Exemption for Certain California Limited Issues

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 230

[Release No. 33-7185; File No. S7-15-95]

RIN 3235-AG51

Exemption for Certain California Limited Issues

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: In order to reduce regulatory burdens associated with certain

offers and sales of securities, the Commission today is proposing a new

exemption from its registration requirements for limited offerings of

up to $5 million that are exempt from qualification under recently

enacted California state securities law. In addition, public comment is

solicited on whether the prohibition against general solicitation in

certain Regulation D offerings should be reconsidered.

DATES: Comments should be submitted to the Commission on or before

September 8, 1995.

ADDRESSES: All comments concerning the proposed rules should be

submitted in triplicate to Jonathan G. Katz, Secretary, U.S. Securities

and Exchange Commission, Mail Stop 6-9, 450 Fifth Street, N.W.,

Washington D.C. 20549 and should refer to File Number S7-15-95. Comment

letters will be available for inspection and copying in the

Commission's public reference room at the same address.

FOR FURTHER INFORMATION CONTACT: Richard K. Wulff, Office of Small

Business Policy, Division of Corporation Finance, at (202) 942-2950 or

James R. Budge, Office of Disclosure Policy, Division of Corporation

Finance, at (202) 942-2910.

SUPPLEMENTARY INFORMATION: The Commission today is proposing a new Rule

1001 1 under Section 3(b) 2 of the Securities Act of 1933

(the ``Securities Act'').3 The new rule would exempt from the

registration requirements of the Securities Act offers and sales up to

$5 million that are exempt from state qualification under paragraph (n)

of Section 25102 of the California Corporations Code.4 Rule 144

5 also would be amended to include securities issued in reliance

upon Rule 1001 in the definition of ``restricted securities.''

the ``Securities Act'').3 The new rule would exempt from the

registration requirements of the Securities Act offers and sales up to

$5 million that are exempt from state qualification under paragraph (n)

of Section 25102 of the California Corporations Code.4 Rule 144

5 also would be amended to include securities issued in reliance

upon Rule 1001 in the definition of ``restricted securities.''

\1\ The proposed rule would be added as Regulation CA, 17 CFR

230.1001.

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

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

\4\ Cal. Corporations Code Sec. 25102(n).

\5\ 17 CFR 230.144.

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I. Introduction

Since the inception of the Securities Act, Congress has delegated

to the Commission the authority to exempt small issues from Securities

Act registration provisions when such action is consistent with the

public interest and the protection of investors. Soon after its

creation, the Commission exercised this authority to provide an

exemption for small offerings,6 and since then, has adopted other

rules from time to time, including exemptive rules under Section 3(b),

to assist small businesses' capital raising ability, where consistent

with investor protection.7

\6\ See Release Nos. 33-158, 159 (April 27, 1934).

\7\ See, e.g., Regulation A [17 CFR 230.251-230.263] and Rule

504 [17 CFR 230.504] in Regulation D [17 CFR 230.501-230.508].

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including exemptive rules under Section 3(b),

to assist small businesses' capital raising ability, where consistent

with investor protection.7

\6\ See Release Nos. 33-158, 159 (April 27, 1934).

\7\ See, e.g., Regulation A [17 CFR 230.251-230.263] and Rule

504 [17 CFR 230.504] in Regulation D [17 CFR 230.501-230.508].

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Today's proposal would provide a federal exemption for offerings of

up to $5 million 8 that meet the qualifications of a new

California exemption designed to assist small business capital

formation.9 The new California law provides an exemption from

state law registration for offerings made to specified classes of

qualified purchasers that are similar, but not the same as, accredited

investors under Regulation D. Unlike Regulation D, various methods of

general solicitations are permitted under the California law. The

Commission believes that the California exemption facilitates small

business capital raising with adequate protections to investors and

therefore proposes to exercise its exemptive authority in Section 3(b)

to provide a parallel federal exemption.

\8\ This is the maximum dollar amount permitted under the

Commission's Section 3(b) exemptive authority.

\9\ The Commission has established the Advisory Committee on the

Capital Formation and Regulatory Processes (``the Advisory

Committee''), chaired by Commissioner Steven M.H. Wallman. The

Advisory Committee is considering fundamental issues relating to the

regulatory framework governing the capital formation process,

including whether the current system of registering securities

offerings should be replaced with a company registration system. The

Advisory Committee may make recommendations that, if endorsed by the

Commission, may result in rule proposals or legislative

recommendations that could address the matters discussed in this

release.

