[Federal Register Volume 59, Number 133 (Wednesday, July 13, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-16954]
[[Page Unknown]]
[Federal Register: July 13, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34328; File No. SR-PSE-92-42]
Self-Regulatory Organizations; Filing of Amendment Nos. 2 and 3
to Proposed Rule Change by the Pacific Stock Exchange, Inc. Relating to
the Listing and Trading of SCOR Securities on the Exchange
July 7, 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 June 2,
1994\1\ and July 7, 1994 the Pacific Stock Exchange, Inc. (``PSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') Amendment Nos. 2 and 3 to File No. SR-PSE-92-42\2\ 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 amendment to the proposed rule change
from interested persons.
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\1\The Exchange subsequently filed Exhibit 1 to the Amendment
(form of notice for Federal Register) with the Commission on June 15
and June 22, 1994.
\2\The proposed rule change was published for public comment in
Exchange Act Release No. 32514 (June 25, 1993), 58 FR 35496 (July 1,
1993).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The PSE is amending its proposal to list and trade Small Corporate
Offering Registration (``SCOR'') securities on the Exchange.
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
The Exchange is amending its proposal to list securities under the
SCOR designation. The amendment is partly based upon discussions the
Exchange has held, subsequent to the initial filing, with committees of
the North American Securities Administrations Association, Inc.
(``NASAA''),3 the California Department of Corporations, and
leaders from the small business community. The Exchange believes that
the proposal, as amended, satisfactorily addresses the mutual concerns
of these individuals and organizations.
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\3\The Exchange consulted extensively with the Small Business
Capital Formation and the Small Business Sales Practices committees
of NASAA.
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Inclusion of Preferred Stock
The Exchange notes that many companies, particularly in the high-
technology sector, have a capital structure consisting of two classes
of capital stock, i.e., a single class each of common and preferred.
The class of common stock is privately held by insiders and, generally,
is not transferable, while the preferred stock is issued to qualified
public investors. Under this structure, holders of preferred stock have
preference over common shareholders in the event of liquidation. The
Exchange has determined, accordingly, that it would consider listing a
company's preferred stock under the SCOR program if the company's
overall capital structure and corporate governance policies were
sufficiently designed to protect the interests of public investors.
Initial Listing Requirements
The Exchange's initial filing proposed that each issuer of a SCOR
security have a public float of at least 200,000 shares and a market
capitalization of $1 million. Since the $1 million market
capitalization requirement also represents the maximum offering amount
allowable under Rule 504, the Exchange is proposing to lower the
effective market capitalization threshold to $750,000, with a
corresponding reduction in public float to 150,000 shares and in net
worth to $750,000. This reduction would provide a viable range of
$750,000 to $1 million for SCOR offerings, making allowances for
potential costs associated with the offering. The Exchange believes
that, with these modifications, the SCOR listing program will be more
viable in enabling bona fide companies to raise capital pursuant to
Rule 504. The Exchange also believes that these proposed changes to the
initial listing requirements for SCOR securities will continue to
ensure adequate public distribution, and will not inhibit the growth of
the trading markets or negatively influence specialists' abilities to
maintain fair and orderly markets. The public float requirement of
150,000 shares exceeds the NASDAQ Small Cap initial listing standard of
100,000 shares. Moreover, the Exchange's calculation of public float is
more stringent than that of the NASD in that it excludes any
concentrated holdings of 5% or more.4 Finally, because certain
SCOR offerings may be ``integrated,''5 it is conceivable that the
applicant issuer may have a greater public distribution than initially
expected and, therefore, would further exceed the minimum requirements.
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\4\The NASD excludes concentrated holdings of more than 10
percent. See NASD By-Laws, Schedule D, Part II, Sec. 1(c)(7).
\5\Factors to be considered in determining whether offerings
should be ``integrated'' are whether the offerings: (1) Involve the
same class of security, (2) involve the same type of consideration,
(3) are part of a single plan of financing, (4) are made at or about
the same time, and (5) are made for the same general purpose. See
Securities Act Release Nos. 4434 (1961) and 4552 (1963).
