Self-Regulatory Organizations; Pacific Stock Exchange, Inc.; Order Granting Approval to Proposed Rule Change and Amendment No. 1 to Proposed Rule Change Relating to the Listing and Trading of Small Corporate Offering Registration (``SCOR'') Securities on the Exchange

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-35628; File No. SR-PSE-94-31]

Self-Regulatory Organizations; Pacific Stock Exchange, Inc.;

Order Granting Approval to Proposed Rule Change and Amendment No. 1 to

Proposed Rule Change Relating to the Listing and Trading of Small

Corporate Offering Registration (``SCOR'') Securities on the Exchange

April 19, 1995.

I. Introduction

On December 15, 1994, the Pacific Stock Exchange, Inc. (``PSE'' or

``Exchange'') submitted to the Securities and Exchange Commission

(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934 (``Act'')\1\ and rule 19b-4

thereunder,\2\ a proposed rule change to permit the Exchange to list

and trade Small Corporate Offering Registration (``SCOR'') securities.

On April 12, 1995, the Exchange submitted Amendment No. 1 to the

proposal.\3\

\1\15 U.S.C. 78s(b)(1) (1988).

\2\17 CFR 240.19b-4 (1994).

\3\See letter from Michael Pierson, PSE, to Katherine Simmons,

SEC, dated April 12, 1995 (``PSE Letter''). The Amendment clarified

certain aspects of the SCOR program, see infra notes 12, 16, and 26,

and made non-substantive changes to the SCOR Rules. Notice of the

Amendment was therefore unnecessary.

---------------------------------------------------------------------------

The proposed rule change was published for comment in Securities

Exchange Act Release No. 35140 (December 22, 1994), 60 FR 159 (January

3, 1995). No comments were received on the proposal.\4\ This order

approves the PSE's SCOR listing on a three year pilot basis.\5\

\4\The PSE originally proposed to list and trade SCOR securities

in 1992. That proposal was published for public comment in

Securities Exchange Act Release No. 32514 (June 25, 1993), 58 FR

35496 (July 1, 1993) (File No. SR-PSE-92-42). The Commission

received several comment letters regarding the proposal, and

subsequently published amendments to the proposal for public comment

in Securities Exchange Act Release No. 34328 (July 7, 1994), 59 FR

35776 (July 13, 1994). The Exchange withdrew File No. SR-PSE-92-42

on November 22, 1994, and submitted the instant filing that includes

modifications to the proposal in response to comments from the

public and from Commission staff.

\5\The PSE will evaluate the SCOR listing program at least on an

annual basis to determine whether this new marketplace has achieved

its policy objectives, which the Exchange states are to facilitate

capital formation for small businesses and to provide public market

liquidity for the securities of these small businesses.

---------------------------------------------------------------------------

II. Description

The SCOR listing would be a new tier of listed securities that

would not qualify for listing on the PSE under either its Tier I or

Tier II listing criteria.\6\ Under the SCOR designation, issuers may

list any single class of common or preferred stock\7\ that was issued

pursuant to either Regulation A or Rule 504 under the Securities Act of

1933 (``Securities Act'').\8\ The listing of [[Page 20788]] securities

under the SCOR designation will not provide issuers with the exemption

from state securities registration requirements accorded to exchange-

listed securities by most states.\9\ Furthermore, SCOR securities will

not be eligible for marginability and must be paid for in full.\10\

\6\The Commission approved the PSE's two-tiered listing criteria

for its regular listings in Securities Exchange Act Release No.

34429 (July 22, 1994), 59 FR 50950 (August 1, 1994).

\7\Once a class of SCOR securities has been accepted for listing

on the Exchange, all securities of that class will be listed and

traded on the Exchange as SCOR securities, except those securities

of the class that are subject to restrictions that make them

ineligible for trading on the Exchange.

\8\Under Regulation A, public offerings of up to $5 million in a

twelve-month period are exempt from registration under the

Securities Act. See 17 CFR 230.251 to 230.263 (1994). Rule 504 of

Regulation D provides an exemption from registration for limited

offerings and sales of securities not exceeding $1,000,000. See 17

CFR 230.504 (1994).

\9\The PSE Rule states that SCOR securities ``shall not be

considered to be `listed' or `approved for listing upon notice of

issuance' for purposes of any exemption from filing for issuer or

non-issuer transactions under the securities laws or regulations of

any state or other jurisdiction of the United States.'' See PSE Rule

3.2(t), Commentary .03.

