Securities Act Concepts and Their Effects on Capital Formation

SECURITIES AND EXCHANGE COMMISSION

[Release Nos. 33-7314; 34-37480; International Series Release No. 1010;

File No. S7-19-96]

RIN 3235-AG83

Securities Act Concepts and Their Effects on Capital Formation

AGENCY: Securities and Exchange Commission.

ACTION: Concept Release.

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SUMMARY: The Securities and Exchange Commission (the ``Commission'')

has received the Report of the Advisory Committee on the Capital

Formation and Regulatory Processes (the ``Advisory Committee'')

chartered by the Commission. In addition to its consideration of the

Report of the Advisory Committee (the ``Advisory Committee Report''),

the Commission is reexamining the application of the Securities Act of

1933 and the rules thereunder to securities offerings. Information and

comment are being sought with regard to what reforms could or should be

undertaken, consistent with the Commission's investor protection

mandate, to reform the current regulation of the capital formation

process. Varying approaches, including a ``company registration''

concept recommended by the Advisory Committee, are being considered.

DATES: Comments should be received by September 30, 1996.

ADDRESSES: Comments should be submitted in triplicate to Jonathan G.

Katz, Secretary, U.S. Securities and Exchange Commission, 450 Fifth

Street, N.W., Stop 6-9, Washington, D.C., 20549. Comments also may be

submitted electronically to the following electronic mail address:

[email protected]. All comment letters should refer to File No. S7-

19-96; this file number should be included in the subject line if

electronic mail is used. Comment letters will be available for public

inspection and copying at the Commission's Public Reference Room, 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).

FOR FURTHER INFORMATION CONTACT: Anita Klein, Office of Chief Counsel,

Division of Corporation Finance, (202) 942-2900. For copies of the

Advisory Committee Report, please fax a request to the Office of

Commissioner Wallman at (202) 942-9563 or call (202) 942-0800.1

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\1\ The Advisory Committee Report is also available through the

Commission's Public Reference Room and the Commission's Internet Web

site (http://www.sec.gov). For further information with respect to

the Advisory Committee Report, contact the Advisory Committee staff:

David A. Sirignano, Staff Director, at (202) 942-2870; Dr. Robert

Comment (202) 942-8036; Catherine T. Dixon, (202) 942-2920; Meridith

Mitchell (202) 942-0890; or Luise M. Welby (202) 942-2990.

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SUPPLEMENTARY INFORMATION:

I. Introduction

The Securities Act of 1933 (the ``Securities Act'') 2 and the

rules and regulations thereunder have long provided the foundation for

a capital formation system whose integrity, fairness and liquidity are

unparalleled. Because U.S. capital formation methods and markets are

characterized by innovation, the Commission vigilantly seeks to

identify ways to improve its regulatory framework governing that

system.3 Two studies presented to the

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Commission this year are assisting the Commission with its most recent

efforts to reexamine that regulatory framework.

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\2\ 15 U.S.C. Secs. 77a et seq.

\3\ The current reexamination of the Securities Act registration

system is the most recent step in the modern reevaluation of the

regulatory framework that many date back to the publication of the

1966 article by Milton Cohen which first suggested the integration

of the Securities Act and the Securities Exchange Act of 1934 (the

``Exchange Act'') (15 U.S.C. Secs. 78a et seq.) disclosure systems.

See M. Cohen, ``Truth in Securities'' Revisited, 79 Harv. L. Rev.

1340 (1966). Since the publication of that article, the Commission

has conducted or arranged several studies related to the disclosure

system, including those completed by the Commission's Disclosure

Policy Study Group in 1969 and the Commission's Advisory Committee

on Corporate Disclosure in 1977. See Disclosure to Investors--A

Reappraisal of Administrative Policies under the '33 and '34 Acts

(Mar. 1969) (commonly referred to as the ``Wheat Report''); Report

of the Advisory Committee on Corporate Disclosure to the Securities

and Exchange Commission (Nov. 1977). Those efforts paved the way for

significant integration of the Securities Act and Exchange Act

disclosure systems by the Commission in 1982. See Securities Act

Release No. 6383 (Mar. 3, 1982) [47 FR 11380].

Further refinement of the Securities Act registration system

included, for example, the development of the short-form shelf

registration system, which has enabled ``seasoned issuers'' to

conduct a primary offering on a delayed or continuous basis if

certain requirements are met. Shelf registration has afforded an

eligible registrant a certain degree of flexibility by enabling it

to time its offering when market conditions are most advantageous.

The Commission's subsequent adoption of a ``universal'' shelf

registration system in 1992 increased this flexibility even further

by permitting an eligible company to register debt, equity, and

other securities on a single shelf registration statement, without

having to specify the amount of each class of securities to be

offered. See Securities Act Release Nos. 6499 (Nov. 17, 1983) [48 FR

52889] and 6964 (Oct. 22, 1992) [57 FR 48970].

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The first report delivered to the Commission was the Report of the

Task Force on Disclosure Simplification (the ``Task Force'') of March

1996 (the ``Task Force Report'').4 Among many other

recommendations, the Task Force identified a number of areas in which

modernization and simplification of the registration and disclosure

processes could be accomplished.5

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\4\ Report of the Task Force on Disclosure Simplification (March

1996).

\5\ Comment is being solicited infra Section II.B.2, II.B.5 and

II.B.6 with respect to a limited number of specific aspects of the

Task Force Report.

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Today, the second report is being presented to the Commission by

the Advisory Committee, chaired by Commissioner Steven M.H.

Wallman.6 The Advisory Committee has been studying the securities

offering process and the Commission's rules regulating it since

February 1995.7 The objective of the Advisory Committee has been

to assist the Commission in evaluating the efficacy of the regulatory

process relating to the public offering of securities, securities

market trading, and corporate reporting. The Advisory Committee Report

is being published contemporaneously with this release and reflects 18

months of extensive study and analysis of the regulatory

framework.8 The Advisory Committee's work has assisted the

Commission in focusing on diverse developments in the markets (some of

which are more recent in origin and some of which reflect longer-term

trends) and their current effects on the regulatory framework. Those

developments and effects are the impetus for the Commission's current

reexamination of some of the fundamental concepts of the regulatory

framework. The Advisory Committee Report and its recommendations will

be the subject of an ongoing review by the Commission and its

staff.9

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\6\ Report of the Advisory Committee on the Capital Formation

and Regulatory Processes (July 24, 1996).

\7\ The Advisory Committee consisted of: The Honorable Steven

M.H. Wallman, Chairman; Professor John C. Coffee, Jr.; The Honorable

Barber B. Conable, Jr.; Robert K. Elliott; Edward F. Greene; Dr.

George N. Hatsopoulos; A. Bart Holaday; Paul Kolton; Roland M.