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Net Worth and Net Tangible Assets
To prevent a company that has no tangible assets net of liabilities
from being listed, the Exchange will apply both net worth and net
tangible assets as a test. Accordingly, proposed Rule 3.2(t)(2) would
require that a company have both net tangible assets of at least
$500,000 and a total net worth of at least $750,000.
Audited Financial Statements
Proposed Rule 3.2(t)(4) provides that, at the time of its
application, the issuer must provide the Exchange with audited
financial statements for the most recent fiscal year-end (and unaudited
interim financial statements), and that such statements must be
prepared in accordance with generally accepted accounting principles.
Qualitative Listing Requirements
Proposed Rule 3.2(t)(6) sets forth additional qualitative
requirements in determining a company's listing eligibility. The fact
that an applicant may meet the numerical requirements does not mean
that its application will be approved. The Exchange recognizes the
potential for investor risk in SCOR securities; however, the Exchange
is confident that through a rigorous merit review process, it can
attain the mutual goals of supporting small business capital formation
while providing sufficient protection for the investing public.
Preferred Stock--Anti-Dilution Clause
The Exchange is proposing in Commentary .04 to Rule 3.2(t) to
provide that it will not list convertible preferred issues containing a
provision that permits the company, at its discretion, to reduce the
conversion price of its stock other than in accordance with the terms
of the company's articles of incorporation or any amendments thereof
made contemporaneously with the offering under which the issuer is
applying for listing.
Representations of Approval for Listing
The Exchange has added language that clearly prohibits a company or
broker-dealer from misrepresenting SCOR securities as having been
approved for Exchange listing when, in fact, they have not been
approved. Accordingly, the Exchange is proposing to add Commentary .05
to Rule 3.2(t) stating that any reference to this Exchange made either
by the issuer or the underwriter of the issuer in any prospectus,
offering circular, or similar document that reasonably implies
endorsement or listing approval by the Exchange, and which is made
without the prior consent to the Exchange, is prohibited.6
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\6\If the Exchange finds that a company or broker-dealer has
engaged in such conduct, it will immediately report the matter to
the appropriate state regulatory agency and to the Commission.
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Delisting
Proposed Rule 3.5(r), Commentary .01, has been revised to
incorporate specific times required for compliance with certain
maintenance requirements once a deficiency has occurred. The commentary
now states that a company with a deficiency in either market value of
public float or minimum bid price for ten consecutive business days
shall have 90 days thereafter in which to comply with the maintenance
requirements. It further states that, should the deficiency continue
beyond the prescribed period, the Exchange shall delist the security.
2. Statutory Basis
The proposal is consistent with Section 6(b) of the Act, in
general, and Section 6(b)(5), in particular, in that it is designed to
facilitate transactions in securities, to promote just and equitable
principles of trade, and to protect investors and the public interest.
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
The Commission published the Exchange's rule proposal to list SCOR
securities in July 1993.\7\ Several comment letters were received by
the Commission, including comments from the California Department of
Corporations\8\ and NASAA's Small Business Capital Formation
Committee.\9\ While these comment letters generally supported the
Exchange's overall policy objectives to facilitate capital formation
for small companies and to provide public investors in those securities
with more liquidity, the agencies recommended that revisions be made to
the Exchange's rule proposal to strengthen the qualitative listing
requirements in order to ensure adequate investor protection. They also
suggested that more precise language be incorporated to assure that the
listings requirements would not be waived.
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\7\See Exchange Act Release No. 32514 (June 25, 1993), 58 FR
35496 (July 1, 1993).
\8\See letter from Brian A. Thompson, Acting Commissioner of
Corporations, State of California, to Jonathan G. Katz, Secretary,
SEC, dated July 21, 1993.