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hether the current system of registering securities

offerings should be replaced with a company registration system. The

Advisory Committee may make recommendations that, if endorsed by the

Commission, may result in rule proposals or legislative

recommendations that could address the matters discussed in this

release.

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II. The California Exemption

On September 26, 1994, a new exemption from the issuer transactions

qualification provisions of the California Corporations Code became

effective.10 The provision was specifically designed ``to

facilitate the ability of small companies to raise capital to finance

their growth.'' 11

\10\ Chapter 828, Statutes of 1994 (Senate Bill 1951--Killea),

adding subdivision (n) to Corporations Code Section 25102.

\11\ Section 3, Senate Bill 1951.

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The exemption generally is limited to issuers that are California

corporations or any other form of business entity organized in that

state, including partnerships and trusts. In addition, non-California

organized businesses may use the exemption if they can attribute more

than 50 percent of property, payroll and sales to California and if

more than 50 percent of outstanding voting securities of the issuer are

held of record by persons having addresses in California. It is not

available for offerings relating to a rollup transaction, nor may it be

used by ``blind pool'' issuers or investment companies subject to the

Investment Company Act of 1940 (the ``Investment Company Act'').12

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

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Sales under the exemption must be effected only to qualified

purchasers who buy for investment purposes and not for redistribution.

A qualified purchaser is defined as:

Designated professional or institutional purchasers or

persons affiliated with the issuer;13

estment Company Act'').12

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

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Sales under the exemption must be effected only to qualified

purchasers who buy for investment purposes and not for redistribution.

A qualified purchaser is defined as:

Designated professional or institutional purchasers or

persons affiliated with the issuer;13

\13\ Officers and directors of corporate issuers (or persons

performing similar duties), general partners and trustees where the

issuer is a partnership or a trust, small business investment

companies, business development companies subject to the Investment

Company Act, private venture capital companies exempted from the

Investment Advisers Act of 1940 [15 U.S.C. 80b-1 et seq.], certain

natural persons, entities comprised of accredited investors, banks,

savings and loan associations, insurance companies, Investment

Company Act companies, non-issuer pension or profit-sharing trusts,

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

Code [26 U.S.C. 501(c)(3)], business entities (corporations,

business trusts or partnerships) with assets of more than $5

million. All these persons would qualify as ``accredited investors''

under Rule 501(a) [17 CFR 230.501(a)].

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Certain relatives residing with qualified purchasers;

Promoters;

Any person purchasing more than $150,000 of securities in

the offering; 14

ations,

business trusts or partnerships) with assets of more than $5

million. All these persons would qualify as ``accredited investors''

under Rule 501(a) [17 CFR 230.501(a)].

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Certain relatives residing with qualified purchasers;

Promoters;

Any person purchasing more than $150,000 of securities in

the offering; 14

\14\ Under the California provision, $150,000 purchasers and

natural persons meeting a $1 million net worth or $250,000 annual

income test must also satisfy one of the following additional

suitability standards: (1) they must have, alone or with the

assistance of a professional advisor, the capacity to protect their

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

risk of the investment; or (3) the investment must not exceed 10

percent of the person's net worth.

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Entities whose equity owners are limited to officers,

directors and any affiliate of the issuer;

Reporting companies under the Securities Exchange Act of

1934 (the ``Exchange Act''), 15 if the transaction involves the

acquisition of all of an issuer's capital stock for investment;

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

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A natural person whose net worth exceeds $500,000, or a

natural person whose net worth exceeds $250,000 if such purchaser's

annual income exceeds $100,000--in either case the transaction must

involve

(a) only a one-class voting stock (or preferred establishing the

same voting rights),

(b) an amount limited to no more than 10 percent of the purchaser's

net worth, and

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A natural person whose net worth exceeds $500,000, or a

natural person whose net worth exceeds $250,000 if such purchaser's

annual income exceeds $100,000--in either case the transaction must

involve

(a) only a one-class voting stock (or preferred establishing the

same voting rights),

(b) an amount limited to no more than 10 percent of the purchaser's

net worth, and

(c) a purchaser able to protect his or her own interests (alone or

with the help of a professional advisor);16

\16\ This provision states that each such natural person, by

reason of his or her business or financial experience, or the

business or financial experience of his or her professional advisor

(who is unaffiliated with and who is not compensated, directly or

indirectly, by the issuer), can be reasonably assumed to have the

capacity to protect his or her interests in connection with the

transaction. The California Department of Corporations has indicated

that qualified investors under this rubric must have business or

financial experience or rely on a professional advisor. Release No.

