[Federal Register Volume 60, Number 81 (Thursday, April 27, 1995)]
[Unknown Section]
[Pages 20787-20790]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-10297]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35628; File No. SR-PSE-94-31]
Self-Regulatory Organizations; Pacific Stock Exchange, Inc.;
Order Granting Approval to Proposed Rule Change and Amendment No. 1 to
Proposed Rule Change Relating to the Listing and Trading of Small
Corporate Offering Registration (``SCOR'') Securities on the Exchange
April 19, 1995.
I. Introduction
On December 15, 1994, the Pacific Stock Exchange, Inc. (``PSE'' or
``Exchange'') submitted to the Securities and Exchange Commission
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'')\1\ and rule 19b-4
thereunder,\2\ a proposed rule change to permit the Exchange to list
and trade Small Corporate Offering Registration (``SCOR'') securities.
On April 12, 1995, the Exchange submitted Amendment No. 1 to the
proposal.\3\
\1\15 U.S.C. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1994).
\3\See letter from Michael Pierson, PSE, to Katherine Simmons,
SEC, dated April 12, 1995 (``PSE Letter''). The Amendment clarified
certain aspects of the SCOR program, see infra notes 12, 16, and 26,
and made non-substantive changes to the SCOR Rules. Notice of the
Amendment was therefore unnecessary.
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The proposed rule change was published for comment in Securities
Exchange Act Release No. 35140 (December 22, 1994), 60 FR 159 (January
3, 1995). No comments were received on the proposal.\4\ This order
approves the PSE's SCOR listing on a three year pilot basis.\5\
\4\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.
\5\The PSE will evaluate the SCOR listing program at least on an
annual basis to determine whether this new marketplace has achieved
its policy objectives, which the Exchange states are to facilitate
capital formation for small businesses and to provide public market
liquidity for the securities of these small businesses.
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II. Description
The SCOR listing would be a new tier of listed securities that
would not qualify for listing on the PSE under either its Tier I or
Tier II listing criteria.\6\ Under the SCOR designation, issuers may
list any single class of common or preferred stock\7\ that was issued
pursuant to either Regulation A or Rule 504 under the Securities Act of
1933 (``Securities Act'').\8\ The listing of [[Page 20788]] securities
under the SCOR designation will not provide issuers with the exemption
from state securities registration requirements accorded to exchange-
listed securities by most states.\9\ Furthermore, SCOR securities will
not be eligible for marginability and must be paid for in full.\10\
\6\The Commission approved the PSE's two-tiered listing criteria
for its regular listings in Securities Exchange Act Release No.
34429 (July 22, 1994), 59 FR 50950 (August 1, 1994).
\7\Once a class of SCOR securities has been accepted for listing
on the Exchange, all securities of that class will be listed and
traded on the Exchange as SCOR securities, except those securities
of the class that are subject to restrictions that make them
ineligible for trading on the Exchange.
\8\Under Regulation A, public offerings of up to $5 million in a
twelve-month period are exempt from registration under the
Securities Act. See 17 CFR 230.251 to 230.263 (1994). Rule 504 of
Regulation D provides an exemption from registration for limited
offerings and sales of securities not exceeding $1,000,000. See 17
CFR 230.504 (1994).
\9\The PSE Rule states that SCOR securities ``shall not be
considered to be `listed' or `approved for listing upon notice of
issuance' for purposes of any exemption from filing for issuer or
non-issuer transactions under the securities laws or regulations of
any state or other jurisdiction of the United States.'' See PSE Rule
3.2(t), Commentary .03.
\10\The rule change amends the PSE's Maintenance Margin Rule to
prove that:
Rule 2.16(b). The margin which must be maintained in margin
accounts of customers, whether members, allied members, member firms
or non-members, shall be as follows:
* * *
(5) In the case of securities listed pursuant to Rule 3.2(t)
[SCOR securities], 100% of the market value, in cash, of each
security held ``long'' in the account.
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A. Initial Listing Standards
The qualification process for SCOR applicants will be the same as
the process in place for other PSE-listed equity issuers. Applications
for listing will be reviewed by the Exchange's Listing Department,
which works directly with the Equity Listing Committee. The Equity
Listing Committee is comprised of floor members, ``upstairs'' members,
and member firm representatives.
