Rule 701Exempt Offerings Pursuant to Compensatory Arrangements

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 230

[Release No. 33-7645; File No. S7-5-98]

RIN 3235-AH21

Rule 701--Exempt Offerings Pursuant to Compensatory Arrangements

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``we'' or

``Commission'') is adopting amendments to Rule 701 under the Securities

Act of 1933, which provides an exemption from registration for

securities issued by non-reporting companies pursuant to compensatory

arrangements. These amendments make Rule 701 more useful and eliminate

unnecessary restrictions. We are removing the $5 million aggregate

offering price ceiling and setting the maximum amount of securities

that may be sold in a 12-month period to a more appropriate, flexible

limit related to the size of the issuer. The amendments also require

specific disclosure from issuers that sell more than $5 million worth

of securities in a 12-month period, and harmonize the definition of

consultant and advisor to the one contained in Form S-8, the short-form

registration statement form for the offer and sale of employee benefit

plan securities.

EFFECTIVE DATE: April 7, 1999.

FOR FURTHER INFORMATION CONTACT: Richard K. Wulff (202-942-2950),

Office of Small Business, Division of Corporation Finance, Securities

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

SUPPLEMENTARY INFORMATION: We are adopting amendments to Rule 701 \1\

under the Securities Act of 1933 (``Securities Act'').\2\

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\1\ 17 CFR 230.701.

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

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I. Executive Summary and Background

In 1988, we adopted Rule 701 under the Securities Act \3\ to allow

private companies to sell securities to their employees without the

need to file a registration statement, as public companies do. The rule

provides an exemption from the registration requirements of the

Securities Act for offers and sales of securities under certain

compensatory benefit plans or written agreements relating to

compensation. The exemptive scope covers securities offered or sold

under a plan or agreement between a non-reporting (``private'') company

(or its parents or majority-owned subsidiaries) and the company's

employees, officers, directors, partners, trustees, consultants and

advisors.

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\3\ Release No. 33-6768 (April 14, 1988) [53 FR 12918].

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When we adopted the rule, we determined that it would be an

unreasonable burden to require these private companies, many of which

are small businesses, to incur the expenses and disclosure obligations

of public companies when their only public securities sales were to

employees. Further, these sales are for compensatory and incentive

purposes, rather than for capital-raising. To accommodate these

companies, we used the maximum extent of the authority we had at that

time under Section 3(b) of the Securities Act \4\ to exempt offers and

sales of up to $5 million per year.

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\4\ 15 U.S.C. 77c(b).

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Currently, the amount of securities subject to outstanding offers

in reliance on Rule 701, plus the amount of securities offered or sold

under the rule in the preceding 12 months, may not exceed the greatest

of $500,000, or an amount determined under one of two different

formulas. One formula limits the amount to 15% of the issuer's total

assets measured at the end of the issuer's last fiscal year. The other

formula restricts the amount to no more than 15% of the outstanding

securities of the class being offered. Regardless of the formula

elected, Rule 701 restricts the aggregate offering price of securities

subject to outstanding offers and the amount sold in the preceding 12

months to no more than $5 million.

Over the years, our staff has monitored the use of the rule. The

staff concluded that the rule has been popular for both small

businesses and larger private companies. However, the $5 million limit

appears to have become unnecessarily restrictive in light of inflation,

the increased popularity of equity ownership as a retention and

incentive device for employees, and the growth of deferred compensation

plans.

In October 1996, Congress enacted the National Securities Markets

Improvement Act of 1996 (``NSMIA''),\5\ which, for the first time, gave

us the authority to provide exemptive relief in excess of $5 million

for transactions such as these. The legislative history of NSMIA stated

specifically that we should use this new authority to lift the $5

million ceiling on Rule 701.\6\ In February 1998, we proposed a number

of revisions to increase the flexibility and usefulness of Rule 701, as

well as to simplify and clarify the rule.\7\

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\5\ Pub. L. 104-290, 110 Stat. 3416 (October 11, 1996).

\6\ Both Committee Reports specifically highlighted the current

$5 million limit contained in Rule 701 and sought prompt Commission

action to raise that ceiling to ``not less than $10 million.'' H.R.

Rep. No. 104-622 at 38; S. Rep. No. 104-293 at 16.

\7\ Release No. 33-7511 (February 27, 1998) [63 FR 10785]

(``Rule 701 Proposing Release''). We received 33 letters of comment

on the proposals. You may inspect and copy the comment letters in

our Public Reference Room in File No. S7-5-98. Comments that were

submitted electronically are available on our website (http://

www.sec.gov).

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Today, we announce revisions to the rule that:

(1) remove the $5 million aggregate offering price ceiling and,

instead, set the maximum amount of securities that may be sold in a

year at the greatest of:

--$1 million (rather than the current $500,000);

--15% of the issuer's total assets; or

--15% of the outstanding securities of that class;

(2) require the issuer to provide specific disclosure to each

purchaser of securities if more than $5 million worth of securities are

to be sold;

(3) do not count offers for purposes of calculating the available

exempted amounts; \8\

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\8\ Note, however, that the rule now requires issuers to count

as sales the securities underlying the options at the time of the

option grant based upon the exercise price.

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(4) harmonize the definition of consultants and advisors permitted

to use the exemption to the narrower definition of Form S-8; \9\

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\9\ 17 CFR 239.16b. Form S-8, a simplified form for registering

sales to employees, is available only to public companies subject to

the reporting requirements of the Securities Exchange Act of 1934

[15 U.S.C. 78a et seq.] (``Exchange Act''). See also the release

relating to revisions to Form S-8 we are adopting today, Release No.

33-7646. (``S-8 Adopting Release'').

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(5) amend Rule 701 to codify current and more flexible

interpretations; and

(6) simplify the rule by recasting it in plain English.

Together, these changes will add greater flexibility for companies

to compensate sell securities their employees with securities and, at

the same time, will provide that essential information be delivered to

employees in appropriate situations and in a timely manner. The vast

majority of commenters on the Rule 701 Proposing Release supported the

proposed amendments, particularly the lifting of the $5 million

aggregate offering price ceiling and the removing of offers from the

ceiling calculation. A number of commenters, however, expressed

concerns about the proposed disclosure requirements, particularly as

they relate to foreign private issuers.

