29168 Federal Register / Vol. 63, No. 102 /Thursday, May 28, 1998 / Proposed Rules

aspects of the proposal.

Communications should identify the

airspace docket number and be

submitted in triplicate to the address

listed above. Commenters wishing the

FAA to acknowledge receipt of their

comments on this notice must submit

with those comments a self-addressed,

stamped postcard on which the

following statement is made:

‘‘Comments to Airspace Docket No. 98–

AGL–32.’’ The postcard will be date/

time stamped and returned to the

commenter. All communications

received on or before the specified

closing date for comments will be

considered before taking action on the

proposed rule. The proposal contained

in this notice may be changed in light

of comments received. All comments

submitted will be available for

examination in the Rules Docket, FAA,

Great Lakes Region, Office of the

Assistant Chief Counsel, 2300 East

Devon Avenue, Des Plaines, Illinois,

both before and after the closing date for

comments. A report summarizing each

substantive public contact with FAA

personnel concerned with this

rulemaking will be filed in the docket.

Availability of NPRM’s

Any person may obtain a copy of this

Notice of Proposed Rulemaking (NPRM)

by submitting a request to the Federal

Aviation Administration, Office of

Public Affairs, Attention: Public Inquiry

Center, APA–230, 800 Independence

Avenue, S.W., Washington, DC 20591,

or by calling (202) 267–3484.

Communications must identify the

notice number of this NPRM. Persons

interested in being placed on a mailing

list for future NPRM’s should also

request a copy of Advisory Circular No.

11–2A, which describes the application

procedure.

The Proposal

The FAA is considering an

amendment to 14 CFR part 71 to modify

Class E airspace at Prairie Du Chien, WI,

to accommodate aircraft executing the

proposed GPS Rwy 29 Prairie Du Chien

Municipal Airport by increasing the

radius of the existing controlled

airspace for the airport. Controlled

airspace extending upward from 700 to

1200 feet AGL is needed to contain

aircraft executing the approach. The

area would be defected on appropriate

aeronautical charts. Class E airspace

designations for airspace areas

extending upward from 700 feet or more

above the surface of the earth are

published in paragraph 6005 of FAA

Order 7400.9E dated September 10,

1997, and effective September 16, 1997,

which is incorporated by reference in 14

CFR 71.1 The Class E airspace

designation listed in this document

would be published subsequently in the

Order.

The FAA has determined that this

proposed regulation only involves an

established body of technical

regulations for which frequent and

routine amendments are necessary to

keep them operationally current.

Therefore this, proposed regulation—(1)

is not a ‘‘significant regulatory action’’

under Executive Order 12866; (2) is not

a ‘‘significant rule’’ under DOT

Regulatory Policies and Procedures (44

FR 11034; February 26, 1979); and (3)

does not warrant preparation of a

Regulatory Evaluation as the anticipated

impact is so minimal. Since this is a

routine matter that will only affect air

traffic procedures and air navigation, it

is certified that this proposed rule will

not have a significant economic impact

on a substantial number of small entities

under the criteria of the Regulatory

Flexibility Act.

List of Subjects in 14 CFR Part 71

Airspace, Incorporation by reference,

Navigation (air).

The Proposed Amendment

Accordingly, pursuant to the

authority delegated to me, the Federal

Aviation Administration proposes to

amend 14 CFR part 71 as follows:

PART 71—DESIGNATION OF CLASS A,

CLASS B, CLASS C, CLASS D, AND

CLASS E AIRSPACE AREAS;

AIRWAYS; ROUTES; AND REPORTING

POINTS

1. The authority citation for part 71

continues to read as follows:

Authority: 49 U.S.C. 106(g), 40103, 40113,

40120; E.O. 10854, 24 FR 9565, 3 CFR, 1959–

1963 Comp., p. 389.

§ 71.1 [Amended]

2. The incorporation by reference in

14 CFR 71.1 of the Federal Aviation

Administration Order 7400.9E, Airspace

Designations and Reporting Points,

dated September 10, 1997, and effective

September 16, 1997, is amended as

follows:

Paragraph 6005 Class E airspace areas

extending upward from 700 feet or more

above the surface of the earth.

* * * * *

AGL WI E5 Prairie Du Chien, WI [Revised]

Prairie Du Chien Municipal Airport, WI

(lat. 43° 01′ 49′′N, long. 91° 32′ 14′′W)

Waukon VORTAC

(lat. 43° 16′ 49′′N, long. 91° 32′ 14′′W)

That airspace extending upward from 700

feet above the surface within a 9.3-mile

radius of Prairie Du Chien Municipal Airport,

and within 3.9 miles each side of the 130°

radial of the Waukon VORTAC extending

from the 9.3-mile radius to 16.1 miles

southeast of the airport.

* * * * *

Issued in Des Plaines, Illinois on May 7,

1998.

Maureen Woods,

Manager, Air Traffic Division.

[FR Doc. 98–14174 Filed 5–27–98; 8:45 am]

BILLING CODE 4910–13–M

SECURITIES AND EXCHANGE

COMMISSION

17 CFR Part 230

[Release No. 33–7541; S7–14–98]

RIN 3235–AH35

Revision of Rule 504 of Regulation D,

the ‘‘Seed Capital’’ Exemption

AGENCY: Securities and Exchange

Commission.

ACTION: Proposed rules.

SUMMARY: Rule 504 of Regulation D

provides an exemption from Securities

Act registration when non-reporting

issuers make securities offerings that do

not exceed an aggregate annual amount

of $1 million. These offerings are not

reviewed by the Commission. Instead,

state securities regulation plays an

important role in the oversight of these

transactions. Securities sold under Rule

504 are generally freely tradable except

by affiliates. Based on recent reports

from the Commission’s examination and

enforcement programs, it appears that

the freely tradable nature of these

securities may have facilitated some

later fraudulent secondary transactions

in the over-the-counter markets for

securities of ‘‘microcap’’ companies. In

light of this use, Rule 504 may need to

be strengthened. Therefore, we are

publishing for comment proposed

amendments to eliminate the freely

tradable nature of securities issued

under Rule 504.

