[Federal Register Volume 60, Number 1 (Tuesday, January 3, 1995)]
[Notices]
[Pages 159-161]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-32254]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35140; File No. SR-PSE-94-31]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by Pacific Stock Exchange, Inc. Relating to the Listing and
Trading of Small Corporate Offering Registration (``SCOR'') Securities
on the Exchange
December 22, 1994.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on December
15, 1994, the Pacific Stock Exchange, Inc. (``PSE'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II and III below, which
Items have been prepared by the self-regulatory organization. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The PSE is submitting this rule filing in order to permit the
Exchange listing and trading of common stock and preferred stock that
qualifies under the Small Corporate Offering Registration (``SCOR'')
designation.\1\
\1\The PSE originally proposed to list and trade SCOR securities
in 1992. That proposal was published for public comment in
Securities Exchange Act Release No. 32514 (June 25, 1993), 58 FR
35496 (July 1, 1993) (File No. SR-PSE-92-42). The Commission
received several comment letters regarding the proposal, and
subsequently published amendments to the proposal for public comment
in Securities Exchange Act Release No. 34328 (July 7, 1994), 59 FR
35776 (July 13, 1994). The Exchange withdrew file no. SR-PSE-92-42
on November 22, 1994, and submitted the instant filing that includes
modifications to the proposal in response to comments from the
public and from Commission staff.
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II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of and basis for the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of these statements may be examined at
the places specified in Item IV below. The self-regulatory organization
has prepared summaries, set forth in Sections A, B, and C below, of the
most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Introduction
The Exchange is proposing to list and trade common stock and
preferred stock that qualifies under the Small Corporate Offering
Registration (``SCOR'') designation. Under the proposal, the SCOR
marketplace will be implemented on a three-year pilot basis and the
program will be evaluated at least on an annual basis to determine
whether this new marketplace has achieved its policy objectives--to
facilitate capital formation for small businesses and to provide public
market liquidity. The SCOR program will include any securities of an
issuer that has been designated as common stock and/or preferred issued
pursuant to (i) Regulation A under the Securities Act of 1933
(``Securities Act'') and using the prescribed form as applicable; or
(ii) Rule 504 under the Securities Act and using Form U-7 of the North
American Securities Administrators Association (``NASAA'') or a state
variation of such form with substantially similar requirements.\2\
Since such securities are not currently listed or traded on any
national securities exchange, the PSE believes that the implementation
of the Exchange's proposal will facilitate the capital formation
process for small companies and will supply much-needed liquidity to
public investors within a regulated marketplace. In addition, under the
proposal, companies will be afforded all of the benefits of an Exchange
listing, with the exception of the Blue Sky exemption from state
securities registration requirements and automatic marginability.
\2\Once a single issuance of securities has been accepted for
listing on the Exchange, all securities of that class will be
considered to be ``SCOR'' securities for purposes of this rule,
including restricted securities (i.e., securities restricted
pursuant to federal or state securities laws, by any other law, by
any agreement, or in any other manner), provided that such
restricted securities may not be eligible for trading on the
Exchange.
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In August 1992, the Commission adopted certain rules as part of its
Small Business Initiatives program. The program includes, in part,
substantive changes to the ``small issues'' exemption from registration
requirements under the Securities Act (Regulation A), as well as
changes to the ``seed capital'' registration exemption pursuant to Rule
504 under the Securities Act. These revisions are designed to
facilitate the access of small companies to capital markets and to
reduce the costs of compliance with the federal securities laws.
Rule 504
The Commission's modifications to Rule 504 include the elimination
of several restrictions and other changes that would allow small
companies to conduct public offerings of up to $1 million in
unrestricted securities during a twelve-month period. These changes are
designed to allow small companies to market offerings directly to
prospective investors by bypassing both the venture capital and small
underwriting houses. At the state level, offerings may be registered
using the SCOR registration form, Form U-7; however, such limited
offerings must also qualify under state Blue Sky laws that require
delivery of a prospectus, offering circular, or disclosure document to
all purchasers prior to sale. The Form U-7 has been supported by the
American Bar Association as well as NASAA.\3\
\3\See Small Corporate Offering Registration Program and Form U-
7, 1 Blue Sky L. Rep. (CCH) 6461 (September 1994).
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Regulation A
The Commission revised Regulation A to exempt from registration
public offerings of up to $5 million in a twelve-month period. The
disclosure requirements are embodied in the offering statement (SEC
Form 1-A), which consists of three parts. The offering circular is
contained in Part II and may be prepared in three alternative formats,
one of which permits the use of the same simplified disclosure
statement (Form U-7) that is prescribed by most states for SCOR
offerings.
The Exchange believes these changes to Regulations A and D, in
conjunction [[Page 160]] with the efforts of several states that are in
the forefront of the small business movement, will clearly benefit both
the investing public as well as small companies seeking access to
capital markets. The Exchange also believes the expanded use of the
Form U-7 in Regulation A offerings will encourage a more effective and
simplified system of raising capital. The collective efforts of federal
and state agencies to streamline the registration process for small
corporate offerings is especially important because the institutional
venture capital industry has substantially abandoned the financing of
small start-up companies, leaving them the private offering market as
the only remaining source of capital. Therefore, the development of the
SCOR program has made corporate offerings more flexible and less costly
to small companies, without compromising investor protection.
