Self-Regulatory Organizations; Filing of Amendment Nos. 2 and 3 to Proposed Rule Change by the Pacific Stock Exchange, Inc. Relating to the Listing and Trading of SCOR Securities on the Exchange

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34328; File No. SR-PSE-92-42]

Self-Regulatory Organizations; Filing of Amendment Nos. 2 and 3

to Proposed Rule Change by the Pacific Stock Exchange, Inc. Relating to

the Listing and Trading of SCOR Securities on the Exchange

July 7, 1994.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on June 2,

1994\1\ and July 7, 1994 the Pacific Stock Exchange, Inc. (``PSE'' or

``Exchange'') filed with the Securities and Exchange Commission

(``Commission'') Amendment Nos. 2 and 3 to File No. SR-PSE-92-42\2\ as

described in Items I, II and III below, which Items have been prepared

by the self-regulatory organization. The Commission is publishing this

notice to solicit comments on the amendment to the proposed rule change

from interested persons.

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\1\The Exchange subsequently filed Exhibit 1 to the Amendment

(form of notice for Federal Register) with the Commission on June 15

and June 22, 1994.

\2\The proposed rule change was published for public comment in

Exchange Act Release No. 32514 (June 25, 1993), 58 FR 35496 (July 1,

1993).

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I. Self-Regulatory Organization's Statement of the Terms of Substance

of the Proposed Rule Change

The PSE is amending its proposal to list and trade Small Corporate

Offering Registration (``SCOR'') securities on the Exchange.

II. Self-Regulatory Organization's Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, the self-regulatory organization

included statements concerning the purpose of and basis for the

proposed rule change and discussed any comments it received on the

proposed rule change. The text of these statements may be examined at

the places specified in Item IV below. The self-regulatory organization

has prepared summaries, set forth in Sections A, B, and C below, of the

most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule Change

1. Purpose

The Exchange is amending its proposal to list securities under the

SCOR designation. The amendment is partly based upon discussions the

Exchange has held, subsequent to the initial filing, with committees of

the North American Securities Administrations Association, Inc.

(``NASAA''),3 the California Department of Corporations, and

leaders from the small business community. The Exchange believes that

the proposal, as amended, satisfactorily addresses the mutual concerns

of these individuals and organizations.

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\3\The Exchange consulted extensively with the Small Business

Capital Formation and the Small Business Sales Practices committees

of NASAA.

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Inclusion of Preferred Stock

The Exchange notes that many companies, particularly in the high-

technology sector, have a capital structure consisting of two classes

of capital stock, i.e., a single class each of common and preferred.

The class of common stock is privately held by insiders and, generally,

is not transferable, while the preferred stock is issued to qualified

public investors. Under this structure, holders of preferred stock have

preference over common shareholders in the event of liquidation. The

Exchange has determined, accordingly, that it would consider listing a

company's preferred stock under the SCOR program if the company's

overall capital structure and corporate governance policies were

sufficiently designed to protect the interests of public investors.

Initial Listing Requirements

The Exchange's initial filing proposed that each issuer of a SCOR

security have a public float of at least 200,000 shares and a market

capitalization of $1 million. Since the $1 million market

capitalization requirement also represents the maximum offering amount

allowable under Rule 504, the Exchange is proposing to lower the

effective market capitalization threshold to $750,000, with a

corresponding reduction in public float to 150,000 shares and in net

worth to $750,000. This reduction would provide a viable range of

$750,000 to $1 million for SCOR offerings, making allowances for

potential costs associated with the offering. The Exchange believes

that, with these modifications, the SCOR listing program will be more

viable in enabling bona fide companies to raise capital pursuant to

Rule 504. The Exchange also believes that these proposed changes to the

initial listing requirements for SCOR securities will continue to

ensure adequate public distribution, and will not inhibit the growth of

the trading markets or negatively influence specialists' abilities to

maintain fair and orderly markets. The public float requirement of

150,000 shares exceeds the NASDAQ Small Cap initial listing standard of

100,000 shares. Moreover, the Exchange's calculation of public float is

more stringent than that of the NASD in that it excludes any

concentrated holdings of 5% or more.4 Finally, because certain

SCOR offerings may be ``integrated,''5 it is conceivable that the

applicant issuer may have a greater public distribution than initially

expected and, therefore, would further exceed the minimum requirements.

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\4\The NASD excludes concentrated holdings of more than 10

percent. See NASD By-Laws, Schedule D, Part II, Sec. 1(c)(7).