DATES: Comments should be received on

or before July 27, 1998.

ADDRESSES: Please send three copies of

the comment letter to Jonathan G. Katz,

Secretary, U.S. Securities and Exchange

Commission, Mail Stop 6–9, 450 Fifth

Street, N.W., Washington, D.C. 20549.

Comments also may be submitted

electronically to the following e-mail

address: rule-comments@sec.gov. All

comment letters should refer to File

Number S7–14–98; this file number

should be included on the subject line

if e-mail is used. Anyone can inspect

and copy the comment letters in our

public reference room at 450 Fifth
Federal Register / Vol. 63, No. 102 /Thursday, May 28, 1998 / Proposed Rules 29169

1Pub. L. No. 96–477, 94 Stat. 2275. That Act

amended the Securities Act by adding Section 4(6)

[15 U.S.C. 77(d)(6)] which, among other matters,

exempts from registration offers or sales of

securities in the aggregate amount of $5 million or

less if solely made to ‘‘accredited investors.’’

2 17 CFR 230.501 et seq. Regulation D provides

three separate securities offering exemptions from

Securities Act registration: Rules 504, 505 and 506.

Rule 505 is a limited offering exemption for nonpublic offerings of up to $5 million. It is designed

to help small businesses because it permits sales to

a small number of nonaccredited, unsophisticated

investors. It also was created to coordinate with the

North American Securities Administrators

Association, Inc. (‘‘NASAA’’) Uniform Limited

Offering Exemption (‘‘ULOE’’). Rule 506 is the

Commission’s safe harbor rule promulgated under

the ‘‘non-public’’ offering exemption of Section 4(2)

[15 U.S.C. 77d(2)]. It permits private sales only to

accredited investors and a limited number of

sophisticated investors.

3 15 U.S.C. 77a et seq.

4See Release No. 33–6389 (March 8, 1982) [47 FR

11251].

5A non-reporting issuer is an issuer that is not

subject to the reporting requirements of Section 13

or 15(d) of the Securities Exchange Act of 1934 [15

U.S.C. 78a et seq.]. Other issuers that are ineligible

to use Rule 504 include investment companies and

development stage companies that either have no

specific business plan or purpose or have indicated

that the business plan is to engage in a merger or

acquisition with an unidentified company or

companies, or other entity or person. See Rule

504(a) of Regulation D.

6Rule 504 offerings are aggregated for this

purpose with all other offerings exempt pursuant to

Section 3(b) (e.g., Rule 504 or 505 offerings) and all

offerings made in violation of Section 5(a) of the

Securities Act [15 U.S.C. 77e(a)].

7See interpretive letter to Mr. E.H. Hawkins (June

26, 1997), setting forth the views of the Division of

Corporation Finance that affiliates who receive

securities in a Rule 504 offering are subject to resale

restrictions.

8Rule 504 is not a part of ULOE. Connecticut,

Delaware and Oklahoma have exemptions that

directly coordinate with Rule 504. See J.W. Hicks,

7A Exempted Transactions under the Securities Act

of 1933, Section 7.09[3](1997).

9As with all Regulation D offerings, a Form D is

required to be filed with the Commission no later

than 15 days after the first sale in the Rule 504

offering. See Rule 503 [17 CFR 230.503]. Filing a

Form D is not, however, a condition to the

exemption.

10See, e.g., Schroeder, ‘‘Penny Stock Fraud is

Again on a Resurgence, Bolstered by Loopholes and

New Technology,’’ Wall St. J., September 4, 1997,

at 12.

11The 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.

12These proposals are part of the our

comprehensive agenda to deter registration and

trading abuses, particularly by ‘‘microcap’’ issuers.

The Commission has developed a four-pronged

approach to minimize ‘‘microcap fraud’:

enforcement, investor education, compliance

examinations, and regulation.

The Commission issued three releases on

February 17, 1998 to address this abuse. See

Securities Act Release No. 7505, adopting

amendments to Regulation S [17 CFR 230.901 et

seq.]; Securities Act Release No. 7506, proposing

amendments to restrict the use of Form S–8 for

sales to consultants and advisors; and Exchange Act

Release No. 39670, proposing amendments to

Exchange Act Rule 15c2–11 [17 CFR 240.15c2–11]

to require all broker-dealers to obtain and review

enhanced information about certain issuers when

they first publish (or resume publishing) a

quotation for a security.

13Securities issued in a Rule 504 transaction

would be defined as ‘‘restricted securities’’ as the

term is defined in Rule 144(a)(3) [17 CFR

230.144(a)(3)]. The Commission has not observed

the same level of fraudulent secondary trading in

securities issued pursuant to Rules 505 and 506,

which are restricted. This observation suggests that

restricting resale may deter abuse. The Commission

requests data and analysis from commenters on

whether these rules are being abused.

14As originally adopted in 1982, the exemption

was subject to a $500,000 limitation. In 1988, the

ceiling for public offerings was increased to $1

million. See Release No. 33–6758 (March 3, 1988)

[53 FR 7866].

15Form U–7 (also referenced as ULOR, uniform

limited offering registration, or SCOR, small

corporate offering registration), which was

developed by NASAA and the American Bar

Association, is a special registration format for

Continued

Street, N.W., Washington, D.C. 20549.

We will post comment letters submitted

electronically on our Internet Web site

(http://www.sec.gov).

FOR FURTHER INFORMATION CONTACT:

Richard K. Wulff or Barbara C. Jacobs,

Office of Small Business, Division of

Corporation Finance, at (202) 942–2950.

