APPENDIX A

 THE IMPACT OF THE CURRENT REGULATORY SYSTEM
 ON INVESTOR PROTECTION AND CAPITAL FORMATION

I. Introduction

 The Committee, in the course of its deliberations,

identified costs associated with the current regulatory process

and disclosure requirements relating to public offerings of

securities, secondary market trading and corporate reporting. 

The Committee then investigated the extent to which the benefits

derived from the existing regulatory structure continue to

justify the identified costs. Although significant progress has

been made by the Commission over time to streamline the capital

formation process, particularly through the adoption of the

integrated disclosure system and shelf registration, domestic

capital formation through public securities offerings continues

to be hampered by costs and uncertainties associated with the

registration process. These costs include both direct and

indirect costs created by the registration process, including

costs resulting from the increasingly complex, and often

ambiguous, legal distinctions that have evolved to protect that

process. 

 The current regulatory system crafted during the era of the

Great Depression does not fully and most efficiently meet the

needs and realities of today's markets, which are increasingly

complicated by modern financing techniques, technological

advancements, globalization, and changes in investor profiles and

demands. These developments bring into question whether all
==========================================START OF PAGE 2======

types of companies should be subject to the current Securities

Act's transactional registration requirements each time they

desire to raise capital in the public markets. After concluding

that the current structure was imposing unnecessary costs, while

not fully taking into account the needs of today's investors, the

Committee determined to recommend a shift in the focus of the

regulatory structure from the current transactional system to a

company registration system that would reduce these costs while

enhancing investor protection.

II. Direct and Indirect Costs and Uncertainties Resulting From
 the Registration Process for Public Offerings

 The current registration scheme imposes indirect and
 direct costs. The indirect costs include uncertainty
 and delay arising from the possibility of Commission
 staff review (including the possibility of losing a
 market window), market overhangs, short-selling and
 related activities, and publicity constraints. Direct
 costs include legal, accounting, underwriting, printing
 and filing fees.

 A. Costs of Registration - The Offering Process

 1. Direct Costs Associated with the Public Offering
Process

 The public offering process can be costly for issuers. For

smaller companies and newer entrants to the capital markets, the

fees paid to the Commission, state regulators, accountants,

lawyers, underwriters, and financial printers amount to a larger

percentage of offering proceeds than for more seasoned issuers. 

However, the absolute amount of these direct costs also can be

significant for more seasoned issuers. Generally, direct costs

are higher for offerings of common stock compared to bonds. From

January 1990 through December 1994, it is estimated that the
==========================================START OF PAGE 3======

direct costs of raising capital in public offerings averaged 2.2%

of proceeds for straight debt, 3.8% for convertible bonds, 7.1%

for repeat offerings of equity by seasoned issuers, and 11.0% for

initial public offerings of equity.-[1]-

 Table 1 below, prepared by the Committee staff, shows the

breakdown of the components of the direct costs of public

offerings, focusing on offerings of common stock from January

1993 to December 1995. Underwriter's compensation (spread) is

the largest component of floatation costs, typically amounting to

5.3% of proceeds in repeat offerings and 7% of proceeds in

initial public offerings. Systematic underpricing, as measured

by the discount from market price, constitutes the second largest

component, typically amounting to 1.2% of proceeds in repeat

offerings and 7.1% in initial public offerings. Summing these

costs and all other direct fees (for lawyers, accountants,

printers, and regulators), the total cost of raising capital

through public offerings of common stock typically amounts to

7.3% of proceeds in repeat public offerings and 16.9% in initial

public offerings. Table 1 also provides data on floatation costs

broken down according to the type of filing used to register the

stock, and shows that typical costs are lowest for issuers using

Form S-3 shelf offerings (5.0%) and highest (almost 20 - 30%)

among the small-business filers that use Form 

---------FOOTNOTES----------
 -[1]- Inmoo Lee, Scott Lockhead, Jay Ritter and Quanshui
 Zhao, The Costs of Raising Capital, Journal of
 Financial Research, Vol. XIX, No. 1, pp. 59-74
 (Spring 1996).
==========================================START OF PAGE 4======

SB-2.-[2]-










































---------FOOTNOTES----------
 -[2]- Form SB-2 is a short-form registration statement
 available to small businesses. One reason, seen
 in Table 1, that the offering costs for SB-2
 filers is a higher proportion of proceeds is that
 the typical SB-2 offer yields just $6 million in
 proceeds, compared to $78 million for shelf
 offerings.
==========================================START OF PAGE 5======

 
Table 1 - see accompanying link

 Floatation costs are higher for small business issuers for

reasons unrelated to regulation, but a differential regulatory
==========================================START OF PAGE 6======

burden is the best explanation for the lower floatation costs

experienced by S-3 issuers as compared to S-1 issuers. For

repeat offerings of common stock by seasoned issuers, S-1 issuers

incur costs totalling approximately 9.2% of proceeds, whereas S-3

(non-shelf) issuers incur costs totalling approximately 6.3% of

proceeds, and S-3 (shelf) issuers incur costs totalling 5.0% of

proceeds. These differences are only partly attributable to the

larger offer size seen in offerings on Form S-3. Table 1b below

reports typical offering costs for various sized offers, and a

pattern of lower costs for offerings utilizing Form S-3 is found

within each size-based subgroup.

Table 1b - see accompanying link

==========================================START OF PAGE 7======



 The single largest determinant of the lower costs seen in

the S-3 shelf filings is the ability to distribute the securities

at the current market price upon takedown, rather than at a

discount to the market price as seen in offerings utilizing Form

S-1 or Form S-3 non-shelf. These cost savings are indicative of

the benefits of "just-in-time" financing techniques that would be

available to company-registered issuers. It is the Committee's

hope and expectation that an increase in an issuer's flexibility

to go to market in a more streamlined manner could result in

further reductions in the direct costs of public offerings. 

Lower direct costs could translate into lower costs of capital in

numerous ways. Allowing for the adoption of just-in-time capital

techniques, whereby companies can access the market exactly when

they want and for the exact amount they want, will help eliminate

the discount from the market price currently experienced in non-

shelf public offerings of common stock. In addition, by

extending the benefits of the streamlined offering process and

creating greater flexibility regarding the delivery of disclosure

documents to investors, underwriting, legal and printing costs

should be reduced further. 
==========================================START OF PAGE 8======

 2. Delay and Uncertainty Caused by Commission Staff

Review

 The time consumed by the registration process represents an

indirect cost for issuers. Under the current system, no sales

of securities are allowed until the Commission has declared a

registration statement to be effective. During this waiting

period, the length of which may be affected by whether the

Commission staff reviews the document, issuers may miss a desired

market window. 

 Under the current Commission staff's selective review

criteria, all registration statements for initial public

offerings (IPOs) are reviewed by the staff. In addition,

pursuant to internal selective review criteria, the staff may

choose to review any other registration statement filed with the

Commission, including shelf registration statements when

initially filed to register securities for the shelf. Prior to

filing a registration statement, even the most seasoned issuer

will not know whether its registration statement will be

reviewed, or the length of the time delay resulting from the

review process if there is a staff review. Issuers trying to

sell securities, other than off a shelf registration statement

previously declared effective, consequently cannot predict in

advance exactly when they will be able to go to market.-[3]- 

---------FOOTNOTES----------
 -[3]- For shelf offerings, the shelf registration
 statement may not be used until declared effective
 by the staff. And, as a practical matter, most
 initial takedowns off a shelf occur shortly after
 (continued...)
==========================================START OF PAGE 9======

Often, they will prepare two different time schedules when

planning a public offering -- one assuming Commission review, and

the other assuming no review -- and the difference between these

two timetables can be substantial.-[4]- 

 If a registration statement is reviewed, the staff does not

comment on the merits of an offering. Rather, the staff

evaluates the adequacy of the issuer's disclosures. Staff review

encompasses the disclosure in the registration statement as well

as in the company's Exchange Act reports and any other documents

on file with the Commission. Under shelf registration, however,

the staff does not review prior to its use the prospectus

supplement containing transactional information that is used in

taking down securities off the shelf for public sale. 

 After receiving staff comments, issuers may respond to the

issues raised in the comment letter by revising disclosures in

the registration statement and other corporate disclosures

(including possibly Exchange Act reports) to address the staff's

concerns, by explaining in a supplemental letter to the staff why


---------FOOTNOTES----------
 -[3]-(...continued)
 the registration statement becomes effective. 
 Thus, the staff review process may still pose a
 real impediment to shelf takedowns. However,
 because the issuer may register up to the amount
 of securities that it expects to issue in the next
 two years, and there generally is no post-
 effective staff review of takedown prospectuses,
 theoretically this delay does not have to occur
 frequently.

 -[4]- Transcript of May 8, 1995 Advisory Committee
 Meeting at 227 (statement of Gerald Backman).
==========================================START OF PAGE 10======

revisions are not necessary, or both. After the issuer resolves

the concerns raised by the staff, the registration statement is

declared effective. In the extreme, where an issuer misses a

market opportunity while responding to the staff's inquiries, the

company will have expended significant funds preparing for an

unsuccessful offering (although, for a shelf issuer where

registration statement has been declared effective, the issuer

can use the effective shelf at a subsequent time). The mere

prospect of such uncertainty and delay may cause an issuer to

forego a registered offering.

 Table 2 below provides a Committee staff analysis of recent

issuer experience with staff review, covering the frequency of

review and the average length of waiting periods. These results

are given for registration statements of underwritten offerings

of common stock that were declared effective during 1994 and

1995. During that period, all initial public offerings received

a full review. In addition, pursuant to selective review, less

than one in six Form S-3 shelf and non-shelf registration

statements were reviewed, and approximately one-third of all

other registration statements for repeat offerings were reviewed.
==========================================START OF PAGE 11======

Table 2 - see accompanying link

 The typical time period between the filing and the

effectiveness of the registration statement was less than three

months for an initial public offering and less than two months

for repeat offerings. Waiting periods may be longer when the

staff's review and comments are extensive and require substantial
==========================================START OF PAGE 12======

revisions to the registration statement before being declared

effective, thereby introducing uncertainty into the capital

formation process. Staff review also reduces the predictability

of waiting periods, i.e., the length of the waiting period will

vary more where the document is reviewed than when not reviewed. 

