[Federal Register Volume 64, Number 44 (Monday, March 8, 1999)]
[Proposed Rules]
[Pages 11118-11124]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-5298]



  Federal Register / Vol. 64, No. 44 / Monday, March 8, 1999 / Proposed 
Rules  

[[Page 11118]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 239

[Release No. 33-7647; File No. S7-2-98]
RIN 3235-AG94


Registration of Securities on 
Form S-8

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule; Extension of comment period and further request 
for comment.

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SUMMARY: In connection with the proposals issued on February 17, 1998, 
Release No. 33-7506 [63 FR 9648] (the ``Proposing Release''), the 
Securities and Exchange Commission (``we'' or ``Commission'') is 
issuing a new proposal to amend Form S-8. The new proposal is targeted 
to prevent the abuse of Form S-8 to register offerings to consultants 
and advisors who act as statutory underwriters, or to register 
securities issued as compensation to consultants or advisors who 
promote the registrant's securities. In addition, we are extending the 
comment period until May 7, 1999 for the proposals and requests for 
comment in the Proposing Release that we continue to consider.

DATES: We must receive your comments on or before May 7, 1999.

ADDRESSES: Please submit three copies of your comments to Jonathan G. 
Katz, Secretary, U.S. Securities and Exchange Commission, Mail Stop 6-
9, 450 Fifth Street, NW, Washington, DC 20549. You also may submit 
comments electronically at the following e-mail address: rule-
[email protected]. All comment letters should refer to File Number S7-2-
98; include this file number on the subject line if you use e-mail. You 
may inspect and copy comment letters in the public reference room at 
the same address. We will post electronically submitted comment letters 
on the Commission's Internet Web site (http://www.sec.gov).

FOR FURTHER INFORMATION CONTACT: Anne M. Krauskopf, Special Counsel, 
Office of Chief Counsel, Division of Corporation Finance, at (202) 942-
2900.

SUPPLEMENTARY INFORMATION: Today we propose further amendments to Form 
S-8 \1\ under the Securities Act of 1933 (``Securities Act'').\2\
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    \1\ 17 CFR 239.16b.
    \2\ 15 U.S.C. 77a et seq.
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I. Executive Summary and Background

    In 1998, as part of our comprehensive agenda to deter registration 
and trading abuses, including microcap fraud,\3\ we proposed various 
amendments to Form S-8.\4\ In particular, Form S-8 has been misused to 
issue securities to nominal ``consultants and advisors'' who act as 
statutory underwriters \5\ to sell the securities to the general 
public, and to register securities issued to stock promoters.\6\
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    \3\ See Securities Act Release No. 7505 (Feb. 17, 1998) [63 FR 
9632], adopting amendments to Regulation S [17 CFR 230.901 et seq.]; 
Release No. 39670 (Feb. 17, 1998) [63 FR 9661] under the Securities 
Exchange Act of 1934 (``Exchange Act'') [15 U.S.C. 78a et seq.], 
proposing amendments to Exchange Act Rule 15c2-11 [17 CFR 240.15c2-
11]; Securities Act Release No. 7541 (May 21, 1998) [63 FR 29168], 
proposing amendments to Securities Act Rule 504 [17 CFR 230.504]; 
Securities Act Release No. 7644 (Feb. 25, 1999), adopting amendments 
to Securities Act Rule 504; and Exchange Act Release No. 41110 (Feb. 
25, 1999), reproposing amendments to Rule 15c2-11.
    \4\ See Securities Act Release 7506 (Feb. 17, 1998) [63 FR 9648] 
(the ``Proposing Release'').
    \5\ An ``underwriter'' is defined in Section 2(a)(11) of the 
Securities Act [15 U.S.C. 77b(a)(11)] to include ``any person who 
has purchased from an issuer with a view to, or offers or sells for 
an issuer in connection with, the distribution of any security, or 
participates or has a direct or indirect participation in any such 
undertaking, or participates or has a participation in the direct or 
indirect underwriting of any such 
undertaking * * * .''
    \6\ For a detailed discussion of Form S-8 abuses, see Securities 
Act Release No. 7646 (Feb. 25, 1999) (the ``Adopting Release''), at 
Sections I.A and II.
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    Today, in a companion release we adopt some of the 1998 proposals 
that were designed to deter further misuse of the form.\7\ We also 
propose a different amendment (the ``new proposal'') that would amend 
the instructions to Form S-8 to impose new qualification requirements 
for companies using the form. The new proposal would require, before 
filing a registration statement on Form S-8, that:
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    \7\ See Adopting Release at Sections II.A and II.B. We also 
adopt amendments that allow Form S-8 to be used for the exercise of 
employee benefit plan stock options by the employee's family members 
who receive the options from the employee by gift or through a 
domestic relations order, and clarify executive compensation 
disclosure requirements that apply to transferred options. See 
Adopting Release at Section III.
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     Any company be timely in its Exchange Act reports \8\ 
during the 12 calendar months and any portion of a month before the 
Form S-8 is filed; and
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    \8\ These reports are required by Sections 13(a) and 15(d) of 
the Exchange Act [15 U.S.C. 78m(a) and 15 U.S.C. 78o(d)].
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     A company formed by merger of a nonpublic company into an 
Exchange Act reporting company with only nominal assets at the time of 
the merger wait until it has filed an annual report on Form 10-K \9\ or 
Form 10-KSB \10\ containing audited financial statements reflecting the 
merger.
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    \9\ 17 CFR 249.310.
    \10\ 17 CFR 249.310b.
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    In issuing the new proposal, our specific goal is to make Form S-8 
less susceptible to abuse, without imposing undue burdens on companies 
more likely to be operating legitimate employee benefit plans. We 
believe that the new proposal may be better targeted toward deterring 
potentially abusive situations.
    We also solicit comment on whether other potential amendments, such 
as Exchange Act disclosure of aggregate Form S-8 sales to both 
consultants and employees, may prevent further abuse of Form S-8 (the 
``new comment solicitations'').\11\
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    \11\ See Section III, below.
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    Finally, we extend the comment period on one of the proposals and 
some of the requests for comment that we issued in the 1998 proposal 
(together, the ``remaining proposals'').\12\ We may adopt any 
combination of the new proposal, the remaining proposals and the new 
comment solicitations.
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    \12\ See Section IV, below.
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II. Registrant Eligibility Proposal