94-C (September 27, 1994).

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Pension and profit sharing trusts, as well as 401(k) plans

17 and Individual

Retirement Accounts of individual qualified purchasers.

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

Issuers must provide certain purchasers who are natural persons

18 a disclosure document as specified in Rule 502 of Regulation D

19 five days prior to any sale or commitment to purchase.

\18\ This delivery requirement is limited to those natural

persons designated as qualified purchasers because their net worth

exceeds $500,000, or whose net worth exceeds $250,000 where there is

an annual income of $100,000.

\19\ See 17 CFR 230.502(b)(2).

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n D

19 five days prior to any sale or commitment to purchase.

\18\ This delivery requirement is limited to those natural

persons designated as qualified purchasers because their net worth

exceeds $500,000, or whose net worth exceeds $250,000 where there is

an annual income of $100,000.

\19\ See 17 CFR 230.502(b)(2).

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Offers, oral or written, are generally limited to qualified

purchasers. However, the law does permit general announcements of a

proposed offering to be widely published and circulated, so long as

they contain only specified information. 20 This general

announcement process is modeled on the ``test the waters'' concept

being used by several of the states 21 and by the Commission in

connection with Regulation A.

\20\ The California provision limits the content of the general

announcement to the following items: the issuer's identity; the full

title of the securities being offered; the suitability standards of

prospective investors; a statement that no money is being sought or

will be accepted, that an indication of interest involves no

commitment to purchase and that under certain circumstances a

disclosure document will be provided prior to purchase; and the

name, address and telephone number of a person who can provide

further information about the offering. Only the following

additional information may be included at the issuer's option: a

brief description of the business, its geographical location and the

offering price or method of determination.

\21\ See CCH NASAA Reports para. 7036. Colorado, Kansas,

Massachusetts, Oklahoma, Oregon, Pennsylvania, Vermont, Virginia and

Washington are participating in a pilot program in this regard.

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ssuer's option: a

brief description of the business, its geographical location and the

offering price or method of determination.

\21\ See CCH NASAA Reports para. 7036. Colorado, Kansas,

Massachusetts, Oklahoma, Oregon, Pennsylvania, Vermont, Virginia and

Washington are participating in a pilot program in this regard.

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A notice must be filed with the California Corporations

Commissioner at the initial offer of securities or with the publication

of a general announcement of proposed offering, whichever comes first,

accompanied by a $600 filing fee. A second filing is required within 10

business days after the close or abandonment of the offering, and in no

case later than 210 days after the filing of the initial notice.

Because the new California exemption combines a form of general

solicitation using a ``test the waters'' concept with a qualified

purchaser concept in part derived from the Uniform Limited Offering

Exemption (``ULOE''), 22 it does not fit well within any current

federal exemption, other than Rule 504, 23 which is limited to $1

million, or potentially the intrastate offering exemption. 24

Rules 505 of 506 of Regulation D prohibit general solicitations;

moreover, California's definition of qualified purchasers is broader

than Regulation D's. The intrastate offering exemption is available

only for those offerings by issuers incorporated and doing business in

California.

\22\ CCH NASAA Reports para. 6201.

\23\ 17 CFR 230.504.

\24\ Securities Act Section 3(a)(11) [15 U.S.C. 77c(a)(11)] and

Rule 147 [17 CFR 230.147].

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chasers is broader

than Regulation D's. The intrastate offering exemption is available

only for those offerings by issuers incorporated and doing business in

California.

\22\ CCH NASAA Reports para. 6201.

\23\ 17 CFR 230.504.

\24\ Securities Act Section 3(a)(11) [15 U.S.C. 77c(a)(11)] and

Rule 147 [17 CFR 230.147].

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The Commission does not believe that these differences need to be

an impediment to the ability of small businesses to take full advantage

of the California exemption. While the qualified purchaser definition

differs somewhat from the accredited investor definition for

individuals, the California law includes additional suitability

standards. Moreover, the general announcement of proposed offering is

subject to significant limitation, thereby protecting against abuse of

the procedure. The provisions of the California law are consistent with

investor protection and the public interest, and therefore warrant the

Commission's full exercise of its exemptive authority under Section

3(b).