The degree to which waiting periods vary in length is illustrated

in Figure 5 in the Addendum to this Appendix A, which is a

histogram showing the relative frequency with which waiting

periods of various lengths were observed among underwritten

offers of additional common stock during 1993 and 1994. As shown

in Figure 5, the distribution of the length of waiting periods is

more tightly clustered around the average waiting period in the

absence of a staff review. The length of the waiting period also

is influenced significantly, however, by factors separate from

the Commission review procedure, such as whether the disclosure

in the registration statement when initially filed was

significantly deficient, whether the issuer delayed or

significantly altered the structure of the financing after the

registration statement was filed, and whether the issuer's

Exchange Act reports had been recently reviewed by the

staff.-[5]-

---------FOOTNOTES----------
 -[5]- Even if a document is not reviewed by the
 Commission staff, issuers can and do amend
 registration statements prior to effectiveness. 
 On average, non-shelf registration statements that
 are not reviewed are amended at least once prior
 to effectiveness (compared to approximately three
 amendments if reviewed). Although shelf
 registration statements are amended less often
 (continued...)
==========================================START OF PAGE 13======

 The risk that disclosed information is erroneous, incomplete

or fraudulent is itself a significant uncertainty that can impose

costs on the capital formation process. Thus, a potential

benefit of the retention of Commission review of transactional

disclosure documents arises from efforts by the Commission staff

to compel issuers to disclose more fully information that would

impact market perceptions of the value of the securities to be

issued.

 The Committee strongly believes that staff review is

important where the transaction involves IPOs or major

restructurings. In these cases, the issuer in essence is

beginning the disclosure process anew because the bulk of the

information already available to the public, if any, is not as

useful as in the case of a seasoned company doing a routine

financing. In addition, the coverage by analysts and the

efficiency of the markets in reviewing and absorbing the

information and in pricing securities is less effective in these

transactions than with routine repeat offerings by seasoned

companies. By retaining staff review in these instances,

corrective revisions of preliminary prospectuses prior to closing

can enhance the quality of the disclosure provided to investors,

---------FOOTNOTES----------
 -[5]-(...continued)
 than non-shelf registration statements after
 filing with the Commission, non-reviewed shelf
 registration statements are amended prior to
 effectiveness .5 times versus 2.4 times for
 reviewed shelf registration statements (although
 presumably some of these amendments in the latter
 category are voluntary).
==========================================START OF PAGE 14======

prevent later and more disruptive corrective disclosure, and

reduce an issuer's exposure to litigation. In the case of Form

S-3 eligible issuers doing routine offerings, however, where the

market following these issuers is better informed and efficient,

the benefits of any review process obviously are less

certain.-[6]- Simply put, the efficacy of the continuous

disclosure reporting scheme under the Exchange Act, including the

review by the staff of operating and financial information filed

on Form 10-K and other reports, may render unnecessary the

separate pre-review by the staff of registration statements and

other transactional filings by reporting companies. 

 Some argue that the possibility of Commission review of

seasoned issuer transactional filings provides significant

deterrent value that serves to increase the quality of public

disclosures. They argue these issuers voluntarily provide

negative material disclosure without the benefit of an actual

review, at least partially due to the possibility that they might

be reviewed. Others argue that the primary motivator in ensuring

proper disclosure is the fact that the issuer is subject to

liability for market fraud and other civil liability and

government enforcement actions for improper disclosures. In this

respect, strict liability under Section 11 for material

---------FOOTNOTES----------
 -[6]- In fact, the Division of Corporation Finance
 appears to acknowledge this in that it does not
 review takedown prospectuses in the context of
 shelf registrations and reviews only approximately
 14 to 16 percent of Form S-3 (shelf and non-shelf)
 registration statements.
==========================================START OF PAGE 15======

misstatements undoubtedly serves to ensure appropriate compliance

with the dictate of full and fair disclosure. 

 In the Committee's view, it is inherently difficult to

measure or quantify the incidence of or avoided costs related to

false or misleading statements that are never made, either

because of the possibility of staff review or the threat of

liability. The staff of the Committee analyzed stock-price

evidence in an effort to quantify the benefit to investors

provided by the review process with respect to transactional

filings by reporting companies. If the information generated by

the staff review is predominantly negative, and if stock prices

generally reflect publicly available information, then one could

expect Commission reviews, at least in certain instances, to be

associated with declines in stock prices relative to the market,

on average, over the course of the review. Table 3 below

provides evidence regarding the impact of Commission reviews on

filings for underwritten public offerings of additional common

stock by Nasdaq, NYSE and Amex-listed issuers during 1993 and

1994. The evidence in Table 3 shows no statistically significant

difference in the average change in stock prices relative to the

market according to whether or not filings are reviewed. 

 Even if this data is construed as demonstrating that no new

material information is generated by staff review of these

transactional filings, that result should not be surprising. If

the continuous disclosure requirements (including the threat of

liability) and staff review of periodic reports are working as
==========================================START OF PAGE 16======

intended, then no material company-related information should be

disclosed during the pre-effective review process.

 Moreover, the statistical test was only available for repeat

offers by more seasoned issuers, and was only conducted for

exchange-listed and Nasdaq issuers. Therefore, no evidence was

considered on the value added by staff review in initial public

offerings or in the case of the smallest companies, where the

value added by staff review would be expected to be greater.

Table 3 - see accompanying link
==========================================START OF PAGE 17======

 On balance, and consistent with the thrust of the

Commission's initiatives, the Committee believes that the cost

and uncertainties created by the current Commission staff review

process of transactional filings might be eliminated for most

issuances by large seasoned companies without any adverse loss of

deterrent effect, as long as those transactional disclosures, as

well as the company's periodic and other filed reports, remain

subject to staff review on a routine basis after the transaction,

as well as remaining subject to Securities Act liability. The

possibility that a company's periodic and other filed reports as

well as transactional disclosure could be reviewed after the

completion of the offering should be as effective as the

deterrence currently provided by the possibility of review prior

to going to market.

 3. Residual Costs Associated With Registering Equity
 Securities On Shelf Registration Statements --
 Pre-offering Filing Fees, Short-Selling and Market
 Overhang 

 Recognizing the costs associated with the traditional

registration process and staff review, the Commission over the

last fifteen years has acted to alleviate delays in going to

market by adopting the shelf registration process. This process

allows seasoned companies to register securities in advance for

sale at a later date. Shelf registration gives a company the

flexibility to enter the market quickly by offering the

previously registered securities "off the shelf," either in one

offering or in several tranches. When the company decides to do

such a "takedown," it files with the Commission, and delivers to
==========================================START OF PAGE 18======

investors, a prospectus supplement describing the terms of the

securities and the specific offering. Issuers are permitted to

use the prospectus supplement to market the securities prior to

their sale. Although it may be reviewed subsequent to the

offering, the prospectus supplement is not subject to Commission

staff review prior to its use. Shelf registration also can be

used for secondary distributions by selling shareholders who wish

to time their sales to coincide with favorable market price

movements. 

 As originally adopted, shelf registration required the

delineation of the specific amount of each class of security to

be registered. In 1992, the Commission amended the rule

governing the shelf procedure to allow "unallocated" or

"universal" shelf registration where companies may register an

aggregate dollar amount of one or more classes of securities

without having to specify the amount of each class of security

that is registered.-[7]-

 Table 4 below reports on recent usage of shelf registration

by corporate issuers of additional securities (i.e., repeat

offerings). During the period from January 1992 through December

1995, on a value-weighted basis, shelf registration was used for

approximately one-half of all underwritten offers of preferred

stock and approximately 40 percent of all underwritten offers of

---------FOOTNOTES----------
 -[7]- Simplification of Registration Procedures for
 Primary Offerings, Securities Act Rel. 6943 (July
 16, 1992) [57 FR 32461 (July 22, 1992)] (the
 "Primary Offerings Procedures Release").
==========================================START OF PAGE 19======

corporate debt, but only approximately ten percent of all

underwritten offers of common stock. While sellers of additional

common stock are still less likely to use a shelf registration

than are sellers of preferred stock and debt, the year-by-year

changes reported in Table 4 show that sellers are increasingly

using the shelf registration process to sell common stock. In

1992, takedowns from shelf registrations amounted to three

percent of all underwritten offers of additional common stock. 

In 1994 and 1995, fifteen percent of the total value of

additional underwritten common stock issues came from shelf

registrations.-[8]- Indeed, a recent Wall Street Journal

article pointed out not only the increase in recent years in the

number of shelf registration statements that include equity, but

also the recent use of shelf takedowns to sell large amounts of

equity in what are essentially "big block trades." -[9]-

Table 4 - see accompanying link



---------FOOTNOTES----------
 -[8]- Of the $9.4 billion in common stock sold using
 shelf registration from January 1992 through
 December 1994, the Committee staff estimates that
 at least $7.6 billion was sold using the
 unallocated shelf process.

 -[9]- Michael Santoli, Block Trades Test Traditions On
 Wall Street, Wall St. J., February 9, 1996, at
 B12B, col. 3 ("Santoli") ("Shelf filings that
 cover equity have steadily become more common,
 rising 18% to 110 in 1995 after climbing 26% in
 1994"). 
==========================================START OF PAGE 20======


 One significant deterrent to the use of the shelf

registration process has been issuers' fear of a dilutive "market

overhang." Overhang often depresses the trading price of a

company's stock once a registration statement is filed disclosing

the issuer's plans to issue additional common stock. Generally,

this market overhang effect seems more pronounced for smaller

issuers. Committee member Dr. George Hatsopoulos submitted a

compilation of repeat (mostly non-shelf) offerings of common

stock under $50 million completed in the five-year period ending

August 9, 1994 (1401 transactions) that showed an average decline

of the issuer's stock price by six percent from the time of

filing to the time of the public offering.-[10]- A

---------FOOTNOTES----------
 -[10]- Documents for Advisory Committee Meeting, May 8,
 1995, Tab C (Letter dated May 4, 1995 from George
 N. Hatsopoulos to Commissioner Steven M.H.
 (continued...)
==========================================START OF PAGE 21======

comparable analysis is reported in Table 3 above for repeat

offerings of common stock by companies with pre-offer market

capitalization (rather than offer size) of more or less than $100

million. Among smaller issuers, net-of-market stock price

declines averaged approximately seven percent. Among larger

issuers, there was no significant decline in stock prices on

average, indicating that the market overhang effect appears less

pronounced among the class of issuers that initially would be

eligible for the company registration pilot.

 Some or all of the decline in the market price of smaller

issuers could be due to anticipation of the dilutive effect of

the new offering. The higher average floatation costs reported

for smaller issuers in Table 1 above are consistent with this

possibility. The market also may view a registration statement

for possible future sales of common stock as a signal that, in

management's view, the price of the stock has peaked. The

evidence in Table 3 above, that price declines are concentrated

among the smaller issuers, is consistent with this view, since

smaller companies generally are less closely followed by

analysts, and the investment community is generally less well

informed about managements opinions.