    Our investigation of the misuse of Form S-8 shows that the 
companies involved frequently share one or more of the following 
characteristics:
     Failure to file Exchange Act reports, or failure to file 
them on a timely basis;
     ``Going public'' by means of a merger into a public 
``shell'' corporation with only nominal assets; and
     Stopping Exchange Act reporting not long after using Form 
S-8 to make an unregistered distribution to the general public, whether 
or not the company is eligible to suspend or terminate its Exchange Act 
reporting.
    We believe that tightening the eligibility standards of Form S-8 
may be needed in order to deter abuse. In cases involving companies 
formed by merger of a non-reporting company into a public ``shell,'' a 
Form S-8 instruction requiring post-merger public information would 
have prevented misuse.\13\ In other cases, a Form S-8 instruction 
requiring the issuer to have filed Exchange Act reports on a timely 
basis would have prevented misuse.\14\
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    \13\ See, e.g., In the Matter of Sky Scientific, Inc. (``Sky 
Scientific''), Securities Act Release No. 7372, Exchange Act Release 
No. 38049, Accounting and Auditing Enforcement Release No. 863 (Dec. 
16, 1996); and SEC v. Hollywood Trenz, Inc., Litigation Release No. 
15730, Accounting and Auditing Enforcement Release No. 1032 (May 4, 
1998).
    \14\ See, e.g., SEC v. Charles O Huttoe, et al., Litigation 
Release No. 15153 (Nov. 7, 1996); and SEC v. Softpoint, Litigation 
Release No. 14480, Accounting and Auditing Release No. 666 (Apr. 27, 
1995).
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    Form S-8 currently permits use of the form by any company that:
     Immediately before the time of filing is subject to the 
requirement to