\10\The rule change amends the PSE's Maintenance Margin Rule to

prove that:

Rule 2.16(b). The margin which must be maintained in margin

accounts of customers, whether members, allied members, member firms

or non-members, shall be as follows:

* * *

(5) In the case of securities listed pursuant to Rule 3.2(t)

[SCOR securities], 100% of the market value, in cash, of each

security held ``long'' in the account.

---------------------------------------------------------------------------

A. Initial Listing Standards

The qualification process for SCOR applicants will be the same as

the process in place for other PSE-listed equity issuers. Applications

for listing will be reviewed by the Exchange's Listing Department,

which works directly with the Equity Listing Committee. The Equity

Listing Committee is comprised of floor members, ``upstairs'' members,

and member firm representatives.

The initial listing requirements for common and preferred stock\11\

must be met at the time an issuer applies for listing.\12\ The Exchange

may accept applications to list a SCOR offering if the securities have

been registered at the state level,\13\ and if there are at least

150,000 publicly held shares and at least 250 public beneficial holders

of the class of securities. In addition, issuers must have total net

tangible assets of at least $500,000 and total net worth of at least

$750,000. The last offering price in the class of security for which

the issuer is applying must have been at least $5 per share.\14\

\11\In formulating the listing requirements for SCOR securities,

the Exchange consulted with the Small Business Capital Formation and

Small Business Sales Practices Committees of the North American

Securities Administrators Association (``NASAA''), the California

Department of Corporations, and leaders from the small business

community.

\12\The Exchange will not grant ``conditional'' approvals, i.e.,

approvals conditioned on the satisfaction of the listing criteria

sometime in the future. See PSE Letter, supra note 3.

\13\Issuers must register the securities to be listed at the

state level using either the state Form U-7 (or the equivalent

registration form to which a regulatory review is applied), or a

coordinated state filing with the federal Form 1-A offering

statement. Once an issuer's class of common or preferred stock has

been approved for SCOR listing, the securities must be registered

under Section 12(b) of the Act.

\14\The Exchange will consider the offering price of individual

separate SCOR offerings in a class of securities to help determine

whether the value of the SCOR securities to be listed is at least $5

per share. The Exchange will consider the circumstances of SCOR

offerings so that issuers will not be able to effect ``token''

offerings in order to satisfy the $5 requirement. See also PSE Rule

3.2(t)(6)(iv) (stating that the exchange will consider whether there

have been material changes in the financial condition of the company

or other events that could have a significant adverse impact upon

the value of the SCOR securities to be listed).

---------------------------------------------------------------------------

In addition to the quantitative listing requirements, when

reviewing an application for listing, the Exchange will consider other

factors such as (1) a company's management plan outlining the

development of its business for a period of at least 24 months,\15\ (2)

the background and past conduct of officers, directors, principal

shareholders, and key employees of the company, (3) the adequacy of the

company's resources to conduct its business,\16\ and (4) any material

changes in the financial condition of the company or other events that

could have an impact upon the value of the security to be listed. In

addition, the Exchange will consider all other available information

that may be relevant to its review of listing eligibility.\17\

\15\The management plan must demonstrate that the product,

service, or technology is sufficiently developed and that there is a

reasonable expectation of future earnings from its business. The

listing of companies that have done blank check offerings will not

be permitted.

\16\The PSE will not list any company with an outstanding

``going concern'' opinion from its independent auditor. See PSE

Letter, supra note 3. See also PSE Rule 3.5(s) (Exchange considers

delisting a security upon the issuance of an independent public

accountant's disclaimer opinion on financial statements).

\17\The Exchange generally will not list a company if the

business in which it is engaged is not anticipated to produce

profits within a reasonable period of time, if the business

operations depend upon the development of a product or system that

will not be completed prior to listing, or if preliminary objectives

upon which the profit-making ability of the business depends have

not been achieved.

---------------------------------------------------------------------------

SCOR issuers will be required to comply with the corporate

governance requirements and disclosure policies applicable to all

securities listed on the Exchange.\18\ The corporate governance

provisions include rules concerning conflicts of interest, quorum,

shareholder approval, annual meetings, and solicitation of proxies and

consents. The corporate disclosure policies provide guidance to

companies in making appropriate public disclosure and include

information regarding consultation with the PSE Listings Department,

internal handling of confidential corporate matters, and relationships

between company officials and others.\19\

\18\See PSE Rule 3.3. SCOR securities are subject to all of the

corporate governance requirements contained in PSE Rule 3.3 except

the independent directors/audit committee requirement of Rule

3.3(b).

\19\The PSE's proposed fee schedule for SCOR securities was

published in Securities Exchange Act Release No. 35395 (February 17,

1995), 60 FR 10626 (February 27, 1995).