The initial listing requirements for common and preferred stock\11\
must be met at the time an issuer applies for listing.\12\ The Exchange
may accept applications to list a SCOR offering if the securities have
been registered at the state level,\13\ and if there are at least
150,000 publicly held shares and at least 250 public beneficial holders
of the class of securities. In addition, issuers must have total net
tangible assets of at least $500,000 and total net worth of at least
$750,000. The last offering price in the class of security for which
the issuer is applying must have been at least $5 per share.\14\
\11\In formulating the listing requirements for SCOR securities,
the Exchange consulted with the Small Business Capital Formation and
Small Business Sales Practices Committees of the North American
Securities Administrators Association (``NASAA''), the California
Department of Corporations, and leaders from the small business
community.
\12\The Exchange will not grant ``conditional'' approvals, i.e.,
approvals conditioned on the satisfaction of the listing criteria
sometime in the future. See PSE Letter, supra note 3.
\13\Issuers must register the securities to be listed 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. Once an issuer's class of common or preferred stock has
been approved for SCOR listing, the securities must be registered
under Section 12(b) of the Act.
\14\The Exchange will consider the offering price of individual
separate SCOR offerings in a class of securities to help determine
whether the value of the SCOR securities to be listed is at least $5
per share. The Exchange will consider the circumstances of SCOR
offerings so that issuers will not be able to effect ``token''
offerings in order to satisfy the $5 requirement. See also PSE Rule
3.2(t)(6)(iv) (stating that the exchange will consider whether there
have been material changes in the financial condition of the company
or other events that could have a significant adverse impact upon
the value of the SCOR securities to be listed).
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In addition to the quantitative listing requirements, when
reviewing an application for listing, the Exchange will consider other
factors such as (1) a company's management plan outlining the
development of its business for a period of at least 24 months,\15\ (2)
the background and past conduct of officers, directors, principal
shareholders, and key employees of the company, (3) the adequacy of the
company's resources to conduct its business,\16\ and (4) any material
changes in the financial condition of the company or other events that
could have an impact upon the value of the security to be listed. In
addition, the Exchange will consider all other available information
that may be relevant to its review of listing eligibility.\17\
\15\The management plan must demonstrate that the product,
service, or technology is sufficiently developed and that there is a
reasonable expectation of future earnings from its business. The
listing of companies that have done blank check offerings will not
be permitted.
\16\The PSE will not list any company with an outstanding
``going concern'' opinion from its independent auditor. See PSE
Letter, supra note 3. See also PSE Rule 3.5(s) (Exchange considers
delisting a security upon the issuance of an independent public
accountant's disclaimer opinion on financial statements).
\17\The Exchange generally will not list a company if the
business in which it is engaged is not anticipated to produce
profits within a reasonable period of time, if the business
operations depend upon the development of a product or system that
will not be completed prior to listing, or if preliminary objectives
upon which the profit-making ability of the business depends have
not been achieved.
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SCOR issuers will be required to comply with the corporate
governance requirements and disclosure policies applicable to all
securities listed on the Exchange.\18\ The corporate governance
provisions include rules concerning conflicts of interest, quorum,
shareholder approval, annual meetings, and solicitation of proxies and
consents. The corporate disclosure policies provide guidance to
companies in making appropriate public disclosure and include
information regarding consultation with the PSE Listings Department,
internal handling of confidential corporate matters, and relationships
between company officials and others.\19\
\18\See PSE Rule 3.3. SCOR securities are subject to all of the
corporate governance requirements contained in PSE Rule 3.3 except
the independent directors/audit committee requirement of Rule
3.3(b).
\19\The PSE's proposed fee schedule for SCOR securities was
published in Securities Exchange Act Release No. 35395 (February 17,
1995), 60 FR 10626 (February 27, 1995).
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B. Maintenance Standards
The SCOR maintenance standards require that there are at least
100,000 publicly held shares with a market value of at least $500,000,
at least 200 public beneficial holders, and a last sale price of at
least $1 per share. In addition, the issuer must maintain total net
tangible assets for at least $250,000 and total net worth of at least
$500,000. A company with a deficiency in either market value of public
float or market price will be subject to delistings procedures should
the deficiency exist either for a majority of business days of any
three-month period, or for any period of ten consecutive business
days.\20\ If there is a deficiency in any other quantitative standard,
the Exchange will immediately suspend dealings in the security and
subject the company to delisting proceedings.