We have considered these comments and we believe that we have

struck an

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appropriate balance between the needs of employee-investors and the

needs of non-reporting companies. In particular, we have decided to

impose the disclosure requirements only on sales above $5 million,

instead of on all Rule 701 sales, as proposed. These revisions to Rule

701 are being adopted pursuant to the exemptive authority provided to

the Commission under Section 28 of the Securities Act.\10\

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\10\ ``The Commission, by rule or regulation, may conditionally

or unconditionally exempt any person, security or transaction, or

any class or classes of persons, securities or transactions from any

provision of this title or any rule or regulation issued under this

title to the extent that such exemption is necessary or appropriate

in the public interest, and is consistent with protection of

investors.'' 15 U.S.C. 77bb. As more fully described below, we find

that the exemption is appropriate in the public interest and is

consistent with the protection of investors.

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II. Amendments to Rule 701

The amendments to Rule 701 have been adopted in most respects as

proposed, with the exceptions discussed below. The changes to the rule

are not retroactive. Offers and sales made in reliance on Rule 701

before the effective date will continue to be valid if they met the

conditions of the rule before its revision.\11\ The principal changes

are in the areas of exemptive limits, disclosure, and the treatment of

consultants and advisors, as discussed in detail below. In addition, we

are adopting a number of clarifying and simplifying provisions,

including the following:

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\11\ Offers that were being made under the Rule 701 exemption as

it used to read may be consummated under those terms. For example,

vested options may be exercised in reliance upon the prior version

of Rule 701. Options issued in reliance upon the Rule 701 exemption

(in contrast to a ``no sale'' theory) may be exercised in reliance

upon the prior version of the rule, whether vested or unvested. See

the interpretive letter to Richard M. Leisner (December 21, 1995).

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Expanding the scope of the rule to exempt sales to

employees of majority-owned subsidiaries of the issuer's parent (i.e.,

brother-sister subsidiaries);

Providing: (1) that a private, wholly-owned subsidiary can

use its parent's assets, whether or not the parent is a public company,

in making the 15% of assets calculation so long as the parent fully and

unconditionally guarantees the obligations of the subsidiary issued

under the rule (if the guarantee does not exceed 15% of the parent's

assets), such as in the case of many deferred compensation

arrangements; and (2) an exemption for the parent's guarantee;

Clarifying that sales to former employees may be completed

under the rule if those persons were employees when the securities

initially were offered;\12\

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\12\ As adopted, the rule also includes former directors,

officers, general partners, trustees, consultants and advisors.

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Specifying the manner of considering employee/consultant

services in calculating the aggregate sales limit; and

Facilitating tax and estate planning by permitting the

rule to be available for option exercises by family members of

employees who acquire Rule 701 securities from the employee through a

gift or a domestic relations order.\13\

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\13\ This change is consistent with the amendments to Form S-8

adopted today with respect to transferable securities. ``Family

member'' is defined in Rule 701(c)(3) the same way as ``family

member'' in General Instruction A.1(a)(5) of Form S-8 as adopted

today in the S-8 Adopting Release.

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A. Exemptive Limits

As proposed, we are removing the $5 million aggregate offering

price ceiling and raising the current $500,000 level that can be sold

in a year to $1 million.\14\ Also as proposed, the revised rule no

longer limits the dollar amount of securities offered to employees.

Instead, issuers will make calculations based solely on actual sales or

amounts to be sold (as with options) in a 12-month period. Changing the

focus from offers to sales will make it easier for issuers to determine

the exempt amount of securities transactions, while continuing to

assure that the transactions are not so large as to trigger the need

for registration. We believe that these changes, in combination with

the other changes adopted, will provide issuers the flexibility they

need, without creating opportunities for abuse.

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\14\ The revised rule also makes it clear, as proposed, that the

calculations of total assets and securities outstanding are measured

as of the issuer's most recent balance sheet date, which must be no

older than the end of its last fiscal year.

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With respect to equity incentives such as restricted stock and

compensatory stock purchases, the calculations will be made as of the

transaction date. Deferred compensation and similar plans will make

measurements based upon the date of an irrevocable election to defer

compensation. With respect to options, calculations will be made as of

the date of the option's grant, without regard to whether the option is

currently exercisable or ``vested.'' We make this change for option

calculations in response to comments emphasizing the difficulty in

keeping track of outstanding options, when they become exercisable and

when they might be exercised.\15\ We believe that this method of

determining the available exemption should make no difference from an

investor protection point of view since the 12-month limit will still

apply. However, this change will greatly simplify the issuer's

oversight of outstanding offers and perhaps benefit more employees and

others who may participate in the compensatory arrangements. The rule

makes it clear that calculations with respect to options should be

based on the exercise price, since the purpose is to measure the

securities that will be sold under the exemption.\16\

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\15\ In particular, commenters were concerned that basing

calculations on the option exercise date could result in an

unanticipated loss of the exemption if too many optionees exercised

their options at the same time. Although options are offers of the

underlying securities that can be made without limitation and are

exempt under the revised rule, using the exercise price at the date

of grant simplifies the calculations of the available exemption

amount and allows issuers to avoid the administrative difficulties

of keeping track of outstanding options.

\16\ In the event that exercise prices are later changed or

repriced, a recalculation will have to be made under Rule 701.

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Rule 701 provides that the calculation of the exempt amount should

account for the value of both consultant and employee services.\17\ A

number of the commenters misunderstood this provision. The point of the

revision is to clarify that compensatory arrangements should not be

valued at ``zero'' or treated as a gift. Even when the employee or

consultant is not required to pay additional consideration for the

securities being issued, these securities typically would have some

intrinsic worth, such as book value or a multiple of book value. The

value of services exchanged for securities issued must be measured by

reference to the value of the securities issued rather than the

employee's salary or consultant's invoice. The rule as revised makes

this clear.

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\17\ Rule 701(d)(3)(i).

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B. Disclosure to Persons Covered by Rule 701

We were concerned that eliminating the $5 million ceiling could

result in some very large offerings of securities without the

protections of registration, even though made pursuant to compensatory

arrangements. We therefore proposed to impose a specific disclosure

requirement on all transactions under the exemption. We solicited

comment on whether some dollar amount of transactions might not require

specified disclosure, for example, $1 million. In response to comment,

and our consideration of reasonable alternatives, we have decided to

require no specified disclosure requirement for sales up to $5 million.