 For these reasons, disclosure of an issuer's intent to issue

a significant amount of equity can be material to investors

particularly with respect to smaller companies. Dr. Hatsopoulos,

---------FOOTNOTES----------
 -[10]-(...continued)
 Wallman) ("Hatsopoulos Letter").
==========================================START OF PAGE 22======

however, raised concerns that prior public notice of an issuer's

impending sale of additional common stock provides market

arbitragers with an opportunity to sell the stock short, possibly

exacerbating the anticipated price decline.-[11]- As

stated by Dr. Hatsopoulos, 

 [o]nce an offering is announced, [the arbitragers] sell
 the company's stock short with the intent to cover
 their short at the offering. Because of fear for such
 an activity, we decided many times in the past to do
 offerings offshore and register the shares after
 completion.-[12]-

It has been reported elsewhere that short sellers tend to be

active in the shares of companies once the company files a

registration statement for a public offering of common stock,

presumably because the pendency of an added supply of common

stock reduces the likelihood that the short seller will be caught

in a squeeze.-[13]- Ultimately, both the company and the

---------FOOTNOTES----------
 -[11]- A market participant has described the phenomenon
 as a foolproof way to make money. The market has
 created a self-fulfilling prophesy about what will
 happen when you file: the price goes down, the
 short interest goes up, buyers go to the
 sidelines, and the deal comes at a much, much
 lower price. Bernstein, Some New Buyers Emerge
 From Gloom, BioCentury, The Bernstein Report on
 BIOBusiness, May 6, 1995, at A3.

 -[12]- Hatsopoulos Letter, supra n.10, at 4.

 -[13]- It is estimated that short interest during the
 period between filing date and offer date is
 approximately three times greater than it is in
 the three months before the filing date, based on
 a sample of 474 offerings of additional common
 stock by exchange-listed issuers. See Assem
 Safieddine and William J. Wilhelm, Jr., "An
 Empirical Investigation of Short-Selling Activity
 Prior to Seasoned Equity Offerings," December
 (continued...)
==========================================START OF PAGE 23======

existing shareholders suffer as a result of adverse effects on

the market price of the company's stock, which could

significantly raise the cost of equity capital for issuers. 

 It was particularly because of these issuer concerns with

potential market overhang that the Commission adopted the

unallocated shelf procedure to facilitate the use of shelf

registration for delayed offerings of common stock and

convertible securities.-[14]- The recent upward trend in

the percentage of all underwritten offerings of common stock that

are made using the shelf registration process suggests that the

1992 introduction of the unallocated shelf procedure has met with

some success. However, the continuing need to specify an

aggregate dollar amount of securities to be offered apparently

has perpetuated market overhang concerns. Industry participants

advised the Committee staff that they still recommend against use

of even the unallocated shelf for common stock offerings, except

where the issuer is large enough to be less susceptible to market







---------FOOTNOTES----------
 -[13]-(...continued)
 1995, Unpublished Paper, Boston College. SEC
 rules prohibit short sales of equity securities in
 advance of public offerings, but only when the
 short sales are covered with securities sold in
 the offering. See Exchange Act Rule 10b-21 [17
 CFR 240.10b-21].

 -[14]- See Primary Offerings Procedures Release, supra
 n.7.
==========================================START OF PAGE 24======

overhang or where the issuer already has disclosed their

intention to raise significant equity capital.-[15]- 

 Although some market participants indicated potential

interest in advance notice to the market of significant equity

offerings, the Committee concluded that simultaneous notice to

the market through the filing of a Form 8-K, as well as

disclosure of the issuer's financing activities in other reports,

should adequately serve to protect the interest of investors

without requiring issuers -- at least seasoned issuers -- to

signal their intentions months in advance. Indeed, in many

instances under the company registration system, public notice of

a specific offering would occur earlier than required today under

shelf offerings, where transactions are disclosed in prospectus

supplements first filed with the Commission up to two business

days after their use. In the Committee's view, the long-term

market overhang effect could be reduced, or even eliminated,

under a company registration system that does not mandate the

advance filing of a registration statement covering a specified

dollar amount of securities, while appropriate notice to the

market of an offering can be expedited through the company

registration Form 8-K filing requirement.


---------FOOTNOTES----------
 -[15]- Transcript of May 8, 1995 Advisory Committee
 Meeting at 146 (describing staff discussions with
 representatives of financial executives and
 underwriters); Documents for Advisory Committee
 Meeting, July 26, 1995, Tab E (Letter dated July
 21, 1995 from Michael Holladay, General Attorney
 of AT&T, to the Committee).
==========================================START OF PAGE 25======

 There are other limitations to the current unallocated shelf

process that would be eliminated as a result of the

implementation of a company registration system. First, a shelf

may not be used until the shelf registration statement is

declared effective by the staff, perpetuating much of the

uncertainty and delay that the shelf system was adopted to

address. Based upon information available to the staff, as of

December 31, 1994, approximately 58% of the initial takedowns of

securities off an unallocated shelf that included common stock

occurred within 60 days of the initial filing of the Form S-3

registration statement. Approximately 39% occurred within 40

days of the filing. In roughly 50% of the offerings, half the

time between the filing of the registration statement and the

initial takedown occurred prior to the effective date.

 Second, the filing fee for shelf registration is non-

refundable and payable at the time of registration rather than

upon the actual takedown of securities (unlike the "pay-as-you-

go" structure of company registration). Third, in most cases,

the issuer only may register on the shelf an aggregate dollar

amount of securities that it reasonably expects to be offered and

sold within the next twenty-four months. Moreover, in the case

of at-the-market offerings of equity securities,-[16]- the

---------FOOTNOTES----------
 -[16]- An "at-the-market" offering is an offering of
 securities into an existing trading market for
 outstanding shares of the same class at other than
 a fixed price on or through the facilities of a
 national securities exchange or to or through a
 market maker otherwise than on an exchange. 
 (continued...)
==========================================START OF PAGE 26======

offering must be conducted by an underwriter and the amount of

any voting stock that is registered for this purpose may not

exceed ten percent of the aggregate market value of the

registrant's outstanding voting stock held by non-affiliates. 

Company registration also would create more flexibility regarding

prospectus delivery than the current shelf system. Shelf issuers

are required to deliver a final prospectus no later than delivery

of the confirmation, and are restricted in the use of selling

materials or term sheets absent prior or simultaneous delivery of

the prospectus. Finally, company registration would make the

streamlined offering process available in connection with

material acquisitions, whereas the current shelf registration

system generally does not.






















---------FOOTNOTES----------
 -[16]-(...continued)
 Securities Act Rule 415(a)(4)(i) [17 C.F.R.
 230.415(a)(4)(i)].
 
==========================================START OF PAGE 27======

 B. Indirect Costs Associated with the Current Regulatory

Scheme

 1. Securities Act Concepts Designed to Ensure the
 Registration of Public Offers and Sales Can
 Produce Unnecessary Costs and Uncertainties and
 Reduce Flexibility in Structuring Financing
 Transactions

 Gun-jumping. Any improper soliciting activities prior to,

or during, the registration process (generally referred to as

"gun-jumping" or "beating the gun")-[17]- violate the

registration requirements of the Securities Act. These

restrictions apply to both large, seasoned public companies that

have been publicly reporting for years, as well as small, non-

public companies contemplating an initial public offering. If

the Commission staff determines that gun-jumping has occurred,

the effective date of the registration statement may be delayed

in an effort to mitigate the effects of the improper publicity on

the market.-[18]- Although the Commission's policies in

this area are not intended to restrict the ordinary flow of

information to investors and analysts, the difficulties of

drawing clear distinctions between permitted and prohibited

market communications have led some reporting companies to limit

their ordinary course disclosures to the marketplace while


---------FOOTNOTES----------
 -[17]- See generally Stanley Keller, Basic Securities Act
 Concepts Revisited, INSIGHTS, May 1995, at 5 (the
 "Keller Article"). 

 -[18]- Gun-jumping also can afford purchasers a right of
 rescission under Section 12(a)(1) of the
 Securities Act.
==========================================START OF PAGE 28======

contemplating or conducting a public offering.-[19]- Thus,

although the gun-jumping doctrine may serve to protect purchasers

in the offering by hindering circumvention of the registration

requirements, it also may chill or delay the disclosure of some

company-related information that is beneficial to the

marketplace. The Committee questioned whether the chilling

effect of the gun-jumping doctrine serves investor protection

when the issuer is required to supply the markets with extensive

public disclosures on an ongoing basis through its Exchange Act

filings. 

 Integration and General Solicitation Doctrines. In addition

to the statutory "gun-jumping" restrictions, certain technical

distinctions and concepts have evolved to prevent issuers from

evading the protections of Securities Act registration by

publicly distributing unregistered securities through private

placements, or through affiliates acting as conduits to the

public. Such distinctions and concepts have injected a

significant degree of legal uncertainty into the capital

---------FOOTNOTES----------
 -[19]- Although not necessarily representing the current
 views of the Commission or the Commission staff,
 this cautious approach is based upon longstanding
 Commission pronouncements in this area. See
 Guidelines for the Release of Information by
 Issuers Whose Securities Are in Registration,
 Securities Act Rel. 5180 (August 6, 1971) [36 FR
 16506 (August 21, 1971)] (although companies are
 free to publish factual information while in
 registration, they must refrain from making
 "predictions, projections, forecasts, or opinions
 with respect to value"). See also Securities Rel.
 5009 (Oct. 7, 1969) [34 FR 16870] and 4697 (May
 28, 1964) [29 FR 7317]. 
==========================================START OF PAGE 29======

formation process, thereby generating additional costs. The

Committee also questioned whether such distinctions are necessary

in the case of a seasoned issuer for which the same level of

information is continuously provided to the markets as would be

provided through the registration process. 

 Under the federal securities laws, in certain circumstances,

separate offerings that could each independently meet the

conditions for an exemption from registration may be deemed to be

"integrated" into a single offering for which no exemption is

available. The integration test applied by the

Commission-[20]- is intended to prevent issuers from

circumventing the registration requirements by dividing a single

plan of financing into separate offerings in order to obtain an

exemption that would not be available for the entire transaction.


There are a few safe harbors that offer some level of comfort by

assuring non-integration of certain exempt offerings separated by

at least six months from another offering.-[21]- If an

---------FOOTNOTES----------
 -[20]- The SEC applies a five-factor test to determine
 whether separate offerings are to be integrated,
 or combined into a single offering. Integration
 may be required when: (1) the offerings are part
 of the same financing plan; (2) the offerings are
 made for the same general purpose; (3) the same
 class of security is issued in each of the
 offerings; (4) the offerings are made at or about
 the same time; and (5) the same kind of
 consideration is to be received in each of the
 offerings. See Non-Public Offering Exemption,
 Securities Act Rel. 4552 (November 6, 1962) [27 FR
 11316 (November 16, 1962)].

 -[21]- See Securities Act Regulation D [17 C.F.R.
 230.502]; Securities Act Rule 147 [17 C.F.R.
 (continued...)
==========================================START OF PAGE 30======

issuer is unable to comply with a safe harbor, depending on the

facts, its otherwise exempt offerings may be integrated,

resulting in a Section 5 violation. 