SUPPLEMENTARY INFORMATION:

I. Executive Summary

Over the years, Congress has passed

significant legislation to aid small

businesses in raising capital in the

private and public securities markets.

The Small Business Investment

Incentive Act of 1980, for example, was

designed to reduce the regulatory

restraints on small business capital

formation.1 In response to that Act, the

Commission adopted Regulation D 2

under the Securities Act of 1933

(‘‘Securities Act’’) 3 in 1982.4 Rule 504 of

Regulation D is the limited offering

exemption designed to aid small

businesses raising ‘‘seed capital.’’

Currently, it allows a non-reporting

issuer 5 to offer and sell securities to an

unlimited number of persons. The

exemption is not conditioned on the

sophistication or experience of the

investors or on delivery of any specific

information to them. General

solicitation and general advertising are

permitted for all Rule 504 offerings.

However, the offering price for a Rule

504 offering, aggregated with certain

other offerings, may not exceed $1

million within a 12-month period.6

Securities sold under the exemption

may be resold freely by non-affiliates of

the issuer.7

Issuers using Regulation D must find

exemptions or register in every state in

which they offer the securities. The vast

majority of states require registration of

Rule 504 offerings.8 In enacting Rule

504, the Commission tacitly deferred

primary regulatory responsibility to

state securities administrators because

the size and local nature of these small

offerings did not appear to warrant the

imposition of extensive federal

regulation.9 These offerings continue,

however, to be subject to federal

antifraud and other civil liability

provisions.

Despite the protective limitations

built into the exemption by the

Commission, it appears that securities

issued under Rule 504 have been used

to facilitate a number of fraudulent

secondary transactions through the OTC

Bulletin Board operated by the National

Association of Securities Dealers, Inc.

(‘‘NASD’’) or the ‘‘pink sheets’’

published by the National Quotation

Bureau, Inc.10 These offerings have

generally involved the securities of

‘‘microcap’’ companies, i.e., those

characterized by thin capitalization, low

share prices, and little or no analyst

coverage. While we believe that the

scope of abuse is small in relation to the

actual usage of the exemption,11 we also

believe that a regulatory response may

be necessary.12 Therefore, we are

proposing to implement the same resale

restrictions on securities issued in a

Rule 504 transaction as apply to

transactions under the other Regulation

D exemptions.13 In this way, we believe

that unscrupulous stock promoters will

be less likely to use Rule 504 as the

source of the freely tradable securities

they need to facilitate their fraudulent

activities in the secondary markets.

While this change also will have some

impact upon small businesses trying to

raise ‘‘seed capital’’ in bona fide

transactions, we believe that effect is

justified in light of the circumstances.

Without action to hinder the use of

securities issued under Rule 504 for

fraudulent purposes, small businesses

could be unfairly impacted by the taint

that might attach to Rule 504 offerings.

Moreover, to minimize the impact, we

would continue to allow public

solicitation and unrestricted use of

public advertising to aid small

businesses in their search for investors.

II. Background of Rule 504

Before the 1992 amendments, Rule

504 provided a different exemptive

scheme than the current rule does.

Former Rule 504 exempted public

offerings if sales did not exceed $1

million 14 in a 12-month period and if

the offering was registered with one or

more states that required the

preparation and delivery of a disclosure

document to investors before sale.15
29170 Federal Register / Vol. 63, No. 102 /Thursday, May 28, 1998 / Proposed Rules

companies registering securities under state

securities laws when relying upon Rule 504. See

Harris, Keller, Stakias & Liles, Financing the

‘‘American Dream,’’ 43 Business Lawyer 757 (1988).

As of October 1997, Form U–7 has been either

formally adopted or recognized and accepted by 40

states.

16See Release No. 33–6949 (July 30, 1992) [57 FR

36442]. On April 28, l993, the Commission adopted

additional revisions to facilitate still further

financings by small business issuers. See Release

No. 33–6996 (April 28, 1993) [58 FR 26509].

17Section 2(a)(11) of the Securities Act [15 U.S.C.

77b(a)(11)].

18Regulation D exemptions are available only to

the issuer of the securities. None of these

exemptions can be used by any other person.

Preliminary Note 4 to Regulation D.

19 In 1992, the Dow Jones Industrial Average, a

price-weighted average of 30 actively-traded stocks

listed on the New York Stock Exchange, was at

3000; it recently passed the 9000 mark. Other

indicators similarly demonstrate the overall growth

of the securities markets. For example, during the

same period, the Russell 2000 small stock index, a

measure of the stock performance of small company

stocks, moved from 200 to a recent close of over

490.

20The National Association of Securities Dealers,

Inc. (NASD) also has recently proposed a series of

measures to address microcap fraud. See, e.g., OTC

Bulletin Board Quotations Rule Amendments

(NASD Notice to Members 98–14) (Rule 6530 and

Rule 6540).

21This technique is sometimes colloquially

referred to as ‘‘pump and dump.’’

22 17 CFR 230.251 et seq.

23The Commission hosts town hall meetings

across the country from time to time for small

business to discuss issues like the Commission’s

capital formation rules. These meetings are

instructive about the current concerns and

problems facing small businesses in raising capital

Private offerings, in which general

solicitation and general advertising were

prohibited, were exempted if sales did

not exceed $500,000. State registration

was not a condition to the exemption in

the private context.

