21356 Federal Register / Vol. 61, No. 91 / Thursday, May 9, 1996 / Rules Regulations

1The rule is being added as Regulation CE (for

coordinated exemptions), 17 CFR 230.1001, rather

than as Regulation CA, as proposed.

2 15 U.S.C. 77c(b).

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

4Cal. Corporations Code Section 25102(n).

5 17 CFR 230.144.

6Release No. 33–7185 (June 27, 1995) [60 FR

35638] (‘‘proposing release’’).

7This is the maximum dollar amount permitted

under the Commission’s Section 3(b) exemptive

authority.

8 17 CFR 230.501–230.508.

9The letters and comment summary are available

for inspection and copying in the Commission’s

public reference room. Refer to File No. S7–15–95.

10Chapter 828, Statutes of 1994 (Senate Bill

1951—Killea), adding subdivision (n) to

Corporations Code Section 25102.

11Section 3, Senate Bill 1951.

12 15 U.S.C. 80a-1 et seq.

13Officers and directors of corporate issuers (or

persons performing similar duties); general partners

and trustees, where the issuer is a partnership or

a trust; small business investment companies;

business development companies subject to the

Investment Company Act; private venture capital

companies exempted from the Investment Advisers

Act of 1940 [15 U.S.C. 80b–1 et seq.]; entities

comprised of accredited investors; banks; savings

and loan associations; insurance companies;

Investment Company Act companies; non-issuer

pension or profit-sharing trusts; and, organizations

(corporations, business trusts or partnerships)

described in Section 501(c)(3) of the Internal

Revenue Code [26 U.S.C. 501(c)(3)] with assets of

more than $5 million. Individuals with a net worth

of $1 million or annual income of more than

$200,000 also are qualified purchasers under the

California exemption. All these persons would

qualify as ‘‘accredited investors’’ under Rule 501(a)

[17 CFR 230.501(a)].

14These persons must also satisfy one of the

following additional suitability standards: (1) They

must have, alone or with the assistance of a

professional advisor, the capacity to protect their

own interests; (2) they must have the ability to bear

the economic risk of the investment; or (3) the

investment must not exceed 10 percent of the

person’s net worth. These criteria also apply to

individuals who have a net worth of over $1 million

or annual income exceeding $200,000.

15 15 U.S.C. 78a et seq.

Authority: 15 U.S.C. 78a, et seq., unless

otherwise noted;

* * * * *

3. 17 CFR Parts 240 and 249 are

amended by removing the reference to

‘‘$5 million’’ and adding in its place

‘‘$10 million’’ in the following sections:

(a) 17 CFR 240.12g–1

(b) 17 CFR 240.12g–4(a)(1)(ii)

(c) 17 CFR 240.12g–4(a)(2)(ii)

(d) 17 CFR 240.12h–3(b)(1)(ii)

(e) 17 CFR 240.12h–3(b)(2)(ii)

(f) 17 CFR 249.323(a)

Dated: May 1, 1996.

By the Commission.

Jonathan G. Katz,

Secretary.

[FR Doc. 96–11625 Filed 5–9–96; 8:45 am]

BILLING CODE 8010–01–P

SECURITIES AND EXCHANGE

COMMISSION

17 CFR Part 230

[Release No. 33–7285; File No. S7–15–95]

RIN 3235–AG51

Exemption for Certain California

Limited Issues

AGENCY: Securities and Exchange

Commission.

ACTION: Final rules.

SUMMARY: In order to reduce regulatory

burdens associated with certain offers

and sales of securities, the Securities

and Exchange Commission

(‘‘Commission’’) today is adopting a

new exemption from its registration

requirements for limited offerings of up

to $5 million that are exempt from

qualification under a 1994 California

state securities law.

EFFECTIVE DATE: The effective date of

Rule 1001 and the amendment to Rule

144 will be effective June 10, 1996.

FOR FURTHER INFORMATION CONTACT:

Richard K. Wulff, Office of Small

Business Policy, Division of Corporation

Finance, at (202) 942–2950 or James R.