 A private offering also may lose its exempt status if, under

the integration test, it is integrated with a registered offering

and considered a single public offering.-[22]- A private

placement of the same security that is the subject of a

registration statement might avoid integration, however, if the

same transaction were structured differently, e.g., if the

registered security was sold off a shelf registration

statement.-[23]- Needless to say, some of these

distinctions have been condemned as "form over substance" and as

"metaphysics."-[24]-



---------FOOTNOTES----------
 -[21]-(...continued)
 230.147].

 -[22]- A completed non-public offering under 4(2) will
 not lose its exempt status as a result of a
 subsequent registered offering of the same class
 of securities. See Securities Act Rule 152 [17
 C.F.R. 230.152]. A 4(2) offering will be deemed
 completed when the purchasers' investment decision
 is finalized, meaning consummation of the
 transaction is no longer subject to any conditions
 within the purchaser's control. See Black Box,
 Inc., SEC No-Action Letter [1990 Transfer Binder]
 Fed. Sec. L. Rep. (CCH) 77,256 (June 26, 1990).

 -[23]- See Documents for Advisory Committee Meeting, May
 8, 1995, Tab H (Memorandum dated April 26, 1995
 from William J. Williams, Jr. to the Advisory
 Committee).

 -[24]- See, e.g., Gerald S. Backman and Stephen E. Kim, A
 Cure for Securities Act Metaphysics: Integrated
 Registration, INSIGHTS, May 1995, at 18. 
==========================================START OF PAGE 31======

 Companies that tend to raise capital more frequently can be

unduly burdened by the integration concept. Companies that want

to conduct multiple exempt offerings within a compressed time

frame often are unable to wait the necessary six months to rely

on a safe harbor from integration. Also, issuers that use

securities as consideration for multiple small acquisitions run

the risk of having those offerings integrated -- even in

situations where the acquisitions have been negotiated on a face-

to-face basis between sophisticated parties.

 A separate concern arises from the prohibition on general

solicitations in private offerings. The general solicitation

doctrine is intended to prevent a broad-based offer of securities

without the mandated protections of the Securities Act

registration process. Therefore, public dissemination of

information regarding an anticipated or pending private offering

may be deemed to be a general solicitation, which would adversely

impact an issuer's ability to rely on a valid exemption from

registration under the Securities Act.

 However, since an unregistered distribution or placement of

a large amount of a public company's securities, particularly

common stock, can have a material effect on the issuer, and can

result in significant dilution of existing shareholders,

information about financing activities can be important to the

market and the company's existing shareholders. The Commission

has attempted to provide some guidance to help issuers

distinguish between acceptable market disclosure and prohibited
==========================================START OF PAGE 32======

general solicitations.-[25]- Nevertheless, news about

private placements is widely disseminated. In fact, third

parties routinely publicize information about pending private

placements, including information that would be outside the

permitted scope of the safe harbor if attributed to the

issuer.-[26]- Ratings are now routinely published

concerning planned private offerings.-[27]- Thus, the

---------FOOTNOTES----------
 -[25]- In 1994, the Commission enacted a safe harbor
 permitting reporting issuers to disclose publicly
 certain limited information regarding proposed
 unregistered offerings. Information that is more
 pertinent to the offering process, such as the
 underwriter's name, may not be disclosed. See
 Securities Act Rule 135c [17 C.F.R. 230.135c], as
 adopted in Simplification of Registration and
 Reporting Requirements for Foreign Companies; Safe
 Harbors for Public Announcements of Unregistered
 Offerings and Broker-Dealer Research Reports,
 Securities Act Rel. 7053 (April 19, 1994) [59 FR
 21644 (April 26, 1994)]. In addition, the
 Commission has proposed to amend its annual and
 quarterly report forms to mandate disclosure of
 unregistered placements of common equity (and
 common equity equivalents) in an issuer's periodic
 reports. See Streamlining Disclosure Requirements
 Relating to Significant Business Acquisitions and
 Requiring Quarterly Reporting of Unregistered
 Equity Sales, Securities Act Rel. 7189 (June 27,
 1995) [60 FR 35656 (July 10, 1995)].

 -[26]- For instance, publications such as the Private
 Placement Letter provide detailed information on a
 weekly basis regarding rumored and completed
 private placements, often naming the investment
 banking firm(s) acting as placement agent or
 underwriter and discussing ranges of pricing
 information.

 -[27]- See Anne Schwimmer, S&P to Rate 144A Bond Deals
 Just Like Public Offerings; But Tricky Questions
 Still Remain For the Public/Private Hybrid,
 Investment Dealers' Digest, March 4, 1996, at 12,
 stating that "Standard & Poor's has begun to
 (continued...)
==========================================START OF PAGE 33======

boundaries of the general solicitation doctrine are breaking down

since the very information prohibited under the doctrine is

routinely being released to both the market and potential

offerees prior to completion of the private placement. Indeed,

the Commission recently solicited comments on the continued

viability of the prohibition against general solicitation in

private offerings.-[28]- 

 The general solicitation concept has other consequences that

burden an issuer's flexibility in structuring transactions

without furnishing any counterbalancing investor protections. 

For instance, the Commission staff takes the position that the

filing of a registration statement covering a specific securities

offering (as contrasted with a shelf registration), even without

offering activity, may constitute a general solicitation for that

securities offering.-[29]- Consequently, with limited

---------FOOTNOTES----------
 -[27]-(...continued)
 publicly release ratings on many Rule 144A private
 placements -- hammering home the market's view
 that most of these private placements are de facto
 public bonds behind the private veneer." Moody's
 Investors Service already rates 144A deals.

 -[28]- Exemption for Certain California Limited Issues,
 Securities Act Rel. 7185 (June 27, 1995)[60 FR
 35638 (July 10, 1995)].

 -[29]- See Circle Creek AquaCulture V, L.P., SEC No-
 Action Letter (March 26, 1993)("The staff also is
 unable to concur in your view that the prior
 registered offering would not constitute a
 "general solicitation" for purposes of rule 502(c)
 of Regulation D"); Letter from John J. Huber,
 Former Director of the Division of Corporation
 Finance, to Michael Bradfield, Former General
 Counsel of the Board of Governors of the Federal
 (continued...)
==========================================START OF PAGE 34======

exceptions, a private offering of the same or similar security

undertaken while a non-shelf registration statement is pending or

immediately following the registered offering could be tainted by

the earlier general solicitation resulting in a Section 5

violation. This result may occur even if the issuer decides to

abandon the public offering and withdraw the registration

statement. 

 The Commission staff also has viewed the solicitation of

offerees based on the private offering exemption to be

inconsistent with a subsequent filing to register the sale of the

privately offered securities to the same investors.-[30]- 

Viewed as a single transaction, the offer was made before the

filing of the registration statement and therefore constitutes

gun-jumping. Such a scenario may arise where the issuer seeks to

"test the waters" by soliciting indications of interest in a

contemplated offering or the issuer files the registration

statement after the purchasers are committed to purchase to avoid

giving them restricted securities (rather than registering the

resale of the securities acquired by the purchasers, as in so-

---------FOOTNOTES----------
 -[29]-(...continued)
 Reserve System (March 23, 1984) ("The filing of a
 registration statement constitutes an offer to the
 public and thus a general solicitation of
 investors which precludes reliance on the
 exemption provided by Section 4(2)"). 

 -[30]- See Summary of Capital Raising, Acquisition and
 Other Activity Involving the Division of
 Corporation Finance, THE SEC SPEAKS IN 1996, Vol.
 1, at 146 (the "Current Issues Outline"); Keller
 Article, supra n.17, at 9.
==========================================START OF PAGE 35======

called "PIPES" transactions).-[31]- Section 5, in the view

of the staff, requires that the offer and the sale both be either

private or public.-[32]- Otherwise, the registration of

the sale to investors solicited privately "would deprive public

purchasers from those investors of the protection of

registration."-[33]- 

 It is questionable whether the validity of exemptions from

registration should depend on slight gradations in the structure

of transactions, especially where the transactions do not differ

in their economic substance. Because in some instances there are

no bright-line tests for determining when separate offerings will

be integrated, some argue that issuers often incur considerable

expense and delay in procuring legal opinions on this point and

in structuring transactions to satisfy formulaic and formalistic

interpretations. Consequently, the Committee concluded that the

integration and general solicitation concepts often needlessly

complicate a company's capital-raising activities. Since in the

case of seasoned issuers, the registration process often does not

provide any additional disclosure concerning the issuer to the

markets, preservation of these concepts can only be justified by

the need to ensure the sanctity of the transactional registration


---------FOOTNOTES----------
 -[31]- "PIPES" refers to "private investment, public
 equity." Keller Article, supra n.17,
 at 7.

 -[32]- See Current Issues Outline, supra n.30.

 -[33]- Keller Article, supra n.17, at 6.
==========================================START OF PAGE 36======

requirements. The recommended pilot would address these issues -

- at least for those issuers initially eligible for the pilot --

by treating all offers and sales by a registered company as

registered for disclosure and liability purposes, regardless of

whether made on a public or private basis. Once company

registration is extended to all issuers (with whatever additional

protections, if any, are needed for investors), these concerns

could be addressed directly for smaller issuers as

well.-[34]- 

 Constraints on Resales - Statutory Underwriters and
Affiliates. Although Section 4(1) of the Securities Act provides

an exemption from registration for sales of securities by persons

other than an "issuer, underwriter or dealer," under the current

system registration may be required when "restricted" securities

(securities issued in a private placement) are resold by

investors. Furthermore, the registration requirements place

restrictions on the ability of a person who controls or is

controlled by or under common control with the company, i.e., an

"affiliate," to resell both restricted and unrestricted

securities.-[35]- This restriction also extends to persons

---------FOOTNOTES----------
 -[34]- Until such time as the company registration system
 completely replaces the current system, other
 initiatives may address certain of these issues. 
 See, e.g., the proposal for "pink herring"
 registration of offers, as described in the Report
 of the Task Force on Disclosure Simplification to
 the Securities and Exchange Commission (March 5,
 1996) ("Task Force Report"), at p.31.
 