---------------------------------------------------------------------------

B. Maintenance Standards

The SCOR maintenance standards require that there are at least

100,000 publicly held shares with a market value of at least $500,000,

at least 200 public beneficial holders, and a last sale price of at

least $1 per share. In addition, the issuer must maintain total net

tangible assets for at least $250,000 and total net worth of at least

$500,000. A company with a deficiency in either market value of public

float or market price will be subject to delistings procedures should

the deficiency exist either for a majority of business days of any

three-month period, or for any period of ten consecutive business

days.\20\ If there is a deficiency in any other quantitative standard,

the Exchange will immediately suspend dealings in the security and

subject the company to delisting proceedings.

\20\In each instance, for purposes of the maintenance standards,

the market price and the market value of public float will be

calculated by using the last sale of the trading day. Should no

transactions be effected in the security on a given trading day, the

prevailing closing bid price will be used in determining the market

value of public float and the last sale price of a security. In the

event that there is not a bid price readily available, the Exchange

will rely on other recognized established securities markets in

which the issue is traded to determine the market value of public

float and the last share price.

---------------------------------------------------------------------------

SCOR securities also will be subject to suspension and/or

withdrawal from listing and registration as a listed issue if the

Exchange finds that the listed company fails to comply with the

Exchange's listing policies or agreements.\21\ Furthermore, an issuer

of SCOR securities must take appropriate steps to ensure that no such

securities are sold on its behalf in reliance upon the exemption from

state securities registration that is otherwise available to companies

listed on the Exchange. If an issuer fails to take such steps, the

Exchange will immediately suspend [[Page 20789]] dealings in the

security and subject the company to delisting proceedings. Whenever the

Exchange staff determines that a security should be removed from the

list, the issuer will be given an opportunity to present to the Equity

Listing Committee any reasons why the security should not be delisted.

A decision by the Equity Listing Committee to delist a security may be

appealed to a Board committee or a committee appointed by the Board of

Governors for such purpose.\22\

\21\Other factors the Exchange will consider include, among

others, the issuance of an independent public accountant's

disclaimer opinion on financial statements required to be certified

and losses which are so substantial that, in the opinion of the

Exchange, it appears questionable as to whether a company will be

able to continue operations. In addition, the Exchange would examine

a company that has depleted, sold or otherwise disposed of its

principal operating assets, or substantially discontinued the

business that it conducted at the time it was listed, or that has

been authorized to liquidate its assets. See PSE Rule 3.5(s).

\22\If a security is delisted, the Exchange must submit an

application to the Commission to strike the security from listing

and registration. A copy of such application will be provided to the

issuer in accordance with Section 12 of the Act. See 15 U.S.C.

78l(d) (1988).

---------------------------------------------------------------------------

C. Trading and Transaction Reporting

The Exchange will allocate SCOR securities to Exchange specialists

for auction market trading. All transactions in SCOR securities will be

reported on a real-time basis, and will be identified by a ``.SC''

suffix to the ticker symbol. All of the PSE's rules and equity

surveillance procedures will be applicable to transactions in SCOR

securities.

III. Discussion

A. Introduction

The Commission finds that the proposed rule change is consistent

with the requirements of the Act and the rules and regulations

thereunder applicable to a national securities exchange and, in

particular, the requirements of Sections 6 and 11A.\23\ Section 6(b)(5)

requires, among other things, that the rules of an exchange be designed

to perfect the mechanism of a free and open market and a national

market system and to protect investors and the public interest. Section

11A generally promotes the development of a national market system for

securities to assure economically efficient execution of securities

transaction; fair competition among brokers and dealers, among exchange

markets and markets other than exchange markets; the availability to

brokers, dealers, and investors of information with respect to

quotations for and transactions in securities; the practicability of

brokers executing investors' orders in the best market; and an

opportunity for investors' orders to be executed without the

participation of a dealer.

\23\15 U.S.C. Secs. 78f and 78k-1 (1988).

---------------------------------------------------------------------------

B. SCOR Marketplace

In general, the Commission believes the PSE's SCOR listing program

should provide benefits to investors as well as small companies listed

under the program. The SCOR listing standards will provide small

companies who would not otherwise be eligible for exchange trading with

an opportunity to list securities on a national securities exchange for

the first time. The Commission believes that the availability of an

exchange listing as an alternative to solely over-the-counter (``OTC'')

trading will provide an additional trading mechanism that could

increase capital committed to trading SCOR securities. In addition, the

availability of the SCOR listing on the PSE will enhance SCOR issuer

access to the U.S. capital markets.