This formulation apparently has worked well to date. We do not

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believe the exemption has been misused for fraudulent purposes in its

current format. We agree with the commenters that the additional

burdens related to mandatory financial and risk disclosure for these

limited offerings are unnecessary.

On the other hand, the revised rule provides no aggregate offering

price ceiling and thus substantial amounts of securities exceeding $5

million may be issued by large private companies. Indeed, a number of

commenters with this profile urged the Commission to remove the ceiling

quickly so that they can enjoy sooner the benefits of the exemption for

their compensatory arrangements. These commenters appear to be

comfortable with a greater disclosure requirement as the tradeoff for

greater use of the exemptive rule. Moreover, we believe that many of

these companies already have prepared the type of disclosure required

in their normal course of business, either for using other exemptions,

such as Regulation D \18\ or for other purposes. As a result, the

disclosure requirement generally would be less burdensome for them. If

these companies do not want to disclose the requisite information to

their employees and others, they may continue to follow the current

provisions of the rule and keep the amount sold below $5 million in a

12-month period. In that case, they would continue to provide only the

disclosure needed to satisfy the antifraud provisions of the law.\19\

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\18\ 17 CFR 230.501 et seq.

\19\ See Preliminary Note 1 to Rule 701.

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We would have investor protection concerns if we removed the $5

million ceiling without imposing specific disclosure requirements, as

discussed below. In contrast, we believe that disclosure requirements

are not needed for offerings below the $5 million threshold at this

time. We have not witnessed abuse below this threshold, and therefore

the burden of preparing and disseminating the new disclosure does not

justify the potential benefits to employee-investors.

Where the formula permits sales in excess of $5 million during a

12-month period, and the issuer chooses to take advantage of this

increased amount, the new disclosure should be provided to all

investors before sale. This requirement will obligate issuers to

provide disclosure to all investors if the issuer believes that sales

will exceed the $5 million threshold in the coming 12-month period. If

disclosure has not been provided to all investors before sale, the

issuer will lose the exemption for the entire offering when sales

exceed the $5 million threshold.

The disclosure requirements are adopted as proposed. The required

disclosure consists of:

A copy of the compensatory benefit plan or contract;\20\

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\20\ A copy of the compensatory benefit plan or contract must be

given to all offerees under current Rule 701. Under the revisions,

this will continue to be required, whether or not the specific

disclosure requirement is triggered by exceeding the $5 million

amount.

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A copy of the summary plan description required by the

Employee Retirement Income Security Act of 1974 (``ERISA'') \21\ or, if

the plan is not subject to ERISA, a summary of the plan's material

terms;

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\21\ 29 U.S.C. 1104-1107.

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Risk factors associated with investment in the securities

under the plan or agreement; and

The financial statements required in an offering statement

on Form 1-A \22\ under Regulation A.\23\

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\22\ 17 CFR 239.90. Part F/S of Form 1-A generally provides for

unaudited financial statements. However, issuers that have audited

financial statements must provide them, instead of unaudited ones.

\23\ 17 CFR 230.251 et seq.

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The type and amount of disclosure needed in a compensatory

securities transaction differs from that needed in a capital-raising

transaction. In a bona fide compensatory arrangement, the issuer is

concerned primarily with compensating the employee-investor rather than

maximizing its proceeds from the sale. Because the compensated

individual has some business relationship, perhaps extending over a

long period of time, with the securities issuer, that person will have

acquired some, and in many cases, a substantial amount of knowledge

about the enterprise. The amount and type of disclosure required for

this person is not the same as for the typical investor with no

particular connection with the issuer. The current standards of

financial statement disclosure contained in Regulation A should satisfy

our concerns for a level of disclosure that will provide basic

protections in a compensatory transaction but may not be available as a

result of ordinary employment or business dealings.\24\ The standard is

well established and may be very familiar to private issuers, since

these financial statements and risk factor disclosure requirements are

used not only in Regulation A, but also in the private placement

exemptions contained in Regulation D.\25\

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\24\ As proposed and adopted, if a reporting company is relying

on Rule 701 to guarantee the obligations of a subsidiary's

securities sold under the rule, the issuer must deliver the parent's

financial statements that would be required by Rule 10-01 of

Regulation S-X (17 CFR 210.10-01) and Item 310 of Regulation S-B (17

CFR 228.310). Rule 701(e)(5).

\25\ See Rule 502(b)(2)(i)(A) of Regulation D [17 CFR

230.502(b)(2)(i)(A)].

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Compliance with the minimum disclosure standards for Rule 701 may

not necessarily meet the antifraud standards of the securities law.\26\

The disclosure required will depend upon the facts circumstances.\27\

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\26\ E.g., Section 17(a) of the Securities Act [15 U.S.C.

77q(a)], Section 10(b) of the Exchange Act [15 U.S.C. 78j(b)], and

Rule 10b-5 [17 CFR 240.10b-5].

\27\ Issuers eligible to take advantage of the increased

availability of the exemption also should be mindful of the

requirements of the Exchange Act [15 U.S.C. 78l(g)]. Once an issuer

exceeds 500 shareholders and $10 million in assets, it must register

under Section 12(g) of the Exchange Act and provide full disclosure

as a ``public'' company. See Rule 12g-1 [17 CFR 240.12g-1].

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Some commenters expressed concern that requiring a private issuer

to deliver disclosure documents, particularly financial statements, to

employee-investors could result in serious harm to the company if the

information were to come into possession of its competitors. In view of

the substantial amounts of securities that may now be issued under Rule

701, we believe that a minimal level of disclosure consisting of risk

factors and Regulation A unaudited financial statements is essential to

meet even the lower level of information needed to inform compensatory-

type investors such as employees and consultants. Private issuers can

use certain mechanisms, such as confidentiality agreements, to protect

competitive information. Alternatively, an issuer could elect to stay

below the $5 million threshold to avoid these disclosure obligations.

C. Foreign Private Issuers

In the Rule 701 Proposing Release, we especially sought comment on

how foreign private issuers \28\ should be treated under Rule 701,

given that more and more U.S. persons are employed by foreign

companies. Many foreign private issuers with substantial amounts of

securities held by U.S. persons provide only ``home country reports''

and do not prepare financial statements with a reconciliation to U.S.

generally accepted accounting principles (``GAAP'') because of the Rule

12g3-2(b) exemption from the registration requirements of the Exchange

Act.\29\ This exemption is available even though

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the number of U.S. holders may exceed 500 and total company assets

exceed $10 million, which ordinarily would trigger the Exchange Act

reporting requirements.