 -[35]- To ensure that routine trading transactions
 between individual investors do not trigger the
 (continued...)
==========================================START OF PAGE 37======

or entities that are affiliates of a company that was acquired by

the issuer in exchange for the issuer's securities.-[36]- 

Consequently, this restriction may hinder a public company in

using its securities for business acquisitions. These

constraints arise from the broad interpretation of the statutory

---------FOOTNOTES----------
 -[35]-(...continued)
 disclosure obligations associated with registered
 public offerings, Section 4(1) of the Securities
 Act [15 U.S.C. 77d(1)] provides an exemption from
 registration for transactions by a "person other
 than an issuer, underwriter or dealer." 
 Purchasers from the issuer who sell their
 securities nevertheless may be deemed to be
 "statutory underwriters," and hence unable to rely
 on Section 4(1), if they are found to have acted
 as links in a chain of transmission of securities
 from the issuer to the public. Section 2(11) [15
 U.S.C. 77b(11)] provides that persons who
 control, or are controlled by, or under common
 control with the issuer shall be considered "the
 issuer" for the purposes of determining who is an
 underwriter. Thus, distributions of outstanding
 securities can trigger the application of the
 underwriter concept to require registration if the
 sale is by or on behalf of an affiliate of the
 issuer. The statutory provision applies even
 where the affiliate acquired the shares in the
 open market or in a registered offering by the
 issuer.
 
 -[36]- When an issuer offers securities in exchange for
 other securities in certain business combinations,
 or in certain asset acquisitions, the offer and
 subsequent exchange may be deemed an offer and
 sale for the purposes of the Securities Act. 
 Securities Act Rule 145 [17 C.F.R. 230.145]. Any
 affiliate of the acquired company who receives
 securities of the acquiror company and
 subsequently resells those securities in public
 transactions without registration may be deemed an
 underwriter of such securities unless they are
 sold in compliance with the quantity limitations
 and other restrictions of Rule 144 (except the
 holding period requirement). Rule 145(d) [17 CFR
 230.145(d)].
==========================================START OF PAGE 38======

definition of "underwriter" set forth in Section 2(11) of the

Securities Act and are intended to protect the integrity of the

registration scheme against the risk of an issuer's indirect

distribution of securities to the investing public through

affiliates or private placement participants. If such a

distribution is deemed to occur through the conduit of a

statutory underwriter, and the issuer is relying on a private

placement exemption, loss of the Section 4(1) exemption by a

seller may cause the issuer to lose its exemption as well. 

 Despite Commission efforts in adopting and refining Rules

144 and 144A to provide guidance in this area and to limit the

restraints on resales to only those situations where necessary to

provide investor protection,-[37]- significant burdens and

uncertainties remain. The Committee examined whether

restrictions on resales continue to make sense in today's

markets, particularly where the issuer files periodic reports

under the Exchange Act. For these issuers, requiring separate

registration of the resales generally does not provide any

information that has not already been assimilated by the market

---------FOOTNOTES----------
 -[37]- The Commission has provided detailed safe harbor
 protections under Rule 144 for resales of
 restricted securities and affiliate sales that are
 subject to various conditions, including holding
 periods, limitations on selling methods, and
 volume restrictions. Securities Act Rule 144 [17
 CFR 230.144]. Similarly, under Rule 144A, the
 Commission has provided a safe harbor for resales
 of restricted securities to certain large
 sophisticated institutions, known as qualified
 institutional buyers, or "QIBs," subject to non-
 fungibility limitations and other requirements. 
 Securities Act Rule 144A [17 CFR 230.144A].
==========================================START OF PAGE 39======

from the company's Exchange Act reports. In such instances, the

costs of monitoring compliance with Rule 144 by control persons

and the diminished liquidity of shares held by any officer,

director or substantial shareholder deemed an affiliate, do not

appear to be justified. In addition, the Committee viewed the

resale restrictions imposed on the affiliate of an acquired

company who receives securities in an acquisition as reducing the

incentives for the use of securities as consideration in

acquisitions. As a consequence, both acquirors and acquirees

could incur unnecessary costs, including potentially adverse tax

consequences that may result if the parties resort to an

acquisition for cash instead.

 The burdens created by these resale restrictions do not

impact solely on the issuer and its affiliates. Institutional

investors subject to regulatory capital requirements and

liquidity standards, as well as other fiduciaries, must monitor

and limit the amount of restricted securities in their portfolio.


They also must monitor their resales to ensure compliance with

Rule 144 and Rule 144A requirements. The institution's

monitoring can become unduly complicated if it also holds

registered securities of the same issuer, particularly where the

securities are of the same class. It was hard for the Committee

to justify segregation of the same securities based upon the

method of issuance, especially since the subsequent purchaser of

either the registered security or the non-registered security

would rely on the same body of publicly available information to
==========================================START OF PAGE 40======

make its investment decision, regardless of which security was

purchased.

 Company registration should eliminate the need for these

restrictions on resales. The pilot, by eliminating most of the

incentives for issuing restricted securities in exempt offerings

and by narrowing the applicability of these resale restrictions

to a much smaller group of those who are otherwise affiliates and

underwriters, will significantly curtail the potentially

unnecessary application of resale restrictions, including in the

context of acquisitions. In this way, the pilot company

registration system will provide a means for issuers to avoid the

costs and risks associated with complying with these legal

concepts adopted to police the transactional registration

process. 

 2. Mandatory Prospectus Disclosure Requirements Do
 Not Meet Investor Needs in the Most Efficient

 Manner

 The requirement that a prospectus be delivered to investors

in connection with an offering has traditionally been viewed as

one of the most important protections of the Securities Act. In

practice, however, many have begun to doubt the usefulness of

delivery of a mandated disclosure document, particularly where

full information concerning the issuer is readily available

through the issuer's Exchange Act's filings. The delivery

requirement does not appear to justify the costs in terms of the

usefulness of the information provided. Instead of providing

information of the kind and in the amount sought by investors,
==========================================START OF PAGE 41======

issuers often provide legalistic disclosure documents that are

difficult to read, hard to understand, prepared with litigation

in mind, and delivered after the investment decision is

made.-[38]- Although there are no explicit Commission

mandated disclosure requirements in Rule 144A placements other

than from an antifraud perspective, investor demand has resulted

in the use of 144A offering circulars oriented towards providing

useful information to the prospective purchasers prior to their

investment decision. This experience with Rule 144A demonstrates

that meaningful disclosure will be provided even in the absence

of an express delivery requirement, and in fact, may result in

better and more meaningful disclosure delivered prior to, not

after, the investment decision is made. -[39]-

 Under the current process, after the filing of the

registration statement but before it is declared effective, the

underwriter may use the waiting period to solicit indications of

---------FOOTNOTES----------
 -[38]- Transcript of May 8, 1995 Advisory Committee
 Meeting at 156 (statement of Dr. Burton Malkiel). 
 See also Documents for Advisory Committee Meeting,
 September 29, 1995, Tab E (Letter dated September
 27, 1995 from The Association for Investment
 Management and Research to Commissioner Steven
 M.H. Wallman); Task Force Report, supra n.34, at
 17.
 
 -[39]- Ironically, the current "all or none" requirements
 that impose disclosure and delivery obligations in
 registered offerings, but not in exempt offerings,
 has the effect of causing issuers to seek capital
 in the less regulated markets where investors have
 fewer legal remedies. Arie L. Melnik & Steven E.
 Plaut, Disclosure Costs, Regulation, and Expansion
 of the Private-Placement Market, 10 Journal of
 Accounting, Auditing, & Finance 23 (1995).
==========================================START OF PAGE 42======

interest or otherwise market the securities. Other than the

preliminary prospectus, no written materials explaining the

offering may be distributed to investors before the registration

statement is declared effective. Following effectiveness of the

registration statement, the final prospectus containing the

information mandated by Section 10 of the Securities Act must be

sent or given to investors before or at the time written selling

materials are sent or given, as well as before or at the time the

purchaser is sent or given the written confirmation of sale. 

Because these restrictions apply only to written statements, not

oral selling efforts, the current system may actually encourage

oral solicitations over written solicitations.-[40]- The

prospectus delivery requirements thus make it difficult to

deliver term sheets or computational material or otherwise

provide useful information in writing to investors prior to the

availability or finalization of all mandated

information.-[41]- Moreover, in those instances where no

preliminary prospectus or selling materials are distributed, the

only prospectus that would ever be received by investors would be

the final prospectus, which is not required to be delivered until

the confirmation of sale. In fact, if the registered securities

are listed on an exchange, the prospectus delivery requirement

---------FOOTNOTES----------
 -[40]- Linda C. Quinn, Reforming the Securities Act of
 1933-A Conceptual Framework, INSIGHTS, January
 1996, at 25.

 -[41]- See Kidder Peabody Acceptance Corp. I, SEC No-
 action Letter (available May 17, 1994).
==========================================START OF PAGE 43======

may be satisfied merely by the issuer or underwriter delivering

copies of the prospectus to the relevant exchange for the purpose

of redelivery to members of the exchange upon their

request.-[42]- 

 Company registration will eliminate the often formalistic

and unnecessary burden of physically delivering a formal

prospectus and will provide issuers with the ability to decide

what information to deliver to investors in connection with the

marketing of a securities offering. This additional flexibility

promises to provide investors with more relevant information in a

more timely manner than if across-the-board prospectus delivery

requirements continued to be imposed.-[43]- The proposed

company registration system is crafted to achieve this goal by

requiring information to be provided to the market earlier than

under the current system, by permitting the provision of the




---------FOOTNOTES----------
 -[42]- Securities Act Rule 153 [17 C.F.R. 230.153]. In
 addition, Securities Act Rule 174 [17 C.F.R.
 230.174] exempts transactions in securities of a
 reporting company from the requirement under
 Section 4(3) of the Securities Act [15 U.S.C.
 77d] that dealers deliver a prospectus to
 subsequent secondary market purchasers of the
 registered securities for a period of time after
 the registration statement has been declared
 effective.

 -[43]- In the words of one Advisory Committee member, "I
 am thoroughly convinced that a one-page prospectus
 would actually give investors more information and
 more protection and not less." Transcript of May
 8, 1995 Advisory Committee Meeting at 157-158
 (statement of Dr. Burton Malkiel).
==========================================START OF PAGE 44======

information to be more flexibly structured, and by requiring the

information to be subject to statutory liabilities. 
==========================================START OF PAGE 45======

III. Changes in the Markets and Offering Processes, and the
 Effect on Investor Protection

 The increasing blurring of the lines between public,
 private and offshore markets, the general shift of
 investment volume from the primary markets to the
 secondary trading markets, and the historical reform of
 the public offering process to facilitate capital
 formation have resulted in new offering and investment
 practices. These changes have raised concerns
 regarding the effectiveness of the regulatory process
 and traditional "gatekeeping" functions. Investor
 protection may be adversely impacted where the burdens
 of the registration process cause issuers to raise
 capital in the private and offshore markets absent the
 protections of registration.

 A. Attractiveness of Public, Private and Offshore Markets.


 Despite significant Commission efforts over the years to

streamline the registration process, the domestic private

placement market, as well as offshore markets, remain an

important source of capital for U.S. companies. In the

Committee's view, the ready availability of the private and

offshore markets as alternatives to the registered public markets

as sources of capital, as well as the interrelationship of these

markets, must shape the regulatory policy for public offerings if

the regulatory scheme is to meet its investor protection

purposes.