Machold; Dr. Burton G. Malkiel; Claudine B. Malone; Charles Miller;

Karen M. O'Brien; and Larry W. Sonsini. The Commission gratefully

acknowledges the time and efforts of the members and staff of the

Advisory Committee in producing a thoughtful and comprehensive

report.

The Advisory Committee held eight public meetings and Committee

members and staff met with a number of groups and individuals

concerned with or affected by the Commission's regulation of the

capital formation process.

\8\ Given the concurrent publication of the Advisory Committee

Report and the recent publication of the Task Force Report, both of

which are available on the Commission's Internet Web site and

through the Commission's Public Reference Room, this release does

not attempt to explain in full the varying proposals to reform the

capital formation regulatory process that give rise to many of the

questions asked in this release. Familiarity with the detailed

discussions contained in those documents is assumed, as is

familiarity with many basic Securities Act concepts. The Commission

strongly urges interested parties to read the Advisory Committee

Report in its entirety, as well as Section III of the Task Force

Report.

\9\ See the comprehensive discussions contained in the Advisory

Committee Report concerning market developments and the effects they

have had on the operation of the Securities Act framework. Advisory

Committee Report at pp. 4-9 and Appendix A (``App. A''). Similarly,

see the Task Force Report at pp. 23-28.

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The Advisory Committee Report's primary recommendation is that the

Commission further its integrated disclosure system by implementing a

system based on a ``company registration'' concept first envisioned by

the American Law Institute's Federal Securities Code.10 As

formulated by the Advisory Committee, a company registration system

generally would be accomplished through the following steps:

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\10\ The American Law Institute's Federal Securities Code was

developed, after many years of effort, under the direction of

Professor Louis Loss. See American Law Institute, Federal Securities

Code (1980). See also L. Loss, ``The American Law Institute's

Federal Securities Code Project,'' 25 Bus. Law. 27 (1969).

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On a one-time basis, the issuer 11 files a registration

statement (deemed effective immediately) that includes information

similar to that currently provided in an initial short-form shelf

registration statement. This registration statement could then be used

for all types of securities and all offerings (including those offered

in furtherance of business acquisitions) and all offerings could be

subject to Section 11 strict liability;

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\11\ The Advisory Committee recommends that eligibility for an

initial pilot be limited to issuers that: have registered at least

one public offering under the Securities Act; have been reporting

under the Exchange Act for two years; have a public float of at

least $75 million; and have securities listed on the New York Stock

Exchange, the American Stock Exchange or NASDAQ NMS. Foreign issuers

would be eligible if they file annual, quarterly and other periodic

reports with the Commission on forms designed for domestic issuers,

although the Advisory Committee specifically requests the Commission

to consider whether current foreign issuer eligibility requirements

for Form F-3 primary offerings should be sufficient for eligibility

in the pilot. Most foreign countries (other than Canada) do not

require their issuers to prepare quarterly reports.

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Current and future Exchange Act reports are incorporated by

reference into that registration statement;

Around the time of the offering, transactional and updating

disclosures are filed with the Commission, usually in a Form 8-K that

is incorporated by reference into the registration statement and

subject to Section 11 strict liability, but in certain cases, at the

option of the issuer, through a prospectus supplement like those

traditionally filed in shelf takedowns;

Other than a nominal fee paid at the initial filing, registration

fees would be paid at the time of sale rather than prior to making any

offers (the ``pay as you go'' feature);

Issuers would be required to adopt some disclosure enhancements

(and encouraged to adopt others) that seek to improve the quality and

timeliness of disclosure provided to investors and the markets; and

Formal prospectuses would be required to be physically delivered

only in non-routine transactions and, when so required to be delivered,

they would have to be delivered in time to be considered in connection

with the investment decision. In almost all instances, an issuer could

incorporate by reference filed information into selling materials or

the confirmation of sale to satisfy the legal obligation to deliver a

prospectus (which, under the statute, must precede or accompany a

confirmation of sale).

The Commission seeks comment with respect to the Advisory

Committee's company registration system, as a whole, as well as each of

the separate recommendations contained in the Advisory Committee

Report.12 The Commission is not today proposing and is not in a

position to endorse or reject the views or recommendations expressed in

the Advisory Committee Report, the Task Force Report or any other ideas

contained herein.

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Consideration of public comment on the recommendations in the Advisory

Committee Report, the Task Force Report, and other ideas herein will be

undertaken prior to any future Commission action. In the event the

Commission determines to take such action, a specific proposal will be

published for comment.

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\12\ Comment also is solicited infra Section II.B.1 with respect

to a limited number of specific aspects of the Advisory Committee

Report.

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II. Securities Act Concepts

The Securities Act and the issuer disclosure provisions of the

Exchange Act are premised on the view that investors are best protected

in making investment decisions if they are presented with full and fair

disclosure of all material information about the investments. The

continuing challenge for the Commission lies in adapting the statutory

disclosure framework to developments in the capital markets while

ensuring that investors receive full and fair disclosure in a manner

13 and at a time that allows such informed decision-making.

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\13\ In accordance with a Task Force Report recommendation, the

Commission is currently contemplating the ``plain English'' approach

to prospectus writing in another context. See Task Force Report at

pp. 17-18. This release focuses on the content of the information

delivered rather than the language in which information is

presented.

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Faced with the following developments, among others: increasing

institutionalization of the markets; advances in technology and

communication media; continuing globalization of securities markets;

and the erosion of distinctions between private and public

transactions, the Commission is examining whether the existing investor

protection mechanisms, such as registration of both offers and sales

and physical delivery of final prospectuses to investors around the

time of sale, remain the best methods for accomplishing this full

disclosure objective. The Commission is considering as well whether

specific aspects of the integration of the registration requirements

under the Securities Act and the periodic reporting requirements under

the Exchange Act, if adjusted, could better serve investors' needs for

full disclosure. Finally, the Commission is considering whether certain

distinctions between public and private offerings of public companies

remain necessary and how the increasingly institutional nature of

investors should be reflected in the regulatory framework.

A. Request for Comments on Securities Act Concepts

In this release, the Commission seeks comment on the best methods

for eliminating unnecessary obstacles to capital formation while

improving the quality and timing of disclosure and, therefore, investor

protection. To assist the Commission in its deliberations, certain

concepts that are central to the current capital-raising process and

transcend any one approach to reform are highlighted below. Comment is

solicited regarding the best approach to resolving concerns raised by

those concepts, whether that approach is one or more of the approaches

mentioned herein, a combination thereof, or any approach not described

in this release. In commenting on the issues and approaches discussed

in this release, commenters are requested to focus on how those matters

impact on full and fair disclosure to investors in a manner and at a

time that allows for informed investment decisions.

