From: John Petersen [jlp@ipo-law.com]
Sent: Monday, May 10, 2004 3:32 AM
To: rule-comments@sec.gov
Subject: File No: S7-19-04

Ladies and Gentlemen,

This is our second comment on the proposed changes contemplated by 
Release Nos. 33-8407 and 34-49566 and deals primarily with the proposal 
to prohibit the use of Form S-8 by shell companies, or companies that 
have been shell companies at any time within the last 60 days. Time 
permitting, we hope to submit additional comment on other aspects of 
the Proposed Rules.

On May 3, 2004 we expressed our view that the proposed definition of a 
"shell company" was unreasonably restrictive and suggested that a 
definition based on transactional behavior would be more appropriate 
given the wide variety of public companies that are used as corporate 
shells. We believe the same general criticism applies to the proposed 
restrictions on the use of Form S-8.

Form S-8 is intended to serve as a simple and cost-effective means of 
registering securities that will be offered and sold to employees in 
the ordinary course of business. Because of this narrow purpose, the 
Commission has determined that simplified disclosure and immediate 
effectiveness are appropriate. The problems with the simplified 
registration regime arise principally when Form S-8 is used to register 
securities that will be issued in extraordinary transactions.

The blatant abuse of Form S-8 is not limited to shell companies or 
entities that have been shell companies within the last 60 days. Small 
issuers frequently use Form S-8 for capital raising transactions and 
other purposes that go far beyond the Commission's intent. We support 
the overall effort to curtail abusive transactions. But we believe it 
is bad policy to attempt to regulate abusive transactions by focusing 
on a discrete subset of the potential abusers. In our view it would be 
imminently more reasonable and practical to develop a series of 
bright-line standards that would curtail a wider range of potentially 
abusive transactions, while preserving the integrity of the fundamental 
regulatory scheme.

Every potentially problematic use of Form S-8 that I've encountered 
involves a situation where one or more Form S-8 registration statements 
are used to register a number of shares that is disproportionate to the 
issuer's pre-transaction capital structure. When the number of shares 
registered represents a small fraction of the issuer's pre-transaction 
float, it is likely to be an ordinary course of business transaction, 
even if the registered shares will be issued to a small number of 
people. Conversely, when the number of shares registered represents a 
large fraction of the issuer's pre-transaction float, it is likely to 
be an extraordinary transaction that should probably not be registered 
on Form S-8. For the middle ground, a modest level of regulatory 
oversight is probably warranted.

Instead of prohibiting the use of Form S-8 by shell companies or any 
other narrowly defined class of potentially problematic issuer, we 
believe it would be far better policy to restrict the availability of 
automatic effectiveness when a Form S-8 registration statement 
(together with all other Form S-8 registration statements filed by the 
same issuer during the preceding 12 months) registers a number of 
shares that is more than a pre-determined percentage of the issuer's 
public float. For example, it would be simple to craft a bright line 
rule that provides:

	*	transactions registered on Form S-8 that represent less than 20% of 
the issuer's pre-transaction public float 		would become automatically 
effective upon filing;

	*	transactions registered on Form S-8 that represent more than 20% but 
less than 80% of the pre-transaction 		public float would become 
effective on the 20th day after filing in the absence of staff comment; 
and

	*	transactions that represent 80% or more of the public float could 
only be registered on Form S-8 with the 		staff's express approval.

We would certainly agree that changes to the Form S-8 rules are 
necessary to avoid problematic transactions. But changes that exclude 
one class of issuers while doing nothing to regulate the problematic 
behavior of other issuers are bad policy and do little to inspire 
public confidence in the integrity of the regulatory system.

John L. Petersen
Petersen & Fefer, Attorneys

Chateau de Barbereche
Switzerland 1783 Barbereche

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