\5\Factors to be considered in determining whether offerings

should be ``integrated'' are whether the offerings: (1) Involve the

same class of security, (2) involve the same type of consideration,

(3) are part of a single plan of financing, (4) are made at or about

the same time, and (5) are made for the same general purpose. See

Securities Act Release Nos. 4434 (1961) and 4552 (1963).

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Net Worth and Net Tangible Assets

To prevent a company that has no tangible assets net of liabilities

from being listed, the Exchange will apply both net worth and net

tangible assets as a test. Accordingly, proposed Rule 3.2(t)(2) would

require that a company have both net tangible assets of at least

$500,000 and a total net worth of at least $750,000.

Audited Financial Statements

Proposed Rule 3.2(t)(4) provides that, at the time of its

application, the issuer must provide the Exchange with audited

financial statements for the most recent fiscal year-end (and unaudited

interim financial statements), and that such statements must be

prepared in accordance with generally accepted accounting principles.

Qualitative Listing Requirements

Proposed Rule 3.2(t)(6) sets forth additional qualitative

requirements in determining a company's listing eligibility. The fact

that an applicant may meet the numerical requirements does not mean

that its application will be approved. The Exchange recognizes the

potential for investor risk in SCOR securities; however, the Exchange

is confident that through a rigorous merit review process, it can

attain the mutual goals of supporting small business capital formation

while providing sufficient protection for the investing public.

Preferred Stock--Anti-Dilution Clause

The Exchange is proposing in Commentary .04 to Rule 3.2(t) to

provide that it will not list convertible preferred issues containing a

provision that permits the company, at its discretion, to reduce the

conversion price of its stock other than in accordance with the terms

of the company's articles of incorporation or any amendments thereof

made contemporaneously with the offering under which the issuer is

applying for listing.

Representations of Approval for Listing

The Exchange has added language that clearly prohibits a company or

broker-dealer from misrepresenting SCOR securities as having been

approved for Exchange listing when, in fact, they have not been

approved. Accordingly, the Exchange is proposing to add Commentary .05

to Rule 3.2(t) stating that any reference to this Exchange made either

by the issuer or the underwriter of the issuer in any prospectus,

offering circular, or similar document that reasonably implies

endorsement or listing approval by the Exchange, and which is made

without the prior consent to the Exchange, is prohibited.6

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\6\If the Exchange finds that a company or broker-dealer has

engaged in such conduct, it will immediately report the matter to

the appropriate state regulatory agency and to the Commission.

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Delisting

Proposed Rule 3.5(r), Commentary .01, has been revised to

incorporate specific times required for compliance with certain

maintenance requirements once a deficiency has occurred. The commentary

now states that a company with a deficiency in either market value of

public float or minimum bid price for ten consecutive business days

shall have 90 days thereafter in which to comply with the maintenance

requirements. It further states that, should the deficiency continue

beyond the prescribed period, the Exchange shall delist the security.

2. Statutory Basis

The proposal is consistent with Section 6(b) of the Act, in

general, and Section 6(b)(5), in particular, in that it is designed to

facilitate transactions in securities, to promote just and equitable

principles of trade, and to protect investors and the public interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

The Exchange does not believe that the proposed rule change will

impose any burden on competition that is not necessary or appropriate

in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed

Rule Change Received From Members, Participants or Others

The Commission published the Exchange's rule proposal to list SCOR

securities in July 1993.\7\ Several comment letters were received by

the Commission, including comments from the California Department of

Corporations\8\ and NASAA's Small Business Capital Formation

Committee.\9\ While these comment letters generally supported the

Exchange's overall policy objectives to facilitate capital formation

for small companies and to provide public investors in those securities

with more liquidity, the agencies recommended that revisions be made to

the Exchange's rule proposal to strengthen the qualitative listing

requirements in order to ensure adequate investor protection. They also

suggested that more precise language be incorporated to assure that the

listings requirements would not be waived.

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\7\See Exchange Act Release No. 32514 (June 25, 1993), 58 FR

35496 (July 1, 1993).

\8\See letter from Brian A. Thompson, Acting Commissioner of

Corporations, State of California, to Jonathan G. Katz, Secretary,

SEC, dated July 21, 1993.

\9\See letter from Neal E. Sullivan, Chairman, NASAA's Small

Business Capital Formation Committee, to Jonathan G. Katz,

Secretary, SEC, dated July 30, 1993. The Commission also received 15

supportive comment letters from small companies and individuals.

