[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