The Commission believes investors in small companies also will

benefit from exchange trading of SCOR securities. Each SCOR security

traded on the PSE will be handled by an Exchange specialist who is

required to commit capital to maintain fair and orderly markets.

Furthermore, trading of SCOR securities on the Exchange will be subject

to the PSE's trading and surveillance rules. The Commission believes

exchange trading with appropriate market surveillance should improve

the quality of market making in SCOR securities. In addition,

transactions in SCOR securities will be broadcast over the Consolidated

Tape System (``CTS'') and the Consolidated Quote System (``CQS'')

Network B as local issues.\24\ The Commission believes this real-time

reporting and wide dissemination of quotations and transactions in SCOR

securities should result in more efficient and fair markets for the

securities. Finally, because exchange-trading of SCOR securities

requires the companies to register under Section 12(b) of the Act and

to comply with the disclosure requirements of the federal securities

laws, listing may provide investors with greater access to information

about SCOR issuers.

\24\SCOR securities will be identified by a ``.SC'' suffix to

the ticker symbol so that members, public investors, and others can

distinguish SCOR securities from other securities traded on the

Exchange.

---------------------------------------------------------------------------

The Commission recognizes, however, that the listing standards for

SCOR issuers are significantly lower than those for regular PSE-listed

issuers and that the markets for SCOR securities normally may not be as

liquid and deep as those for regular PSE-listed securities. The

Commission therefore has considered carefully the PSE's proposal, and

for the reasons stated below, believes the SCOR proposal satisfies the

requirements of the Act.

C. SCOR Listing Standards

In general, the Commission believes the development and enforcement

of adequate standards governing the initial and continued listing of

securities on an exchange is necessary to ensure that only bona fide

companies with sufficient public float, investor base, and trading

interest to support a fair and orderly auction market will be listed.

Adequate standards are especially important given the expectations of

investors regarding exchange trading and the imprimatur of listing on a

particular market.\25\ Once a security has been approved for initial

listing, maintenance criteria allow an exchange to monitor the status

and trading characteristics of that issue to ensure that it continues

to meet the exchange's standards for market depth and liquidity. For

the reasons set forth below, the Commission believes that the proposed

rule change will provide the PSE with appropriate standards to

determine which securities warrant listing under the Exchange's new

SCOR designation.

\25\See, e.g., In re Silver Shield Mining and Milling Company,

Securities Exchange Act Release No. 6214 (March 18, 1960) (``use of

the facilities of a national securities exchange is a privilege

involving important responsibilities under the Exchange Act''); In

re Consolidated Virginia Mining Co., Securities Exchange Act Release

No. 6192 (February 26, 1960) (same).

---------------------------------------------------------------------------

The Commission believes that the initial and maintenance criteria

for SCOR issuers, as described above, are consistent with Sections

6(b)(5) and 11A of the Act in that these criteria should help to ensure

the maintenance of fair and orderly markets for SCOR securities, as

well as enhance benefits and protections for investors who trade in

these securities. Specifically, the numerical listing and maintenance

criteria include minimum requirements for public float and outstanding

shares. While these are lower than the regular PSE listing standards,

they are high enough to ensure that some minimum level of public

interest and liquidity will be available in SCOR securities. Although

these lower standards might not be sufficient for regular listings,

they are acceptable for SCOR securities given the benefits noted above

that the listing of such securities would produce (in particular, the

increased information disclosure).

The Commission believes the quantitative SCOR listing standards are

adequate to ensure that fair and orderly markets can be maintained.

This conclusion is reinforced by the PSE's decision not to accept

applications from issuers until they meet the minimum numerical listing

criteria.\26\ The [[Page 20790]] Commission believes that making

satisfaction of the numerical listing criteria mandatory before the

Exchange considers whether an issuer is appropriate for exchange

trading should help safeguard the integrity of the exchange market and

the securities listed thereon.

\26\In addition, a SCOR-listed issuer that becomes eligible for

trading on the Exchange under its Tier I or Tier II criteria may

``graduate'' to the main lists. However, companies on the Exchange's

main lists may not move down to the SCOR listing program. See PSE

Letter, supra note 3.

---------------------------------------------------------------------------

In addition to the quantitative standards, the Exchange considers

other qualitative factors such as an issuer's management plan, the

background of officers and directors, and the adequacy of the company's

resources. The Commission believes that these factors, combined with

other Exchange rules regarding corporate governance and disclosure

policies, will help to ensure that only companies with sufficient

business plans and resources will have access to the PSE's public

market.