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\28\ This term is defined in Rule 405 [17 CFR 230.405].

\29\ 17 CFR 240.12g3-2(b). Rule 12g3-2(b) exempts from Exchange

Act registration securities of a foreign private issuer, if the

issuer furnishes to us annual and other reports and other materials

that are publicly available in its home market.

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We solicited comment on whether non-reporting foreign private

issuers should be subject to some annual ceiling, such as $10 million.

Without a limit, the new calculation formula could result in the sale

of a large amounts of securities to a many employees without such

companies ever being required to register under the Securities Act or

the Exchange Act. Commenters objected to a limit, noting that foreign

private issuers typically undertake broad-based offerings to their U.S.

employees for legitimate compensatory reasons and in order to treat all

of their employees alike regardless of their location. Many commenters

expressed the view that any tightening of the exemption for foreign

private issuers would simply result in securities-based incentives not

being offered to the U.S. employees of foreign issuers.

We have determined not to impose any annual ceiling on foreign

private issuers, given the compensatory nature of Rule 701 offerings

and the detrimental effect that such a rule could have on the

compensation packages of U.S. employees. Instead, non-reporting foreign

private issuers will be required to provide the same disclosure as non-

reporting domestic issuers if sales under Rule 701 exceed $5 million in

a 12-month period.\30\ Imposing this obligation on all issuers is the

price for removal of the $5 million offering limit.

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\30\ See Section II.B above.

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We do not believe that any additional modification needs to be made

at this time for foreign private issuers because they will be subject

to the same disclosure requirements as domestic issuers. When, and if,

we accept international accounting standards or guidelines for filing

and reporting purposes, we would amend Rule 701 to allow these

standards to satisfy the rule's financial statement disclosure

obligations for foreign private issuers. For issuers making smaller

offerings, the foreign companies may continue to follow the rule as

they have in the past, which means that ``home country'' reports may be

used, as necessary, to satisfy the antifraud standards. However, larger

companies that cross the $5 million barrier will have to provide the

disclosure required under Regulation A, which includes unaudited

financial statements.

Where financial statements prepared in accordance with U.S. GAAP

are not provided, a reconciliation to such principles must be

attached.\31\ The provisions of Regulation A suggest that a

reconciliation is permitted only for Canadian companies. This is

because Canadian companies are the only foreign issuers eligible to use

that exemption. In contrast, any foreign issuer is eligible to use Rule

701, but if it exceeds the $5 million amount it must provide financial

statements as required by Regulation A. If U.S. GAAP financials are not

available, the financials provided must be reconciled to U.S. GAAP.

Although there are costs involved in preparing the reconciliation and a

number of the commenters objected to the notion of preparing a

reconciliation to U.S. GAAP, we believe that the minimal level of

disclosure for these compensatory transactions is the Regulation A

financial statements, which must be reconciled to U.S. GAAP. Foreign

private issuers that do not wish to provide the disclosure specified

may elect to keep their Rule 701 sales below the $5 million threshold

for disclosure, the same as for domestic issuers.

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\31\ See Item 17 of Form 20-F [17 CFR 249.220f].

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D. Consultants and Advisors

Like regular employees, consultants and advisors are eligible to

receive securities under the Rule 701 exemption. Similarly, where the

issuer is a reporting company, consultants and advisors may receive

securities in a transaction registered on Form S-8.\32\ Currently, the

staff interprets the scope of eligible consultants and advisors

differently for purposes of Rule 701 and Form S-8. The staff has

interpreted Rule 701 to permit participation by a broader range of

consultants and advisors, even though the words are identical in both

Rule 701 and Form S-8.

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\32\ General Instruction A.1(a) to Form S-8.

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At the same time we proposed changes to Rule 701, we proposed

changes to Form S-8 to further limit further the scope of eligible

consultants and advisors.\33\ In many cases, the Form has been misused

by registering shares for issuance to consultants and advisors who do

not have sufficient connection and familiarity with, the company. In

some cases, these persons are receiving the securities for capital-

raising, rather than compensatory, purposes and engage in public

distributions of the company's securities.\34\

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\33\ See Release No. 33-7506 (Feb. 17, 1998) [63 FR 9648] (``S-8

Proposing Release'').

\34\ For a fuller discussion of misuse of Form S-8 involving

consultant and advisors, see the S-8 Proposing Release and the S-8

Adopting Release. Today we also propose additional amendments to

Form S-8, which are designed to address abuses in the use of that

form.

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In the Rule 701 Proposing Release, we asked how consultants and

advisers participate in compensatory arrangements and whether we should

restrict their participation. We also asked whether Rule 701 and Form

S-8 should be harmonized in their treatment of these persons. We are

concerned that persons who would misuse exemptions will develop new

methods to abuse deregulatory safe harbors, even as we are taking steps

to close down other avenues for abuse.

We have determined that the flexible definition of ``consultants

and advisors,'' particularly in the context of registered offerings on

Form S-8, has led to abuse. We are concerned that Rule 701 could be

similarly abused if we make changes only to Form S-8, even though Rule

701 securities, unlike Form S-8 securities, are restricted.\35\ We are

therefore adopting a definition of the term ``consultants and

advisors'' in Rule 701 that will harmonize with the new definition in

Form S-8,\36\ and narrow the scope of eligible consultants and

advisors.

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\35\ Ninety days after a company becomes subject to the

reporting requirements of the Exchange Act, the restrictions lapse.

Rule 701(g)(3). Under the revised rule, because all offers are

exempt, and for purposes of ceiling calculations option exercise

prices are used at the date of grant regardless of the current

exercisability of the option, vested or unvested options will be

exercisable in reliance upon Rule 701 even after the issuer becomes

a public company. Cf. the interpretive letter to Richard M. Leisner

(December 21, 1995).

\36\ The S-8 Adopting Release adopts the ccorresponding changes

into Form S-8. That release also provides additional guidance on

determining the scope of eligible consultants and advisors. See S-8

Adopting Release Section II.A.2. This guidance is applicable to Rule

701 as well as to Form S-8.

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As revised, securities promoters clearly will be excluded from the

scope of persons eligible to participate under the exemption.