Budge, Office of Disclosure Policy,

Division of Corporation Finance, at

(202) 942–2910, 450 Fifth Street, N.W.,

Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION: The

Commission today is adopting, as

proposed, new Rule 1001 1 under

Section 3(b) 2 of the Securities Act of

1933 (‘‘Securities Act’’). 3 The new rule

exempts from the registration

requirements of the Securities Act offers

and sales up to $5 million that are

exempt from state qualification under

paragraph (n) of Section 25102 of the

California Corporations Code. 4

Securities Act Rule 144 5 also has been

amended to include securities issued in

reliance upon Rule 1001 in the

definition of ‘‘restricted securities.’’

I. Introduction

In June 1995, pursuant to its authority

to provide exemptions for small

offerings under Section 3(b) of the

Securities Act, the Commission

proposed a new rule 6 designed to assist

small businesses’ capital raising ability

by creating a federal exemption for

offerings of up to $5 million 7 that meet

the qualifications of a California

exemption. The California law provides

an exemption from state law registration

for offerings made to specified classes of

qualified purchasers that are similar, but

not the same as, accredited investors

under Regulation D.8 Certain methods of

general solicitation are permitted under

the California law.

The Commission received ten

comment letters, which generally were

supportive of the proposals.9 The

Commission believes that the California

exemption has the potential to facilitate

small business capital raising. It is

anticipated that the new rule will result

in compliance cost savings for small

businesses and others because

qualifying issuers will be exempt from

both state qualification and federal

registration. At the same time, the

exemption assures adequate protections

to investors. Therefore, the Commission

is exercising its exemptive authority in

Section 3(b) to provide a parallel federal

exemption for the California exemption

by adopting new Rule 1001.

II. The California Exemption

On September 26, 1994, an exemption

from the issuer transactions

qualification provisions of the California

Corporations Code became effective.10

The provision was specifically designed

‘‘to facilitate the ability of small

companies to raise capital to finance

their growth.’’ 11

The exemption generally is limited to

issuers that are California corporations

or any other form of business entity

organized in that state, including

partnerships and trusts. In addition,

non-California organized businesses

may use the exemption if they can

attribute more than 50 percent of

property, payroll and sales to California

and if more than 50 percent of

outstanding voting securities of the

issuer are held of record by persons

having addresses in California. It is not

available for offerings relating to a

rollup transaction, nor may it be used by

‘‘blind pool’’ issuers or investment

companies subject to the Investment

Company Act of 1940 (the ‘‘Investment

Company Act’’). 12

Sales under the exemption must be

effected only to qualified purchasers

who buy for investment purposes and

not for redistribution. A qualified

purchaser is defined as:

• Designated professional or

institutional purchasers or persons

affiliated with the issuer; 13

• Certain relatives residing with

qualified purchasers;

• Promoters;

• Any person purchasing more than

$150,000 of securities in the offering; 14

• Entities whose equity owners are

limited to officers, directors and any

affiliate of the issuer;

• Reporting companies under the

Securities Exchange Act of 1934 (the

‘‘Exchange Act’’), 15 if the transaction
Federal Register / Vol. 61, No. 91 / Thursday, May 9, 1996 / Rules Regulations 21357

16This provision states that each such natural

person, by reason of his or her business or financial

experience, or the business or financial experience

of his or her professional advisor (who is

unaffiliated with and who is not compensated,

directly or indirectly, by the issuer), can be

reasonably assumed to have the capacity to protect

his or her interests in connection with the

transaction. The California Department of

Corporations has indicated that qualified investors

under this rubric must have business or financial

experience or rely on a professional advisor.

Release No. 94–C (September 27, 1994).

17 26 U.S.C 401(k).

18This delivery requirement is limited to those

natural persons designated as qualified purchasers

because their net worth exceeds $500,000, or whose

net worth exceeds $250,000 where there is an

annual income of $100,000.

19 17 CFR 230.502(b)(2).