 Although difficult to quantify because public disclosure of

such information is limited, it is thought that legal and

accounting fees are not likely to be as high in transactions

effected in non-public and offshore markets as compared to non-
==========================================START OF PAGE 46======

shelf offerings made in the public market.-[44]- Non-

registration, however, also may involve significant costs. 

Historically, securities have been offered in the private

placement market at significant discounts to prevailing market

prices, representing a significant cost of raising capital for

issuers.-[45]- One reason for this discount is that

investors in private placements (and certain other exempt

offerings and offshore offerings) often must accept a "holding"

period of illiquidity as "the price of the issuer's outflanking

the Commission's registration procedures."-[46]- In

return, investors demand and receive a discount from the

prevailing price of the equivalent securities trading in the

public markets. In fact, the Committee staff estimates that the

typical discount from market value seen in private placements of

common stock by NYSE, AMEX, and Nasdaq issuers is approximately

20 percent.-[47]- 

---------FOOTNOTES----------
 -[44]- Documents for Advisory Committee Meeting, May 8,
 1995, Tab D (Memorandum for Members of the
 Advisory Committee on the Capital Formation and
 Regulatory Processes dated April 25, 1995 from
 Edward Greene and Larry Sonsini to Commissioner
 Steven M.H. Wallman).

 -[45]- See Documents for Advisory Committee Meeting,
 March 6, 1995, Tab F (Memorandum dated March 1,
 1995 from Professor John Coffee to the Advisory
 Committee).

 -[46]- Id., at 2.

 -[47]- Based on the median discount observed in 67
 private placements reported by Securities Data
 Corp. in the period January 1992 - December 1994,
 where a selling price was disclosed. In many
 (continued...)
==========================================START OF PAGE 47======

 The offshore markets also are being accessed in lieu of the

domestic public markets. In the 1980s, the increasing

globalization of the world's securities markets, coupled with the

growth and speed of the transactions in the Euromarkets, along

with U.S. companies' increasing interest in diversifying their

shareholder base and the ease of entry into foreign capital

markets, led to a significant increase in offshore offerings of

securities by U.S. issuers. In order to clarify the reach across

national boundaries of the registration requirements of Section 5

for companies raising capital abroad, the Commission adopted

Regulation S in 1990. In doing so, the Commission made clear

that offers and sales of securities occurring outside the United

States are not subject to the registration requirements of

Section 5.-[48]- 

 Industry participants have advised the Committee staff that

U.S. companies resort to the offshore markets for a number of

---------FOOTNOTES----------
 -[47]-(...continued)
 cases, however, a selling price was not disclosed.

 This discount is many times larger than
 corresponding discounts observed in public
 offerings and reported in Table 1 above, where the
 typical discount is 7.1% for IPOs and 1.2% for
 repeat offers.

 -[48]- Regulation S provides safe harbors for primary
 offerings and resale transactions abroad that
 comply with certain conditions, including
 prohibitions on resales back into the United
 States for certain periods of time. See
 Regulation S under the Securities Act [17 C.F.R. 
 230.901 to 230.904]. See also Problematic
 Practices Under Regulation S, Securities Act Rel.
 7190 (June 27, 1995) [60 FR 35663 (July 10, 1995)]
 (the "Regulation S Release").
==========================================START OF PAGE 48======

reasons, including the desire to avoid the Commission and state

blue sky registration requirements, or even to minimize the

potential risk of loss of exemptions available for private

placements. Some companies also use offshore offerings in

connection with acquisitions because of the costs and other

burdens of complying with Commission and U.S. GAAP requirements

governing presentation of the acquired company's reconciled pro

forma financial statements.-[49]- 

 B. Blurring of Distinctions Between Public, Private and

Offshore Markets. 

 The inability to partition markets based on their regulated

or unregulated status suggests that application of regulatory

protections should be focused on the issuer rather than any

particular transaction. By eliminating distinctions based upon

the circumstances under which a security was originally issued,

and instead improving the disclosure publicly disseminated by the

issuer on an ongoing basis, investors in all the markets for the

issuer's securities would benefit.

 As stated by Stanley Keller at the May 8, 1995 Committee

Meeting, for all practical and economic purposes, the public and

private markets are merging.-[50]- Any distinctions

---------FOOTNOTES----------
 -[49]- See Streamlining Disclosure Requirements Relating
 to Significant Business Acquisitions and Requiring
 Quarterly Reporting of Unregistered Equity Sales,
 Securities Act Rel. 7189 (June 27, 1995) [60 FR
 35656 (July 10, 1995)].

 -[50]- See Transcript of May 8, 1995 Advisory Committee
 Meeting at 208 (statement of Stanley Keller).
==========================================START OF PAGE 49======

between the two markets have become blurred. The traditional

delineations between registered securities and restricted

securities have become confused through the use of strategies to

minimize the impact of the resale restrictions on privately

placed securities. For instance, holders of securities subject

to resale restrictions, including affiliates, holders of

restricted securities issued in private placements, and offshore

purchasers in Regulation S offerings, are resorting to various

hedging techniques (including short sales and equity swaps) to

avoid or reduce the economic impact of such

restrictions.-[51]-

 In addition, under certain conditions, issuers may resort to

the use of "A/B exchange offers" to give purchasers of non-

registered securities the benefits of a freely tradeable security

without having to delay the offering by undergoing the

registration process at the original offering stage.-[52]- 

---------FOOTNOTES----------
 -[51]- See Managing the Managers, The Economist, February
 10, 1996, at 19.

 -[52]- Under the current system, privately placed
 securities may be registered for resale if the
 issuer is willing to agree to pay that expense. 
 Resale registration often occurs promptly after
 the closing of the private placement. In the
 resale registration statement, resellers must be
 named as selling shareholders. Therefore, they
 could be subjected to statutory underwriters'
 liability under circumstances where it may not be
 feasible or economical for them to make a
 reasonable investigation of the issuer's public
 disclosures. There also is a prospectus delivery
 obligation. Pursuant to a line of no-action
 letters, the so-called "A/B exchange offer" allows
 certain restricted securities to be converted into
 (continued...)
==========================================START OF PAGE 50======

In the case of issuers who are already reporting issuers prior to

the issuance of the restricted securities, the structure of this

process seems to be an unnecessary formalism devised to ensure

technical compliance with the transactional mandates of the

Securities Act.-[53]- Further, while difficult to defend

on a legal or economic basis, the Commission's line-drawing

prohibiting the use of the A/B exchange offer for common equity

of domestic issuers, like the non-fungibility requirement of Rule

144A, appears necessary solely to prevent the wholesale

undermining of the current registration scheme, not to protect

purchasers of the securities in the trading markets.



---------FOOTNOTES----------
 -[52]-(...continued)
 freely tradeable securities through the mechanism
 of a registered exchange offer of an identical
 security without all of the holders being
 classified as underwriters. See Exxon Capital
 Holding Corporation, SEC No-Action Letter
 (available May 13, 1988). See also Shearman &
 Sterling, SEC No-Action Letter (available July 2,
 1993). The A/B exchange offer procedure is
 available only for nonconvertible debt securities,
 certain types of preferred stock, and initial
 public offerings or initial listings in the U.S.
 of common stock of foreign issuers. See Keller
 Article, supra n.17, at 6. This procedure is not
 available for common stock of domestic issuers, or
 of foreign issuers who already are reporting
 companies, nor is it applicable to market
 professionals who continue to be considered
 statutory underwriters. 

 -[53]- At the May 8, 1995 Advisory Committee meeting, Mr.
 Keller described this process as really like
 taking a rubber stamp and just stamping on [the
 security] registered. Transcript of May 8,
 1995 Advisory Committee Meeting at 208 (statement
 of Stanley Keller).
==========================================START OF PAGE 51======

 Distribution practices and pricing also reflect a

convergence in public and private markets. What used to be

thought of as public offerings are being done privately under

Rule 144A. Bearing close resemblance to public offerings, Rule

144A placements often are facilitated by investment banking firms

and accompanied by detailed offering circulars making extensive

disclosures regarding the offering as well as the company and its

financial condition. In the traditional private placement arena,

the movement is towards more standardized documentation, which

minimizes the opportunities for investors to negotiate terms or

to conduct individual due diligence.-[54]- Some investment

banks even have combined or closely aligned different practice

groups (both public and private) in order to compete for business

in a competitive marketplace.-[55]- 

---------FOOTNOTES----------
 -[54]- See ACIC Designs Pamphlet to Make Private Market
 User Friendly, Corporate Financing Week, February
 20, 1995, at 6. See also Private Placement
 Process Enhancements, American College of
 Investment Counsel, Transaction Process
 Enhancement Committee (January 1995).

 -[55]- See Kimberly Weisul, Integrating Private and
 Public Product at Merrill; 'The Lines Continuously
 Blur' Between Two Teams Sitting 30 Feet Apart on
 Merrill's Trading Floor, Investment Dealers'
 Digest, August 28, 1995, at 19. In addition, the
 same article states that Goldman, Sachs & Co. also
 is well-noted for the close collaboration between
 its private and public teams. See also Ronan
 Donohue, The Private Market's Creative Drive; The
 Private Placement Market Has Become So Creative
 That the Exotic is Commonplace, Investment
 Dealers' Digest, March 4, 1996, at 14 ("Donahue"),
 stating that "most investment banks have moved to
 house 144A activity under the capital markets
 umbrella with all the fervor of syndicate selling
 (continued...)
==========================================START OF PAGE 52======

 Likewise, on the buy side, the line between debt issued

under Rule 144A and the public bond market also has become

thin.-[56]- Due to the active participation of mutual

funds as both buyers and sellers of Rule 144A debt securities,

liquidity is readily available, even without subsequent

registration.-[57]- In fact, participants in the market

have come to view the designation of a security as a "Rule 144A

security" as more of a technicality rather than as a distinction

of any economic consequence.-[58]-

 Further evidence of the blurring of the private and public

markets is provided by recent news articles discussing the

shrinking of the traditional pricing premium on debt offerings in

both the traditional private placement market and the Rule 144A




---------FOOTNOTES----------
 -[55]-(...continued)
 and screen-based trading. At Salomon,
 underwritten 144As are executed like public deals
 . . . . Merrill Lynch has practically amalgamated
 the two activities, as has Goldman Sachs."

 -[56]- See, Donahue, supra n. 55, at 24, stating that
 "further evidence emerged during the year that the
 fine line between the 144A and the public bond
 market is becoming almost gossamer."

 -[57]- Mutual Funds Are Key to 144A Bond Liquidity,
 Private Placement Letter, September 18, 1995, at
 12.

