the small
business issuer's most recent annual financial statements filed at or
prior to the date of acquisition to evaluate each of the following
conditions:
(i) Compare the small business issuer's investments in and advances
to the acquiree to the total consolidated assets of the small business
issuer as of the end of the most recently completed fiscal year. For a
proposed business combination to be accounted for as a pooling of
interests, also compare the number of common shares exchanged or to be
exchanged by the small business issuer to its total common shares
outstanding at the date the combination is initiated.
(ii) Compare the small business issuer's proportionate share of the
total assets (after intercompany eliminations) of the acquiree to the
total consolidated assets of the small business issuer as of the end of
the most recently completed fiscal year.
(iii) Compare the small business issuer's equity in the income from
continuing operations before income taxes, extraordinary items and
cumulative effect of a change in accounting principles of the acquiree
to such consolidated income of the small business issuer for the most
recently completed fiscal year.
Computational note to paragraph (c)(2): For purposes of making
the prescribed income test the following guidance should be applied:
If income of the small business issuer and its subsidiaries
consolidated for the most recent fiscal year is at least 10 percent
lower than the average of the income for the last five fiscal years,
such average income should be substituted for purposes of the
computation. Any loss years should be omitted for purposes of
computing average income.
(3)(i) If none of the conditions specified in paragraph (c)(2) of
this Item exceeds 20%, financial statements are not required. If any of
the conditions exceed 20%, but none exceeds 40%, financial statements
shall be furnished for the most recent fiscal year and any interim
periods specified in paragraph (b) of this item. If any of the
conditions exceed 40%, financial statements shall be furnished for the
two most recent fiscal years and any interim periods specified in
paragraph (b) of this item.
(ii) The separate audited balance sheet of the acquired business is
not required when the small business issuer's most recent audited
balance sheet filed is for a date after the acquisition was
consummated.
(iii) If the aggregate impact of individually insignificant
businesses acquired since the date of the most recent audited balance
sheet filed for the registrant exceeds 50%, financial statements
covering at least the substantial majority of the businesses acquired
shall be furnished. Such financial statements shall be for the most
recent fiscal year and any interim periods specified in paragraph (b)
of this Item.
(iv) Registration statements not subject to the provisions of
Sec. 230.419 of this chapter (Regulation C) and proxy statements need
not include separate financial statements of the acquired or to be
acquired business if it does not meet or exceed any of the conditions
specified in paragraph (c)(2) of this Item at the 50 percent level, and
either:
(A) The consummation of the acquisition has not yet occurred; or
(B) The effective date of the registration statement, or mailing
date in the case of a proxy statement, is no more than 74 days after
consummation of the business combination, and the financial statements
have not been filed previously by the registrant.
(v) An issuer that omits from its initial registration statement
financial statements of a recently consummated business combination
pursuant to paragraph (c)(3)(iv) of this section shall furnish those
financial statements and any pro forma information specified by
paragraph (d) of this Item under cover of Form 8-K (Sec. 249.308 of
this chapter) no later than 75 days after consummation of the
acquisition.
(4) If the small business issuer made a significant business
acquisition subsequent to the latest fiscal year end and filed a report
on Form 8-K which included audited financial statements of such
acquired business for the periods required by paragraph (c)(3) of this
Item and the pro forma financial information required by paragraph (d)
of this Item, the determination of significance may be made by using
pro forma amounts for the latest fiscal year in the report on Form 8-K
rather than by using the historical amounts of the registrant. The
tests may not be made by ``annualizing'' data.
(d) Pro Forma Financial Information. (1) Pro forma information
showing the effects of the acquisition shall be furnished if financial
statements of a business acquired or to be acquired are presented.
* * * * *
[[Page 54516]]
PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1993
6. The authority citation for part 239 continues to read in part as
follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77sss, 78c, 78l,
78m, 78n, 78o(d), 78w(a), 78ll(d), 79e, 79f, 79g, 79j, 79l, 79m,
79n, 79q, 79t, 80a-8, 80a-29, 80a-30 and 80a-37, unless otherwise
noted.
* * * * *
7. By revising paragraph (b)(7) of Item 17 of Form S-4 (referenced
in Sec. 239.25) to read as follows:
Note: Form S-4 does not and these amendments will not appear in
the Code of Federal Regulations.
Form S-4
* * * * *
Item 17. Information with Respect to Companies Other Than S-3 or S-2
Companies.
* * * * *
(b) * * *
(7) Financial statements as would have been required to be included
in an annual report furnished to security holders pursuant to Rules
14a-3 (b)(1) and (b)(2) (Sec. 240.14a-3 of this chapter) or Rules 14c-3
(a)(1) and (a)(2) (Sec. 240.14c-3 of this chapter), had the company
being acquired been required to prepare such a report; Provided,
however, that the balance sheet for the year preceding the latest full
fiscal year and the income statements for the two years preceding the
latest full fiscal year need not be audited if they have not previously
been audited. In any case, such financial statements need only be
audited to the extent practicable. If this Form is used for resales to
the public by any person who with regard to the securities being
reoffered is deemed to be an underwriter within the meaning of Rule
145(c) (Sec. 230.145(c) of this chapter), the financial statements of
such companies must be audited for the fiscal years required to be
presented pursuant to paragraph (b)(2) of Rule 3-05 of Regulation S-X
(17 CFR 210.3-05).