Independent agents,\37\ franchisees and salespersons who do not have an

employment relationship with the issuer no longer will be within the

scope of ``consultant or advisor.'' \38\ A person in a de facto

employment relationship with the issuer, such as a non-employee

providing services that traditionally are performed by an

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employee,\39\ with compensation paid for those services being the

primary source of the person's earned income, would qualify as an

eligible person under the exemption.\40\ Other persons displaying

significant characteristics of ``employment,'' such as the professional

advisor providing bookkeeping services, computer programming advice, or

other valuable professional services may qualify as eligible

consultants or advisors, depending upon the particular facts and

circumstances.\41\ Our staff will continue to handle questions about

``consultant or advisor'' status on a case-by-case basis through its

interpretive letter process, but the terms will be interpreted in the

same manner for both Rule 701 and Form S-8.

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\37\ In the revisions to Form S-8 adopted today, we permit

insurance agents who are exclusive agents of the issuer, its

subsidiaries or parents or who derive more than 50% of their annual

income from the issuer to be considered ``employees'' under Form S-

8. We have made a corresponding change to Rule 701.

\38\ The following interpretive letters defining eligible

consultants or advisors under Rule 701 may no longer be relied upon,

as of the effective date of the amendments, except to the extent

that they have been relied upon for currently outstanding offers and

previous sales under the provision: Golfpro, Inc. (October 3, 1989);

Herff Jones, Inc. (November 13, 1990); Microchip Technology, Inc.

(November 4, 1992); Optika Imaging Systems, Inc. (October 1, 1996);

USWeb Corporation (November 7, 1996).

\39\ However, these services must not be in connection with the

offer or sale of securities in a capital-raising transaction, and

must not directly or indirectly promote or maintain a market for the

issuer's securities.

\40\ See Foundation Health Corporation (July 12, 1993).

\41\ Morgan Health Group, Inc. (December 18, 1995); Princeton

Medical Managers Resources (September 12, 1997); PHM Management

Resources, Inc. (September 16, 1997); Talbert Medical Corporation

(September 16, 1997); Osler Health, Inc. (February 11, 1998);

Comprehensive Health Care Corp. (April 30, 1998) are inconsistent

with the interpretation rendered in the Foundation Health letter

under Form S-8 and are also overturned today, although they too may

continue to be relied upon for outstanding offers and previous

sales. These issuers may resubmit their interpretive requests for

staff consideration, highlighting in their submissions the type of

arrangements between the parties that show the services, if any,

that the physicians provide to the issuers and others to permit an

assessment of their status under the new ``consultant and advisor''

provision.

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E. Other Revisions

Because it has become increasingly commonplace to sell stock of a

private subsidiary to employees of a parent or affiliate subsidiary,

and because these transactions retain the envisioned compensatory

character, we have implemented our proposal to expand exemption

coverage to sales to employees of majority-owned subsidiaries of the

issuer's parent (i.e., brother-sister subsidiaries).\42\

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\42\ Rule 701(c). Form S-8 continues to be unavailable for

offers and sales to employees of brother-sister subsidiaries.

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We also have adopted our proposal that Rule 701 should be available

for sales, such as option exercises, by family donees of compensatory

securities and transferees who receive these securities in divorce

proceedings. Rule 701 is now available for immediate family members who

have acquired such securities through a gift or a domestic relations

order. For this purpose ``family member'' is defined as in Form S-8 to

include any child, stepchild, grandchild, parent, stepparent,

grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-

law, father-in-law, son-in-law, daughter-in-law, brother-in-law or

sister-in-law, including adoptive relationships, any person sharing the

employee's household (other than a tenant or employee), a trust in

which these persons have more than a fifty percent beneficial interest,

a foundation in which these persons (or the employee) control the

management of assets, and any other entity in which these persons (or

the employee) own more than fifty percent of the voting interests. This

provision is consistent with the treatment of transferable securities

under Form S-8.\43\

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\43\ See the S-8 Adopting Release.

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III. Cost-Benefit Analysis

As an aid in the evaluation of the costs and benefits of our

original proposals, which were deregulatory in nature, we requested the

views and other supporting information of the public. We received no

comments in response to this request. Nonetheless, we believe that the

rule as revised provides substantial benefits that justify any costs

involved. A major feature of the exemption is its regulatory

flexibility. Thus, benefits it offers include maintaining the existing

exemption for small companies, expanding the availability of the

exemption by applying otherwise established disclosure requirements,

and permitting companies to preserve cash by using stock for

compensatory purposes. The amended rule as a whole provides regulatory

relief for companies, even larger ones, although relief with the fewest

conditions continues to be for small issuers and others that decide to

maintain their offerings below the $5 million ceiling.

For every issuer, the minimum available exemptive amount has been

increased from $500,000 to $1 million. This doubling of exemption

should be particularly attractive to smaller companies that are unable

to utilize the formulas effectively. In addition, we have decided not

to require specified disclosure requirements, including financial

statements, for sales up to $5 million. Further, we determined not to

reinstitute a filing requirement such as Form 701 to report when the

exemption is used.

On the other hand, the revised rule provides no aggregate offering

price ceiling and thus substantial amounts of securities exceeding $5

million may be issued by large private companies. If these companies do

not want to disclose the requisite information to their employees and

others, they may continue to follow the current provisions of the rule

and keep the amount sold below $5 million in a 12-month period. In that

case, they would not have to provide the specified disclosure.

The ability to reward and retain employees with a company's

securities will permit companies to keep valuable employees without

having to use other methods to compensate them, such as borrowing money

or selling securities. Because the rule may encourage companies to

offer incentives to their employees and others, for example through

deferred compensation arrangements, and also facilitates interfamily

donative transfers, it may provide benefits from the perspective of tax

and estate planning as well.

We have concluded that the rule amendments will not result in a

major increase in costs or prices for consumers or individual

industries, or significant adverse effects on competition, employment,

investment, productivity, innovation or small business. We believe that

persons who will rely on the rule will not have significantly increased

costs. In fact, since the current version of the rule is essentially

retained for offerings under the former $5 million ceiling, there

should be no change in the costs of compliance for issuers that have

historically used the exemption and continue to keep their offerings

under $5 million. For issuers that are large enough to go above the $5

million threshold and therefore are required to provide specified

disclosure, any additional costs may not be significant. Some of the

commenters fitting this profile stated that they either already provide

or have the required information readily available for their employees

and other persons.