20The California provision limits the content of

the general announcement to the following items:

the issuer’s identity; the full title of the securities

being offered; the suitability standards of

prospective investors; a statement that no money is

being sought or will be accepted, that an indication

of interest involves no commitment to purchase and

that under certain circumstances a disclosure

document will be provided prior to purchase; and

the name, address and telephone number of a

person who can provide further information about

the offering. Only the following additional

information may be included at the issuer’s option:

a brief description of the business, its geographical

location and the offering price or method of

determination.

21See CCH NASAA Reports § 7036. Arizona,

Colorado, Kansas, Massachusetts, Oregon,

Pennsylvania, Vermont, Virginia and Washington

currently are participating in a pilot program in this

regard, and Indiana has proposed entering this pilot

program as well.

22See CCH NASAA Reports § 6201.

23NASAA is an association of securities

commissioners from each of the 50 states, the

District of Columbia, Puerto Rico, Mexico and

several of the Canadian provinces.

24State statutes and rules based on NASAA’s

ULOE exempt offers or sales of securities made in

compliance with Rules 501–503, 505 and/or 506 of

Regulation D [17 CFR 230.501–230.503, 230.505

and 230.506 respectively], including the prohibition

of general solicitations found in Rule 502(c).

25 17 CFR 230.504.

26Securities Act Section 3(a)(11) [15 U.S.C.

77c(a)(11)] and Rule 147 [17 CFR 230.147].

27One commenter expressed the view that the

Commission should key the exemption to section

25102(n) as it existed at the time it originally

became effective. The Commission has determined

to adopt Rule 1001 as proposed in order to allow

California flexibility to address concerns relating to

its exemption without fear of losing the federal

counterpart. Nevertheless, the Commission will

monitor future changes to the California exemption

to assure that the investor protections are not

diminished in a fashion that would warrant

modification of the federal exemption.

28Rule 1001(a). While the transactions would not

be subject to registration under Section 5, the

antifraud provisions of the federal securities laws

would continue to be applicable to all exempt

transactions. See preliminary note 1 to Rule 1001.

Rule 1001 would provide an exemption only for the

transactions in which the securities are offered or

sold by the issuer; it is not an exemption for the

securities themselves.

29As noted above, California law precludes

reliance on the exemption in connection with

investment company, blind pool or roll-up

offerings; thus, the Rule 1001 exemption also would

be unavailable in those cases.

30Where a transaction involves non-cash

consideration, the amount of the offering would be

calculated as provided under California law.

31Standard integration analysis concepts would

apply. See Release No. 33–4552 (November 7, 1962)

Continued

involves the acquisition of all of an

issuer’s capital stock for investment;

• A natural person whose net worth

exceeds $500,000, or a natural person

whose net worth exceeds $250,000 if

such purchaser’s annual income

exceeds $100,000—in either case the

transaction must involve:

(a) Only a one-class voting stock (or

preferred establishing the same voting

rights),

(b) An amount limited to no more

than 10 percent of the purchaser’s net

worth, and

(c) A purchaser able to protect his or

her own interests (alone or with the

help of a professional advisor); 16

• Pension and profit sharing trusts, as

well as 401(k) plans 17 and Individual

Retirement Accounts of individual

qualified purchasers.

Issuers must provide certain

purchasers who are natural persons 18 a

disclosure document as specified in

Rule 502 of Regulation D 19 five days

prior to any sale or commitment to

purchase.

Offers, oral or written, are generally

limited to qualified purchasers.

However, the law does permit general

announcements of a proposed offering

to be widely published and circulated,

so long as they contain only specified

information. 20 This general

announcement process is modeled on

the ‘‘test the waters’’ concept being used

by several of the states 21 and by the

Commission in connection with

Regulation A.

A notice must be filed with the

California Corporations Commissioner

at the initial offer of securities or with

the publication of a general

announcement of proposed offering,

whichever comes first, accompanied by

a $600 filing fee. A second filing is

required within 10 business days after

the close or abandonment of the

offering, and in no case later than 210

days after the filing of the initial notice.