III. Proposed Regulation CA and Rule 1001

A. The Exemption

Proposed Rule 1001 would provide that offers and sales of

securities, in amounts of up to $5 million, that are exempt from

registration under the California securities law pursuant to paragraph

(n) of Sec. 25102 of the California Corporations Code are exempt from

the registration requirements of Section 5 of the Securities Act,

pursuant to Section 3(b) of that Act.\25\ The proposal would allow

reliance on Rule 1001 by all issuers that qualify for the state

exemption.\26\ Issuers would look to the state of California for

interpretations relating to who qualifies for the exemption, since any

person who lawfully relies on the state exemption also could rely on

its federal counterpart

f Section 5 of the Securities Act,

pursuant to Section 3(b) of that Act.\25\ The proposal would allow

reliance on Rule 1001 by all issuers that qualify for the state

exemption.\26\ Issuers would look to the state of California for

interpretations relating to who qualifies for the exemption, since any

person who lawfully relies on the state exemption also could rely on

its federal counterpart. Comment is requested as to whether proposed

Rule 1001 should include additional eligibility criteria, for example,

non-reporting status under the Exchange Act or small business issuer

status under federal securities laws, as defined in Securities Act Rule

405.\27\

\25\ Proposed Rule 1001(a). While the transactions would not be

subject to registration under Section 5, the antifraud provisions of

the federal securities laws would continue to be applicable to all

exempt transactions. See preliminary note 1 to proposed Rule 1001.

Proposed Rule 1001 would provide an exemption only for the

transactions in which the securities are offered or sold by the

issuer, not for the securities themselves.

\26\ As noted above, California law precludes reliance on the

exemption in connection with investment company, blind pool or roll-

up offerings; thus, the proposed Rule 1001 exemption also would be

unavailable in those cases.

\27\ 17 CFR 230.405.

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As proposed, the rule would not require issuers to notify the

Commission when they rely on the California exemption in view of the

notification provisions of the California law. Comment is solicited as

to whether a notice of reliance, similar to that used in connection

with Regulation D offerings, should be required.

B. Computation of $5 Million Amount

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As proposed, the rule would not require issuers to notify the

Commission when they rely on the California exemption in view of the

notification provisions of the California law. Comment is solicited as

to whether a notice of reliance, similar to that used in connection

with Regulation D offerings, should be required.

B. Computation of $5 Million Amount

Proposed Rule 1001 exempts offerings up to $5 million, the maximum

allowed under Section 3(b). The $5 million limit would apply on an

offering by offering basis.\28\ This approach differs from that applied

in other Section 3(b) rules, where an annual dollar limit for the

aggregate of various Section 3(b) offers has been used.\29\ Rule 1001's

offering by offering approach is proposed to more closely parallel the

California exemptive provision. Comment is requested as to whether the

proposed approach is appropriate, or whether the more traditional

Section 3(b) annual aggregated offering approach should be used. If

commenters prefer that the amount allowed be reduced by other Section

3(b) offerings in the previous 12-month period, which offerings should

reduce the amount? \30\

\28\ Standard integration analysis concepts would apply. See

Release No. 33-4552 (November 7, 1962) [27 FR 11316].

\29\ See, e.g., Rule 251(b) [17 CFR 230.251(b)], Rule 504(b)(2)

[17 CFR 230.504(b)(2)] and Rule 505(b)(2)(i) [17 CFR

230.505(b)(2)(i)].

\30\ Where a transaction involves non-cash consideration, the

amount of the offering would be calculated as provided under

California law.

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C. Resale Limitations

1962) [27 FR 11316].

\29\ See, e.g., Rule 251(b) [17 CFR 230.251(b)], Rule 504(b)(2)

[17 CFR 230.504(b)(2)] and Rule 505(b)(2)(i) [17 CFR

230.505(b)(2)(i)].

\30\ Where a transaction involves non-cash consideration, the

amount of the offering would be calculated as provided under

California law.