Some issuers, however, will face costs in availing themselves of

the increased benefits of the rule--primarily those who decide to issue

more than $5 million worth of securities in the 12-month period. It is

worth noting, however, that these increased costs would be borne

voluntarily. Issuers can perform their own cost-benefit analysis to

decide whether to do an offering in excess of $5 million under the

rule. Currently, issuers do not have the option to make an offering

exceeding $5 million under Rule 701. Even in these cases, the costs of

using Rule 701 may be lower than the costs of using another exemption

or registering the sales. Such costs may include ``in-house''

preparation of disclosure documents, hiring of attorneys and

accountants, and delivery and printing costs.

[[Page 11100]]

Nonetheless, because there may be more securities sales to more

investors, we believe that mandatory disclosure is necessary for

investor protection.

The change to the ``consultants and advisors'' definition, which is

necessary to counteract abuses we have found with some ``compensatory''

arrangements, will impact use of the Rule 701 exemption and perhaps

disadvantage some issuers in their ability to effectively use the

provision. However, the staff will continue to consider interpretive

requests of the term, including reconsideration of some of the letters

we are overturning today.

IV. Exemptive Authority Findings

We find that exempting transactions by nonreporting companies

pursuant to compensatory benefit plans and written compensatory

contracts from Section 5 of the Securities Act is appropriate in the

public interest and is consistent with the protection of investors. We

make these findings based on the reasons that we describe in this

release. In particular, we have determined that Rule 701 has

successfully allowed small businesses to compensate their employees

with securities. The amendments will permit smaller businesses to issue

up to $1 million in securities to their employees, an increase from the

current $500,000 limit, without regard to the company's size. The

amendments also will permit larger private companies to issue more than

$5 million, subject to the established financial statement requirements

of Regulation A and provision of risk factor disclosure. Our use of

exemptive authority will allow more companies and more investors to

benefit from this rule.

The rule is specifically designed not to raise capital. The ability

to reward and retain employees with a company's securities should aid

companies by providing a mechanism to keep valuable employees without

having to use other methods to compensate them, such as borrowing money

or selling securities. Finally, Rule 701 provides private companies

with some of the benefits public companies have under Form S-8.

Furthermore, we have not found instances of abuse of Rule 701, nor

have we become aware of investor complaints. Rather, investors have

enjoyed the benefits of being compensated with the securities of the

company for which they are employed or provide services. Therefore, we

have found that Rule 701 has been consistent with investor protection

in the past. We realize, however, that the exemption will lead to a

greater volume of sales to a larger number of investors. We believe

that requiring disclosure for these larger offerings will help assure

that the use of our exemptive authority in this context is consistent

with the protection of investors.

V. Summary of Final Regulatory Flexibility Analysis

In accordance with 5 U.S.C. 604, we have prepared a Final

Regulatory Flexibility Analysis (``FRFA'') regarding the proposed

amendments.

The analysis notes that the amendments to Rule 701 are a result of:

(1) concerns expressed to us by practitioners; (2) feedback that the

current dollar limitations unduly constrain the ability of many

eligible issuers to use Rule 701; and (3) the specific Congressional

mandate expressed in the legislative history of NSMIA. The purpose of

the revisions is to remove unnecessary constraints. We have determined

that the amendments will not impair investor protection.

As the FRFA describes, from mid-1988 through mid-1993, 1,069

companies filed 1,294 Forms 701 indicating aggregate sales of about

$2.28 billion. On an annual basis, an average of 214 companies reported

$456 million of sales on approximately 260 Forms 701. Based on an

analysis of a sample of these filings, the Commission's Office of

Economic Analysis estimates that 14% of the filings were made by small

businesses. More current information is not available because Form 701

has not been a required submission since 1993.

The revisions should permit greater use of the exemption by small

and large non-reporting issuers alike. The minimum amount that any

issuer can raise under the exemption has been raised from $500,000 to

$1 million. Greater availability of the exemption for employee benefit,

deferred compensation and other plans, as well as to facilitate family

donative transfers, should aid in tax and estate planning. We expect,

therefore, that more companies will use the rule and that the value of

securities sold under the exemption will be larger than it was in the

1988-1993 period. Accordingly, for purposes of estimating the

amendments' economic impact, we estimate that 300 companies per year

will make sales pursuant to Rule 701 and that 42 (14%) of those

companies will be small businesses.

The amendments do not impose any new recordkeeping requirements or

require reporting of additional information. Nonetheless, there is an

impact, especially for larger private companies that choose to offer

compensatory arrangements in excess of the current $5 million ceiling,

as those companies will need to prepare specified disclosure and

provide it to their participating employees. Because a number of

commenters told us that this information is commonly maintained by this

class of issuer (generally not small entities) in order to satisfy

requirements for securities issuance exemptions (such as for private

placements), loans and other purposes such as regulatory and internal

ones, the amendments will not increase reporting, recordkeeping or

compliance burdens, and may reduce those burdens for some companies.

As discussed more fully in the FRFA, several possible significant

alternatives to the amendments were considered to minimize effects on

small entities. These included establishing different compliance or

reporting requirements for small entities, exempting them from all or

part of the proposed requirements, or requiring them to provide

different disclosure, such as all Form 1-A items or the full disclosure

requirements of Form SB-1 or SB-2. In fact, the rule as adopted is

changed from our initial proposal, which would have required all

entities to provide certain disclosure. As adopted, only issuers

selling more than $5 million during a 12-month period will be required

to provide disclosure. The FRFA also indicates that no current federal

rules duplicate, overlap, or conflict with the proposed rule

amendments.

We encouraged written comments on any aspect of the Initial

Regulatory Flexibility Analysis, but received no specific comments in

response to our request. In particular, we sought comment on: (1) the

number of small entities that would be affected by the proposed rule

amendments; and (3) the determination that the proposed rule amendments

would not increase (and in some cases may reduce) reporting,

recordkeeping and other compliance requirements for small entities. For

purposes of making determinations required by the Small Business

Regulatory Enforcement Fairness Act of 1996 (``SBREFA''),\44\ we also

requested data regarding the potential impact of the proposed

amendments on the economy on an annual basis. We received no comments

in response to this request either. A copy of the Final Regulatory

Flexibility Act Analysis may be obtained from Twanna M. Young, Office

of Small Business, Division of Corporation Finance, Securities and

[[Page 11101]]

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

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\44\ Pub. L. No. 104-121, 110 Stat. 857 (1996) (codified in

various sections of 5 U.S.C., 15 U.S.C., and as a note to 5 U.S.C.