1. Quality of ongoing disclosure. Investors in primary offerings

for repeat issuers and investors in the secondary markets generally

rely on periodic disclosure prepared pursuant to the Exchange

Act.14 The existing Securities Act registration system for larger,

seasoned issuers is heavily dependent upon incorporation of disclosure

from such reports into the registration statement.15 Some

observers have suggested that, while issuers undertaking registration

of public offerings often devote significant resources to developing

disclosure of the quality required under the Securities Act, equivalent

resources are not necessarily devoted to preparing disclosure in

Exchange Act periodic reports.

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\14\ For domestic companies, Exchange Act periodic disclosure is

generally provided in annual reports on Form 10-K (17 CFR 249.310)

due 90 days after the end of the fiscal year, quarterly reports on

Form 10-Q (17 CFR 249.308a) due 45 days after the end of the fiscal

quarter and ``material events'' reports on Form 8-K (17 CFR 249.308)

due within a specified number of days (either 5 business days or 15

calendar days) after the event occurs.

\15\ See Form S-3, 17 CFR 239.13.

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Given the importance of investor protection, both with respect to

investors in primary offerings and investors in the secondary trading

markets,16 the Commission solicits comment regarding whether, in

fact, a significant difference exists in the quality of disclosure

between Securities Act and Exchange Act documents. If such a difference

exists, what Commission action should be taken to address this concern?

Should enhancement of current safeguards (such as the application of

liability provisions) or the adoption of newly devised

safeguards,17 or both, be used to ensure that disclosure in

Exchange Act documents is equal in quality to that in Securities Act

documents?

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\16\ It is estimated that the secondary trading market for

equity securities was roughly 35 times as large (in aggregate dollar

terms) as the amount registered for primary offerings in 1995. See

Advisory Committee Report at p. 2.

\17\ See, e.g., Advisory Committee Report regarding certain

disclosure enhancements at pp. 26-28 and infra Section II.B.1.b.

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Are there particular aspects of Exchange Act disclosure that are in

need of improvement, and thus require specific Commission focus? Is

there information in Securities Act disclosure that should be mandated

in Exchange Act reports?18 To enhance disclosure quality, should

further participation of persons independent of the issuer, such as

independent accountants, be required in the preparation of Exchange Act

reports?

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\18\ See, e.g., Advisory Committee Report regarding Risk Factors

at p. 27 and Appendix B (``App. B''), pp. 56-57.

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If various reforms would result in disclosure less often being

prepared specifically in connection with the offering process, or would

allow issuers quicker, more frequent (potentially continuous) access to

the capital markets, would any concern about existing Exchange Act

disclosure quality be exacerbated? Are improvements needed to ensure

that Exchange Act reports provide a more current stream of information

to investors? For example, should consideration be given to adopting a

requirement, similar to certain self-regulatory organizations'

requirements, that information that could materially affect the market

for an issuer's securities be disclosed promptly in a public filing

with the Commission?19 Should the filing dates for Exchange Act

reports (e.g. Form 8-K) be accelerated or should the events that

trigger such reports be broadened?20 Should the disclosure of

particular events be accelerated?21

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\19\ See, e.g., New York Stock Exchange Listed Company Manual

Sec. 202.05; American Stock Exchange Company Guide Sec. 1102; and

National Association of Securities Dealers By-laws, Schedule D.

\20\ See, e.g., Advisory Committee Report at p. 27 and App. B,

pp. 55-56.

\21\ See, e.g., Advisory Committee Report at p. 27.

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2. Informing Investors. a. Constructive versus Physical Delivery

The Securities Act prohibits persons from sending securities through

interstate commerce ``for the purpose of sale or for delivery after

sale, unless accompanied or preceded by a prospectus that meets the

requirements'' of Securities Act Section 10(a).22 In addition, the

Section 10(a) prospectus must be sent or given prior to or at the same

time with any communication, such as selling

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materials or confirmations, that would otherwise fall within the broad

definition of ``prospectus.''23 These prospectus delivery

provisions, which were established to ensure that investors would be

fully informed, today are fulfilled in some cases by physical delivery

of written prospectuses and in some cases by a mixture of physical

delivery of transaction-specific information and constructive delivery

(through the issuer incorporating the information by reference from

filed documents) of company information. Through the 1995 adoption of

Rule 434, the Commission has allowed constructive delivery of some

transaction-specific information in limited circumstances by larger

issuers.24

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\22\ 15 U.S.C. Sec. 77j(a). Section 5(b)(2) of the Securities

Act, 15 U.S.C. Sec. 77e(b)(2).

\23\ See Section 2(10)(a) of the Securities Act, 15 U.S.C.

Sec. 77b(10)(a).

\24\ See Securities Act Release No. 7168 (May 11, 1995) [60 FR

26604]. For larger, seasoned issuers, Securities Act Rule 434 (17

CFR 230.434) currently allows constructive delivery of transaction-

specific information (other than that relating to the description of

the securities offered) and company information (other than material

issuer developments) in firm commitment underwritten offerings for

cash.

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The Commission is considering whether there are circumstances under

which constructive delivery to investors of all offering information

(including both company and transaction-specific disclosure) would

provide sufficient investor protection. Have advances in technology and

communications now established a system whereby ``accessibility''

provides roughly the same amount of investor protection as physical

delivery? Should reliance solely on constructive delivery be permitted

only if access is assured not only through the Commission but also

through other media? Is the broad dissemination of publicly available

information regarding a company, which the ``efficient market

hypothesis'' assumes,25 in fact a reality for most investors, and

not just sophisticated ones, at any given time? Does it matter, under

the ``efficient market hypothesis'' or otherwise, if just sophisticated

investors have this information? Is it useful to require this

information to be physically delivered if, as under the current system,

it is not required to be delivered until days after the investment

decision is made? On what basis are investors in the secondary markets

making investment decisions?

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\25\ The ``efficient market hypothesis'' generally provides that

the price of a company's publicly traded securities fully reflects

all available information about the company at any given time. See,

e.g., L. Loss and J. Seligman, 1 Securities Regulation 1, 184-86, n.

41 (1994). While there are different versions of the ``efficient

market hypothesis,'' perhaps the most widely accepted version is the

``semi-strong'' variant, which posits that all publicly available

information is quickly disseminated into the marketplace and

reflected in the price of a company's stock. See Loss and Seligman,

supra at 185, note 41. The Commission has previously relied on such

a version of the ``efficient market hypothesis,'' for example, when

adopting Securities Act Rule 415 concerning shelf registration. See

Securities Act Release No. 6499.

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Where constructive delivery is being used, is there nevertheless a

minimum amount of basic offering information not typically contained in

a confirmation that the Commission should mandate be physically

delivered, such as in a newly developed short-form profile prospectus,

regardless of the nature of the offering or investor? If so, why?