In July 1992, the Commission adopted

revisions to its rules and forms to

further facilitate capital raising by small

businesses.16 The amendments

eliminated all restrictions on the

manner of offering and on resales under

Rule 504. As a result, a non-reporting

company could offer up to $1 million of

securities in a 12-month period and be

subject only to the antifraud and other

civil liability provisions of the federal

securities laws. General solicitation and

general advertising were permitted for

all Rule 504 offerings. Further,

securities sold under Rule 504 were not

deemed ‘‘restricted securities’’ and thus

were available for immediate resale by

non-affiliates of the issuer, as long as the

non-affiliates were not ‘‘underwriters’’ 17

of the offering.18

In revising the exemption in 1992, the

Commission sought to balance the needs

of investors and the needs of small

business. In the years that have elapsed

since Rule 504 was revised, the capital

markets have experienced

unprecedented growth.19 The strong

markets have given rise to more

widespread trading of securities in nonreporting companies in interdealer

quotation systems such as the OTC

Bulletin Board. Moreover, since 1992,

market innovations and technological

changes—most notably, the Internet—

have created the possibility of

nationwide markets for these exempt

securities that were once thought to be

sold only locally. The combination of

these factors, the lack of widelydistributed public information about

companies making Rule 504 offerings

and the freely tradable nature of Rule

504 securities may have exacerbated the

opportunities for microcap fraud.

There have been a significant number

of recent Commission examinations of

broker/dealers and enforcement

investigations with allegations of fraud

involving microcap companies.20 Some

of these matters involve transactions

where a company sold securities in

reliance upon Rule 504 to certain

persons who then manipulated the price

of the securities to defraud unknowing

investors. While the initial Rule 504

sales have not necessarily been

fraudulent, the Commission is

concerned that the current Rule’s

flexibility, which permits general

solicitation of investors, contains no

disclosure requirements, and allows free

transferability of issued securities, is

being abused by perpetrators of

microcap fraud.

In some cases, those who prey on

investors through fraudulent schemes

make prearranged ‘‘sales’’ of securities

under Rule 504 to nominees in states

that do not have registration or

prospectus delivery requirements. As a

part of this arrangement, these securities

are subsequently placed with brokerdealers who use cold-calling techniques

to sell the securities at ever-escalating

prices to unsuspecting investors. When

their inventory of shares has been

exhausted, these firms permit the

artificial market demand they have

created to collapse, causing investors to

lose much, if not all, of their

investment.21

While Rule 504 is not essential to

such a microcap fraud, its limited

compliance requirements provide an

attractive device for stock manipulators

to generate a large pool of securities for

use in manipulation schemes. If the

microcap market, or offerings under

Rule 504, become stigmatized as

unsavory, legitimate small businesses

may become less able to raise money as

investors lose confidence in the market

and in the integrity of those making

such offerings. To prevent that from

happening, the Commission is

reevaluating the Rule and the revisions

to it adopted in 1992.

III. Proposed Revisions

In order to discourage abuse of those

provisions of the Rule 504 exemption

that unscrupulous stock promoters

apparently find attractive and yet

preserve the usefulness of the

exemption for small business, the

Commission proposes to impose resale

restrictions on securities issued

pursuant to the provision. Under the

proposal, all securities issued under

Rule 504 would constitute ‘‘restricted

securities’’ as the term is used in Rule

144. Consequently, these securities

could only be resold: (1) After the oneyear holding period imposed by Rule

144, (2) through registration, or (3)

through another exemption (such as

Regulation A22), if available.

This approach would be consistent

with the other Regulation D exemptions

and other types of offerings not

registered with us. While it typically

prevents investors from reselling the

securities in less than a year, it also

discourages the use of the securities as

a part of a fraud or manipulation during

the same period. It encourages longer

term investment and may provide the

necessary time for the market to learn

more about the small issuer, which are

beneficial factors for the investor and

the issuer as well.

The Commission requests comments

on the effect of this proposal upon the

abuses we have described in the

microcap market. If commenters believe

that the proposal will not have the

desired prophylactic impact, they

should explain the bases for their views

and indicate their views of the problem,

the appropriate manner of rectifying it

and data supporting their views.

In developing our recommendations,

we always try to determine whether the

proposed regulatory actions will unduly

burden legitimate small businesses. We

keep in regular contact with small

business representatives. Based upon

our ongoing dialogue, we believe that

today’s proposals are sufficiently

measured so that the most useful

aspects of Rule 504 would be preserved.

We have found that small business

representatives share our concern about

the harmful presence of those who

would taint the microcap market and

therefore raise the cost of raising capital

for legitimate small businesses. We

specifically seek the views of the small

business community on the proposals.23
Federal Register / Vol. 63, No. 102 /Thursday, May 28, 1998 / Proposed Rules 29171

in the securities markets, and permit us to design

programs that will meet their needs consistent with

the protection of investors. In future sessions, we

intend to discuss our proposals with attendees and

encourage them to submit their views as a part of

this rulemaking proceeding. In addition, the

University of Southern California recently

sponsored a forum at which a number of issues

important to small business, including alleged

abuses that are the basis for our proposal, were

discussed and considered by a group of small

business representatives and Commission staff.

24State exemptions of this nature include those

based upon the ‘‘Model Accredited Investor

Exemption,’’ which was adopted by NASAA in

1997. CCH NASAA Reporter Paragraph 361.

Generally, the rule exempts offers and sales of

securities from state registration requirements, if

among other matters, the securities are sold only to

persons who are, or are reasonably believed to be,

‘‘accredited investors’’ as defined in Rule 501(a) of

Regulation D. Written solicitations under that

provision are generally limited to a type of

‘‘tombstone’’ ad. To date, 11 states have adopted the

exemption.

25 17 CFR 230.502(b).

26 5 U.S.C. 552.

27See NASAA’s Report of the Task Force on the

Future of Shared State and Federal Securities

Regulation (October 1997). The Task Force, among

other matters, recommended that the Commission

raise the offering amount in Rule 504 offerings to

$10 million pursuant to its new authority under

Section 28 of the Securities Act [15 U.S.C. 77z–3].

It also recommended that offerings made in an

amount over $1 million be required to be registered

in the states where the offering is made.

28See note 16 above.