\9\See letter from Neal E. Sullivan, Chairman, NASAA's Small
Business Capital Formation Committee, to Jonathan G. Katz,
Secretary, SEC, dated July 30, 1993. The Commission also received 15
supportive comment letters from small companies and individuals.
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In the months that followed (September 1993 through May 1994) the
Exchange consulted extensively with the California Department of
Corporations and NASAA\10\ to resolve the above-mentioned comments as
well as other questions that were subsequently raised during this time
interval. After careful review and consideration of all the information
received from the aforementioned parties, the Exchange incorporated new
language into the rules that the Exchange Staff believes satisfactorily
addresses these comments. A number of minor changes have been made
throughout the filing for stylistic and clarification purposes.
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\10\In February 1994, the Exchange was advised by Barry Guthary,
Chairman of NASAA's Small Business Capital Formation Committee, that
our initiative to list SCOR securities would be more appropriately
reviewed by the NASAA Small Business Sales Practices Committee
chaired by Deborah Bortner, Assistant Securities Administrator,
State of Washington Securities Division. Consequently, since March
1994, the Exchange has received constructive and valuable input from
this committee. In a letter dated April 14, 1994, the Exchange
received a formal response from Ms. Bortner's committee regarding
the Exchange's amended rule proposal.
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The most substantive comments received by the Exchange that
precipitated this amendment are categorically discussed below.
Representations of Approval for Listing
In the original proposal, NASAA was troubled by the lack of a
definitive enforcement standard precluding companies (or underwriters)
from falsely claiming in a prospectus that the securities being offered
were approved for listing on the Exchange. The Exchange appreciated
NASAA's concerns that a company or broker-dealer may employ such a
scheme to defraud any prospective investor by misrepresenting that SCOR
securities have been approved for listing. To address this concern, the
Exchange has added more precise language that clearly prohibits this
practice.\11\
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\11\See proposed Rule 3.2(t), Commentary .06.
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Qualitative Listing Requirements
As mentioned above, the California Department of Corporations and
NASAA suggested that the Exchange incorporate additional qualitative
factors that would be evaluated in determining a company's listing
eligibility. Therefore, the Exchange expanded and provided further
specificity to the guidelines to be considered in the review of any
listing application. The standards set forth in proposed Rules 3.2(a)
and 3.2(t)(6) are intended to provide guidelines that will be strictly
enforced. The fact that an applicant may meet the numerical
requirements does not mean that its application will be necessarily
approved.
Compliance with Listing Requirements for Minimum Price and Market
Capitalization
In a letter dated March 21, 1994, the California Department of
Corporations questioned how and when the initial listing requirement
for market capitalization would be calculated. In order to eliminate
any potential confusion in determining whether the issuer satisfies the
initial price per share and market capitalization requirements, the
Exchange decided to provide further specificity to the pricing
guidelines.\12\ The Exchange felt that any direct reference to the term
``market value'' as proposed in the original rule filing would be
inappropriate because there is no practical means to establish how and
when market value is calculated.
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\12\See proposed Rule 3.2(t)(3) and subsections (iv) and (v) of
proposed Rule 3.2(t)(6).
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Trading Environment
The Exchange received comment letters from the California
Department of Corporations and NASAA, dated March 21 and April 13,
1994, respectively, which expressed similar concerns regarding the role
and obligations of the specialist in trading SCOR securities. On May 2,
1994, the Exchange provided the California Department of Corporations
with a formal response to their inquiry and cited specific provisions
of Exchange regulations governing a specialist's trading obligations,
capital requirements, and performance standards. In this letter, the
Exchange made a strong commitment toward ensuring that their SCOR
listing policies and trading procedures would be effectively applied
and well administered.
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 it 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 to determine whether the proposed rule
change should be disapproved.
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, NW., Washington, DC 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, NW.,
Washington, DC 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-92-42 and should be
submitted by August 3, 1994.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-16954 Filed 7-12-94; 8:45 am]
BILLING CODE 8010-01-M