III. Regulation CE and Rule 1001

A. Need for a New Exemption

The California exemption combines a

form of general solicitation using a ‘‘test

the waters’’ concept with a qualified

purchaser concept derived in part from

the Uniform Limited Offering

Exemption (‘‘ULOE’’), 22 an official

policy guideline of the North American

Securities Administrators Association,

Inc. (‘‘NASAA’’) 23 that was adopted in

coordination with the Commission’s

adoption of Regulation D. 24 California’s

exemption does not fit well within any

current federal exemption, other than

Rule 504, 25 which is limited to $1

million, or potentially the intrastate

offering exemption. 26 Rules 505 and 506

of Regulation D prohibit general

solicitations; moreover, California’s

definition of qualified purchasers is

broader than Regulation D’s. The

intrastate offering exemption is

available only for those offerings by

issuers incorporated and doing business

in California.

The Commission does not believe that

these differences need to be an

impediment to the ability of small

businesses to take full advantage of the

California exemption. While the

qualified purchaser definition differs

somewhat from the accredited investor

definition for individuals, the California

law includes additional suitability

standards. Moreover, the general

announcement of proposed offering is

subject to significant limitation, thereby

protecting against abuse of the

procedure. The provisions of the

California law are consistent with

investor protection and the public

interest, and therefore warrant the

Commission’s full exercise of its

exemptive authority under Section 3(b).

B. The Exemption

New Rule 1001 provides that offers

and sales of securities, in amounts of up

to $5 million, that are exempt from

registration under the California

securities law pursuant to paragraph (n)

of section 25102 of the California

Corporations Code 27 are exempt from

the registration requirements of Section

5 of the Securities Act, pursuant to

Section 3(b) of that Act.28 All issuers

that qualify for the state exemption can

rely on the Rule 1001 exemption.29

Issuers should look to the state of

California for interpretations relating to

who qualifies for the exemption, since

any person who lawfully relies on the

state exemption also could rely on its

federal counterpart. Commenters who

spoke to the issue supported the

Commission’s proposal not to impose

additional qualifying standards.

As in the proposal, the final rule does

not require issuers to notify the

Commission when they rely on the

California exemption in view of the

notification provisions of the California

law.

C. Computation of $5 million amount

Rule 1001 exempts offerings up to $5

million, the maximum allowed under

Section 3(b).30 The $5 million limit will

apply on an offering-by-offering basis.31
21358 Federal Register / Vol. 61, No. 91 / Thursday, May 9, 1996 / Rules Regulations

[27 FR 11316]. These concepts are currently under

review in connection with the work of the Task

Force on Disclosure Simplification and the

Advisory Committee on the Capital Formation and

Regulatory Processes. See notes 37 and 37, below.

32See, e.g., Rule 251(b) [17 CFR 230.251(b)], Rule

504(b)(2) [17 CFR 230.504(b)(2)] and Rule

505(b)(2)(i) [17 CFR 230.505(b)(2)(i)].

33Rule 1001(c) and amendment to Rule 144.

34See, e.g., Section 4(6) of the Exchange Act [15

U.S.C. 78d(6)] and Securities Act Rule 506.

35Three commenters supported this approach.

Two commenters, however, believed that the

Commission should not proceed on a state-by-state

basis; rather, it should take a broader approach by

creating a federal exemption that the individual

states could then use to fashion their own

coordinated exemptions. The Commission will

consider this suggestion, together with others put

forward by commenters with respect to facilitating

small business capital formation, in connection

with future rulemaking projects.

36The Task Force on Disclosure Simplification

was organized in August 1995 to review forms and

rules relating to capital-raising transactions,

periodic reporting pursuant to the Exchange Act,

proxy solicitations, and tender offers and beneficial

ownership reports under the Williams Act. Its goal

was to identify where the disclosure process could

be simplified and, consistent with investor

protection, to make regulation of capital formation

more efficient. Following a seven-month review, the

Task Force completed its report, including a

number of recommendations, which the

Commission authorized for publication on March 5,

1996. This report is available for inspection and

copying at the Commission’s public reference room.