29NASAA and a number of states have developed

regional review procedures that permit an issuer to

file in each state, but to indicate with the filing that

regional review is requested. Under those

circumstances, the issuer will receive only one set

of comments, and the filing can become effective

simultaneously in all states in the region in which

filings have been made. To date, the regional system

has been set up in the following areas: Western

States (Alaska, Arizona, California, Colorado, Idaho,

Oregon, Utah and Washington); New England States

(Connecticut, Maine, Massachusetts, New

Hampshire, Rhode Island, and Vermont); and

Midwestern States (Illinois, Indiana, Iowa, Kansas,

Michigan, Missouri, and Wisconsin).

IV. Other Possible Approaches to Rule

504 Reform

The Commission seeks comments on

whether it should adopt other

amendments to Rule 504, in addition to

or in lieu of those discussed in this

release, to discourage its abuse while

preserving its utility for small

businesses.

The Commission is particularly

interested in hearing from commenters

about whether general solicitation and

advertising should continue to be

permitted in Rule 504 offerings, and

whether the lack of restrictions in this

area have been a source of abuse,

particularly in finding investors or

generating market interest in issuer

securities. If general solicitation and

general advertising is thought to be

connected to abusive situations,

commenters should recommend how

these abuses might be deterred. For

example, should the Commission

reintroduce the requirement that general

solicitation and general advertising of

securities offered under Rule 504 be

conditioned in some way? Under one

model, public offerings under the Rule

504 exemption might be limited to

where the issuer complies with state

registration processes that require the

preparation and delivery of a disclosure

document to investors prior to sale of

the securities. Should general

solicitation and general advertising be

contingent upon state registration and

prospectus delivery to all investors

before sale? Would adding these

requirements further discourage

fraudulent secondary market activity as

well as fraudulent offerings under Rule

504? If so, would the cost to small

businesses of restricting the solicitation

methods permitted by Rule 504 be

outweighed by the benefits from

avoiding a taint to Rule 504? How

should offerings made pursuant to

certain state exemptions, such as the

one recently developed for sales to

‘‘accredited investors,’’ 24 be treated?

Under this model (which was the rule

before 1992), private offerings would

continue to be permitted without

compliance with this particular type of

state registration procedure. Should all

provisions of the previous version of the

rule be reinstituted, i.e., should publicly

offered securities issued under the

exemption be unrestricted?

The Commission also is particularly

interested in hearing from commenters

about the absence of specific disclosure

requirements under Rule 504, as

contrasted to offerings under Rules 505

and 506, which must satisfy the

information requirements of Rule 502(b)

of Regulation D.25 Should the

Commission require that a disclosure

document satisfying those information

requirements be delivered to nonaccredited investors before sale in Rule

504 offerings? To ensure easy access for

all investors, should disclosure

documents and other sales materials be

required to be provided as an exhibit to

the Form D? Since Forms D are not

currently filed electronically with the

Commission, should a change be made

requiring electronic filing? Should these

documents be provided to the

Commission for its information only?

What issues would this type of

procedure raise under the Freedom of

Information Act 26? Should a

confidential treatment process be

developed to protect some of the

information contained in these

documents?

V. Solicitation of Comment—Other Rule

504 Improvements

The Commission seeks comment with

respect to each of the other facets of the

current Rule 504 regulatory compliance

scheme. Specifically, does the current

Rule serve investors’ interests? If not,

how could this Rule be further

strengthened? Should a lower aggregate

dollar amount, such as $500,000, be

implemented with different

requirements in order to provide a more

effective compliance system? Should

the current 12-month measuring period

be lengthened to 2 years, with or

without a change in the aggregate dollar

limitation?

Should the types of issuers eligible to

use the exemption be changed? For

example, should particular types of

‘‘penny stock’’ issues be excluded, e.g.,

offerings for less than $1 per share?

Should issuers with total assets or

market capitalization below a minimum

amount be precluded from using the

rule, e.g., $1 million? Would such a

limit be consistent with a stated purpose

of the exemption: for raising ‘‘seed

capital’’?

Does the current rule serve issuers’

needs? At the same time we are

proposing to tighten the rule, are there

other areas of the Rule that we can

modify to provide small businesses with

flexibility without compromising

investor protection? For example,

should the measuring period for

determining the scope of an offering be

shortened to six months? Should the

dollar limitation in the Rule be

increased to $5 million or some higher

dollar amount if accompanied with

additional compliance requirements

such as specified disclosure

requirements or state registration

requirements? 27

Do differences in state registration

schemes affect the utility of Rule 504?

Do those differences affect the incidence

of fraudulent secondary trading? If so,

how? Has reliance on state regulation

achieved the goals set out by the

Commission when it amended Rule 504

in 1992? 28 Although improving, has the

lack of uniformity of state securities

regulation in this area had any impact

on Rule 504 offerings? Should Rule 504

be revised to impose greater uniformity

nationwide in disclosures provided to

investors under Rule 504? Should

public offerings under Rule 504 be

limited to only those offerings registered

in and made in states participating in

NASAA’s regional review program? 29

Should the Commission take a more

active role in monitoring Rule 504

transactions to ensure compliance with

the antifraud requirements of the federal

securities laws? Should additional

information be mandated in Form D?
29172 Federal Register / Vol. 63, No. 102 /Thursday, May 28, 1998 / Proposed Rules

30 17 CFR 230.701.

31 15 U.S.C. 77s(a). 32 5 U.S.C. 603.

33Pub. L. 104–121, 110 Stat. 857 (1996) (codified

in scattered sections of 5 U.S.C., 15 U.S.C., and as

a note to 5 U.S.C. 601).

For example, should Form D be required

to indicate the state(s) where the

offering was made? Or, should Form D

filers be required to amend their filings

periodically (whether quarterly,

annually or some other increment of

time) to disclose: (1) Whether they have

prepared or provided information to

facilitate trading such as the NASD’s

Form 211, which is required prior to

inclusion on the OTC Bulletin Board;

and (2) whether they have provided

other information to potential or

existing market makers for their

securities?