* * * * *
8. By revising paragraph (b)(5) of Item 17 of Form F-4 (referenced
in Sec. 239.34) to read as follows:
Note: Form F-4 does not and these amendments will not appear in
the Code of Federal Regulations.
Form F-4
* * * * *
Item 17. Information with Respect to Foreign Companies Other Than F-3
or F-2 Companies.
* * * * *
(b) * * *
(5) Financial statements as would have been required to be included
in an annual report on Form 20-F (17 CFR 249.220f) had the company
being acquired been required to prepare such a report; Provided,
however, that the balance sheet for the year preceding the latest full
fiscal year and the income statements for the two years preceding the
latest full fiscal year need not be audited if they have not previously
been audited. In any case, such financial statements need only be
audited to the extent practicable. If this Form is used for resales to
the public by any person who with regard to the securities being
reoffered is deemed to be an underwriter within the meaning of Rule
145(c) (Sec. 230.145(c) of this chapter), the financial statements of
such companies must be audited for the fiscal years required to be
presented pursuant to paragraph (b)(2) of Rule 3-05 of Regulation S-X
(17 CFR 210.3-05).
* * * * *
PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934
9. The authority citation for part 249 continues to read in part as
follows:
Authority: 15 U.S.C. 78a, et seq., unless otherwise noted;
* * * * *
10. By amending Form 8-K (referenced in Sec. 249.308) by removing
Instruction 2, by revising paragraph C.3 of the General Instructions,
revising Instruction 4 of Item 2, and revising paragraph (a)(4) and
Instruction 1 of Item 7 to read as follows:
Note: Form 8-K does not and these amendments will not appear in
the Code of Federal Regulations.
Form 8-K
* * * * *
GENERAL INSTRUCTIONS
* * * * *
C. Application of General Rules and Regulations
* * * * *
3. A ``small business issuer,'' defined under Rule 12b-2 of the
Exchange Act (Sec. 240.12b-2 of this chapter), shall refer to the
disclosure items in Regulation S-B (17 CFR 228.10 et seq.) and not
Regulation S-K. If there is no comparable disclosure item in Regulation
S-B, a small business issuer need not provide the information
requested. A small business issuer shall provide the information
required by Item 310 (c) and (d) of Regulation S-B in lieu of the
financial information required by Item 7 of this Form.
* * * * *
Item 2. Acquisition or Disposition of Assets.
* * * * *
Instructions.
* * * * *
4. An acquisition or disposition shall be deemed to involve a
significant amount of assets (i) if the registrant's and its other
subsidiaries' equity in the net book value of such assets or the amount
paid or received therefor upon such acquisition or disposition exceeded
10 percent of the total assets of the registrant and its consolidated
subsidiaries, or (ii) if it involved a business (see Sec. 210.11-01(d))
which is significant (see Sec. 210.11.01(b)). Acquisitions of
individually insignificant businesses are not required to be reported
pursuant to this item unless they are related businesses (see
Sec. 210.3-05(a)(3)) and are, in the aggregate, significant.
* * * * *
Item 7. Financial Statements and Exhibits.
* * * * *
(a) * * *
(4) Financial statements required by this item may be filed with
the initial report, or by amendment not later than 60 days after the
date that the initial report on Form 8-K must be filed. If the
financial statements are not included in the initial report, the
registrant should so indicate in the Form 8-K report and state when the
required financial statements will be filed. The registrant may, at its
option, include unaudited financial statements in the initial report on
Form 8-K.
* * * * *
Instructions. 1. During the period after a registrant has reported
a business combination pursuant to Item 2 above until the date on which
the financial statements specified by Item 7 above must be filed, the
registrant will be deemed current for purposes of its reporting
obligations under section 13(a) or 15(d) of the Securities Exchange Act
of 1934. With respect to filings under the Securities Act of 1933,
however, registration statements will not be declared effective and
post-effective amendments to registrations statements will not be
declared effective unless financial statements meeting the requirements
of Rule 3-05 of Regulation S-X (Sec. 210.3-05 of this chapter) are
provided. In addition, offerings should not be made pursuant to
effective registrations statements or pursuant to Rules 505 and 506 of
Regulation D (Secs. 230.501 through 506 of this chapter), where any
purchasers are not accredited investors under Rule 5-01(a) of that
Regulation, until the audited financial
[[Page 54517]]
statements required by Rule 3-05 of Regulation S-X (Sec. 210.3-05 of
this chapter) are filed. Provided, however, that the following
offerings or sales of securities may proceed notwithstanding that
financial statements of the acquired business have not been filed:
(a) Offerings or sales of securities upon the conversion of
outstanding convertible securities or upon the exercise of outstanding
warrants or rights;
(b) Dividend or interest reinvestment plans;
(c) Employee benefit plans;
(d) Transactions involving secondary offerings; or
(e) Sales of securities pursuant to Rule 144 (Sec. 230.144 of this
chapter).
* * * * *
Dated: October 10, 1996.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-26561 Filed 10-17-96; 8:45 am]
BILLING CODE 8010-01-P