 -[58]- As stated by a trader, "I bought a couple of 144As
 yesterday and, quite frankly, forgot they were
 144As. . . . The forms came across my desk to
 remind me. . . . Other than to comply with
 technical restrictions, we don't even really think
 of 144A as a category." Id.
==========================================START OF PAGE 53======

market.-[59]- With regard to the private placement market,

"ferocious competition has driven down both spreads for investors

and fees for intermediaries."-[60]- Likewise, as the Rule

144A market for the securities of domestic issuers has grown, the

market has become more efficient and liquid, thereby reducing the

illiquidity premium. The liquidity provided by both registration

rights and the A/B exchange offer technique also could be

contributing to the narrowing of spreads in the Rule 144A market.


However, the regulatory burdens for equity are still significant

(with U.S. issuers of common equity generally not being able to

avail themselves of the beneficial treatment under Rule 144A or

A/B exchange offers), thereby still imposing significant costs on

issuers. 



---------FOOTNOTES----------
 -[59]- See Anne Schwimmer, Should Retail Investors Buy
 Private Placements?; "After Three Years, You Can
 Sell It to Grandma," Investment Dealers' Digest,
 August 28, 1995, at 11. See also Anne Schwimmer,
 144A Bond Market Surges with Volume and Liquidity;
 Reaches Critical Mass after Years of False Starts,
 Investment Dealers' Digest, August 21, 1995, at
 12; Rosalyn Retkwa, Private Placements Push for
 Strategic Part in Corporate Finance Picture,
 Corporate Cashflow Magazine, December 1995, at 26.

 -[60]- Welcome to the Free-for-All; Private Placement
 Bankers Adjust to a Radically Changing
 Marketplace, Investment Dealers' Digest, August
 28, 1995, at 14. See also Private Placements
 Becoming Cheap Alternative to Public Markets,
 Corporate Financing Week, April 17, 1995, in which
 market participants state that "[p]rivate
 placement yield spreads have tightened and fees
 have shrunk to the point where it is often cheaper
 for issuers with less than $100 million of debt to
 tap the private versus the public market."
==========================================START OF PAGE 54======

 In addition, the increasing use of the offshore markets by

U.S. issuers has raised regulatory concerns regarding the

effectiveness of rules separating the offshore and domestic

markets, particularly where the only trading market for the

security is in the United States.-[61]- Due to the resale

restrictions on Regulation S securities, upon issuance, they are

not supposed to trade freely with any comparable securities in

the United States. Consequently, the Regulation S securities,

particularly equity, usually are priced at a discount to the U.S.

market price. Non-U.S. investors may attempt to capture this

spread, however, by creating short positions in the United States

with the intent to cover the position with the lower priced




---------FOOTNOTES----------
 -[61]- The legal risk of flowback of securities issued
 offshore into the domestic public markets
 increases substantially with equity offerings by
 U.S. issuers of listed securities, particularly
 where there is no market for the securities
 outside the United States. See Edward F. Greene
 and Jennifer M. Schneck, Recent Problems Arising
 Under Regulation S, INSIGHTS, August 1994, at 2
 (the Greene/Schneck Article ). Any such flowback
 without a valid exemption would expose the issuer
 to Commission and private litigation based on the
 failure to register the securities. While it is
 possible to register for resale securities
 initially offered outside the United States
 through the use of a "flowback" registration
 statement, unless the entire offshore distribution
 is registered for flowback, there would be
 practical difficulties in determining which of the
 securities were registered under the Securities
 Act given the fungibility of securities in the
 secondary markets. See Ronald R. Adee, Flow-back
 Registration Statements, INSIGHTS, April 1988, at
 10.
==========================================START OF PAGE 55======

Regulation S securities.-[62]- In the alternative, a non-

U.S. investor with a valid exemption from registration can sell

the Regulation S securities back into the United States upon

expiration of the Regulation S holding period, which can span as

little as 40 days. Thus, the securities placed outside the

United States in reliance on Regulation S may be traded back into

the United States, in some cases almost immediately, with no

investor protection under the Securities Act for any subsequent

purchasers in the United States.

 Recent press reports reveal another motive for offshore

offerings.-[63]- Despite technical compliance with

Regulation S's resale restrictions, some issuers reportedly have

used the rule to effect an indirect illegal distribution to U.S.

investors by, among other things, placing unregistered securities

temporarily offshore to evade registration

requirements.-[64]- Similarly, holders of restricted

---------FOOTNOTES----------
 -[62]- Greene/Schneck Article, supra n.61, at 6.

 -[63]- See, e.g., Jaye Scholl, Easy Money: How Foreign
 Investors Profit at the Expense of Americans, An
 Invitation to Scamsters?, Barron's, April 29,
 1996, at 31; Laurie Cohen, Rule Permitting
 Offshore Stock Sales Yields Deals That Spark SEC
 Concerns, Wall Street Journal, April 26, 1994, at
 C1; Linda C. Quinn, SEC Division of Corporation
 Finance Expresses Concern, INSIGHTS, April 1994,
 at 36.

 -[64]- As stated by the Commission in the recent release
 regarding problematic practices under Regulation
 S, 

 it has come to the Commission's attention that
some
 market participants are conducting placements
of
 
(continued...)
==========================================START OF PAGE 56======

securities have attempted to used the resale safe harbor of

Regulation S to "wash" or remove the resale restrictions on those

securities. The premise that the federal securities laws can be

administered on a geographical basis is being further undermined

by the ability of issuers to place offers on the Internet, which

"shows no respect for those boundaries."-[65]- These

developments have raised concerns regarding the effectiveness of

the restrictions under Regulation S in policing the integrity of

the Securities Act registration process.

 The effects of the merging of the public, private and

offshore markets on the operation of the current Securities Act

concepts and protections are grounds for significant concern. It

seems clear that these concepts are no longer capable of

achieving their purpose of protecting investors, and are imposing

substantial costs on issuers. In the case of seasoned issuers,

the benefits of attempting to preserve these distinctions are
 

 -[64]-(...continued)
 securities purportedly offshore under
Regulation S
 under circumstances that indicate that such
securities
 are in essence being placed offshore
temporarily to
 evade registration requirements with the result
that
 the incidence of ownership of the securities
never
 leaves the U.S. market, or that a substantial
portion
 of the economic risk relating thereto is left
in or is
 returned to the U.S. market during the
restricted
 period, or that the transaction is such that
there was
 no reasonable expectation that the securities
could be
 viewed as actually coming to rest abroad. 

 Regulation S Release, supra n.48, [60 FR at
35664].

 -[65]- Michael Salz, Small Stock Issuers Find a New
 Market on the Internet, Wall Street Journal, May
 14, 1996 at 132 (quoting K. Robert Bertram,
 Pennsylvania Securities Commission).
==========================================START OF PAGE 57======

unclear, given the significant costs and reduced investor

protection that comes from them. Rather, with regard to seasoned

issuers, the Committee concluded that investor protection would

be better served by a regulatory model that no longer attempts to

preserve any artificial distinctions among these markets. 

Instead, the new regulatory model would provide for Securities

Act protections for all sales to purchasers in the United States

(regardless of whether the securities were first offered abroad),

and would extend the type of discipline and quality of disclosure

traditionally enjoyed by the primary markets to the company's

continuous reporting, for the benefit of all the markets for the

seasoned issuer's securities.

 C. Growth of Secondary Markets and Changes in Offering
Techniques. Due to the explosive growth of trading in the

secondary markets as compared to the primary issuance market,

today most investors look to the Exchange Act for protection,

rather than the Securities Act. As shown in Figure 2 in the

Addendum to this Appendix A, with regard to common stock, the

U.S. capital markets have shifted -- on a relative basis -- from

a primary role as a source of capital to a venue predominantly

for secondary trading. As shown in Figure 2, the secondary

trading markets for common equity have grown exponentially in

comparison to the primary issuance market, with over $5,500

billion in secondary trading versus $155 billion in primary

issuances in 1995. The registered primary issuance market for
==========================================START OF PAGE 58======

common stock has remained relatively stagnant as a source of

capital since 1933.-[66]-

 From a liability perspective, this shift is significant

since the key liability provisions of the Securities Act offer

protections only to purchasers of securities in the primary

offering, not those purchasing an identical security in the

secondary markets.-[67]- Moreover, since some believe

Exchange Act reports "tend to be taken less seriously, and to be

of lower quality," than documents prepared specifically for use

in registered offerings,-[68]- the ultimate effect on

---------FOOTNOTES----------
 -[66]- Figures 1 and 2 to the Addendum to this Appendix
 A. In addition, as shown in Figure 1, there has
 been a substitution in the primary markets of
 corporate debt for equity since 1983.

 -[67]- Although a secondary market purchaser who
 purchases securities that were originally
 registered under the Securities Act technically
 would be able to bring a claim under Section 11 of
 the Securities Act for material misstatements or
 omissions in the registration statement, the
 statute of limitations has begun to run with the
 initial sale by the issuer and such purchaser must
 be able to trace the securities purchased in the
 secondary market back to the original registration
 statement in order to maintain the Section 11
 claim. Also, claims under Section 12(a)(2) of the
 Securities Act for material misstatements or
 omissions in the prospectus may only be brought
 against those in privity with the purchaser or who
 otherwise engage in soliciting activities. Pinter
 v. Dahl, 486 U.S. 622 (1988).

 -[68]- See Milton H. Cohen, The Integrated Disclosure
 System -- Unfinished Business, 40 Bus. Law. 987,
 992 (1985) ("Cohen, Unfinished Business")
 (describing general agreement that the Exchange
 Act reports are not of the same quality as the
 Securities Act documents). Industry participants
 have informed the Committee staff that this
 (continued...)
==========================================START OF PAGE 59======

investor protection is potentially far-reaching for both the

primary and secondary markets that price and function on the

basis of those reports.

 Even when investors do participate in public offerings of

securities, thereby receiving the protection of the Securities

Act, the prospectus delivery and disclosure requirements have

much less significance in the case of seasoned issuers because

the company-related mandatory disclosure is incorporated by

reference from the issuer's Exchange Act reports rather than

physically delivered directly to purchasers. When Congress

adopted the Securities Act in 1933, it envisioned that

prospective investors would receive a single disclosure document

containing all material information necessary to make an informed

investment decision prior to making such decision.-[69]- 

Integrated disclosure and shelf registration have led to an

---------FOOTNOTES----------
 -[68]-(...continued)
 conclusion is still valid today. See Transcript
 of July 26, 1995 Advisory Committee Meeting at 178
 (statement of Roland Machold: "I used to write
 prospectuses myself and I can remember the first
 thing you did was throw away the 10-K and start
 from scratch. And I think that still goes on. The
 10-K is filled out by clerks and the offering
 circular is filled out by people who have
 concerns"). See also Documents for Advisory
 Committee Meeting, September 29, 1995, Tab E
 (Letter dated August 1, 1995 from Robert S.
 Merritt, Chief Financial Officer, and Joseph J.
 Kadow, Vice President and General Counsel, Outback
 Steakhouse, Inc. to Brian T. Borders, President,
 Association of Publicly Traded Companies)(stating
 that Exchange Act disclosures could be improved).