Comment also is solicited regarding whether the same method of

delivery should be required for all purchasers in a single offering.

Should issuers be permitted to choose different methods of delivery for

different investors, without regard to the investor's level of

sophistication? 26 If different delivery methods are appropriate,

should the choice be dependent upon the nature of the purchaser, the

size of the offering, the type of security offered, or a combination of

such factors? If the nature of the purchaser is a determining factor,

would the ``accredited investor'' test, 27 the ``qualified

institutional buyer'' test 28 or another test serve as the best

criterion for determining whether constructive or physical delivery is

used? If the Commission were to require information to be delivered to

unsophisticated investors in a more costly manner, would issuers and

underwriters be less likely to permit such investors to participate in

an offering? Would it depend on the type of offering? Would additional

flexibility provided to issuers and underwriters to tailor disclosure

documents to unsophisticated investors encourage inclusion of such

investors by issuers and underwriters?

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\26\ See Advisory Committee Report at pp. 18-22.

\27\ ''Accredited investor'' is defined in Securities Act Rule

501(a), 17 CFR 230.501(a). See Advisory Committee Report at p. 21.

\28\ ''Qualified institutional buyer'' is defined in Securities

Act Rule 144A(a)(1), 17 CFR 230.144A(a)(1).

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Would constructive delivery be appropriate in every offering of a

particular type of securities (e.g. debt), or would the appropriateness

of constructive delivery be dependent as well on the size of the

offering or the identity of the purchasers? 29 Would investors

know in what manner information would be delivered if the issuer could

employ multiple delivery options? In the view of commenters, would this

information matter to investors?

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\29\ See Advisory Committee Report at pp. 19-22 and App. B, p.

16.

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b. Timing of delivery. One key element of the full disclosure

objective is ensuring that investors are given sufficient time to

consider material information in making investment decisions. Under

current rules, prospectus delivery is required prior to or at the same

time with the confirmation in primary offerings. In practice,

therefore, Section 10(a) prospectuses may be unlikely to be sent to

investors in advance of the decisions to purchase. In some cases,

preliminary prospectuses are delivered, but they generally are not

required to be delivered if the issuer is reporting under the Exchange

Act.30 For reporting issuers, material company information for the

most part will have been widely available at the time of any offering,

but information regarding the offering transaction and any information

that reflects material developments since the last Exchange Act report

was filed would not have been.31 Comment is requested with regard

to whether investors in primary offerings by reporting companies

receive transactional and material developments information in the

traditional physical form in sufficient time to make informed

investment decisions. If not, what Commission action would be

appropriate to ensure that result?

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\30\ Exchange Act Rule 15c2-8, 17 CFR 240.15c2-8.

\31\ For non-shelf offerings today, such information may be on

file with the Commission for some time prior to the offering,

although the amount of time is dependent upon many factors,

including whether the staff reviews that registration statement. To

the extent pre-transaction staff review for repeat issuers'

registration statements would be limited or eliminated in the

future, that time is likely to become shorter, and could become

materially shorter.

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To the extent that transaction-specific information is

constructively delivered through public filings rather than physically

delivered to individual offerees, does such an approach delay or aid

absorption of that information by investors in the primary offering or

by the market? If such information is filed just prior to sale, would

investors have more, less, or the same opportunity to make informed

decisions under constructive delivery as they have today under the

shelf registration system, where the transaction-specific information

is physically delivered with the confirmation sometime after the

investment decision is made?

c. Limitations on written communications other than the statutory

prospectuses. The drafters of the Securities Act intended that the

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statutory prospectus be the written selling document for securities.

``Free writing'' outside the statutory prospectus is not generally

permitted except in the post-effective period when the Section 10(a)

prospectus has been delivered to investors. Comment is solicited with

respect to whether more flexibility to inform investors by use of

written vehicles other than the traditional prospectus should be

permitted. For example, should simplified profile prospectuses be

permitted or required? With respect to offerings by seasoned issuers,

if significant ongoing information is and has been available to

investors with respect to such issuers, is the potential for harm from

allowing or encouraging non-prospectus information delivery minimized?

Would investor protection be likely to improve to the extent that

issuers are encouraged to provide written, rather than oral,

information about the basic terms of the transaction? Alternatively,

would more flexibility be likely to result in use of selling materials

driven by marketing needs that (in the distributed form) significantly

differ from the prospectus envisioned by the Securities Act? If so,

would investors' focus shift to the marketing language instead of the

mandated prospectus disclosure, particularly if the latter is

constructively rather than physically delivered? What standard of

liability should attach to such other selling materials?

Would a system allowing incorporation by reference of the required

prospectus disclosure from a registration statement previously filed

with the Commission facilitate the use of simplified term sheets or

other types of ``free writing?'' Would that system facilitate free

writing if such selling materials had to be filed and subject to

liability under Section 12(a)(2)? Would sufficient investor protection

exist where Section 12(a)(2) liability is applied?

To what extent would issuers be more inclined to provide selling

materials under that sort of system than under the current system?

Would the requirement to have a Section 10(a) prospectus (and the

selling materials) on file by the time of use of the selling materials

present any difficulty as a practical matter, even though statutory

disclosure may be wholly incorporated by reference rather than

delivered physically? 32

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\32\ The Section 10(a) prospectus would be required to be on

file subject to, if applicable, Rule 430A (17 CFR 230.430A) and Rule

424 (17 CFR 230.424).

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3. Timeliness of disclosure--informing the market. Under the

current shelf system, information concerning shelf takedowns (contained

in a prospectus supplement) is not required to be filed until the

second business day following the earlier of: the date of determination

of the offering price, or the date of first use in connection with the

offering. Some have expressed concern that the current structure of the

shelf registration system does not require timely disclosure to the

secondary markets of all material information that is being disclosed

to investors in the primary offering. 33

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\33\ See, e.g., Advisory Committee Report at pp. 5-6. See also

Securities Act Rule 424(b), 17 CFR 230.424(b).

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Does the post-takedown filing of prospectus supplements strike an

appropriate balance between quick access to capital and timely

disclosure to investors in the secondary markets for such securities?

Is this balance appropriate if the prospectus supplement is available

earlier? Are the secondary markets having difficulty assimilating such

information during the period before it is filed with the Commission

because of limited access to such information? What role do wire

services and others play in disseminating such information? If all this

information is already fully disseminated to the secondary markets at

the time investors make the decision to purchase in the primary

offering, is it necessary to require any filing or mandate any specific

form of information delivery for transactions? As procedures are

developed permitting issuers to access the capital markets more

quickly, what changes, if any, are likely to occur to the underwriting

process and investor participation?