\20\In each instance, for purposes of the maintenance standards,
the market price and the market value of public float will be
calculated by using the last sale of the trading day. Should no
transactions be effected in the security on a given trading day, the
prevailing closing bid price will be used in determining the market
value of public float and the last sale price of a security. In the
event that there is not a bid price readily available, the Exchange
will rely on other recognized established securities markets in
which the issue is traded to determine the market value of public
float and the last share price.
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SCOR securities also will be subject to suspension and/or
withdrawal from listing and registration as a listed issue if the
Exchange finds that the listed company fails to comply with the
Exchange's listing policies or agreements.\21\ Furthermore, an issuer
of SCOR securities must take appropriate steps to ensure that no such
securities are sold on its behalf in reliance upon the exemption from
state securities registration that is otherwise available to companies
listed on the Exchange. If an issuer fails to take such steps, the
Exchange will immediately suspend [[Page 20789]] dealings in the
security and subject the company to delisting proceedings. Whenever the
Exchange staff determines that a security should be removed from the
list, the issuer will be given an opportunity to present to the Equity
Listing Committee any reasons why the security should not be delisted.
A decision by the Equity Listing Committee to delist a security may be
appealed to a Board committee or a committee appointed by the Board of
Governors for such purpose.\22\
\21\Other factors the Exchange will consider include, among
others, the issuance of an independent public accountant's
disclaimer opinion on financial statements required to be certified
and losses which are so substantial that, in the opinion of the
Exchange, it appears questionable as to whether a company will be
able to continue operations. In addition, the Exchange would examine
a company that has depleted, sold or otherwise disposed of its
principal operating assets, or substantially discontinued the
business that it conducted at the time it was listed, or that has
been authorized to liquidate its assets. See PSE Rule 3.5(s).
\22\If a security is delisted, the Exchange must submit an
application to the Commission to strike the security from listing
and registration. A copy of such application will be provided to the
issuer in accordance with Section 12 of the Act. See 15 U.S.C.
78l(d) (1988).
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C. Trading and Transaction Reporting
The Exchange will allocate SCOR securities to Exchange specialists
for auction market trading. All transactions in SCOR securities will be
reported on a real-time basis, and will be identified by a ``.SC''
suffix to the ticker symbol. All of the PSE's rules and equity
surveillance procedures will be applicable to transactions in SCOR
securities.
III. Discussion
A. Introduction
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange and, in
particular, the requirements of Sections 6 and 11A.\23\ Section 6(b)(5)
requires, among other things, that the rules of an exchange be designed
to perfect the mechanism of a free and open market and a national
market system and to protect investors and the public interest. Section
11A generally promotes the development of a national market system for
securities to assure economically efficient execution of securities
transaction; fair competition among brokers and dealers, among exchange
markets and markets other than exchange markets; the availability to
brokers, dealers, and investors of information with respect to
quotations for and transactions in securities; the practicability of
brokers executing investors' orders in the best market; and an
opportunity for investors' orders to be executed without the
participation of a dealer.
\23\15 U.S.C. Secs. 78f and 78k-1 (1988).
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B. SCOR Marketplace
In general, the Commission believes the PSE's SCOR listing program
should provide benefits to investors as well as small companies listed
under the program. The SCOR listing standards will provide small
companies who would not otherwise be eligible for exchange trading with
an opportunity to list securities on a national securities exchange for
the first time. The Commission believes that the availability of an
exchange listing as an alternative to solely over-the-counter (``OTC'')
trading will provide an additional trading mechanism that could
increase capital committed to trading SCOR securities. In addition, the
availability of the SCOR listing on the PSE will enhance SCOR issuer
access to the U.S. capital markets.
The Commission believes investors in small companies also will
benefit from exchange trading of SCOR securities. Each SCOR security
traded on the PSE will be handled by an Exchange specialist who is
required to commit capital to maintain fair and orderly markets.