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file reports under Section 13\15\ or 15(d) of the Exchange Act; and
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    \15\ 15 U.S.C. 78m.
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     Has filed all reports and other materials so required 
during the preceding 12 months (or such shorter period as the 
registrant was required to file under the Exchange Act).
    Under the new proposal, more stringent eligibility standards would 
apply to all companies. Any company filing a Form S-8 would be required 
to have filed its most recent Exchange Act reports on a timely basis 
(the ``proposed timeliness standard''), and companies formed by a 
merger of a non-reporting company into a public ``shell'' no longer 
would be able to file a Form S-8 immediately.
    Under the proposed timeliness standard, in order to file a Form S-
8, any company would need to:
     Be subject to the Exchange Act reporting requirements;
     Have filed all Exchange Act Section 13(a) or 15(d) reports 
and all other materials required to be filed during the immediately 
preceding 12 months (or such shorter time as the company was subject to 
the Exchange Act reporting requirements); and
     Have timely filed all Exchange Act Section 13(a) or 15(d) 
reports required to be filed during the 12 calendar months and any 
portion of a month immediately preceding the Form S-8 filing (or such 
shorter time as the company was subject to those requirements).
    The first two requirements would be the same as the existing Form 
S-8 eligibility standard.\16\ The third requirement would apply the 
timeliness standards of Securities Act Forms S-2 \17\ and S-3 \18\ to 
Form S-8. As with Forms S-2 and S-3, a company that uses Rule 12b-25 
\19\ to extend the due date for all or part of an Exchange Act report 
would be considered timely if the company actually filed the material 
within the time prescribed by that rule. Because Form S-8, like Forms 
S-2 and S-3, provides disclosure through incorporation by reference of 
Exchange Act reports, requiring those reports to be filed on a timely 
basis as a form eligibility condition would be appropriate.
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    \16\ The proposed language would clarify that the existing 
standard's reference to ``other materials required to be filed'' 
means the materials required by Exchange Act Sections 14(a) or 14(c) 
[15 U.S.C. 78n(a) and 78n(c)].
    \17\ See General Instruction I.C(2) to Form S-2 [17 CFR 239.12].
    \18\ See General Instruction I.A.3(b) to Form S-3 [17 CFR 
239.13].
    \19\ 17 CFR 240.12b-25.
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    The proposed timeliness standard would apply to certain post-
effective amendments as well as new filings. When a registration 
statement is post-effectively amended to satisfy the updating standards 
of Securities Act Section 10(a)(3),\20\ the form and contents of the 
amendment must conform to the applicable rules and forms in effect on 
the date it is filed.\21\ With Form S-8, like Form S-3, incorporation 
by reference of the company's subsequently filed annual report on Form 
10-K or Form 10-KSB is deemed to amend the registration statement for 
Section 10(a)(3) updating purposes. Accordingly, for an effective Form 
S-8, the proposed timeliness standard also would be triggered when an 
Exchange Act annual report is due, for purposes of determining whether 
the company may continue to use that Form S-8 to make compensatory 
offers and sales of securities. If the company does not timely file its 
Form 10-K or Form 10-KSB under the standards of the new proposal, that 
Form S-8 no longer would be available for purposes of making subsequent 
offers and sales of securities.
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    \20\ 15 U.S.C. 77j(a)(3). This section states that if a 
registration statement is used more than nine months following its 
effective date, the information it contains may be no more than 16 
months old.
    \21\ Securities Act Rule 401(b) [17 CFR 230.401(b)].
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    A stricter standard would apply to a company formed by a merger 
between an entity that was not subject to the Exchange Act reporting 
requirements at the time of the merger and an entity subject to the 
Exchange Act reporting requirements that had only nominal assets at the 
time of the merger. This type of company would not be allowed to file 
any registration statement on Form S-8 until it had filed an annual 
report on Form 10-K or Form 10-KSB containing audited financial 
statements reflecting the merger, even if its other Exchange Act 
reports were timely filed.
    Because a company that ``goes public'' through a ``shell'' merger 
does not file a Form 10 or Form 10-SB,\22\ the merged entity does not 
file audited financial statements until it files an Exchange Act annual 
report. The period before the first Exchange Act annual report is filed 
appears to be the most likely period for using Form S-8 to make an 
improper public offering, because the discipline of an audit has not 
yet been applied to the financial statements of the merged entity.\23\ 
Prohibiting ``shell'' companies from using Form S-8 until such an 
annual report is filed will make Form 
S-8 unavailable during this critical period. Once the Form 10-K or 10-
KSB is filed within 12 months after the formation/merger, the company 
would be subject to the proposed timeliness standard.
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    \22\ 17 CFR 249.210 and 249.210b. These are the long form 
Exchange Act registration statements, which contain extensive 
business and financial information.
    \23\ In this regard, note that Item 3(a) of Form S-8 requires a 
registrant to incorporate by reference into its Form S-8 the 
registrant's latest annual report filed under Section 13(a) or 15(d) 
of the Exchange Act, or either: (1) the latest prospectus filed 
under Rule 424(b) [17 CFR 230.424(b)]; or (2) the registrant's 
effective registration statement on Form 10, 10-SB, 20-F or 40-F [17 
CFR 249.210, 249.220f and 249.240f]. One of these documents (or the 
company's annual report under Exchange Act Rule 14a-3(b) [17 CFR 
240.14a-3(b)]) also must be delivered to plan participants to 
satisfy Form S-8 prospectus delivery materials requirements under 
Rule 428(b)(2) [17 CFR 230.428(b)(2)]. These standards are designed 
to require incorporation by reference and delivery of a document 
containing audited financial statements for the registrant's latest 
fiscal year. The new proposal would assure that a company that 
``goes public'' through a ``shell'' merger satisfies these 
requirements with respect to the merged entity, rather than the 
premerger ``shell.''
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    Commenters are requested to address whether the new proposal would 
be an effective deterrent to Form S-8 abuse. In particular, would the 
proposed timeliness standard deter misuse by the companies most likely 
to abuse Form 
S-8 without imposing undue burdens on companies that sponsor legitimate 
employee benefit plans? Many companies that file Forms S-8 also file 
(or are establishing eligibility to file) registration statements on 
Forms S-2 and S-3.\24\ We do not believe that it will be difficult for 
these companies to satisfy the same timeliness standards for purposes 
of Form S-8. We also believe that imposing these timeliness standards 
on other companies will make the form less susceptible to abuse. 
However, we request your comment on whether the proposed timeliness 
standard would be equally effective and less burdensome if it required 
timely filing only of the company's annual report on Form 10-K or Form 
10-KSB, rather than all Exchange Act reports.
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    \24\ Although General Instruction I.B.1 requires the aggregate 
market value of a company's voting and non-voting common equity held 
by non-affiliates to be at least $75 million for Form S-3 to be 
available for a primary offering, this condition need not be met in 
order to use Form S-3 for any other transaction for which it is 
available, such as secondary offerings.
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    We also are considering whether the proposed timeliness standard 
should apply only to some subset of public companies. Can this 
requirement be tailored so that it does not apply to the companies 
least likely to abuse Form 
S-8? For example, should the standard apply only to companies that do 
not have securities listed on a national securities exchange or 
admitted to trading on the NASDAQ National

[[Page 11120]]