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In the months that followed (September 1993 through May 1994) the

Exchange consulted extensively with the California Department of

Corporations and NASAA\10\ to resolve the above-mentioned comments as

well as other questions that were subsequently raised during this time

interval. After careful review and consideration of all the information

received from the aforementioned parties, the Exchange incorporated new

language into the rules that the Exchange Staff believes satisfactorily

addresses these comments. A number of minor changes have been made

throughout the filing for stylistic and clarification purposes.

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\10\In February 1994, the Exchange was advised by Barry Guthary,

Chairman of NASAA's Small Business Capital Formation Committee, that

our initiative to list SCOR securities would be more appropriately

reviewed by the NASAA Small Business Sales Practices Committee

chaired by Deborah Bortner, Assistant Securities Administrator,

State of Washington Securities Division. Consequently, since March

1994, the Exchange has received constructive and valuable input from

this committee. In a letter dated April 14, 1994, the Exchange

received a formal response from Ms. Bortner's committee regarding

the Exchange's amended rule proposal.

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The most substantive comments received by the Exchange that

precipitated this amendment are categorically discussed below.

Representations of Approval for Listing

In the original proposal, NASAA was troubled by the lack of a

definitive enforcement standard precluding companies (or underwriters)

from falsely claiming in a prospectus that the securities being offered

were approved for listing on the Exchange. The Exchange appreciated

NASAA's concerns that a company or broker-dealer may employ such a

scheme to defraud any prospective investor by misrepresenting that SCOR

securities have been approved for listing. To address this concern, the

Exchange has added more precise language that clearly prohibits this

practice.\11\

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\11\See proposed Rule 3.2(t), Commentary .06.

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Qualitative Listing Requirements

As mentioned above, the California Department of Corporations and

NASAA suggested that the Exchange incorporate additional qualitative

factors that would be evaluated in determining a company's listing

eligibility. Therefore, the Exchange expanded and provided further

specificity to the guidelines to be considered in the review of any

listing application. The standards set forth in proposed Rules 3.2(a)

and 3.2(t)(6) are intended to provide guidelines that will be strictly

enforced. The fact that an applicant may meet the numerical

requirements does not mean that its application will be necessarily

approved.

Compliance with Listing Requirements for Minimum Price and Market

Capitalization

In a letter dated March 21, 1994, the California Department of

Corporations questioned how and when the initial listing requirement

for market capitalization would be calculated. In order to eliminate

any potential confusion in determining whether the issuer satisfies the

initial price per share and market capitalization requirements, the

Exchange decided to provide further specificity to the pricing

guidelines.\12\ The Exchange felt that any direct reference to the term

``market value'' as proposed in the original rule filing would be

inappropriate because there is no practical means to establish how and

when market value is calculated.

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\12\See proposed Rule 3.2(t)(3) and subsections (iv) and (v) of

proposed Rule 3.2(t)(6).

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Trading Environment

The Exchange received comment letters from the California

Department of Corporations and NASAA, dated March 21 and April 13,

1994, respectively, which expressed similar concerns regarding the role

and obligations of the specialist in trading SCOR securities. On May 2,

1994, the Exchange provided the California Department of Corporations

with a formal response to their inquiry and cited specific provisions

of Exchange regulations governing a specialist's trading obligations,

capital requirements, and performance standards. In this letter, the

Exchange made a strong commitment toward ensuring that their SCOR

listing policies and trading procedures would be effectively applied

and well administered.

III. Date of Effectiveness of the Proposed Rule Change and Timing

for Commission Action

Within 35 days of the publication of this notice in the Federal

Register or within such other period: (i) As the Commission may

designate up to 90 days of such date if it finds such longer period to

be appropriate and publishes its reasons for so finding or (ii) as to

which the self-regulatory organization consents, the Commission will:

(A) by order approve the proposed rule change, or

(B) institute proceedings to determine whether the proposed rule

change should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views and

arguments concerning the foregoing. Persons making written submissions

should file six copies thereof with the Secretary, Securities and

Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.

Copies of the submission, all subsequent amendments, all written

statements with respect to the proposed rule change that are filed with

the Commission, and all written communications relating to the proposed

rule change between the Commission and any person, other than those

that may be withheld from the public in accordance with the provisions

of 5 U.S.C. 552, will be available for inspection and copying at the

Commission's Public Reference Section, 450 Fifth Street, NW.,

Washington, DC 20549. Copies of such filing will also be available for

inspection and copying at the principal office of the PSE. All

submissions should refer to File No. SR-PSE-92-42 and should be

submitted by August 3, 1994.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-16954 Filed 7-12-94; 8:45 am]

BILLING CODE 8010-01-M