[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