Market System? \25\ Alternatively, should the standard apply only to 
companies that do not have securities listed on the New York Stock 
Exchange or the American Stock Exchange, or admitted to trading on the 
NASDAQ National Market System? In either case, are there any particular 
listing requirements that would form an appropriate basis for 
distinguishing among different markets for this purpose?
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    \25\ In this case, we anticipate that the proposed timeliness 
standard would apply to companies with securities traded in or 
quoted on markets such as the Pink Sheets, the OTC Bulletin Board, 
and the Nasdaq Small Cap market, as well as companies whose 
securities trade other than in an organized market, such as 
securities that are traded exclusively on the internet.
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    If we impose the proposed timeliness standard on a limited basis, 
should its application be based on the company's size rather than the 
market on which the company's securities are traded? If so, should a 
size test be based on assets or revenues? For example, would it be 
appropriate to apply the proposed timeliness standard only to companies 
with annual revenues below $10 million? Should a revenue test be lower, 
such as $5 million, or higher, such as $20 or $25 million? If instead 
the test is based on assets, should the standard apply only to 
companies with assets below $50 million? Would a lower limit, such as 
$25 million, or a higher limit, such as $100 million, be more 
appropriate? Should an asset test be based on total assets, or only net 
tangible assets, whose value is more readily determinable and 
realizable?
    Should a size test be based instead on the aggregate market value 
of the voting and non-voting common equity held by non-affiliates (the 
``public float''), as reported in the company's most recently filed 
Form 10-K or Form 10-KSB? If so, should the proposed timeliness 
standard apply only to companies with a public float less than $75 
million?
    Would the new proposal be more effective if it required newly 
reporting companies, as well as companies formed by ``shell'' mergers, 
to postpone filing a Form S-8 for a specified period of time after 
becoming subject to the Exchange Act in order to establish a reporting 
history? For example, should we reinstate a 90-day waiting period 
before a newly reporting company is allowed to file a Form S-8? \26\ 
Would a different waiting period be appropriate, either shorter (30 or 
60 days or some other number) or longer (120 or 180 days or some other 
number)?
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    \26\ Previously, the Form S-8 instructions required the 
registrant to have been subject to the Exchange Act reporting 
requirements for 90 days before filing a Form S-8. This requirement 
was eliminated in the 1990 revisions to Form S-8. See Securities Act 
Release No. 6867 (Jun. 6, 1990) [55 FR 23909]. In proposing this 
change, the Commission noted that ``[r]etention of the requirement 
that Form S-8 registrants be subject to Exchange Act reporting 
obligations would provide for current public information. 
Information in an effective Securities Act or Exchange Act 
registration statement would be available to the marketplace and the 
registrant would be subject to the continuous reporting system under 
the Exchange Act. As a result, the business and financial 
information regarding the registrant would be available to 
employees.'' Securities Act Release No. 6836 (Jun. 12, 1989) [54 FR 
25936].
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    With respect to companies formed by ``shell'' mergers, should the 
new proposal instead prohibit them from using Form S-8 for a longer 
period of time, such as 18 months, two years, or three years? Does the 
``nominal assets'' standard provide sufficient guidance? If not, should 
an objective benchmark be provided? What level of assets would be 
appropriate for this purpose? For example, should assets of $200,000 or 
less be considered ``nominal''? Should the ``nominal'' character of the 
public shell's assets be measured on an absolute basis (such as 
$100,000, $200,000, $500,000 or some other number), or by reference to 
the assets of the private company that is acquired (such as five, ten, 
or 25 percent of the combined assets, or some other percentage)?
    Should all assets be considered for purposes of this test, or only 
net tangible assets? In addition--or as an alternative--should the test 
address whether the public shell has had continuous operations for a 
specified period of time? For example, Exchange Act Rule 3a51-1 \27\ 
excludes from the definition of ``penny stock'' a security of an issuer 
having net tangible assets in excess of $2 million, if the issuer has 
been in continuous operation for at least 3 years, or $5 million, if 
the issuer has been in continuous operation for less than three years.
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    \27\ 17 CFR 240.3a51-1.
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    Should the eligibility test for companies formed through ``shell'' 
mergers be measured by reference to the ``shell's'' assets at all, or 
only with respect to whether the ``shell'' has a business plan other 
than to merge with the private company? For example, Securities Act 
Rule 419 \28\ defines a ``blank check company,'' in part, as a 
development stage company that either has no specific business plan or 
purpose, or has indicated that its business plan is to merge with an 
unidentified company or companies.\29\ Should the same test apply for 
Form 
S-8 eligibility purposes, whether or not a merger candidate is 
identified? If we use this test, should we eliminate the ``development 
stage'' provision?
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    \28\ 17 CFR 230.419.
    \29\ Securities Act Rule 251(a)(3) [17 CFR 230.251(a)(3)] makes 
the Regulation A [17 CFR 230.251 et seq.] exemption from Securities 
Act registration unavailable to these companies. Similarly, Rule 
504(a)(3) [17 CFR 230.504(a)(3)] makes the Rule 504 [17 CFR 230.504] 
exemption of Regulation D [17 CFR 230.501 et seq.] unavailable to 
these companies.
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    The standards of the new proposal would apply to a company whether 
or not the company is a ``small business issuer.'' \30\ However, we 
request comment on whether the new proposal would have a 
disproportionate adverse effect on small business issuers. Would the 
new proposal discourage these issuers from going public, so that they 
could continue to issue securities to employees under Securities Act 
Rule 701? \31\
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    \30\ This term currently is defined as a company that: (i) has 
revenues of less than $25,000,000; (ii) is a U.S. or Canadian 
issuer; (iii) is not an investment company; (iv) if a majority owned 
subsidiary, the parent corporation is also a small business issuer; 
and (v) the public float (aggregate market value of outstanding 
voting and non-voting common stock held by non-affiliates) does not 
exceed $25,000,000. See Item 10 of Regulation 
S-B [17 CFR 228.10] and Securities Act Rule 405 [17 CFR 230.405]. In 
the Securities Act Reform Release (Securities Act Release No. 7606A 
(Nov. 13, 1998) [63 FR 67171]), we proposed to amend the definition 
of ``small business issuer'' to raise the revenue threshold to 
$50,000,000, and to eliminate the public float test. See Securities 
Act Reform Release at Section V.E.2.
    \31\ 17 CFR 230.701. The Commission adopted amendments to Rule 
701 in Securities Act Release No. 7645 (Feb. 25, 1999).
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    Finally, would the new proposal be more effective and less 
burdensome than any of the remaining proposals? \32\ In particular, 
would the new proposal be more effective and impose fewer burdens on 
legitimate employee benefit plans than the proposed Form S-8 Part II 
disclosure of the number of securities issued to consultants, their 
names and the services they provide (or disclosure of the same 
information in the company's Exchange Act reports)? Is the new proposal 
better targeted at the specific problem than a limitation on the 
percentage of a class of securities outstanding that may be sold to 
consultants and advisors during the company's fiscal year?
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    \32\ The remaining proposals are described in Section IV, below.
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III. Other Potential Amendments

    Although we do not propose any other specific amendment today, we 
ask commenters to address whether any approaches other than the new 
proposal and the remaining proposals would help to deter Form S-8 
abuse. For example, should we consider other forms of certification? As 
described below, one of the remaining proposals is to expand the 
existing Form S-8 certification to