 -[69]- See H.R. Rep. No. 85, 73d Cong., 1st Sess., at 8
 (1933).
==========================================START OF PAGE 60======

increasing percentage of the primary issuances of securities by

seasoned companies being made through the streamlined Form S-3

process,-[70]- where less of the disclosure mandated by the

Securities Act is actually being delivered to investors. 

Instead, and appropriately, greater reliance is placed on the

integrity of the Exchange Act reports to ensure a fair pricing of

securities by repeat issuers. 

 Recent rule changes adopted by the Commission to facilitate

prospectus delivery in light of the movement to a three business

day standard settlement time frame ("T + 3"),-[71]- and

interpretive guidance issued by the Commission to assist issuers

in the use of electronic rather than paper delivery of documents

to investors under the federal securities laws,-[72]-

preview the rapid changes occurring in the procedures used in

securities offerings. Already, market participants are permitted

to deliver the statutory prospectus information in more than one

document. Also, such documents may be delivered to investors at


---------FOOTNOTES----------
 -[70]- For information regarding the history of repeat
 issuances of common equity by seasoned issuers on
 Form S-3 over the last ten years, see Figure 4 in
 the Addendum to this Appendix A of the Report.

 -[71]- See Securities Act Rule 434 [17 C.F.R. 230.434],
 as adopted in Prospectus Delivery; Securities
 Transactions Settlements, Securities Act Rel. 7168
 (May 11, 1995) [60 FR 26604 (May 17, 1995)]; Rule
 15c6-1 [17 C.F.R. 240.15c6-1].

 -[72]- See Use of Electronic Media for Delivery Purposes,
 Securities Act Rel. 7233, Exchange Act Rel. 36345
 (October 6, 1995) [60 FR 53458 (October 13,
 1995)].
==========================================START OF PAGE 61======

separate intervals and in varying manners, including electronic

delivery. Consequently, actual delivery of a final printed

integrated prospectus to investors prior to or with the

confirmation may soon become a relic of the past.

 As a result of these market and regulatory changes, the

traditional transactional registration process may no longer be

directly relevant to investors purchasing the securities of

seasoned issuers. Since so much of the information deemed

necessary for an investment decision is being provided through

the public filing of Exchange Act reports with the Commission,

the Committee believed that the original goals of the Securities

Act would be better served by the adoption of new disclosure

practices and procedures that should have the beneficial effect

of focusing the participants in the capital formation process on

enhancing the quality of the disclosure in these reports.

 D. Changes in Gatekeeper Role. According to Milton H.

Cohen, the superiority of Securities Act disclosure is related

directly to the "in terrorem" effect of the statutory liability

provisions of the Securities Act on the issuer's directors,

underwriters, accountants, and other gatekeepers charged with

responsibility for the issuer's disclosure in connection with a

public offering.-[73]- Under the traditional offering

process, ordinarily there would be ample time available before

the filing of a registration statement, and again before

---------FOOTNOTES----------
 -[73]- See Cohen, Unfinished Business, supra n.68, at
 989.
==========================================START OF PAGE 62======

effectiveness of that registration statement, for these

gatekeepers to exercise their investigatory responsibilities. 

The lead underwriter normally participates in the drafting of the

registration statement and undertakes significant investigation

of the company, its business and its management in connection

with an offering. This due diligence obligation has developed

largely in response to the underwriter's exposure to liability

for false or misleading disclosures in the registration

statement. Supporters of the current liability system point out

that it imposes policing responsibilities on those parties best

equipped to judge the accuracy and completeness of registration

disclosures. This disincentive to carelessness created by the

liability structure ultimately benefits investors and the markets

as a whole.

 Many in the underwriting and legal communities believe that

it has become increasingly difficult for underwriters to

discharge their due diligence responsibility in the context of

the streamlined offering process afforded by integrated

disclosure and shelf registration. According to a recent report

on due diligence by the American Bar Association's Task Force on

Due Diligence,-[74]- the informational convergence between

the Securities Act and the Exchange Act as a result of integrated


---------FOOTNOTES----------
 -[74]- American Bar Association Committee on Federal
 Regulation of Securities, Report of the Task Force
 on Sellers' Due Diligence and Similar Defenses
 Under the Federal Securities Laws, 48 Bus. Law.
 1185 (May 1993).
==========================================START OF PAGE 63======

disclosure, and the severe time constraints imposed by shelf

registration, make it difficult, if not impossible, for

underwriters in a shelf takedown to perform a traditional, in-

depth due diligence analysis of the issuer, especially since the

bulk of the required company-related disclosure will be satisfied

through incorporation by reference. Underwriters claim to be

hampered in their due diligence efforts because they typically do

not help prepare the issuer's Exchange Act reports.-[75]- 

Thus, with respect to seasoned issuers using the shelf process,

the current system may be suffering from an erosion of the

underwriter's traditional performance of due diligence, one of

the key safeguards against fraud under the Securities Act

liability paradigm.

 With the increasing use of the shelf process to conduct

offerings of equity securities, the difficulties highlighted in

the ABA Due Diligence Report may become further exacerbated. 

This trend is evidenced by recent reports of large takedowns of

common equity off a universal shelf being directly placed in what

are essentially block trades, as contrasted with the usual

underwritten offering approach.-[76]- Underwriting firms

---------FOOTNOTES----------
 -[75]- Documents for Advisory Committee Meeting, November
 21, 1995, Tab E (Letter dated November 2, 1995
 from the Securities Industry Association to the
 Advisory Committee, at 5-7)(the "SIA Letter").

 -[76]- Santoli, supra n.9 ("efforts to sell stock
 directly are another sign of Wall Street's eroding
 role as gatekeeper and disseminator of
 information, a process that gathers force with
 each new application of communications technology
 (continued...)
==========================================START OF PAGE 64======

assert that the shift in the focus of disclosure to the periodic

reports filed under the Exchange Act, as well as the streamlining

of the registration process through the adoption of shelf

registration, without a commensurate change in the statutory

liability structure or the gatekeeper function, is fundamentally

unfair and should be addressed.-[77]- 

 Members of the board of directors likewise may have cause

for concern under the current liability scheme. Substantial

portions of the Securities Act disclosure requirements are now

being satisfied with information incorporated by reference from

Exchange Act periodic reports. Board members do not tend to pay

as much attention to the preparation of information in a

company's periodic reports as they would if such information was

being prepared directly for a public offering

document.-[78]- Nor are board members positioned to review

either the Exchange Act filings or offering documents in an

environment of frequent offerings conducted with minimal advance





---------FOOTNOTES----------
 -[76]-(...continued)
 to the investment business").

 -[77]- SIA Letter, supra n.75, at 7-10.

 -[78]- See Transcript of May 8, 1995 Advisory Committee
 Meeting at 166 (statement of Mr. Roland M.
 Machold). See also Joseph McLaughlin, Integrated
 Disclosure, Shelf Registration and Other Due
 Diligence Challenges in the Public Offering
 Process, PLI CONDUCTING DUE DILIGENCE 1995 (March
 14, 1995), at 2.
==========================================START OF PAGE 65======

planning and little opportunity for a due diligence

review.-[79]- 

 Finally, the increased significance of the secondary markets

is cause to question the wisdom of focusing the gatekeeper

function on episodic transactions. Indeed, a significant portion

of the reporting companies whose securities are actively traded




---------FOOTNOTES----------
 -[79]- During the February 22, 1996 Advisory Committee
 meeting, Professor Coffee gave the following
 "illustrations:"

 I had a conversation [with an outside director] on the
 board of a company that has been, for the last six
 months, making daily sales of its equity securities to
 an underwriter through universal shelf registration.

 His problem, as he said throwing up his hands, is there
 is no way in the world that we can conduct daily due
 diligence. There is nothing in the system that tells
 us how we can do it or what we can do to comply with
 this kind of world.

 He went on to describe to me a case ... of a very major
 insurance company that has been told by its
 underwriters that it would be very attractive to it to
 be able to use the underwriter to make daily small
 sales in a manner that would not move the market.

 Again, selling equity securities through the market
 maybe three or four times a week in small quantities,
 but the board of directors and the lawyers of that
 large insurance company are very, very concerned that
 kind of process of constant sales would expose the
 directors to difficulties because there would be no way
 that they could, on a constant basis, fulfill their due
 diligence responsibilities. 

 Transcript of February 22, 1996 Advisory Committee Meeting
 at 51-52. Professor Coffee observed that one of the
 intended effects of company registration -- small, frequent
 equity offerings not planned very many days in advance --
 would present the same concerns. Id. at 52.
==========================================START OF PAGE 66======

in the public markets never access these markets for new

capital.-[80]- Consequently, apart from the important

discipline of the annual audit, these companies are never

subjected to the type of investigation by others contemplated by

the Securities Act.

 The company registration system, by contrast, will help

alleviate some of these concerns by permitting and encouraging

more and better due diligence by those in the position to be most

knowledgeable, without lowering liability standards. By

providing incentives and mechanisms for increased and enhanced

ongoing oversight of a company's disclosures to the market, and

by requiring all material development disclosure, including

transactional disclosure, to be filed as part of the registration

statement at the time of the offering, investor confidence in

both the primary and secondary trading markets should be

heightened, thereby ultimately lowering a company's cost of

capital.

 * * *

 The increasing inapplicability of traditional transactional

registration concepts in today's undifferentiated markets, the

growth of the secondary markets, the regulatory shift to reliance

on Exchange Act reports, as well as the persistent concerns with

the quality of that disclosure and adequacy of gatekeeper due

---------FOOTNOTES----------
 -[80]- See Figure 4 in the Addendum to this Appendix A of
 the Report (only 4-6% of NYSE, AMEX and Nasdaq
 companies made underwritten offerings of
 additional common stock each year since 1985).
==========================================START OF PAGE 67======

diligence in the context of today's expedited offering process,

all point to the conclusion that the existing Securities Act

protections and processes needed to be re-examined. Investor

protection and capital formation would be better served by a

regulatory system that operates to improve the quality and

reliability of a company's continuous disclosure while

eliminating costly transactional registration requirements and

restrictions that no longer serve to protect investors. Improved

disclosure can be accomplished in a number of ways, including by

having senior management and the board of directors focus on and

improve the procedures under which the company's reports are

prepared, and through the adoption of measures to ensure more

timely disclosure of significant developments, as well as through

greater auditor involvement. Measures to reorder and rationalize

the gatekeeper and monitor function to focus on the integrity of

the company's reports on an ongoing, rather than an episodic

basis, will preserve and reinforce the protections afforded by

outside oversight of a company's disclosures.