If information that is not filed with the Commission is not being

fully assimilated prior to the making of investment decisions, comment

is requested with respect to whether, regardless of any other reforms,

the shelf registration system should be amended to require the filing

of complete offering disclosure (including the price and other terms of

the securities) at some point prior to the takedown in order to allow

time for the market to assimilate such information. 34 If so, how

long does it take for such information to be assimilated by the market?

Would the answers to these questions be dependent upon the nature of

the securities involved in the offering, the nature of the offering, or

the size of the issuer?

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\34\ See, e.g., Advisory Committee Report at p. 17.

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Does it matter if transaction-specific disclosure that does not

amount to a material development is not assimilated until some time

after the offering? Should a special requirement apply in cases where

the offering involves a type of security never before sold by the

issuer? Should there be certain events (e.g. a percentage of equity

being offered) that will always be deemed material developments?

In addition, comment is requested with regard to whether takedown

information should be filed in an Exchange Act report that is

incorporated by reference into the registration statement. Should all

Securities Act Rule 424(b) prospectus supplements be deemed to be a

part of the effective registration statement, as is the case with

prospectus supplements filed in connection with Rule 430A?

4. The role of ``gatekeepers'' in maintaining quality of

disclosure. The civil liability provisions of the Securities Act

registration system provide strong incentives for certain parties

independent of the issuer (such as underwriters, accounting

professionals, and others) to take steps to ensure the quality of

disclosure. 35 Given the interest of issuers in quick access to

the capital markets, some commenters and reports have argued that these

``gatekeepers'' may not currently be given the amount of time they wish

or need in which to perform their traditional ``due diligence'' role,

particularly in connection with delayed shelf offerings. 36

Comment and specific data are solicited with respect to the nature and

prevalence of such difficulties. Comment is requested on whether there

is tension between the traditional role of ``gatekeepers'' and the

issuer's desire to have quick access to the capital markets.

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\35\ See Securities Act Section 11, 15 U.S.C. 77k. See also

Securities Act Section 12, 15 U.S.C. Sec. 77l.

\36\ See, e.g., Committee on Federal Regulation of Securities,

``Report of Task Force on Sellers' Due Diligence and Similar

Defenses Under the Federal Securities Laws,'' 48 Bus. Law. 1185

(1993).

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Can the independent ``gatekeepers'' role be reconfigured in order

to facilitate the issuer's ability to access the capital markets

quickly while maintaining or enhancing investor protection? If not,

should reliance on such ``gatekeepers'' continue if a collateral effect

may be to slow down access to the capital markets? Is the increasing

ability of issuers to access the securities markets directly by

themselves affecting the role of underwriters as ``gatekeepers,''

particularly in light of advances in technology and communications? Has

there been a change in the role other parties play, such as analysts

and rating agencies, that should be considered in evaluating the role

of traditional ``gatekeepers?'' In what ways has the

[[Page 40049]]

``due diligence'' process changed to reflect these changes?

Are there mechanisms that could be adopted to allow such

``gatekeepers'' to operate effectively? Have advances in technology and

communications and the existence, in some cases, of auditors engaging

in interim reviews, and analysts and rating agencies made performance

of the ``gatekeeper'' function possible on a continuous basis, or with

little notice, due to the dissemination of information about issuers on

a continuing basis?

Would requiring a separate filing that is subject to Section 11

liability (such as an Exchange Act filing incorporated by reference

into the registration statement) focus the issuer and other parties on

the quality of disclosure and the need to undertake due diligence? If

so, should the timing thereof be dependent upon the type of security

involved and the size of the offering? Should there be a different or

supplemental mechanism (for example, a requirement that independent

``gatekeepers'' be notified of (or engaged for, as applicable) an

offering at least several days in advance, or a requirement that a

certificate be filed by independent ``gatekeepers'' prior to the

offering that they have performed due diligence)? Would these

mechanisms be consistent with today's demands for quick access to

capital?

Would a ``disclosure committee'' of an issuer's board of directors

operate as an effective ``gatekeeper?'' 37 Would such a

``disclosure committee'' likely improve the monitoring of disclosure by

directors or improve the accuracy of disclosure? Would it result in a

diminished oversight role for the rest of the board? What effect would

it have on the liability of the directors serving on the committee?

What effect would it have on the liability of the other directors on

the board? Would board members be willing to serve on such a committee

if there were no Commission guidance on liability? 38 How would it

operate differently from the audit committee?

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\37\ See the full description of this concept at pp. 31-34 of

the Advisory Committee Report. This concept is recommended by the

Advisory Committee, although it is not identified as an essential

element of company registration.

\38\ Although the Advisory Committee Report stops short of

recommending a particular change in the application of liability to

``gatekeepers,'' three members of the Advisory Committee, in a

separate statement, expressed doubt that practitioners would

recommend, or that corporations would adopt, some of the reforms

proposed by the Advisory Committee, and particularly the disclosure

committee concept, unless the Commission accompanied it with a

transition in liability rules. See ``Separate Statement of John C.

Coffee, Jr., Edward F. Greene, and Lawrence W. Sonsini'' in the

Advisory Committee Report at Section IV., p. 38.

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5. Staff review. The Advisory Committee Report states that the

uncertainty surrounding whether there will be staff review of

registration statement disclosure, in cases other than initial public

offerings and major restructurings, results in delays and uncertainties

that may not be justified in terms of public interest and investor

protection benefits.39 The Advisory Committee Report suggests

that, for those issuers in a company registration system, under certain

circumstances, staff review be eliminated with respect to pre-

transaction filings in favor of enhanced reviews of Exchange Act

filings that could provide a similar deterrent effect.

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\39\ See Advisory Committee Report at App. A, pp. 6-14.

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Only a small percentage of the Commission's current reviews of

Securities Act registration statements focus on issuers that are

neither making their initial public offering nor offering securities in

connection with major restructurings.40 Many of those reviews

involve issuers that are either financially troubled or are offering a

new type of security to the public. Comment is requested with respect

to whether the Commission staff should shift its review of repeat

issuers from Securities Act registration statements to the review of

Exchange Act reports. If so, under what circumstances? Should the

Commission instead consider: making public its criteria used to

determine whether to review repeat issuers' registration statements;

limiting its review of repeat issuers' registration statements to those

issuers that are financially troubled or are engaging in an

extraordinary transaction; or allowing repeat issuers to request review

of their Exchange Act reports well in advance of a public offering?

41

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\40\ The Commission staff does not currently review takedown

disclosure in a shelf registration statement prior to use, although

the staff selectively reviews shelf registration statements prior to

their effective date and selectively reviews other registration

statements of repeat issuers, as well as Exchange Act reports of

repeat issuers.

\41\ See the discussion of staff review in the Advisory

Committee Report at App. B, pp. 21-22.