Before the adoption of Rule 701,30 the

Rule 504 exemption was used by a

number of foreign private issuers in

order to compensate their U.S.

employees by issuing them company

securities. Many of these issuers had

substantial market capitalizations and

were listed on foreign exchanges.

Comment is requested concerning the

impact of the proposed revisions upon

these companies. Specifically, is the

Rule 504 exemption still being used by

these issuers? If so, for what purposes is

Rule 504 used? If these foreign private

issuers still use the exemption, should

the Commission treat their Rule 504

issuances differently, i.e., not as

‘‘restricted securities’’ if they are not

microcap companies, and file periodic

public reports in their home or other

countries?

VI. General Request for Comment

Any interested persons wishing to

submit written comment on any of the

issues set forth in this release are

invited to do so by submitting them in

triplicate to Jonathan G. Katz, Secretary,

U.S. Securities and Exchange

Commission, 450 Fifth Street, N.W.,

Washington D.C. 20549. Comments also

may be submitted electronically at the

following e-mail address: rulecomments@sec.gov. All comment letters

should refer to File Number S7–14–98;

this file number should be included on

the subject line if e-mail is used.

Comments received will be available for

public inspection and copying in the

Commission’s public reference room at

450 Fifth Street, N.W., Washington, D.C.

20549. Electronically submitted

comment letters will be posted on the

Commission’s Internet Web site (http://

www.sec.gov). Comments on this

proposal will be considered by us in

complying with our responsibilities

under Section 19(a) of the Securities

Act.31 We further request comment on

any competitive burdens that may result

from adoption of the proposals.

Comments are solicited from the point

of view of, among others, issuers,

underwriters, broker/dealers and the

investing public.

VII. Summary of Initial Regulatory

Flexibility Analysis

We have prepared an Initial

Regulatory Flexibility Analysis

(‘‘IRFA’’) in accordance with the

Regulatory Flexibility Act 32 regarding

the proposed amendments.

The analysis notes that the

amendments to Rule 504 are a result of

our view—and that of representatives of

other regulators—that the current

configuration of the exemption may be

leading to abuse. The purpose of the

proposals is to reduce the potential for

abuse and yet maintain the utility of the

exemption for small businesses. We

believe that the proposed amendments

will enhance the protection of the

investing public.

In calendar year 1997, 1,505 Forms D

were filed by 1,397 companies with the

Commission claiming the Rule 504

exemption. Rule 504 only affects nonreporting companies. The Commission

has sought to minimize the reporting

burden on small businesses. However,

we do not collect data to determine how

many of the non-reporting companies

filing Form D are small businesses.

Therefore, we are unable to determine

exactly how many small businesses will

be affected by the proposed

amendments.

While it is not possible to know with

certainty, it is believed that most Rule

504 offerings were done by small

businesses. The rule changes would

restrict the resale of all securities issued

pursuant to Rule 504. Officials at the

NASD estimate that between 300 and

500 applications for quotation on the

OTC Bulletin Board annually have been

based on the Rule 504 exemption. We

presume, therefore, that the proposal

would affect at least some of the small

businesses currently using Rule 504.

The proposal, if adopted, could cause

these issuers to offer higher discounts in

the sales of their securities, which may

increase their overall cost for capital.

The Commission has insufficient data to

reliably quantify the impact on small

entities offering such a discount, and

requests comment, supported by data

and analysis regarding the nature and

size of any discount.

As discussed more fully in the IRFA,

several possible significant alternatives

to the proposals were considered. These

included: establishing different

compliance or reporting requirements

for small entities, clarifying,

consolidating or simplifying the

compliance and reporting requirements

for small entities, using performance

rather than design standards, exempting

small entities from all or part of the

proposed requirements, or requiring

them to provide more disclosure, such

as the same disclosure required for the

other Regulation D exemptions. The

IRFA also indicates that there are no

current federal rules that duplicate,

overlap, or conflict with the proposed

amendments.

We encourage written comments on

any aspect of the IRFA. In particular, we

seek comment on: (i) the number of

small entities that would be affected by

the proposed amendments; and (ii)

whether the proposed amendments

would affect the reporting,

recordkeeping and other compliance

requirements for small entities and, if

so, how. If you believe the proposals

will significantly impact a substantial

number of small entities, please

describe the nature of the impact and

estimate the extent of the impact with

specific data.

For purposes of making

determinations required by the Small

Business Regulatory Enforcement

Fairness Act of 1996 (‘‘SBREFA’’),33 we

also are requesting data regarding the

potential impact of the proposed

amendments on the economy on an

annual basis. Your comments will be

considered in the preparation of the

Final Regulatory Flexibility Analysis if

the proposed amendments are adopted.

A copy of the Initial Regulatory

Flexibility Act Analysis may be

obtained from Twanna M. Young, Office

of Small Business, Division of

Corporation Finance, Securities and

Exchange Commission, 450 Fifth Street,

N.W., Washington, D.C. 20549.

VIII. Cost-Benefit Analysis

The current version of Rule 504 was

adopted in 1992. At that time it was

believed to contain adequate

compliance standards, including: the

limits on the amount of money

permitted to be raised and the types of

issuers eligible to use the exemption;

the filing of the Form D notification

with the Commission to aid in its

monitoring of the exemption; the federal

antifraud provisions; and, perhaps most

importantly, state regulation of these

transactions. Since that time, however,

securities issued pursuant to Rule 504

have been used in fraudulent secondary

trading.
Federal Register / Vol. 63, No. 102 /Thursday, May 28, 1998 / Proposed Rules 29173

34 15 U.S.C. 77b(b).

35 44 U.S.C. 3501 et seq. 36 44 U.S.C. 3506(c)(2)(B).

The proposed amendments would

address these problems by restricting

the resale of securities; generally this

change would require investors to hold

them for at least one year following

purchase. The Commission believes

these proposed amendments, if adopted,

would benefit issuers and investors by

curbing some of the abuses in the

secondary market, safeguarding

investors, and preserving the utility of

the exemption for legitimate

transactions.