Furthermore, trading of SCOR securities on the Exchange will be subject
to the PSE's trading and surveillance rules. The Commission believes
exchange trading with appropriate market surveillance should improve
the quality of market making in SCOR securities. In addition,
transactions in SCOR securities will be broadcast over the Consolidated
Tape System (``CTS'') and the Consolidated Quote System (``CQS'')
Network B as local issues.\24\ The Commission believes this real-time
reporting and wide dissemination of quotations and transactions in SCOR
securities should result in more efficient and fair markets for the
securities. Finally, because exchange-trading of SCOR securities
requires the companies to register under Section 12(b) of the Act and
to comply with the disclosure requirements of the federal securities
laws, listing may provide investors with greater access to information
about SCOR issuers.
\24\SCOR securities will be identified by a ``.SC'' suffix to
the ticker symbol so that members, public investors, and others can
distinguish SCOR securities from other securities traded on the
Exchange.
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The Commission recognizes, however, that the listing standards for
SCOR issuers are significantly lower than those for regular PSE-listed
issuers and that the markets for SCOR securities normally may not be as
liquid and deep as those for regular PSE-listed securities. The
Commission therefore has considered carefully the PSE's proposal, and
for the reasons stated below, believes the SCOR proposal satisfies the
requirements of the Act.
C. SCOR Listing Standards
In general, the Commission believes the development and enforcement
of adequate standards governing the initial and continued listing of
securities on an exchange is necessary to ensure that only bona fide
companies with sufficient public float, investor base, and trading
interest to support a fair and orderly auction market will be listed.
Adequate standards are especially important given the expectations of
investors regarding exchange trading and the imprimatur of listing on a
particular market.\25\ Once a security has been approved for initial
listing, maintenance criteria allow an exchange to monitor the status
and trading characteristics of that issue to ensure that it continues
to meet the exchange's standards for market depth and liquidity. For
the reasons set forth below, the Commission believes that the proposed
rule change will provide the PSE with appropriate standards to
determine which securities warrant listing under the Exchange's new
SCOR designation.
\25\See, e.g., In re Silver Shield Mining and Milling Company,
Securities Exchange Act Release No. 6214 (March 18, 1960) (``use of
the facilities of a national securities exchange is a privilege
involving important responsibilities under the Exchange Act''); In
re Consolidated Virginia Mining Co., Securities Exchange Act Release
No. 6192 (February 26, 1960) (same).
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The Commission believes that the initial and maintenance criteria
for SCOR issuers, as described above, are consistent with Sections
6(b)(5) and 11A of the Act in that these criteria should help to ensure
the maintenance of fair and orderly markets for SCOR securities, as
well as enhance benefits and protections for investors who trade in
these securities. Specifically, the numerical listing and maintenance
criteria include minimum requirements for public float and outstanding
shares. While these are lower than the regular PSE listing standards,
they are high enough to ensure that some minimum level of public
interest and liquidity will be available in SCOR securities. Although
these lower standards might not be sufficient for regular listings,
they are acceptable for SCOR securities given the benefits noted above
that the listing of such securities would produce (in particular, the
increased information disclosure).
The Commission believes the quantitative SCOR listing standards are
adequate to ensure that fair and orderly markets can be maintained.
This conclusion is reinforced by the PSE's decision not to accept
applications from issuers until they meet the minimum numerical listing
criteria.\26\ The [[Page 20790]] Commission believes that making
satisfaction of the numerical listing criteria mandatory before the
Exchange considers whether an issuer is appropriate for exchange
trading should help safeguard the integrity of the exchange market and
the securities listed thereon.
\26\In addition, a SCOR-listed issuer that becomes eligible for
trading on the Exchange under its Tier I or Tier II criteria may
``graduate'' to the main lists. However, companies on the Exchange's
main lists may not move down to the SCOR listing program. See PSE
Letter, supra note 3.
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In addition to the quantitative standards, the Exchange considers
other qualitative factors such as an issuer's management plan, the
background of officers and directors, and the adequacy of the company's
resources. The Commission believes that these factors, combined with
other Exchange rules regarding corporate governance and disclosure
policies, will help to ensure that only companies with sufficient
business plans and resources will have access to the PSE's public
market.