601).

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VI. Paperwork Reduction Act

Our staff consulted with the Office of Management and Budget

(``OMB'') and submitted the proposals for review in accordance with the

Paperwork Reduction Act of 1995 (``the Act'').\45\ The title to the

affected information collection is: ``Rule 701.'' The specific

information that must be included is explained in the rule itself, and

relates to the issuer and other information that may be associated with

investment in securities under the plan or agreement. The information

is needed by prospective purchasers to make informed investment

decisions.

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\45\ 44 U.S.C. 3501 et seq.

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The proposed amendments will increase the flexibility and utility

of Rule 701 for private companies using securities to compensate their

employees.

The collection of information in Rule 701 will be required in order

for companies to use the rule for sales of their securities to their

employees and other persons covered by the rule. The likely respondents

to the rule are companies that previously used the rule, but were being

constrained by its limits, and companies thatwho could not use the rule

at all because of its limits. While we cannot predict the number of

respondents that may use expanded Rule 701, there were 1,294 Form 701

filings during the period from mid-1988 through mid-1993, when persons

relying upon the exemption were required to file reports with us

concerning their use of the exemption. On the basis of these historical

filings under Rule 701, we estimate that approximately 300 companies

each year will rely on the exemption. The estimated burden for

responding to the collection of information in Rule 701 will not

increase for most companies due to the current disclosure requirements

in Rule 701, but may increase slightly for other companies who may not

be currently providing risk factors and Regulation A financial

statements to employee-purchasers. We estimate that the burden hours

per respondent each year will be two. Therefore, we estimate an

aggregate of 600 burden hours per year.

The information collection requirements imposed by Rule 701 are

mandatory to the extent that a company elects to use the Rule 701

exemption. The information will be disclosed to third parties or the

public. An agency may not conduct or sponsor, and a person is not

required to respond to, a collection of information unless it displays

a current valid OMB control number.

We received no comments in response to our request for comment

regarding the information collection obligation.

VII. Statutory Basis, Text of Amendments and Authority

The amendments to our rules and forms are being adopted pursuant to

sections 2, 3(b), 6, 7, 8, 10, 19(a) and 28 of the Securities Act.

List of Subjects in 17 CFR Part 230

Reporting and recordkeeping requirements, Securities.

For the reasons set out in the preamble, title 17, chapter II of

the Code of Federal Regulations is amended as follows:

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

1. The authority citation for part 230 continues to read as

follows:

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

78c, 78d, 78l, 78m, 78n, 78o, 78w, 78ll(d), 79t, 80a-8, 80a-24, 80a-

28, 80a-29, 80a-30, and 80a-37, unless otherwise noted.

2. By revising Sec. 230.701 to read as follows:

Sec. 230.701 Exemption for offers and sales of securities pursuant to

certain compensatory benefit plans and contracts relating to

compensation.

Preliminary Notes

1. This section relates to transactions exempted from the

registration requirements of section 5 of the Act (15 U.S.C. 77e).

These transactions are not exempt from the antifraud, civil

liability, or other provisions of the federal securities laws.

Issuers and persons acting on their behalf have an obligation to

provide investors with disclosure adequate to satisfy the antifraud

provisions of the federal securities laws.

2. In addition to complying with this section, the issuer also

must comply with any applicable state law relating to the offer and

sale of securities.

3. An issuer that attempts to comply with this section, but

fails to do so, may claim any other exemption that is available.

4. This section is available only to the issuer of the

securities. Affiliates of the issuer may not use this section to

offer or sell securities. This section also does not cover resales

of securities by any person. This section provides an exemption only

for the transactions in which the securities are offered or sold by

the issuer, not for the securities themselves.

5. The purpose of this section is to provide an exemption from

the registration requirements of the Act for securities issued in

compensatory circumstances. This section is not available for plans

or schemes to circumvent this purpose, such as to raise capital.

This section also is not available to exempt any transaction that is

in technical compliance with this section but is part of a plan or

scheme to evade the registration provisions of the Act. In any of

these cases, registration under the Act is required unless another

exemption is available.

(a) Exemption. Offers and sales made in compliance with all of the

conditions of this section are exempt from section 5 of the Act (15

U.S.C. 77e).

(b) Issuers eligible to use this section. (1) General. This section

is available to any issuer that is not subject to the reporting

requirements of section 13 or 15(d) of the Securities Exchange Act of

1934 (the ``Exchange Act'') (15 U.S.C. 78m or 78o(d)) and is not an

investment company registered or required to be registered under the

Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.).

(2) Issuers that become subject to reporting. If an issuer becomes

subject to the reporting requirements of section 13 or 15(d) of the

Exchange Act (15 U.S.C. 78m or 78o(d)) after it has made offers

complying with this section, the issuer may nevertheless rely on this

section to sell the securities previously offered to the persons to

whom those offers were made.

(3) Guarantees by reporting companies. An issuer subject to the

reporting requirements of section 13 or 15(d) of the Exchange Act (15

U.S.C. 78m, 78o(d)) may rely on this section if it is merely

guaranteeing the payment of a subsidiary's securities that are sold

under this section.

(c) Transactions exempted by this section. This section exempts

offers and sales of securities (including plan interests and guarantees

pursuant to paragraph (d)(2)(ii) of this section) under a written

compensatory benefit plan (or written compensation contract)

established by the issuer, its parents, its majority-owned subsidiaries

or majority-owned subsidiaries of the issuer's parent, for the

participation of their employees, directors, general partners, trustees

(where the issuer is a business trust), officers, or consultants and

advisors, and their family members who acquire such securities from

such persons through gifts or domestic relations orders. This section

exempts offers and sales to former employees, directors, general

partners, trustees, officers, consultants and advisors only if such

persons were employed by or providing services to the issuer at the

time the securities were offered. In addition, the term ``employee''

includes insurance agents who are exclusive agents of the issuer, its

subsidiaries or

[[Page 11102]]

parents, are or derive more than 50% of their annual income from those

entities.

(1) Special requirements for consultants and advisors. This section

is available to consultants and advisors only if:

(i) They are natural persons;

(ii) They provide bona fide services to the issuer, its parents,

its majority-owned subsidiaries or majority-owned subsidiaries of the

issuer's parent; and

(iii) The services are not in connection with the offer or sale of

securities in a capital-raising transaction, and do not directly or

indirectly promote or maintain a market for the issuer's securities.