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C. Resale Limitations

The proposed exemption would provide that purchasers in the exempt

transaction receive ``restricted securities.'' \31\ Consequently,

purchasers would have to either register subsequent resales of the

securities or have an exemption for such sales. Categorizing the

securities offered and sold pursuant to the proposed exemption as

``restricted'' is consistent with the California exemption, since it

requires an investment intent on the part of purchasers in the

offering, and such shares could not be resold under California law

without qualification or some other exemption under such law. In

addition, the treatment is consistent with other federal exemptions,

the availability of which depends on the

sophistication, wealth or institutional character of the investor.\32\

\31\ Proposed Rule 1001(c) and proposed amendment to Rule 144.

\32\ See, e.g., Section 4(6) of the Exchange Act [15 U.S.C.

78d(6)], Securities Act Rule 506 [17 CFR 230.506], and Securities

Act Rule 701 [17 CFR 230.701].

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IV. Similar Exemptions Adopted by Other States

lth or institutional character of the investor.\32\

\31\ Proposed Rule 1001(c) and proposed amendment to Rule 144.

\32\ See, e.g., Section 4(6) of the Exchange Act [15 U.S.C.

78d(6)], Securities Act Rule 506 [17 CFR 230.506], and Securities

Act Rule 701 [17 CFR 230.701].

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IV. Similar Exemptions Adopted by Other States

While the exemption being proposed today is based on a California

statute, the Commission is proposing also to provide the same exemption

for each state that enacts a transaction exemption incorporating the

same standards used by California.\33\ This would be done either at

such time as the Commission may determine to adopt Rule 1001, or if a

state adopts such exemption later, the Commission will adopt a

coordinated exemption upon notification by the state. The Commission

requests comment on whether this proposed approach to adopting the Rule

1001 exemption for any state exemptions with the same requirements as

the California exemption is appropriate. Where states determine to

provide comparable exemptions that vary from the specific details of

the California law, the Commission would expect to propose for comment

an exemption comparable to that provided in Rule 1001.

\33\ Several states currently are considering enacting

exemptions comparable to the California law, but the Commission is

unaware of any that have been adopted as of the date of this

release.

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V. General Solicitation Under Regulation D and ULOE

ropose for comment

an exemption comparable to that provided in Rule 1001.

\33\ Several states currently are considering enacting

exemptions comparable to the California law, but the Commission is

unaware of any that have been adopted as of the date of this

release.

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V. General Solicitation Under Regulation D and ULOE

The California exemption permits broad dissemination of information

about a proposed offering--called the ``general announcement''--

including specific information about the offering, such as the price of

the securities to be offered. This ability to reach out to a broad

audience to find possible interest, while formally offering and selling

only to qualified purchasers that may be found through that process,

appears to have the potential to significantly enhance the usefulness

of an exemption that limits sales to specified classes of purchasers.

As noted, however, this public dissemination is one of the features

of the California exemption that makes it difficult to fit within the

Regulation D exemption, since Regulation D prohibits general

solicitations, other than under the Rule 504 seed capital rule.

Similarly, ULOE, an official policy guideline of the North American

Securities Administrators Association, Inc. (``NASAA'') \34\ that was

adopted in coordination with the Commission's adoption of Regulation D,

also prohibits general solicitations in these offerings.\35\ The

inability to reach out broadly to find possible qualified investors for

Regulation D exempt offerings hampers the utility of the exemption and

may raise the costs to companies of trying to do these exempt

offerings; California's new exemption demonstrates the potential

benefits of reexamining the costs and benefits of such prohibition.

ohibits general solicitations in these offerings.\35\ The

inability to reach out broadly to find possible qualified investors for

Regulation D exempt offerings hampers the utility of the exemption and

may raise the costs to companies of trying to do these exempt

offerings; California's new exemption demonstrates the potential

benefits of reexamining the costs and benefits of such prohibition.

\34\ NASAA is an association of securities commissioners from

each of the 50 states, the District of Columbia, Puerto Rico, Mexico

and several of the Canadian provinces.

\35\ State statutes and rules based on NASAA's ULOE exempt

offers or sales of securities made in compliance with Rules 501-503,

505 and/or 506 of Regulation D [17 CFR 230.501-230.503, 230.505 and

230.506 respectively], including the prohibition of general

solicitations found in Rule 502(c).

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Against the backdrop of this new approach in California, the

Commission is considering whether amendments to Regulation D should be

proposed that would similarly facilitate better use of the exemptions

and lower the costs for companies by revising or eliminating the

prohibition against general solicitation for Rule 505 and 506

offerings.