It also is available through the Commission’s

Internet web site [http://www.sec.gov].

37The Securities and Exchange Commission

Advisory Committee on the Capital Formation and

Regulatory Processes was established in February

1995. See Release No. 33–7135 (February 17, 1995)

[60 FR 9415]. The objective of the Committee is to

assist the Commission in evaluating the efficiency

of the regulatory process relating to public offerings

of securities, secondary market trading and

corporate reporting. The Committee’s focus has

been the development of a company registration

system for adoption by the Commission, which

would allow eligible companies to offer and sell

securities relying on a more company-focused, as

opposed to transaction-focused, system. The

Committee plans to issue a report containing its

recommendations in the near future.

Commenters supported this approach,

which differs from that applied in other

Section 3(b) rules, where an annual

dollar limit for the aggregate of various

Section 3(b) offers has been used.32

D. Resale limitations

The new exemption provides that

purchasers in the exempt transaction

receive ‘‘restricted securities.’’ 33

Consequently, purchasers must either

register subsequent resales of the

securities or have an exemption for such

sales. Categorizing the securities offered

and sold pursuant to Rule 1001 as

‘‘restricted’’ is consistent with the

California exemption, since the latter

requires an investment intent on the

part of purchasers in the offering, and

such shares could not be resold under

California law without qualification or

some other exemption under such law.

In addition, the treatment is consistent

with other federal exemptions, the

availability of which depends on the

sophistication, wealth or institutional

character of the investor.34

IV. Other Matters Addressed in the

Proposing Release

A. Exemptions for Other States

The Commission proposed to provide

the same exemption for each state that

enacts a transaction exemption

incorporating the same standards used

by California. To date, the Commission

has not received any request from a state

other than California seeking its own

exemption. The Commission reiterates

its desire to cooperate with the states

and repeats its position that it will

create an exemption for any state that

adopts an exemption incorporating the

same standards used by California.

Separate consideration for a federal

exemption will be given to states that

adopt other similar exemptions that

protect the public interest.35

B. General Solicitation under Regulation

D and ULOE

While not included as a rule proposal,

the Commission indicated in the

proposing release that it was

considering whether amendments to

Regulation D should be proposed that

would facilitate better use of the

exemptions by revising or eliminating

the prohibition against general

solicitation for Rule 505 and 506

offerings. This question was prompted

in part by the approach in the California

exemption that allows a form of general

solicitation followed by sales only to

qualified purchasers. Comment also was

sought as to whether the Commission

should consult with the states and

NASAA about modifying ULOE, which

also prohibits general solicitations in

these offerings.

A number of commenters supported

relaxing the general solicitation

prohibition, believing that it would

enhance the utility of Rule 505 and 506

offerings. The Commission has

determined to proceed with adoption of

the California exemption at this time

while deferring action on the general

solicitation question with respect to

other exemptions, since Section 3(b)

does not prohibit general solicitation for

offerings exempt thereunder. However,

these comments will be considered in

connection with future initiatives

undertaken by the Commission as it

evaluates the reports of the Task Force

on Disclosure Simplification 36 and the

Advisory Committee on the Capital

Formation and Regulatory Processes.37

The work of both of these groups has

been dedicated to reassessing and

reforming the federal securities

disclosure regime where necessary and

appropriate in the public interest and

consistent with investor protection.

V. Cost-Benefit Analysis

The Commission solicited comments

to aid in its evaluation of the costs and

benefits that would result from the

proposed exemption. It was expected

that compliance burdens would

decrease with respect to issuers who

qualify for the proposed exemption,

inasmuch as they would be able to raise

up to $5 million in capital without the

burden and expense of compliance with

the registration and reporting

requirements of the federal securities

laws. Commenters supported that view,

indicating that the exemption would be

beneficial to small business by reducing

their capital raising expenses without

reducing investor protection.