In calendar year 1997, 1,505 Forms D

were filed by 1,397 companies with the

Commission claiming a Rule 504

exemption. Officials at the NASD

estimate that between 300 and 500

applications for quotation on the OTC

Bulletin Board annually have been

based on the Rule 504 exemption. The

Commission cannot estimate the costs of

the proposed amendments with

certainty. Some issuers may be required

to offer discounts or other incentives to

sell their securities in order to

compensate for the restriction on resale.

However, because the exemption is

designed to raise ‘‘seed’’ capital, most of

the issuers and the type of transaction

the rule is designed to reach are in the

early stages of their development. These

issuers are interested in attracting

patient investors who are committed to

remaining with the business for some

period of time. As such, it seems

reasonable that these investors and the

companies would expect the securities

to be held for some period of time;

certainly for at least one year. Our

experience shows that many of the

active trading markets that develop

shortly after securities are issued under

Rule 504 are artificial. While liquidity is

an important feature with any securities

investment, whether it is sufficiently

significant in connection with a ‘‘seed’’

capital offering to require a substantial

discount in the offering price is

debatable. Nonetheless the Commission

is seeking specific comments on this

issue and empirical data. While the

amendments will probably impact

mostly small entities, the changes are

necessary to curb fraud in the market for

the securities of small issuers. The

Commission does not have sufficient

data to reliably estimate this cost and

requests data and analysis from

commenters.

As an aid in the evaluation of the

costs and benefits of these proposals, we

request the views and other supporting

information of the public. It appears to

us that the proposed amendments, if

adopted, would continue to provide the

significant cost savings originally

envisioned for small issuers making

offerings under Rule 504 without

compromising investor protection.

We request your comment on whether

the proposed amendments would be a

‘‘major rule’’ for purposes of the

SBREFA. We request comments on

whether the proposed amendments are

likely to have an annual effect on the

economy of $100 million or more. Your

comments should provide empirical

data to support your views.

Section 2(b) of the Securities Act

requires the Commission, when engaged

in rulemaking that requires a public

interest finding, to consider, in addition

to the protection of investors, whether

the action will promote efficiency,

competition and capital formation.34

The Commission’s preliminary view is

that the proposed amendments would

not have any effect on competition.

Moreover, the proposed amendments

are designed to curb fraud in the market

for the securities of small issuers, and

therefore are likely overall to improve

efficiency and capital formation for

legitimate small businesses. The

Commission is aware, however, that

restricting the resale of securities may

have some impact on the cost of capital

formation. The Commission requests

data and analysis on what effect the

proposed changes may have on

efficiency, competition and capital

formation.

IX. Paperwork Reduction Act

Our staff has submitted the proposals

for review to the Office of Management

and Budget (‘‘OMB’’) in accordance

with the Paperwork Reduction Act of

1995 (‘‘the Act’’). 35 The title to the

affected information collection is:

‘‘Form D.’’ The specific information that

must be included in Form D is

explained in the form itself, and relates

to the issuer, its principals and the

amount of money proposed to be raised

along with proposed applications of the

proceeds. The information is needed for

monitoring use of the exemption as well

as evaluating its usefulness to issuers.

The collection of information in Form

D will continue to be required in order

for companies to use the rule for sales

of their securities. The likely

respondents to the rule are those

companies that have previously used

the rule and other small entities. While

we cannot estimate the number of

respondents that may use revised Rule

504, there were 1,505 Form D filings by

1,397 companies under Rule 504 during

calendar year 1997. We expect that

approximately 1500 companies each

year will be relying on the exemption.

If the revisions to Rule 504 are adopted,

the estimated burden for responding to

the collection of information in Form D

would not increase for most companies

because the information required has

not been changed. The number of

eligible transactions, however, may

decrease. We estimate that the average

burden hours per filing will be 16.

Therefore, we estimate an aggregate of

24,000 burden hours per year. The

Commission does not know how many

issuers may be affected by this proposal,

whether they will decide to rely on

another exemption, or how much, if

any, the information collection burden

would be.

The information collection

requirements imposed by Form D are

mandatory to the extent that a company

elects to use the Rule 504 exemption.

The information is disclosed to the

public. An agency may not conduct or

sponsor, and a person is not required to

respond to, a collection of information

unless it displays a currently valid

control number.

In accordance with the Act,36 we

solicit comment on: (1) whether the

collection of information is necessary;

(2) the accuracy of our estimate of the

burden of the collection of information;

(3) the quality, utility and clarity of the

information to be collected; and (4)

whether the burden of collection of

information on those who are to

respond, including through the use of

automated collection techniques or

other forms of information technology,

may be minimized.

Persons desiring to submit comments

on the collection of information

requirement should direct them to the

Office of Management and Budget,

Attention: Desk Officer for the

Securities and Exchange Commission,

Office of Information and Regulatory

Affairs, Washington, D.C. 20503, and

should also send a copy of their

comments to Jonathan G. Katz,

Secretary, Securities and Exchange

Commission, 450 Fifth Street, N.W.,

Washington, D.C. 20549, with reference

to File No. S7–14 –98. The Office of

Management and Budget is required to

make a decision concerning the

collection of information between 30

and 60 days after publication, so a

comment to OMB is best assured of

having its full effect if OMB receives it

within 30 days of publication.

X. Statutory Basis for the Proposals

The amendments are proposed

pursuant to Sections 2, 3(b), 6, 7, 8, 10,

19(a), 19(c) and 28 of the Securities Act.
29174 Federal Register / Vol. 63, No. 102 /Thursday, May 28, 1998 / Proposed Rules

List of Subjects in 17 CFR Part 230

Reporting and recordkeeping

requirements, Securities.