[[Page 11121]]

require the company to certify that any consultant or advisor who 
receives securities registered on the form is not hired for capital-
raising or promotional activities.
    Instead, each time a company issues securities to consultants, 
should it be required to post-effectively amend its Form S-8 to certify 
that the consultants receiving the securities will not engage in these 
activities? Alternatively, should we require consultants and advisors 
who receive securities registered on Form S-8 to provide the company 
with certifications that they have not and will not engage in capital-
raising, promotional or market maintenance activities? If this 
requirement is imposed, companies would be required to retain the 
certification for a period of time and provide it to the Commission or 
the staff upon request.\33\ Would a three- or five-year retention 
period \34\ be appropriate for this purpose? If not, for what period of 
time should this information be retained?
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    \33\ Securities Act Rule 418 [17 CFR 230.418] requires companies 
to furnish information supplementally to the Commission or the staff 
upon request.
    \34\ Securities Act Rule 428(a)(2) [17 CFR 230.428(a)(2)] 
requires a company to keep documents that are used as part of the 
Form S-8 Section 10(a) prospectus (other than documents incorporated 
by reference) for five years after they are last used as part of 
that prospectus.
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    Instead of certification, another possibility would be to require 
companies to make a statement in Part II of the Form S-8 registration 
statement that the securities will be issued for compensatory, not 
capital-raising, purposes. Would this approach be an effective 
deterrent to abuse?
    In some cases, companies have improperly filed a series of Forms S-
8 to make unregistered offerings of securities to the public, 
distributing a significant percentage--if not most--of the company's 
securities in this manner.\35\ One of the remaining proposals would 
require companies to disclose, in their Exchange Act reports, Form S-8 
sales of securities to consultants and advisors.
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    \35\ See, e.g., Sky Scientific, cited at n. 13 above, in which 
the company conducted an unregistered distribution to the public by 
misusing 106 registration statements and post-effective amendments 
on Form S-8, distributing approximately 30 million shares of common 
stock.
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    Instead, should we require companies to provide disclosure in their 
quarterly and annual Exchange Act reports when aggregate issuances on 
Form S-8 (to both consultants and traditional employees) during the 
preceding 12 month period have exceeded a specified percentage of the 
number of securities of the same class outstanding? In particular, 
would Exchange Act disclosure of aggregate issuances to traditional 
employees, as well as consultants, be necessary to identify companies 
misusing Form S-8 to make public offerings?
    If so, would ten, 15, 20 percent, or some other percentage, of 
outstanding securities of the same class be an appropriate threshold 
for requiring this disclosure? In particular, would the 15 percent of 
outstanding securities of the class or 15 percent of the issuer's total 
assets test used in Rule 701 be an appropriate threshold? Should this 
disclosure identify both the aggregate number of securities and options 
issued, and the aggregate number of employees and consultants who 
received them? Should issuances to employees be segregated from 
issuances to consultants for this purpose? If we require Exchange Act 
disclosure only of aggregate issuances to consultants, would one 
percent of the outstanding securities of the class during the preceding 
12 month period be an appropriate disclosure threshold?
    If an aggregate disclosure requirement is adopted, should companies 
be required to identify individual issuances if they exceed a 
particular threshold, such as one percent of the outstanding securities 
of the class? Should information identifying the recipients of the 
securities be required? Finally, do the companies that abuse Form S-8 
continue to file Exchange Act reports long enough for this kind of 
disclosure to be meaningful?

IV. Continuing Request for Comment

    During the comment period, we are extending our request for comment 
on the remaining proposals.\36\ These are:
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    \36\ We have not republished in this release the text of the 
rules previously published in the Proposing Release. Please refer to 
Sections II.C and II.D of the Proposing Release for a full 
discussion of the remaining proposals. See Section II.C of the 
Adopting Release for a brief discussion of the comments we have 
received to date on the remaining proposals. A Comment Summary with 
respect to the Proposing Release also is available for inspection 
and copying in the Commission's Public Reference Room under file 
number S7-2-98. Comments that were submitted electronically are 
available on the Commission's website (http://www.sec.gov).
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    Proposal: Disclosure in Part II of Form S-8 of the names of any 
consultants or advisors who will receive securities under the 
registration statement, the number of securities to be issued to each 
of them, and the specific services that each will provide the company.
    Requests for comment:
     Whether companies should be required to disclose Form S-8 
sales of securities to consultants or advisors in their Exchange Act 
reports--either in Form 10-K and Form 10-Q,\37\ or on Form 8-K; \38\
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    \37\ 17 CFR 249.308a.
    \38\ 17 CFR 249.308.
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     Whether the aggregate percentage of securities that may be 
sold to consultants and advisors on Form S-8 during the company's 
fiscal year should be limited to a specified percentage of the number 
of securities of the same class outstanding;
     Whether the existing requirement that the company certify 
``that it has reasonable grounds to believe that it meets all of the 
requirements for filing on Form S-8'' should be expanded also to 
require the company to certify that any consultant or advisor who 
receives securities registered on the form does not, and will not, 
engage in capital-raising or promotional activities; and
     Whether the Form S-8 cover page should include a box that 
the company would be required to check if any securities registered on 
the form are offered and sold to consultants and advisors.
    In particular, we are considering carefully whether, to what extent 
and in what form, there should be additional disclosure requirements 
about consultants and advisors. We solicit your comment on this issue.
    With respect to limiting the aggregate percentage of securities 
that may be sold to consultants and advisors on Form S-8 during the 
company's fiscal year, we previously solicited comment whether annual 
percentage limitations of five, ten or 15 percent of the number of 
securities of the same class outstanding, computed based on the 
company's most recent balance sheet, would be appropriate.\39\ Would a 
higher percentage, such as 30 percent, be appropriate for this purpose? 
Would the 15 percent of the issuer's total assets test used in Rule 701 
be an appropriate cap? Instead, should a higher percentage, such as 30, 
40 or 50 percent, be applied to limit annual aggregate Form S-8 sales 
to employees, as well as to consultants and advisors?
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    \39\ See Section II.D of the Proposing Release.
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    We may adopt any combination of the new proposal, the remaining 
proposals and the new comment solicitations.