Consequently, the Commission has

determined to adopt the rule as

proposed.

VI. Final Regulatory Flexibility

Analysis

A final regulatory flexibility analysis

has been prepared in accordance with 5

U.S.C. 604 concerning the adoption of

Rule 1001 exemption and the

amendment to Rule 144. A copy of the

analysis may be obtained by contacting

James R. Budge, Office of Disclosure

Policy, Division of Corporation Finance,

at (202) 942–2910, U.S. Securities and

Exchange Commission, 450 Fifth Street,

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

VII. Statutory Basis for the Rules

Regulation CE, Rule 1001 and the

amendment to Rule 144 are adopted

pursuant to Sections 3(b) and 19 of the

Securities Act.

List of Subjects in 17 CFR Part 230

Registration requirements, Securities.

Text of the Amendments

In accordance with the foregoing,

Title 17, Chapter II of the Code of

Federal Regulations is amended as

follows:

PART 230—GENERAL RULES AND

REGULATIONS, SECURITIES ACT OF

1933

1. The authority citation for Part 230

continues to read in part as follows:

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

77s, 77sss, 78c, 78l, 78m, 78n, 78o, 78w,

78ll(d), 79t, 80a-8, 89a-29, 80a-30, and 80a37, unless otherwise noted.

* * * * *
Federal Register / Vol. 61, No. 91 / Thursday, May 9, 1996 / Rules Regulations 21359

2. By amending § 230.144 by

removing the period at the end of

paragraph (a)(3)(iv) and adding ‘‘; or’’ in

its place and by adding paragraph

(a)(3)(v), to read as follows:

§ 230.144 Persons deemed not to be

engaged in a distribution and therefore not

underwriters.

* * * * *

(a) * * *

(3) * * *

(v) Securities acquired from the issuer

that are subject to the resale limitations

of Regulation CE (§ 230.1001).

* * * * *

3. By adding a new undesignated

center heading and § 230.1001, to read

as follows:

Regulation CE—Coordinated

Exemptions for Certain Issues of

Securities Exempt Under State Law

§ 230.1001 Exemption for transactions

exempt from qualification under § 25102(n)

of the California Corporations Code.

Preliminary Notes: (1) Nothing in this

section is intended to be or should be

construed as in any way relieving issuers or

persons acting on behalf of issuers from

providing disclosure to prospective investors

necessary to satisfy the antifraud provisions

of the federal securities laws. This section

only provides an exemption from the

registration requirements of the Securities

Act of 1933 (‘‘the Act’’) [15 U.S.C. 77a et

seq.].

(2) Nothing in this section obviates the

need to comply with any applicable state law

relating to the offer and sales of securities.

(3) Attempted compliance with this section

does not act as an exclusive election; the

issuer also can claim the availability of any

other applicable exemption.

(4) This exemption is not available to any

issuer for any transaction which, while in

technical compliance with the provision of

this section, is part of a plan or scheme to

evade the registration provisions of the Act.

In such cases, registration under the Act is

required.

(a) Exemption. Offers and sales of

securities that satisfy the conditions of

paragraph (n) of § 25102 of the

California Corporations Code, and

paragraph (b) of this section, shall be

exempt from the provisions of Section 5

of the Securities Act of 1933 by virtue

of Section 3(b) of that Act.

(b) Limitation on and computation of

offering price. The sum of all cash and

other consideration to be received for

the securities shall not exceed

$5,000,000, less the aggregate offering

price for all other securities sold in the

same offering of securities, whether

pursuant to this or another exemption.

(c) Resale limitations. Securities

issued pursuant to this § 230.1001 are

deemed to be ‘‘restricted securities’’ as

defined in Securities Act Rule 144

[§ 230.144]. Resales of such securities

must be made in compliance with the

registration requirements of the Act or

an exemption therefrom.

Dated: May 1, 1996.

By the Commission.

Jonathan G. Katz,

Secretary.

[FR Doc. 96–11626 Filed 5–8–96; 8:45 am]

BILLING CODE 8010–01–P