Text of Rule and Form Proposals

For the reasons set out in the

preamble, title 17, chapter II of the Code

of Federal Regulations is proposed to be

amended as follows:

PART 230—GENERAL RULES AND

REGULATIONS, SECURITIES ACT OF

1933

1. The citation for Part 230 continues

to read in part as follows:

Authority: 15 U.S.C. 77b, 77f, 77g, 77h, 77j,

77r, 77s, 77sss, 78c, 78d, 78l, 78m, 78n, 78o,

78w, 78ll(d), 79t, 80a–8, 80a–24, 80a–29,

80a–30, and 80a–37, unless otherwise noted.

* * * * *

§ 230.502 [Amended]

2. By amending the introductory text

of paragraph (d) of § 230.502 by revising

the words ‘‘Except as provided in

§ 230.504(b)(1), securities’’ to read

‘‘Securities’’.

3. By revising § 230.504(b)(1) to read

as follows:

§ 230.504 Exemption for limited offerings

and sales of securities not exceeding

$1,000,000.

* * * * *

(b) Conditions to be met.—(1) General

conditions. To qualify for exemption

under this § 230.504, offers and sales

must satisfy the terms and conditions of

§§ 230.501 and 230.502(a) and (d).

* * * * *

Dated: May 21, 1998.

By the Commission.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–14024 Filed 5–27–98; 8:45 am]

BILLING CODE 8010–01–P

DEPARTMENT OF HEALTH AND

HUMAN SERVICES

Food and Drug Administration

21 CFR Parts 809 and 864

[Docket No. 97N–0135]

Medical Devices; Hematology and

Pathology Devices; Reclassification;

Restricted Devices; OTC Test Sample

Collection Systems for Drugs of Abuse

Testing; Public Hearing

AGENCY: Food and Drug Administration,

HHS.

ACTION: Notification of public hearing

on proposed rule.

SUMMARY: The Food and Drug

Administration (FDA) is announcing a

public hearing on a proposed rule to

reclassify over-the-counter (OTC) test

sample collection systems for drugs of

abuse testing. The purpose of the public

hearing is to solicit input on the

proposed rule in addition to comments

being submitted to the docket. The

information obtained at the hearing will

assist FDA in its preparation of a final

rule.

DATES: The public hearing will be held

on June 19, 1998, from 9 a.m. to 5 p.m.

Written notices of participation should

be filed by June 8, 1998. Submit written

comments by July 5, 1998.

ADDRESSES: The public hearing will be

held at the Food and Drug

Administration, 5600 Fishers Lane,

conference rooms D and E, Rockville,

MD 20857. Submit written notices of

participation and written comments to

the Dockets Management Branch (HFA–

305), Food and Drug Administration,

12420 Parklawn Dr., rm. 1–23,

Rockville, MD 20857.

FOR FURTHER INFORMATION CONTACT:

Steven I. Gutman, Center for Devices

and Radiological Health (HFZ–440),

Food and Drug Administration, 2098

Gaither Rd., Rockville, MD 20850, 301–

594–3084.

SUPPLEMENTARY INFORMATION: In the

Federal Register of March 5, 1998 (63

FR 10792), FDA published a proposed

rule to reclassify OTC test sample

collection systems for drugs of abuse

testing. FDA has determined that a

public hearing on the proposed rule is

warranted. The hearing will be directed

by William B. Schultz, Deputy

Commissioner for Policy, FDA. To the

extent possible, oral testimony should

address the issues identified in the

proposed rule (63 FR 10792). The

procedures governing the hearing are

those applicable to a public hearing

before the Commissioner of Food and

Drugs under 21 CFR part 15.

Interested persons who wish to

participate may, on or before June 8,

1998, submit a notice of participation to

the Dockets Management Branch

(address above). All notices submitted

should be identified with the docket

number found in brackets in the

heading of this document and should

contain the name, address, telephone

number, business affiliation of the

person requesting to make a

presentation, a brief summary of the

presentation, and the approximate time

requested for the presentation.

Individuals or groups having similar

interests are requested to consolidate

their comments and present them

through a single representative. FDA

will allocate the time available for the

hearing among the persons who

properly file a notice of appearance.

After reviewing the notice of

participation and accompanying

information, FDA will schedule each

appearance and notify each participant

by mail or telephone of the time allotted

to the person and the approximate time

the person’s presentation is scheduled

to begin. FDA may require joint

presentations by persons with common

interests. The schedule of the public

hearing will be available at the hearing

and it will be placed on file in the

Dockets Management Branch following

the hearing.

The administrative record of the

proposed regulation will be open for 15

days after the hearing to allow

comments on matters raised at the

hearing. Persons who wish to provide

additional materials for consideration

are to file these materials with the

Dockets Management Branch (address

above) during that period.

The hearing is informal, and the rules

of evidence do not apply. No participant

may interrupt the presentation of

another participant. Only the presiding

officers and panel members may

question any person during or at the

conclusion of their presentation.

Dated: May 20, 1998.

William K. Hubbard,

Associate Commissioner for Policy

Coordination.

[FR Doc. 98–14048 Filed 5–27–98; 8:45 am]

BILLING CODE 4160–01–F

DEPARTMENT OF THE INTERIOR

Office of Surface Mining Reclamation

and Enforcement

30 CFR Part 936

[SPATS No. OK–022–FOR]

Oklahoma Regulatory Program

AGENCY: Office of Surface Mining

Reclamation and Enforcement (OSM),

Interior.

ACTION: Proposed Rule; reopening and

extension of public comment period on

proposed amendment.

SUMMARY: OSM is announcing receipt of

revisions and additional explanatory

information pertaining to a previously

proposed amendment to the Oklahoma

regulatory program (hereinafter referred

to as the ‘‘Oklahoma program’’) under

the Surface Mining Control and

Reclamation Act of 1977 (SMCRA). The

revisions and additional explanatory

information pertain to normal