Initial and Continued Listing Requirements
The Exchange has in place a regulatory program that will ensure
close scrutiny of any company applying to list its common stock and/or
preferred stock under the SCOR program. The listing qualification
process for SCOR applicants will be the same as the process in place
for other PSE-listed equity issuers. The merit review process is
coordinated by the Exchange's Listings Department, which works directly
with the Equity Listing Committee. This Committee, which is comprised
of floor members, ``upstairs'' members and member firm representatives,
has substantial collective experience in the evaluation of companies
for possible listing on the Exchange.
The Exchange's proposed SCOR marketplace is limited to the listing
of one class of common stock and preferred stock. To ensure a minimum
level of financial performance by issuers under the SCOR program, the
Exchange has developed a single set of initial and maintenance listing
requirements that will apply to both common stock and preferred stock.
In formulating the listing requirements set forth below, the Exchange
consulted extensively with committees of NASAA,\4\ the California
Department of Corporations, and leaders from the small business
community. The Exchange believes that the proposal satisfactorily
addresses the mutual concerns of these individuals and organizations.
\4\The Exchange discussed its proposal with the Small Business
Capital Formation and the Small Business Sales Practices committees
of NASAA.
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Under the proposal, at the time of application and formal request
for listing, the issuer must meet all of the following listing
requirements. First, the SCOR offering in the class of security for
which the issuer is applying for listing must be at least $5 per share,
and constitute at least 150,000 publicly held shares with a minimum
public distribution of 250 beneficial holders.\5\ Second, the company
must have total net tangible assets of at least $500,000 and total net
worth of at least $750,000. Third, the issuer must have specific
corporate governance policies that comply with PSE Rule 3.3.\6\ Fourth,
the issuer must provide the Exchange with audited financial statements
that are required to be included in the issuer's Exchange Act
registration statement. Fifth, the company must demonstrate that the
product, service, or technology is sufficiently developed and that
there is a reasonable expectation of future earnings from its business.
Finally, the issuer must have registered the securities of the class at
the state level using either the state Form U-7 (or the equivalent
registration form to which a regulatory review is applied) or a
coordinated state filing with the federal Form 1-A offering statement.
\5\The term ``public beneficial holder'' means a beneficial
holder who, with respect to the issuer, is not a director or officer
or member of the immediate family thereof or an affiliate or
associate thereof, and whose ownership of an equity security is less
than 5% of the total number of shares issued and outstanding.
\6\PSE Rule 3.3 contains corporate governance requirements
regarding conflicts of interest, independent directors/audit
committee, quorum, shareholder approval, annual meetings,
solicitation of proxies and consents, and common and preferred stock
voting rights. SCOR issues are subject to all of these corporate
governance requirements except for the independent directors/audit
committee requirement in Rule 3.3(b).
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In addition, under the proposal, once an issuer's class of security
has been approved for listing under the SCOR program, the following
requirements must also be met. First, the issuer's class of common
stock and/or preferred stock must be registered under section 12(b) of
the Exchange Act (before it may be treaded on the Exchange). Second,
the issuer must comply with the Exchange's listing policies and
agreements, as well as the reporting and disclosure requirements of the
Exchange Act. Third, in listing additional shares of the same class of
common stock or preferred stock, the issuer must meet the applicable
federal securities laws and state registration requirements. Finally,
an issuer listed under the SCOR program must comply with the Exchange's
listing maintenance requirements set forth in Rule 3.5(r).
Trading Environment and Transaction Reporting
The Exchange intends to allocate common stock and preferred stock
listed under the SCOR program to a Specialist for auction market
trading. Any transactions in such securities would be reported on a
real-time basis. Transactions in SCOR securities would be identified by
a special suffix to the ticker symbol so that members, public investors
and others can distinguish these securities from other securities
traded on the Exchange. Finally, all of the Exchange's rules and equity
surveillance procedures would be applicable to transactions in SCOR
securities.
2. Statutory Basis
The proposed rule change is consistent with section 6(b)(5) of the
Act in that it is designed to prevent fraudulent and manipulative acts
and practices and to perfect the mechanism of a free and open market.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments on the proposed rule change were neither solicited
nor received.\7\
\7\For a discussion of the comments received on the previous PSE
SCOR listing proposal see Securities Exchange Release No. 34328,
supra note 1.
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III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the publication of this notice in the Federal
Register or within such other period (i) as the Commission may
designate up to 90 days of such date if its finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve the proposed rule change, or
(B) institute proceedings whether the proposed rule change should
be disapproved. [[Page 161]]
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for inspection and copying at the
Commission's Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such filing will also be available
for inspection and copying at the principal office of the PSE. All
submissions should refer to File No. SR-PSE-94-31 and should be
submitted by January 24, 1995.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-32254 Filed 12-30-94; 8:45 am]
BILLING CODE 8010-01-M