V. General Request for Comment

    We request your written comment on all aspects of the new proposal, 
the new comment solicitations and the remaining proposals. You should 
address whether the new proposal, as drafted, is easy to understand and 
implement. In particular, would the new proposal and the new comment 
solicitations be less burdensome and

[[Page 11122]]

more effective in deterring Form S-8 abuse than the remaining 
proposals?

VI. Cost-Benefit Analysis

    The new proposal is intended to eliminate misuse of Form S-8 and 
thus enhance investor protection. The costs and benefits of the new 
proposal are discussed below.\40\ We request your written comment on 
this analysis as an aid to further evaluate the costs and benefits of 
the new proposal. Please provide empirical data and other factual 
support for your views to the extent possible.
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    \40\ For a discussion of the costs and benefits of the remaining 
proposals, see Section V of the Proposing Release. We invite 
additional comments on that cost-benefits analysis also.
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    The new proposal is designed to deter the use of Form S-8 to 
register transactions in which consultants or employees act as conduits 
to distribute securities to the public, or transactions in which 
consultants are compensated for other capital-raising or promotional 
services. We believe that this will benefit investors by permitting 
registration and sale of securities only when current information is 
available, which should inhibit fraudulent promotional schemes and will 
enhance investor confidence in the integrity of the securities markets. 
Other forms remain available to register securities for capital-raising 
purposes. The additional costs of using these other forms are justified 
in order to provide adequate information to non-employee investors.
    Our records indicate that approximately 5600 Forms S-8 were filed 
during the fiscal year ending September 30, 1998.\41\ We do not have 
data to determine how many of these filings would have been precluded 
if the amendments had been in effect. Therefore, we cannot quantify the 
impact. However, we believe that the rule change will impact primarily 
transactions that were not intended to use the form.
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    \41\ During the same period, 745 post-effective amendments were 
filed on Form S-8.
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    The new proposal will require:
     Any company using Form S-8 to be timely in its Exchange 
Act reports during the 12 calendar months and any portion of a month 
before the Form S-8 is filed; and
     A company formed by merger of a nonpublic company into an 
Exchange Act reporting company with only nominal assets at the time of 
the merger to wait until it has filed an annual report on Form 10-K or 
Form 10-KSB containing audited financial statements reflecting the 
merger before filing a registration statement on Form S-8.
    Some companies may face increased costs as a result of the rule 
change because, for limited periods of time, Form S-8 may not be 
available to them to register compensatory employee benefit plan 
securities offerings. This could reduce the flexibility of these 
companies' compensation arrangements. Commenters should consider 
whether the new proposal would make an affected company more likely to 
use cash for compensation purposes. If so, would this result in cash 
flow concerns or constrain reinvestment in the company's business?
    For all companies, the proposed timeliness standard would condition 
Form S-8 availability on the company's timely satisfaction of its 
Exchange Act reporting requirements. Form S-8 would be available if the 
company does no more than what it otherwise is required to do. 
Accordingly, the proposed timeliness standard will not require a 
company to incur additional costs. The proposed timeliness standard 
will provide investor protection benefits by giving companies an 
additional incentive to file their Exchange Act reports on a timely 
basis.
    For a company formed by a ``shell'' merger, the proposed standard 
will make Form S-8 unavailable until the company has filed a Form 10-K 
or Form 10-KSB that includes audited financial statements for the 
merged entity. This will provide investor protection benefits by 
ensuring that the audited financial statements of the merged entity, 
rather than merely the ``shell,'' are incorporated by reference into 
the Form S-8. However, during the limited period that the proposed 
standard will apply, such a company would be required to use a less 
streamlined registration statement to register securities offered under 
a compensatory employee benefit plan. The most likely registration 
statement forms to be used for this purpose are Forms S-1, SB-2, S-2 
and S-3. The estimated burden hours for purposes of the Paperwork 
Reduction Act for using Form S-8 are 12 hours. The estimated burden 
hours \42\ for the other forms are:

    \42\ The estimated burden hours for Form S-8 and Form SB-2 
assume that only 25% of the total hours spent to prepare the form 
will be spent by company employees. These estimates assume that the 
remaining 75% of the total hours will be spent by hired 
professionals, such as attorneys or accountants. These estimates 
therefore do not include within the burden hours the remaining 75% 
of total hours, but instead account for that time as costs. The 
estimated burden hours for Form S-2 and S-3 do not follow this 
convention, but instead account for all estimated hours as burden 
hours.
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Form SB-2--138
Form S-3--398
Form S-2--470
Form S-1--1290

    Because none of these alternative forms becomes automatically 
effective upon filing, there may be additional costs due to potential 
delay in implementing the employee benefit plan. However, once the 
company files the required Form 10-K or Form 10-KSB, the company would 
be able to post-effectively amend the less streamlined registration 
statement to convert it to a Form S-8,\43\ assuming the proposed 
general timeliness standard also is satisfied, thereby regaining the 
benefits of the abbreviated form.
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    \43\ See Securities Act Rule 401(e) [17 CFR 230.401(e)].
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    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996 (``SBREFA''),\44\ we request data and analysis on whether 
the new proposal would result in a major increase in costs or prices 
for consumers or individual industries, or significant adverse effects 
on competition, employment, investment, productivity, innovation or 
small business. Would the new proposal be likely to have a $100 million 
or greater annual effect on the economy? Commenters are requested to 
provide empirical data to support their views.
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    \44\ Pub. L. No. 104-121, 110 Stat. 857 (1996) (codified in 
various sections of 5 U.S.C., 15 U.S.C., and as a note to 5 U.S.C. 
601).
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VII. Summary of Initial Regulatory Flexibility Analysis