The Commission believes that the PSE's proposal for SCOR listings

will provide it with the necessary flexibility to determine whether a

SCOR issuer is appropriate for exchange trading,\27\ irrespective of

whether it meets the minimum quantitative listing criteria. Thus, the

Commission believes that the new listing and maintenance standards

strike the appropriate balance between protecting investors and

providing a marketplace for small issuers satisfying the disclosure

requirements under the federal securities laws.

\27\PSE Rule 3.2(t)(6) states: ``Notwithstanding that a company

meets the prescribed listing requirements, the Exchange retains the

discretion to refuse listing to a company where it believes it is in

the public interest to do so.''

---------------------------------------------------------------------------

D. Margin

As discussed above, the PSE is amending Exchange Rule 2.16 to

require that SCOR-listed securities be subject to a 100% maintenance

margin requirement. The Commission agrees with the maintenance margin

approach proposed by the PSE. The SCOR program is intended to be a new

marketplace that attracts issuers that might otherwise trade OTC. It is

logical that the maintenance margin treatment for OTC securities would

apply to SCOR issuers, rather than the treatment accorded regular PSE

companies.\28\

\28\Non-MNS OTC securities are not marginable unless they are

included in the Federal Reserve Board's OTC Margin List. The PSE

will require 100% margin on SCOR securities whether or not they are

included on the Federal Reserve Board's OTC Margin List.

---------------------------------------------------------------------------

E. State Law Concerns

The Commission believes that the safeguards the PSE has established

should make clear to PSE members and SCOR issuers listed under the new

program that the offer and sale of SCOR securities are subject to state

registration and rules. The PSE proposal would prohibit SCOR issuers

from using the exemption from registration requirements that the

securities laws of some states currently make available to other PSE-

listed companies. To accomplish this, the PSE included in its rules

that SCOR issuers would not be able to take advantage of existing

exemptions in state securities registration requirements accorded to

regular PSE-listed securities. In addition, the SCOR rules state that

the Exchange will delist any company that fails to take appropriate

steps to ensure that no SCOR-listed securities are sold on its behalf

in reliance upon the exemption from state securities registration that

is otherwise available to companies listed on the Exchange.

F. Review Procedures

The Commission believes the Exchange has proposed adequate

procedures to screen applications for SCOR listing. The Exchange's

Listing Department staff initially will review applications to confirm

that all quantitative listing criteria have been met and evaluate

issuers according to the qualitative standards discussed above. The

staff will reject applications that fail to meet the quantitative

standards. The staff also has discretion to reject applications that

have qualitative deficiencies. Applications not rejected by the staff

are submitted to the Equity Listing Committee for evaluation. The

Equity Listing Committee must approve all applications before new SCOR

listings may be accepted by the Exchange.

G. Pilot

Finally, the Commission believes it is appropriate to approve the

SCOR program on a three-year pilot basis. This pilot will provide the

Exchange, SCOR issuers, and investors with sufficient time to gain

experience with the program. In addition, during the pilot, the PSE

should monitor and evaluate the SCOR program so that the Commission can

assess the benefits of the SCOR listing. The PSE should file a report

with the Commission if they determine to request an extension of the

pilot or seek permanent approval. The report should contain information

on the number of SCOR listing applications accepted and rejected, the

SCOR securities that have been delisted and the reasons therefore, the

number of SCOR securities that have moved to the PSE's regular market

or another market, and quantitative data on the trading history of SCOR

securities (including average price per share and trading volume).

IV. Conclusion

For the reasons stated above, the Commission believes the rule

change is consistent with the Act and, therefore, has determined to

approve it on a three-year pilot basis. The rule change establishes

quantitative and qualitative listing criteria for SCOR securities that

provide for the protection of investors and the public interest.

Furthermore, the SCOR listing program should provide benefits to

investors and small companies by providing for the exchange-trading of

SCOR securities, which should result in added liquidity, price

discovery, and regulatory oversight.

The Commission does not believe that the rule change will result in

any burden on competition that is not necessary or appropriate in

furtherance of the purposes of the Act, as amended.

It is Therefore Ordered, pursuant to Section 19(b)(2) of the

Act,\29\ that the proposed rule change (SR-PSE-94-31) is approved on a

pilot basis through April 19, 1998.

\29\15 U.S.C. 78s(b)(2) (1988).

---------------------------------------------------------------------------

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\30\

\30\17 CFR 200.30-3(a)(12) (1994).

---------------------------------------------------------------------------

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95-10297 Filed 4-26-95; 8:45 am]

BILLING CODE 8010-01-M