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B. Request for Comment on Aspects of Specific Approaches

1. The Advisory Committee Report. a. Scope of the system. If the

Commission were to ultimately adopt a version of company registration,

should it be preceded by a temporary pilot program to test the system?

If ultimately adopted, should it apply to issuers on a voluntary or

mandatory basis? Should it be mandated for some issuers, and if so,

which ones? Would it be appropriate for smaller issuers without

significant additional investor protection mechanisms? Are the benefits

of the company registration system that do not exist in the current

shelf registration system likely to attract the participation of

issuers given the different requirements of company registration,

including the investor protection enhancements? If available only to

larger issuers on a voluntary basis, are such issuers likely to opt in?

The company registration system, in its recommended pilot stage, would

not be available to all issuers currently eligible to rely on shelf

registration for delayed offerings because, for example, it requires

two years of reporting history as opposed to one year. The Advisory

Committee believed that the extra ``seasoning'' from an additional year

could help ensure the quality of the Exchange Act reporting structure.

Is such an additional requirement appropriate?

If a voluntary company registration system were implemented,

eligible issuers could be operating under one of two separate

registration systems: the Form S-3 (allocated or universal shelf or

non-shelf) registration, or company registration (modified or full). If

such a system were to be implemented, should issuers electing to be

part of the system be required to rely on company registration for all

subsequent offerings of securities if they are to receive certain other

benefits,42 or should issuers be permitted to use a company

registration system except when they issue unregistered securities in

reliance upon statutory exemptions or Commission exemptive rules or

regulations? Should any period of ineligibility to choose a company

registration system be applied if an issuer changes its mind about

participation in the system? Are there offerings of certain exempt

securities and exempt transactions that an issuer should be permitted

to make on an unregistered basis while participating in company

registration? Should debt securities and equity securities be treated

differently with regard to mandatory inclusion?

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\42\ See Advisory Committee Report at App. B, pp. 34-39. Under

the Advisory Committee recommendations, issuers that choose full

company registration would be entitled to rely upon a narrower

application of the resale limitations for ``affiliates'' and a

narrower definition of who is an ``underwriter'' with respect to

their securities. See Advisory Committee Report at App. B, p. 34.

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The current Securities Act regulatory framework applies different

liability standards to registered offerings than

[[Page 40050]]

unregistered offerings.43 For example, strict liability under

Section 11 applies to registered offerings but does not apply to

unregistered offerings. Is this liability distinction likely to lead an

issuer to prefer to retain the option of making unregistered exempt or

offshore offerings? What would be the benefits to investors of a system

in which all offerings are registered (full company registration) as

opposed to the current system in which some offerings are registered

and some are unregistered? What would be the negative consequences? Are

the reasons that issuers choose unregistered private offerings (such as

the need to keep certain information confidential, the activities of

arbitrageurs or the identity of the purchasers) they addressed by the

company registration model? 44

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\43\ See Securities Act Sections 11, 12 and 17, 15 U.S.C.

Secs. 77k, 77l, and 77q. See also Gustafson v. Alloyd Co. Inc., 115

S. Ct. 1061 (1995).

\44\ See Advisory Committee Report at App. A, pp. 18-19, 36-38

and at App. B, p. 45.

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b. Disclosure enhancements. The Advisory Committee Report suggests

that a number of ``disclosure enhancements'' be a part of the company

registration system, largely as methods to ensure the quality and

currency of Exchange Act disclosure.45 Comment is requested with

respect to the effect of each of those enhancements and whether any

resulting benefit would justify any additional cost of complying. For

example, would a benefit be provided by the management certification

(which is not filed but subject to penalty) that is not currently

provided by the signature requirements? Would management be more likely

to read the disclosure document or would it provide the certification,

much in the same way some management reportedly execute signature

pages, without reading the disclosure document?

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\45\ See Advisory Committee Report at pp. 26-28. Those

enhancements include: a certification that is sent with the filing

of each mandatory periodic report that two of four senior officers

have reviewed the issuer's Exchange Act reports and that, to the

best of their knowledge, they do not contain any material false or

misleading information; a one-time management report to the audit

committee or to the board of directors, if there is no audit

committee, describing the procedures followed to ensure integrity of

reports and to avoid insider trading (updated only if materially

changed); an alteration of the due dates for Forms 8-K to 5 business

days after the occurrence of the event where such reports currently

allow 15 calendar days; an expansion of the events that require per

se a filing of a Form 8-K; a new requirement that risk factors

disclosure be included in the Form 10-K (amplified by a discussion

of the benefits of ownership at the issuer's option); a review of

interim financial information under SAS 71 by independent

accountants at the time of filing (a voluntary enhancement); and a

``disclosure committee'' of the board of directors (a voluntary

enhancement).

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The recommended mandatory enhancements focus on internal issuer

action to improve disclosure, rather than seeking enhancement of

Exchange Act reports through persons independent of the issuer. Comment

is requested with respect to the relative costs and benefits of

focusing on internal issuer action as compared to greater participation

of independent ``gatekeepers.'' Should any voluntary enhancement

involving independent parties (e.g. the review of interim financial

results under SAS 71) 46 be mandated? Should any of the mandatory

enhancements be voluntary? Are there additional or alternative

enhancements that would provide investor protection at reasonable cost?

For example, should other communications from the auditors to the

issuer be reported in the Form 8-K filings (e.g. internal control

weaknesses)? Should sales be prohibited during the days following the

occurrence of any event (or certain specified events) triggering a Form

8-K before the report has been filed? As recommended by the Advisory

Committee, should sales be prohibited until the market assimilates the

information after such filing?

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\46\ See AICPA Statement on Auditing Standards No. 71 (May

1992).

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Could aspects of any of the proposed enhancements be modified to

provide greater investor protection without disproportionately

increasing the costs? For example, are there events currently reported

on Form 10-Q that should be subject to an accelerated reporting

schedule on Form 8-K? 47 Would any of the enhancements operate

instead to reduce investor protection? Would any of these enhancements

suggest that fewer persons take responsibility for the disclosure? If

enhancements are beneficial, should they be mandated for some or all

issuers reporting under the Exchange Act, regardless of participation

in company registration?

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\47\ See, e.g., the recommendations regarding acceleration of

reporting of certain events in the Advisory Committee Report at p.

27.

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2. Task Force Report Recommendations. The Task Force Report sets

forth a list of recommended reforms for the regulatory system. The main

focus of those recommendations was on revising the existing shelf

registration system to provide more flexibility and accessibility.