Comment is requested on whether the Commission should explore with

NASAA the possibility of proposing such a change to Regulation D and

ULOE. If NASAA will not follow this approach, would it still be

worthwhile for the Commission to implement the change even if there

were not significant state uniformity?

If the Commission makes proposals to permit some form of general

solicitation in Rule 505 and 506 exempt offerings, a number of

approaches could be considered. For example, a limited approach similar

to the one adopted in California could be implemented. This allows a

written communication to be broadly disseminated, but specifically

limits the information allowed to be included

uniformity?

If the Commission makes proposals to permit some form of general

solicitation in Rule 505 and 506 exempt offerings, a number of

approaches could be considered. For example, a limited approach similar

to the one adopted in California could be implemented. This allows a

written communication to be broadly disseminated, but specifically

limits the information allowed to be included. Would this approach be

sufficiently helpful in allowing companies to locate potential

investors for a private offering, or are the limitations overly

restrictive? Other approaches would permit more extensive

communications to be disseminated, including more extensive written and

oral communications,\36\ but could include some limitations, such as on

the methods of dissemination or the classes of issuers entitled to use

the provision. For example, would dissemination methods that are

designed to reach only accredited investors be workable? Should any

issuers be entitled to disseminate broadly to locate potential

investors, or should this be limited to specific classes of companies,

such as only non-reporting issuers, only small business issuers, or

only reporting issuers? Are there other approaches that the Commission

should consider?

\36\ See, e.g., Release No. 33-7188, a companion release

proposing to permit ``test the waters'' activity in anticipation of

a registered initial public offering, and Rule 254 of Regulation A

[17 CFR 230.254].

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usiness issuers, or

only reporting issuers? Are there other approaches that the Commission

should consider?

\36\ See, e.g., Release No. 33-7188, a companion release

proposing to permit ``test the waters'' activity in anticipation of

a registered initial public offering, and Rule 254 of Regulation A

[17 CFR 230.254].

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Comment generally is requested on whether the Commission should

consider altering the general solicitation prohibition. Given that all

purchasers must continue to meet the requirements of Regulation D, and

all information required by the regulation must be provided prior to

purchase, would the ability to broadly disseminate to locate potential

investors compromise investor protection interests?

Finally, the Commission requests comment as to whether the question

of general solicitation in Regulation D or other private offerings

should be addressed through legislative changes to the Securities Act

rather than through Commission rulemaking. For example, should the

Commission seek specific authority under the Securities Act to exempt

private offerings that include general solicitations, provided that

sales are made only to qualified purchasers? More generally, should the

Commission recommend general exemptive legislation that would allow it

greater flexibility to address these or even broader kinds of issues?

VI. General Request for Comment

should the

Commission seek specific authority under the Securities Act to exempt

private offerings that include general solicitations, provided that

sales are made only to qualified purchasers? More generally, should the

Commission recommend general exemptive legislation that would allow it

greater flexibility to address these or even broader kinds of issues?

VI. General Request for Comment

Any interested persons wishing to submit written comments on the

proposed Section 3(b) exemption as explained in this release, or the

questions regarding general solicitation, are invited to do so by

submitting them in triplicate to Jonathan G. Katz, Secretary, U.S.

Securities and Exchange Commission, 450 Fifth Street, N.W., Washington,

D.C. 20549. Comment is requested from the point of view of the public

interest, the states, and the companies that would be affected;

comments should address any possible effects on investor protection

resulting from the proposed exemption. The Commission further requests

comment on any competitive burdens that might result from the adoption

of the proposals. Comments on this inquiry will be considered by the

Commission in complying with its responsibilities under Section 19(a)

of the Securities Act \37\ and Section 23 of the Exchange Act.\38\

Comment letters should refer to File Number S7-15-95. All comments

received will be available for public inspection and copying in the

Commission's Public Reference Room, 450 Fifth Street, N.W., Washington,

D.C. 20549.

\37\ 15 U.S.C. 77s(a).

\38\ 15 U.S.C. 78w(a).

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VII. Cost-Benefit Analysis

f the Exchange Act.\38\

Comment letters should refer to File Number S7-15-95. All comments

received will be available for public inspection and copying in the

Commission's Public Reference Room, 450 Fifth Street, N.W., Washington,

D.C. 20549.

\37\ 15 U.S.C. 77s(a).

\38\ 15 U.S.C. 78w(a).