    The Commission has prepared an Initial Regulatory Flexibility 
Analysis (``IRFA'') in accordance with 5 U.S.C. 603 regarding the new 
proposal.
    As noted in the analysis, the new proposal is designed to deter 
abusive practices in which Form S-8 is used to make capital-raising 
distributions of securities to the general public, or to compensate 
consultants and advisors for promotional and other capital-raising 
activities. These uses are contrary to the express purposes of the 
form. We believe that the new proposal will not result in any 
impairment of protection for the investing public, and should result in 
improved protection by assuring that capital-raising offerings are 
registered on the forms prescribed for those offerings.
    As the IRFA describes, the staff is aware of approximately 815 
Exchange Act reporting companies that currently satisfy the definition 
of ``small business'' under Rule 157 of the Securities Act.\45\ 
Overall, 13,577 companies are Exchange Act reporting companies. Based 
on a random sample

[[Page 11123]]

of the Forms S-8 filed during fiscal 1998, the Commission estimates 
that approximately 380 of those Forms S-8 were filed by small business 
issuers, and that consultants or advisors were the sole recipients of 
securities registered on approximately 185 of the Forms S-8.
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    \45\ 17 CFR 230.157.
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    The new proposal will not impose any new reporting, recordkeeping 
or compliance burdens for most small issuers. However, the new proposal 
may require some small businesses to use less streamlined forms to 
register securities offerings that otherwise would have been registered 
on Form S-8. We believe that in many cases, however, these will be 
offerings for which Form S-8 was not in fact previously available. This 
may reduce the flexibility of the compensation arrangements for some 
small businesses that merge with ``shells.'' We do not have the data to 
estimate this effect, but note that the effect would be only for the 
limited time until the combined entity files a Form 10-KSB with audited 
financial statements that reflect the merger.
    We invite your written comments on any aspect of the IRFA. In 
particular, we seek your comment on: (1) the number of small entities 
that would be affected by the proposed rule amendments; and (2) the 
determination that the proposed rule amendments would not significantly 
increase reporting, recordkeeping and other compliance requirements for 
small entities. Commenters should address whether the proposed 
amendments to Form S-8 will affect the number of registration 
statements filed on this form, affect the dollar amount of securities 
sales on this form, or affect the form's availability to small 
entities.
    Any commenter who believes that the new proposal will significantly 
impact a substantial number of small entities should describe the 
nature of the impact and estimate the extent of the impact. For 
purposes of making determinations required by SBREFA, we also request 
data regarding the potential impact of the proposed amendments on the 
economy on an annual basis. All comments will be considered in the 
preparation of the Final Regulatory Flexibility Analysis if the new 
proposal is adopted. Please refer to the Proposing Release for a 
summary of the separate Initial Regulatory Flexibility Analysis with 
respect to the remaining proposals.\46\ A copy of either Initial 
Regulatory Flexibility Analysis may be obtained from Anne M. Krauskopf, 
Office of Chief Counsel, Division of Corporation Finance, Securities 
and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549.
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    \46\ Section VI of the Proposing Release.
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VIII. Paperwork Reduction Act Analysis

    Parts of the new proposal contain ``collection of information'' 
requirements within the meaning of the Paperwork Reduction Act of 1995 
(``PRA'').\47\ Our staff has submitted the new proposal for review by 
the Office of Management and Budget (``OMB'') in accordance with the 
PRA. The title to the affected information collection is: ``Form S-8.'' 
An agency may not conduct or sponsor, and a person is not required to 
respond to, a collection of information unless it displays a currently 
valid control number.
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    \47\ 44 U.S.C. 3501 et seq.
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    The new proposal may require some companies to use less streamlined 
forms to register securities offerings that otherwise would have been 
registered on Form S-8. We estimate that this may reduce the number of 
registration statements filed on Form S-8 by approximately not more 
than five percent, and may increase the number of registration 
statements filed on different forms by a corresponding amount. In many 
cases, however, these will be offerings for which Form S-8 was not in 
fact previously available. We believe that this will provide a 
substantial investor protection benefit that justifies any additional 
costs to filers.
    In accordance with 44 U.S.C. 3506(c)(2)(B), we solicit comment on 
the following:
     Whether the proposed changes in the collection of 
information are necessary to the agency's function, including practical 
utility;
     The accuracy of the estimated burden of the proposed 
changes to the collection of information;
     Whether there are ways to enhance the quality, utility and 
clarity of the information to be collected; and
     Whether the burden of collection of information on those 
who are to respond, including through the use of automated collection 
techniques or other forms of information technology, may be minimized.
    Persons who wish to submit comments on the collection of 
information requirement should direct them to the Office of Management 
and Budget, Attention: Desk Officer for the Securities and Exchange 
Commission, Office of Information and Regulatory Affairs, Washington, 
DC, with reference to File No. S7-2-98. Because the OMB is required to 
make a decision concerning the collection of information between 30 and 
60 days after publication, your comment is best assured of having its 
full effect if OMB receives it within 30 days of publication.
    Please refer to the Proposing Release for a separate Paperwork 
Reduction Act Analysis of the remaining proposals.\48\
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    \48\ Section VII of the Proposing Release.
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IX. Statutory Basis and Text of Proposed Amendments

    The new amendment to Securities Act Form S-8 is proposed under the 
authority set forth in Sections 6, 7, 8, 10 and 19 of the Securities 
Act of 1933.

