[Federal Register Volume 59, Number 173 (Thursday, September 8, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-22039]


[[Page Unknown]]

[Federal Register: September 8, 1994]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34615; File No. SR-Amex-94-14]

 

Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by American Stock Exchange, Inc. Relating to the Exchange's 
Rules for the Emerging Company Marketplace

August 30, 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 May 9, 
1994, the American Stock Exchange, Inc. (``Amex'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change, and on August 26, 1994 filed Amendment No. 1 to 
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 Amex is proposing to amend the rules of the Emerging Company 
Marketplace (``ECM'') to clarify certain provisions regarding the 
listing process and the types of securities which are eligible to be 
listed on the ECM, and to memorialize in one central location certain 
established Exchange policies which were previously set forth in other 
documents issued by 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 established the ECM in March 1992 so that companies 
too small for its regular list could realize the benefits of the 
auction market. Since that time, the Exchange has gained significant 
experience with the ECM listing process. In light of that, the Exchange 
has determined that it would be appropriate to expand or clarify 
certain aspects of the original rules, in particular, those provisions 
which concern the listing process and the types of securities which are 
eligible for listing on the ECM.
    Unlike listing on the regular list, where all listing decisions are 
made by the staff, listing on the ECM is a multi-step process which 
also requires the separate concurrence of the ECM Listing Committee 
(the ``Committee''). The Committee applies its subjective expertise in 
evaluating the listing eligibility of ECM prospect companies. While no 
company which is rejected by the ECM Listing Committee may be listed, 
the final decision on listing eligibility is, in each case, made by the 
Exchange staff. This, of course, precludes the listing of any issuer 
which falls short of the ECM listing criteria subsequent to its 
approval by the Committee. The proposed new rules clarify the ECM 
Listing Committee's role in the ECM listing process.
    Specifically, the amended ECM Guidelines provide that, in 
evaluating listing eligibility, the Exchange and the ECM Listing 
Committee will consider the specified numerical criteria, as well as 
such subjective, qualitative factors as may be relevant, including the 
nature of the applicant company's business, its commercial prospects 
and future outlook, the reputation of its management,\1\ its historical 
record and pattern of growth, and its financial integrity. The amended 
Guidelines further note that these subjective criteria are applied on 
an individual basis, that different criteria may have more or less 
significance depending upon the business characteristics of the 
applicant, and that, as a general matter, the relative maturity of a 
company will also influence the factors considered in its 
evaluation.\2\ For example, with a developmental stage company, greater 
weight will likely be given to its future prospects than to its 
historical performance. Although the Guidelines reference certain 
qualitative factors, the Guidelines, both present and as amended, state 
that those particular qualitative factors are not an exclusive list of 
what may be considered in evaluating applicants.
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    \1\The Exchange routinely screens all officers, directors, 
principal shareholders, underwriters, consultants and other 
significant individuals associated with each prospect company 
through a variety of regulatory and commercial databases.
    \2\In fact, no two analysts view a company in exactly the same 
way, and the factors they utilize are not generally susceptible of 
precise definition.
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    The qualitative factors are also applied to each applicant on a 
case-by-case basis. Which factors are of greatest significance will 
likely be a function of the nature of the company's business, the 
company's maturity, and the relative level of commercial acceptance of 
its products or services. Due to the high cost of business or product 
development, for example, young companies are often without positive 
cash flow or earnings, so that the prospects and future outlook of such 
companies must lie at the heart of their qualitative analysis. Whether 
the company is providing a service, developing a new product or 
technology, or exploiting new ones, and the company's plans to raise 
capital and expand through future contracts or otherwise would also 
likely be relevant to the analysis of the applicant. The absence of a 
strong historical record or pattern of growth should not, in and of 
itself, preclude listing on the ECM if the company satisfies the 
quantitative requirements and in the view of the Exchange staff and the 
ECM Listing Committee, has the potential to demonstrate future 
success.\3\ On the other hand, with a more mature company, the Exchange 
would give added consideration to the company's historical record in 
evaluating its suitability for listing.
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    \3\Inevitably some young companies considered for the ECM have 
``going concern'' opinions from their independent auditors. The 
Exchange recognizes that such a qualified opinion is a cautionary 
flag which relates to the issuer's financial integrity. While a 
going concern opinion will not automatically preclude a listing, the 
Exchange staff and the ECM Listing Committee will consider carefully 
why such an opinion was given and how likely the qualifier is to be 
lifted in the near term.
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    In addition to clarifying the ECM Listing Committee's role, the new 
rules also make clear that the Exchange may present companies to the 
Committee prior to the time that they satisfy each of the numerical 
listing criteria, although, as noted above, all companies must meet 
each of the numerical guidelines before trading commences. For example, 
it is not unusual for a company to satisfy virtually all of the 
numerical guidelines but have a shortfall in stockholders' equity which 
it plans to remedy through an imminent private placement. This issuer 
would want to know whether it would be eligible to list upon completion 
of the offering. Indeed, knowledge that it would be approved might be 
useful to the company in determining whether or how to secure 
financing. In these cases, there is no reason to defer presenting the 
company for the ECM Listing Committee's consideration until after the 
completion of the financing transaction. This is no different than what 
happens whenever an initial public offering (``IPO'') is listed on any 
marketplace.
    The new rules also note that while the ECM Listing Committee does 
not ordinarily attach conditions to its approval of a company, if it 
does do so the company may not commence trading on the ECM until such 
conditions are met, or until the company is reconsidered and approved 
by the ECM Listing Committee. The new rules also specify that if, prior 
to trading, a company which was approved by the Committee experiences a 
negative change affecting its business, the Exchange staff shall 
consult with the Chairman of the Committee who shall determine whether 
the change is sufficiently significant so that the company must be 
resubmitted to the full Committee for its review. Finally, if a company 
approved by the ECM Listing Committee has not commenced trading within 
two quarters, the Exchange will resubmit the company to the Committee 
for further review.
    In addition, the ECM rules have been expanded to specifically 
reflect certain matters that were previously covered only in other 
Exchange rules or in the ECM listing agreement, namely that ECM listed 
companies are not eligible to take advantage of the state securities 
(``blue sky'') exemptions which are available to Amex-listed companies, 
and that their listed securities are not automatically marginable.
    Among the other changes are the following:
     a new section has been added to discuss the process of 
transferring to the regular list, and to confirm that Amex companies 
may not transfer ``down'' to the ECM;
     new sections have been added to provide specific 
guidelines for the listing of units, preferred stock and debt 
securities,\4\ and to clarify that the listing of warrants is not 
subject to the price and market value guidelines for common stock; and
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    \4\To date, no debt securities have been listed on the ECM.
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     a technical change is being made to clarify that 
``shareholders'' includes record holders, as well as beneficial 
(``street'' name) holders.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the Act 
in general and furthers the objectives of Section 6(b)(5) in particular 
in that it is designed to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and 
in general, to protect investors and the public interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change will impose no burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received from Members, Participants or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

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, 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. Sec. 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 Amex. All 
submissions should refer to File No. SR-Amex-94-14 and should be 
submitted by September 29, 1994.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-22039 Filed 9-7-94; 8:45 am]
BILLING CODE 8010-01-M