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VII. Cost-Benefit Analysis

To assist the Commission in its evaluation of the costs and

benefits that may result from the proposed exemption discussed in this

release, commenters are requested to provide views and data relating to

any costs and benefits associated with these proposals. It is expected

that compliance burdens will decrease with respect to issuers who

qualify for the proposed exemption, inasmuch as they would be able to

raise up to $5 million in capital without the burden and expense of

compliance with the registration and reporting requirements of the

federal securities laws.

VIII. Summary of Initial Regulatory Flexibility Analysis

An initial regulatory flexibility analysis has been prepared in

accordance with 5 U.S.C. 603 concerning the proposed Rule 1001

exemption and the proposed amendment to Rule 144. The analysis notes

that the purpose of the proposals is to relieve small businesses of

federal registration requirements where the transaction is exempt from

qualification under paragraph (n) of Section 25102 of the California

Corporations Code.

As discussed more fully in the analysis, the changes would affect

persons that are small entities, as defined by the Commission's rules.

It is anticipated that small businesses that qualify for the proposed

exemption would experience a reduction in reporting, recordkeeping and

compliance burdens. The analysis also indicates that there are no

current rules that duplicate, overlap or conflict with the proposed

exemption

the analysis, the changes would affect

persons that are small entities, as defined by the Commission's rules.

It is anticipated that small businesses that qualify for the proposed

exemption would experience a reduction in reporting, recordkeeping and

compliance burdens. The analysis also indicates that there are no

current rules that duplicate, overlap or conflict with the proposed

exemption.

As stated in the analysis, several possible significant

alternatives to the proposals were considered, including, among others,

establishing different compliance or reporting requirements for small

entities or exempting them from all or part of the proposals. The

Commission believes that there is no need for special small business

alternatives, since the purpose of the proposed rulemaking is to reduce

burdens for small business. The fact that larger entities also could

take advantage of the rule should not detract from that purpose.

Written comments are encouraged with respect to any aspect of the

analysis. Such comments will be considered in the preparation of the

Final Regulatory Flexibility Analysis if the proposals are adopted. A

copy of the analysis may be obtained by contacting James R. Budge,

Office of Disclosure Policy, Division of Corporation Finance, at (202)

942-2910, U.S. Securities and Exchange Commission, 450 Fifth Street,

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

IX. Statutory Basis for the Proposal

Regulation CA, Rule 1001 and the amendment to Rule 144 are proposed

pursuant to Sections 3(b) and 19 of the Securities Act.

List of Subjects in 17 CFR Part 230

Registration requirements, Securities.

Text of the Proposed Exemption

In accordance with the foregoing, Title 17, Chapter II of the Code

of Federal Regulations is proposed to be amended as follows:

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

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

follows:

Securities Act.

List of Subjects in 17 CFR Part 230

Registration requirements, Securities.

Text of the Proposed Exemption

In accordance with the foregoing, Title 17, Chapter II of the Code

of Federal Regulations is proposed to be amended as follows:

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

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

follows:

Authority: 15 U.S.C. 77b, 77f, 77g, 77h, 77j, 77s, 77sss, 78c,

78l, 78m, 78n, 78o, 78w, 78ll(d), 79t, 80a-8, 89a-29, 80a-30, and

89a-37, unless otherwise noted.

* * * * *

2. By amending Sec. 230.144 by removing the period at the end of

paragraph (a)(3)(iv) and adding ``; or'' in its place and by adding

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

Sec. 230.144 Persons deemed not to be engaged in a distribution and

therefore not underwriters.

* * * * *

(a) * * *

(3) * * *

(v) Securities acquired from the issuer that are subject to the

resale limitations of Regulation CA (Sec. 230.1001).

* * * * *

3. By adding a new undesignated center heading and Sec. 230.1001,

to read as follows:

Regulation CA--Exemption for Certain Issues of Securities Exempt Under

State Law

Sec. 230.1001 Exemption for transactions exempt from qualification

under Sec. 25102(n) of the California Corporations Code.

Preliminary Notes: (1) Nothing in this section is intended to be

or should be construed as in any way relieving issuers or persons

acting on behalf of issuers from providing disclosure to prospective

investors necessary to satisfy the antifraud provisions of the

federal securities laws. This section only provides an exemption

from the registration requirements of the Securities Act of 1933

(``the Act'') [15 U.S.C. 77a et seq.].

(2) Nothing in this section obviates the need to comply with any

applicable state law relating to the offer and sales of securities.