[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