(2) Definition of ``Compensatory Benefit Plan.'' For purposes of

this section, a compensatory benefit plan is any purchase, savings,

option, bonus, stock appreciation, profit sharing, thrift, incentive,

deferred compensation, pension or similar plan.

(3) Definition of ``Family Member.'' For purposes of this section,

family member includes any child, stepchild, grandchild, parent,

stepparent, grandparent, spouse, former spouse, sibling, niece, nephew,

mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-

law, or sister-in-law, including adoptive relationships, any person

sharing the employee's household (other than a tenant or employee), a

trust in which these persons have more than fifty percent of the

beneficial interest, a foundation in which these persons (or the

employee) control the management of assets, and any other entity in

which these persons (or the employee) own more than fifty percent of

the voting interests.

(d) Amounts that may be sold. (1) Offers. Any amount of securities

may be offered in reliance on this section. However, for purposes of

this section, sales of securities underlying options must be counted as

sales on the date of the option grant.

(2) Sales. The aggregate sales price or amount of securities sold

in reliance on this section during any consecutive 12-month period must

not exceed the greatest of the following:

(i) $1,000,000;

(ii) 15% of the total assets of the issuer (or of the issuer's

parent if the issuer is a wholly-owned subsidiary and the securities

represent obligations that the parent fully and unconditionally

guarantees), measured at the issuer's most recent annual balance sheet

date (if no older than its last fiscal year end); or

(iii) 15% of the outstanding amount of the class of securities

being offered and sold in reliance on this section, measured at the

issuer's most recent annual balance sheet date (if no older than its

last fiscal year end).

(3) Rules for calculating prices and amounts. (i) Aggregate sales

price. The term aggregate sales price means the sum of all cash,

property, notes, cancellation of debt or other consideration received

or to be received by the issuer for the sale of the securities. Non-

cash consideration must be valued by reference to bona fide sales of

that consideration made within a reasonable time or, in the absence of

such sales, on the fair value as determined by an accepted standard.

The value of services exchanged for securities issued must be measured

by reference to the value of the securities issued. Options must be

valued based on the exercise price of the option.

(ii) Time of the calculation. With respect to options to purchase

securities, the aggregate sales price is determined when an option

grant is made (without regard to when the option becomes exercisable).

With respect to other securities, the calculation is made on the date

of sale. With respect to deferred compensation or similar plans, the

calculation is made when the irrevocable election to defer is made.

(iii) Derivative securities. In calculating outstanding securities

for purposes of paragraph (d)(2)(iii) of this section, treat the

securities underlying all currently exercisable or convertible options,

warrants, rights or other securities, other than those issued under

this exemption, as outstanding. In calculating the amount of securities

sold for other purposes of paragraph (d)(2) of this section, count the

amount of securities that would be acquired upon exercise or conversion

in connection with sales of options, warrants, rights or other

exercisable or convertible securities, including those to be issued

under this exemption.

(iv) Other exemptions. Amounts of securities sold in reliance on

this section do not affect ``aggregate offering prices'' in other

exemptions, and amounts of securities sold in reliance on other

exemptions do not affect the amount that may be sold in reliance on

this section.

(e) Disclosure that must be provided. The issuer must deliver to

investors a copy of the compensatory benefit plan or the contract, as

applicable. In addition, if the aggregate sales price or amount of

securities sold during any consecutive 12-month period exceeds $5

million, the issuer must deliver the following disclosure to investors

a reasonable period of time before the date of sale:

(1) If the plan is subject to the Employee Retirement Income

Security Act of 1974 (``ERISA'') (29 U.S.C. 1104-1107), a copy of the

summary plan description required by ERISA;

(2) If the plan is not subject to ERISA, a summary of the material

terms of the plan;

(3) Information about the risks associated with investment in the

securities sold pursuant to the compensatory benefit plan or

compensation contract; and

(4) Financial statements required to be furnished by Part F/S of

Form 1-A (Regulation A Offering Statement) (Sec. 239.90 of this

chapter) under Regulation A (Secs. 230.251 through 230.263). Foreign

private issuers as defined in Sec. 230.405 must provide a

reconciliation to generally accepted accounting principles in the

United States (U.S. GAAP) if their financial statements are not

prepared in accordance with U.S. GAAP (Item 17 of Form 20-F

(Sec. 249.220f of this chapter)). The financial statements required by

this section must be as of a date no more than 180 days before the sale

of securities in reliance on this exemption.

(5) If the issuer is relying on paragraph (d)(2)(ii) of this

section to use its parent's total assets to determine the amount of

securities that may be sold, the parent's financial statements must be

delivered. If the parent is subject to the reporting requirements of

section 13 or 15(d) of the Exchange Act (15 U.S.C. 78m or 78o(d)), the

financial statements of the parent required by Rule 10-01 of Regulation

S-X (Sec. 210.10-01 of this chapter) and Item 310 of Regulation S-B

(Sec. 228.310 of this chapter), as applicable, must be delivered.

(6) If the sale involves a stock option or other derivative

security, the issuer must deliver disclosure a reasonable period of

time before the date of exercise or conversion. For deferred

compensation or similar plans, the issuer must deliver disclosure to

investors a reasonable period of time before the date the irrevocable

election to defer is made.

(f) No integration with other offerings. Offers and sales exempt

under this section are deemed to be a part of a single, discrete

offering and are not subject to integration with any other offers or

sales, whether registered under the Act or otherwise exempt from the

registration requirements of the Act.

(g) Resale limitations. (1) Securities issued under this section

are deemed to be ``restricted securities'' as defined in Sec. 230.144.

(2) Resales of securities issued pursuant to this section must be

in compliance with the registration

[[Page 11103]]

requirements of the Act or an exemption from those requirements.

(3) Ninety days after the issuer becomes subject to the reporting

requirements of section 13 or 15(d) of the Exchange Act (15 U.S.C. 78m

or 78o(d)), securities issued under this section may be resold by

persons who are not affiliates (as defined in Sec. 230.144) in reliance

on Sec. 230.144, without compliance with paragraphs (c), (d), (e) and

(h) of Sec. 230.144, and by affiliates without compliance with

paragraph (d) of Sec. 230.144.

Dated: February 25, 1999.

By the Commission.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 99-5296 Filed 3-5-99; 8:45 am]

BILLING CODE 8010-01-U