Those recommendations included:

Allowing smaller issuers that have been reporting for a year

to make delayed offerings (without altering the disclosure requirements

or permitting forward incorporation by reference);

Eliminating ``at the market'' offering restrictions;

Allowing universal shelf registration for secondary offerings;

Allowing issuers and majority-owned subsidiaries to be named

as possible issuers on a shelf registration (without designating the

issuer until takedown);

Allowing reallocation of securities on a shelf registration

statement by post-effective amendment;

Allowing registration by seasoned issuers without any

specification of the classes registered; and

Allowing seasoned issuers to pay registration fees at the time

of takedown.48

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\48\ See the Task Force Report at pp. 36-40. The Task Force also

recommended allowing smaller issuers that are not eligible for Form

S-3 but have been reporting for a year to deliver their Exchange Act

reports with their prospectuses (rather than reiterating that

information in the prospectuses). All but the first and fourth of

these recommendations noted above are recommendations of the

Advisory Committee. See Task Force Report at pp. 36-40 and the

Advisory Committee Report at p. 35, n. 40 and accompanying text.

The Commission seeks comment with respect to each of the Task

Force's recommendations relating to reforming shelf registration. In

addition, the Commission requests comment specifically on the following

aspects of the Task Force's suggested reforms.

1. Many Task Force shelf registration revisions are similar to the

streamlining aspects of the company registration system. If a company

registration approach is implemented, would any of the Task Force

recommendations to revise the shelf system provide an added benefit to

ineligible (or eligible) issuers without loss of investor protection?

2. Would the Task Force reforms eliminate any remaining concern of

issuers regarding market overhang effects when equity securities may be

issued from a universal shelf?

3. Would reform of the shelf registration process as suggested in

the Task Force Report be appropriate only if investor protection

enhancements also were added? If so, what enhancements would be needed?

Would the shelf registration reforms minimize or exacerbate concerns

about ensuring current information for the secondary markets?

3. Liberalizing the resale of unregistered securities. One approach

to reforming the registration system involves the expansion of Rule

144A under the Securities Act.49 Rule 144A has facilitated the

creation of a private, relatively liquid, limited institutional market

made up of qualified

[[Page 40051]]

institutional buyers (``QIBs''). Suggestions have been made that easing

the restrictions on the types of securities and buyers that may

participate in the Rule 144A market would reduce the cost of capital

formation without a corresponding loss of investor protection.50

Should the Commission consider expanding the use of Rule 144A as an

alternative to, or in combination with, aspects of company

registration? For example, should the fungibility restriction of Rule

144A 51 be revised and, if so, should it be eliminated or simply

eased for a particular class of issuers or securities? Comment also is

requested regarding whether the group of institutions eligible to be

QIBs should be expanded and, if so, in what manner.52 Would the

expansion of this separate institutional market lessen investor

protection in any way or harm the public interest?

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\49\ 17 CFR 230.144A.

\50\ See, e.g., J. Coffee, Jr., ``Re-Engineering Corporate

Disclosure: The Coming Debate Over Company Registration,'' 52 Wash.

& Lee L. Rev. 1143, 1177-79 (1995).

\51\ Under current Rule 144A, securities that are fungible when

issued with those traded on a national securities exchange or quoted

in a U.S. automated inter-dealer quotation system may not be sold in

the 144A market. See Rule 144A(d)(3), 17 CFR 230.144A(d)(3).

\52\ Under Rule 144A, securities may only be offered or sold to

QIBs. To be eligible to be a QIB, an institution must own and invest

on a discretionary basis at least $100 million in securities of

unaffiliated entities, or, if a registered dealer (acting for its

own accounts or on behalf of other QIBs), at least $10 million in

securities of unaffiliated entities. Banks, savings associations and

equivalent foreign institutions must also have a net worth of at

least $25 million to be eligible.

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If the Commission were to expand the use of Rule 144A, revise Rule

152,53 and address further the problematic practices under

Regulation S,54 would enough of the complexity of the ``restricted

versus unrestricted securities'' and ``private versus public offering''

dichotomies be eliminated, or would such actions move the line of

demarcation but otherwise retain all the distinctions? 55 Would

the complexity be eliminated if, in addition, the Commission shortened

the holding period in Rule 144 or would this change move the line of

demarcation? 56 Rule 144 is commonly viewed as setting the

restrictions on resale of most unregistered securities (including sale

of Rule 144A securities outside the QIB market). As such, would

reducing the Rule 144 holding period have the effect of making the

alternative of not registering securities more attractive to issuers

and purchasers and, therefore, tend to minimize the need for further

reform of the registration process? Would rule changes that encourage

more offerings to be unregistered impact investor protection?

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\53\ See infra Section II.B.6.

\54\ Securities Act Release No. 7190 (June 27, 1995) [60 FR

35663].

\55\ Perceived difficulties arising from these distinctions

include: prohibitions on combining a private offer and a public

sale; Section 5 ``gun-jumping'' issues arising from converting a

private offering to a public offering; and general solicitation and

integration concerns arising when converting an offering begun after

filing a registration statement to a private offering. See S.

Keller, ``Basic Securities Act Concepts Revisited,'' INSIGHTS, vol.

9 at pp.5-12 (May 1995) and Advisory Committee Report, App. A at pp.

22-32.

\56\ See Securities Act Release No. 7187 (June 27, 1995) [60 FR

35645]. Rule 144 provides a safe harbor for sales under Securities

Act Section 4(1), 15 U.S.C. 77d(1), for persons selling unregistered

restricted securities and for affiliates of the issuer selling any

issuer securities. The participation of brokers and dealers acting

as intermediaries in such resales is exempt under Securities Act

Section 4(3) or 4(4), 15 U.S.C. 77d(3) or 77d(4).

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4. The four-part approach. Another recently articulated approach to

modernizing the regulatory framework governing the offering process

consisted of: (i) focusing on the nature of purchasers as one of the

factors considered in defining the regulation of registered offerings;

(ii) exempting offers from registration; (iii) allowing communications

other than the statutory prospectus during the offering period, subject

to Section 12(a)(2) (but not Section 11) liability; and (iv) allowing

prospectus delivery by incorporation by reference of the full

prospectus, where appropriate, and pre-confirmation physical delivery

of prospectuses in all other cases. 57 Some of these ideas, such

as use of constructive delivery and allowing non-statutory prospectus

communications, are discussed above.

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\57\ These suggestions were made in a 1995 speech to the

Committee on Federal Regulation of Securities of the American Bar

Association by Linda C. Quinn, then Director of the Division of

Corporation Finance. See L. Quinn, ``Reforming the Securities Act of

1933--A Conceptual Framework,'' INSIGHTS, vol. 10, pp. 25-29 (1995).

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Comment is solicited with respect to whether the implementation of

these reforms would suffice to achieve full disclosure in the modern

offering process. If not, what other actions would be needed? Would the

deregulation of offers resolve some of the complexities resulting from

the statutory distinction between private and public offerings?