List of Subjects in 17 CFR Part 239

    Reporting and recordkeeping requirements, Securities.

Text of the Proposed Amendments

    In accordance with the foregoing, Title 17, Chapter II of the Code 
of Federal Regulations is proposed to be amended as follows:

PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933

    1. The authority citation for part 239 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77sss, 78c, 
78l, 78m, 78n, 78o(d), 78u-5, 78w(a), 78ll(d), 79e, 79f, 79g, 79j, 
79l, 79m, 79n, 79q, 79t, 80a-8, 80a-24, 80a-29, 80a-30 and 80a-37, 
unless otherwise noted.
* * * * *
    2. By amending Sec. 239.16b to redesignate paragraph (b) as 
paragraph (c); redesignate paragraphs (a)(1) and (a)(2) as new 
paragraphs (b)(1) and (b)(2); revise paragraph (a); and add new 
paragraph (b) introductory text to read as follows:


Sec. 239.16b  Form S-8, for registration under the Securities Act of 
1933 of securities to be offered to employees pursuant to employee 
benefit plans.

    (a) A registrant may use this form for registration under the 
Securities Act of 1933 (``the Act'') of the securities listed in 
paragraph (b) of this section if the registrant satisfies the 
requirements of paragraph (a)(1) and (a)(2) of this section:
    (1) A registrant may not file a registration statement on this form 
unless, immediately before filing the registration statement, the 
registrant:
    (i) Is subject to the reporting requirements of sections 13(a) or 
15(d) of the Securities Exchange Act of 1934 (the ``Exchange Act'') (15 
U.S.C. 78m(a) or 78o(d));
    (ii) Has filed all reports required by Section 13(a) or 15(d) of 
the Exchange

[[Page 11124]]

Act and all materials required by section 14(a) or 14(c) of the 
Exchange Act (15 U.S.C. 78n(a) or 78n(c)) required to be filed during 
the 12 months immediately before filing a registration statement on 
this form (or for such shorter period that the registrant was required 
to file such reports and materials); and
    (iii) Has filed on a timely basis all reports required by section 
13(a) or 15(d) of the Exchange Act during the 12 calendar months and 
any portion of a month immediately preceding the filing of the 
registration statement (or for such shorter period that the registrant 
was required to file such reports). If during that time the registrant 
has used Sec. 240.12b-25 of this chapter with respect to a report or a 
part of a report, that material must have been filed within the time 
prescribed by that section.
    (2) If the registrant is an entity formed by the merger between:
    (i) An entity subject to the Exchange Act reporting requirements 
that had only nominal assets at the time of the merger; and
    (ii) An entity that was not subject to the Exchange Act reporting 
requirements at the time of the merger, the registrant may not file a 
registration statement on this form until it has filed an annual report 
on Form 10-K or Form 10-KSB (Sec. 249.310 or Sec. 249.310b of this 
chapter) containing audited financial statements for a fiscal year 
ending after consummation of the merger.
    (b) A registrant may use this form for registration under the Act 
of the following securities:
* * * * *
    3. By amending Form S-8 (referenced in Sec. 239.16b) in General 
Instruction A to redesignate paragraphs 1.(a) and 1.(b) as paragraphs 
1.(d) and 1.(e); revise the introductory text of paragraph 1.; and add 
new paragraphs 1.(a) and 1.(b) to read as follows:

    Note: The text of Form S-8 does not, and this amendment will 
not, appear in the Code of Federal Regulations.

Form S-8 Registration Statement Under the Securities Act of 1933

* * * * *

General Instructions

A. Rule as to Use of Form S-8
    1. A registrant may use this form for registration under the 
Securities Act of 1933 of the securities listed in paragraph 1.(d) and 
1.(e) of this section if the registrant satisfies the requirements of 
paragraph 1.(a) and 1.(b) of this section:
    (a) A registrant may not file a registration statement on this form 
unless, immediately before filing the registration statement, the 
registrant:
    (i) Is subject to the reporting requirements of Sections 13(a) or 
15(d) of the Securities Exchange Act of 1934 (the ``Exchange Act'') (15 
U.S.C. 78m(a) or 78o(d));
    (ii) Has filed all reports required by Section 13(a) or 15(d) of 
the Exchange Act and all materials required by Section 14(a) or 14(c) 
of the Exchange Act (15 U.S.C. 78n(a) or 78n(c)) required to be filed 
during the 12 months immediately before filing a registration statement 
on this form (or for such shorter period that the registrant was 
required to file such reports and materials); and
    (iii) Has filed on a timely basis all reports required by Section 
13(a) or 15(d) of the Exchange Act during the 12 calendar months and 
any portion of a month immediately preceding the filing of the 
registration statement (or for such shorter period that the registrant 
was required to file such reports). If during that time the registrant 
has used Rule 12b-25 (Sec. 240.12b-25 of this chapter) under the 
Exchange Act with respect to a report or a part of a report, that 
material must have been filed within the time prescribed by that rule.
    (b) If the registrant is an entity formed by the merger between:
    (i) An entity subject to the Exchange Act reporting requirements 
that had only nominal assets at the time of the merger; and
    (ii) An entity that was not subject to the Exchange Act reporting 
requirements at the time of the merger, the registrant may not file a 
registration statement on this form until it has filed an annual report 
on Form 10-K or Form 10-KSB (Sec. 249.310 or Sec. 249.310b of this 
chapter) containing audited financial statements for a fiscal year 
ending after consummation of the merger.
* * * * *
    Dated: February 25, 1999.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-5298 Filed 3-5-99; 8:45 am]
BILLING CODE 8010-01-P