Date:    6/1/98 7:28 PM
     
     
U.S. Securities and Exchange Commission 
450 5th Street, NW
Washington, D.C.
     
File Number S7-14-98
     
Gentlemen,
     
     On May 21, 1998, the Commission issued Release No. 33-7541
requesting public comment on whether Rule 504 of Regulation D needed to 
be strengthened to deter fraud in the micro-cap securities markets. 
While agree with the Commission's basic premise that Rule 504 needs to 
be improved in order to deter fraud, I am equally convinced that 
eliminating free transferability for securities issued in Rule 504 
transactions would have a devastating impact on the small-business 
capital markets and effectively gut the exemption.
     
     The Release's Executive Summary makes clear the Commission's belief
that fraudulent deals account for only a small percentage of the total 
volume of Rule 504 transactions.
     
"While we believe that the scope of abuse is small in relation to the 
actual usage of the exemption, [The Commission's records indicate that 
approximately 1500 Forms D have been filed under Rule 504 in each of the 
past several years. NASD officials believe that between 300 to 500 
applications for OTC Bulletin Board quotations were based upon the Rule 
504 exemption in each of those years.] we also believe that a regulatory 
response may be necessary."
     
Nevertheless, the Release proposes to completely eliminate one of the 
principal features that makes Rule 504 an attractive alternative for 
some small business issuers. In my view, there has to be a better way to 
combat a few instances of fraud.
     
     Just as it is difficult to make locks and alarm systems that will
stop a determined thief, it is difficult to craft securities laws and 
regulations that will stop a determined con man. The fact of the matter 
is that if someone is intent on perpetrating an investment fraud, he 
will do so regardless of the legal framework. Since the fundamental 
premise of the securities laws is that full and fair disclosure of all 
material facts is the best protection against fraud, I believe that the 
best course of action will be to tighten the current information 
requirements for publicly traded micro-cap securities. Sadly, the 
Commissions current proposal will have the effect of penalizing all 
small-business issuers in attempt to regulate the conduct of a small 
minority.
     
     Small does not necessarily equal badespecially in the case of new
industries and emerging technologies. And the purpose of the securities 
law is not to protect all investors from all risk. Rather, the principal 
goal is to provide sufficient information to permit a reasonable man to 
make an informed determination of whether the level of risk in a 
particular enterprise is acceptable to him.
     
     There is a tremendous conflict between the need for capital in
small businesses and the micro-cap investor's need for investment 
liquidity. While it's pleasant to believe in the existence of 
"investment angels" who are eager to invest in small companies without a 
concrete exit strategy, the first rule of small company investing is 
"make sure you know your way out before you invest." A secondary, but 
interrelated, problem arises when one considers the relative equity 
stake that is required to raise a specific sum of money. Private 
placements of restricted securities always go off at a significantly 
lower value than public sales of comparable securities. And this fact of 
life is not limited to the micro-cap markets.
     
     The dollar limits on Rule 504 were established in the early 1980's
and over the intervening 16 or 17 years, inflation has significantly 
reduced the relative value of the exemption. As a result, many issuers 
are forced issuers to raise less money than they really need in order to 
fit within the dollar limitations of Rule 504. Rather than gutting the 
exemption, I would prefer to see an increase in the maximum amount of 
sales to perhaps $2 or $2.5 million, thereby giving issuers a better 
chance to raise adequate capital to grow their businesses. Since the 
Commission's staff is giving considerable attention to internal 
proposals to increase the standards for accredited investors, a similar 
increase in the dollar limits of Rule 504 would also seem to be in 
order.
     
     While the Rule 504 exemption does not presently require delivery of
a specific form of disclosure document, every responsible Rule 504 
offering I've encountered meets the minimum disclosure requirements of 
Form U-7 or Regulation A, especially when the issuer contemplates the 
creation of a secondary trading market. Even so, it always amazes me 
when a well prepared Rule 504 offering document will contain from 15 to 
35 pages of deathless prose, but the only document required to support a 
public trading market is a 3 to 4 page summary document that satisfies 
the requirements of Rule 15c2-11.
     
     If the Commission really wants to clamp down on fraud in the
micro-cap securities market, I believe the following specific and 
concrete steps should be taken:
     
   * Every issuer that intends to issue freely-transferable securities
     in a Rule 504 or Regulation A offering should be required, prior to 
     the commencement of trading, to establish a Web-site on the 
     internet that includes a disclosure document meeting the 
     requirements of Form U-7 or Regulation A;
     
   * Every non-reporting issuer that intends to maintain a secondary
     trading market for its securities should also be required to post 
     quarterly and annual updates to its Web-site within a reasonable 
     period after the end of each reporting period so that the available 
     information will continue to satisfy the requirements of Form U-7 
     or Regulation A;
     
   * Every brokerage firm that operates as a market maker for securities
     of a non-reporting issuer should be obligated to independently 
     verify the availability of such information on a regular basis, but 
     not less than quarterly; and
     
   * Every broker should be required to provide the URL of the issuer's
     web-site to his client prior to accepting an order for securities.
     
     I am a firm believer in the propositions that (1) a reasonable man
given access to current and accurate information will usually make an 
informed decision and (2) that fraud can only exist in the absence of 
current and accurate information. If we truly want to reduce fraud in 
the micro-cap markets, information is the answer, not elimination.
     
Sincerely
     
John L. Petersen
Attorney at Law
16755 Ella Boulevard
Suite 177
Houston, Texas 77090