Would there be any loss of investor protection as a result of the

deregulation of offers due to the fact that no document need be filed

until the time of sales, especially with respect to issuers that do not

file under the Exchange Act? Conversely, would there be an increase in

information without the diminution of investor protection if the

deregulation resulted in the freedom to provide written, profile

disclosure not conforming to the traditional prospectus? Are there

classes of registered offerings regarding which the capital markets

have no need for advance notice of the issuers' intentions to offer

securities? Should this approach be considered only for certain classes

of issuers and, if so, which ones?

5. ``Pink herring'' concept. Another recent suggestion is that

offers be permitted to be made by any issuer after filing a ``pink

herring'' registration statement consisting of limited information

regarding the price, the type of security, the method of distribution

and financial results. 58 An initial nominal fee would be paid

with the pink herring filing. Thereafter, public offers and general

solicitations could be made. Although all offers would be registered

under this approach, whether public or private, unregistered sales to

qualified non-retail investors could be made thereafter in compliance

with, for example, Regulation D. 59

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\58\ This approach is described in more detail in the Task Force

Report at p. 31.

\59\ 17 CFR 230.501 through 230.508 and Preliminary Notes

thereto.

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Comment is solicited with respect to whether this proposal would

resolve much of the strain resulting from the erosion of distinctions

between private and public offerings. Would there be a loss of investor

protection due to the fact that only limited disclosure need be filed

until the time of sales? Would there be increased investor protection

from this proposal in comparison to a system where offers are not

regulated at all and no filing is made with the Commission until the

time of sale? Would a benefit result from the potential involvement of

some ``gatekeepers?'' Would there be a benefit from requiring a filing

with the Commission that could be reviewed by offerees or used by the

Commission in the event of fraudulent offers? Should this approach be

considered only for certain classes of issuers, such as non-reporting

issuers, and, if so, for which ones? Should a pink herring filing

include limited company information as well as limited transaction-

specific information?

6. Private and public offerings--revisiting rule 152. Issuers that

undertake a private offering may later decide to make a public offering

instead. The safe harbor provided by Securities Act Rule 152 60

deems the Section 4(2) exemption to continue to apply to the private

transaction in those circumstances if the private offering has been

terminated prior to the

[[Page 40052]]

commencement of the public offering. In the absence of the safe harbor,

the exemption for the private offering may be in doubt, as it could be

integrated with the public offering. The Task Force Report recommended

that Rule 152 be revisited with a view towards permitting a company to

switch from a private offering to a public offering without an

intervening termination of the private offering. 61 Comment is

solicited with respect to whether this proposal would resolve much of

the strain resulting from the erosion of distinctions between private

and public offerings. Would this enhance an issuer's ability to access

the capital markets more efficiently? Would there be a loss of investor

protection from such a change? If Rule 152 is expanded, should its

availability be limited to offerings other than those that may give

rise to disclosure abuses (e.g. blind pools, blank check companies or

penny stocks)?

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\60\ 17 CFR 230.152.

\61\ See Task Force Report at pp. 29-30.

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Similarly, should the Commission modify its view that the act of

filing a registration statement in connection with a non-shelf offering

is deemed to commence a public offering in all cases? Should the

Commission create a safe harbor for private offerings that are

undertaken while the issuer has ``quietly'' filed a registration

statement? 62

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\62\ An issuer ``quietly'' files a registration statement when

the filing of such document with the Commission is not accompanied

by a marketing effort for the securities, including the circulation

of a preliminary prospectus.

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7. General solicitation. Effective June 10, 1996, the Commission

adopted Rule 1001,63 which exempts from registration under the

Securities Act certain small offerings that are exempt from state law

registration under the California Corporations Code.64 The

California law provides an exemption for offerings by California-

related issuers to ``qualified purchasers'' (which are similar to

accredited investors as defined in Securities Act Regulation D). Under

the California law, a general announcement with limited contents may be

widely published and circulated, much like that under the Commission's

Regulation A ``test the waters'' process. Comment is solicited with

respect to whether the Commission should extend the approach in Rule

1001 to offerings on a nationwide basis so that a general solicitation

could precede an exempt sale to qualified purchasers.

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\63\ 17 CFR 230.1001 (Regulation CE).

\64\ Securities Act Release No. 7285 (May 1, 1996) [61 FR

21356].

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Comment also is requested with respect to a broader relaxation of

general solicitation prohibitions on offerings made under Regulation D

Rules 505 and 506.65 Is the inability to reach out broadly to find

qualified investors for such Regulation D offerings unnecessarily

hampering the utility of the regulation and raising costs to issuers?

Would relaxation of such prohibition be appropriate? 66

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\65\ 17 CFR 230.505 and 230.506.

\66\ See the discussion and solicitation of comment contained in

Securities Act Release No. 7185 (June 27, 1995) [60 FR 35638].

Comment letters have been received in response to that solicitation

of comments and are available in the Commission's Public Reference

Room File No. S7-15-95. Such letters will be considered in

connection with this release and need not be resubmitted.

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8. Other Questions. Would modification of the existing shelf

registration system provide the equivalent benefits to issuers and

other participants in the markets, and investors, in both the primary

and secondary markets, as the new company registration system may

provide?

Would modifications to the existing regulatory system (including

shelf registration) provide equivalent benefits to eliminating the need

for regulatory distinctions (such as ``private versus public,''

``domestic versus offshore,'' and other similar issues) as would the

new company registration system if companies opted into full company

registration?

Would it be better to have a pilot program for company

registration, while maintaining the current system, or should instead

the current system be modified?

III. Conclusion

The Commission is soliciting public comment on a variety of issues

relating to the Securities Act offering process, including the effect

of any changes in the regulatory scheme on the operation of both the

primary and secondary markets. In addition to responding to the

questions presented in this release, the Commission encourages

commenters to provide any information to supplement the information and

assumptions contained herein regarding the functioning of the capital-

raising process, the roles of market participants, the advantages and

disadvantages of suggested reforms, the expectations of investors, and

the other matters discussed. The Commission also invites commenters to

provide views and data as to the costs and benefits associated with

possible changes discussed above in comparison to the costs and

benefits of the existing regulatory framework. The Commission also

seeks comment concerning whether, given the passage of time and the

evolution of the capital markets since adoption of the registration

system, legislative reform is needed. In order for the Commission to

assess the impact of changes to the Securities Act regulatory scheme on

capital formation and the protection of investors, comment is solicited

from the point of view of investors, issuers, underwriters, broker-

dealers, analysts, and other interested parties, including accountants

and attorneys involved in the registration process.

By the Commission.

Dated: July 25, 1996.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96-19461 Filed 7-30-96; 8:45 am]

BILLING CODE 8010-01-P