The Commission believes that the PSE's proposal for SCOR listings
will provide it with the necessary flexibility to determine whether a
SCOR issuer is appropriate for exchange trading,\27\ irrespective of
whether it meets the minimum quantitative listing criteria. Thus, the
Commission believes that the new listing and maintenance standards
strike the appropriate balance between protecting investors and
providing a marketplace for small issuers satisfying the disclosure
requirements under the federal securities laws.
\27\PSE Rule 3.2(t)(6) states: ``Notwithstanding that a company
meets the prescribed listing requirements, the Exchange retains the
discretion to refuse listing to a company where it believes it is in
the public interest to do so.''
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D. Margin
As discussed above, the PSE is amending Exchange Rule 2.16 to
require that SCOR-listed securities be subject to a 100% maintenance
margin requirement. The Commission agrees with the maintenance margin
approach proposed by the PSE. The SCOR program is intended to be a new
marketplace that attracts issuers that might otherwise trade OTC. It is
logical that the maintenance margin treatment for OTC securities would
apply to SCOR issuers, rather than the treatment accorded regular PSE
companies.\28\
\28\Non-MNS OTC securities are not marginable unless they are
included in the Federal Reserve Board's OTC Margin List. The PSE
will require 100% margin on SCOR securities whether or not they are
included on the Federal Reserve Board's OTC Margin List.
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E. State Law Concerns
The Commission believes that the safeguards the PSE has established
should make clear to PSE members and SCOR issuers listed under the new
program that the offer and sale of SCOR securities are subject to state
registration and rules. The PSE proposal would prohibit SCOR issuers
from using the exemption from registration requirements that the
securities laws of some states currently make available to other PSE-
listed companies. To accomplish this, the PSE included in its rules
that SCOR issuers would not be able to take advantage of existing
exemptions in state securities registration requirements accorded to
regular PSE-listed securities. In addition, the SCOR rules state that
the Exchange will delist any company that fails to take appropriate
steps to ensure that no SCOR-listed securities are sold on its behalf
in reliance upon the exemption from state securities registration that
is otherwise available to companies listed on the Exchange.
F. Review Procedures
The Commission believes the Exchange has proposed adequate
procedures to screen applications for SCOR listing. The Exchange's
Listing Department staff initially will review applications to confirm
that all quantitative listing criteria have been met and evaluate
issuers according to the qualitative standards discussed above. The
staff will reject applications that fail to meet the quantitative
standards. The staff also has discretion to reject applications that
have qualitative deficiencies. Applications not rejected by the staff
are submitted to the Equity Listing Committee for evaluation. The
Equity Listing Committee must approve all applications before new SCOR
listings may be accepted by the Exchange.
G. Pilot
Finally, the Commission believes it is appropriate to approve the
SCOR program on a three-year pilot basis. This pilot will provide the
Exchange, SCOR issuers, and investors with sufficient time to gain
experience with the program. In addition, during the pilot, the PSE
should monitor and evaluate the SCOR program so that the Commission can
assess the benefits of the SCOR listing. The PSE should file a report
with the Commission if they determine to request an extension of the
pilot or seek permanent approval. The report should contain information
on the number of SCOR listing applications accepted and rejected, the
SCOR securities that have been delisted and the reasons therefore, the
number of SCOR securities that have moved to the PSE's regular market
or another market, and quantitative data on the trading history of SCOR
securities (including average price per share and trading volume).
IV. Conclusion
For the reasons stated above, the Commission believes the rule
change is consistent with the Act and, therefore, has determined to
approve it on a three-year pilot basis. The rule change establishes
quantitative and qualitative listing criteria for SCOR securities that
provide for the protection of investors and the public interest.
Furthermore, the SCOR listing program should provide benefits to
investors and small companies by providing for the exchange-trading of
SCOR securities, which should result in added liquidity, price
discovery, and regulatory oversight.
The Commission does not believe that the rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act, as amended.
It is Therefore Ordered, pursuant to Section 19(b)(2) of the
Act,\29\ that the proposed rule change (SR-PSE-94-31) is approved on a
pilot basis through April 19, 1998.
\29\15 U.S.C. 78s(b)(2) (1988).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\30\
\30\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-10297 Filed 4-26-95; 8:45 am]
BILLING CODE 8010-01-M
