June 16, 2004
Mr. Chip Rainey
Dear Mr. Rainey:
In your letter of June 15, 2004, you request assurance that the staff of the Division of Market Regulation ("Staff") will not recommend enforcement action to the Commission under Section 15(a) of the Securities Exchange Act of 1934 ("Exchange Act") if the Texas Treasury Safekeeping Trust Company ("TTSTC") or the Texas Comptroller of Public Accounts Office ("Comptroller's Office") engages in the offer and sale of certificates that have been cancelled on the books of existing companies, or that were issued by now-dissolved or defunct companies, without registering as a broker-dealer under Section 15(b) of the Exchange Act.
The Staff has issued a series of no-action letters permitting businesses, in limited circumstances, to offer and sell certificates representing ownership interests in existing companies without broker-dealer registration. The Staff's position was predicated on specified conditions designed to ensure that securities offered by these firms were not marketed or sold for investment purposes.1 TTSTC's proposal differs from the business plans of these other entities in that it does not propose to offer and sell certificates representing ownership interests in existing companies. Rather, TTSTC proposes to offer and sell certificates that have been cancelled on the books of existing companies, as well as certificates issued by now-dissolved or defunct companies.
Based on the facts presented and the representations you have made, and without necessarily concurring in your analysis, the Staff will not recommend enforcement action to the Commission under Section 15(a) of the Exchange Act if TTSTC or the Comptroller's Office engages in the activities described in your letter without registering as a broker-dealer under Section 15(b) of the Exchange Act. In granting this relief, we note in particular that:
This position concerns enforcement action only and does not represent a legal conclusion with respect to the applicability of statutory or regulatory provisions of the federal securities laws. Moreover, this position is based on the facts you have presented and the representations you have made, and any different facts or conditions may require a different response. In addition, this position is subject to modification or revocation if at any time the Commission or the Staff determines that such action is necessary or appropriate in furtherance of the purposes of the Exchange Act. Finally, the Staff expresses no view with respect to any other questions that the proposed activities may raise, including the applicability of other federal or state laws to those activities.
Brian A. Bussey
June 15, 2004
This letter is on behalf of our client, the Texas Treasury Safekeeping Trust Company ("TTSTC"), a special-purpose trust company wholly owned by the State of Texas through the Texas Comptroller of Public Accounts Office (the "Comptroller's Office"). The purpose of this letter is to request assurances that the staff will not recommend enforcement action to the Commission under Section 15(a) of the Securities Exchange Act of 1934 (the "Exchange Act") if TTSTC, or the Comptroller's Office, engages in the auction sale of stock, bond or other certificates that (1) constitute abandoned or unclaimed property under Texas law, and (2) either (i) have been cancelled on the books of existing companies, or (ii) were issued in conjunction with now-dissolved or defunct corporations, without registering as a broker-dealer. Neither TTSTC nor the Comptroller's Office will market or advertise the certificates as investments, but rather will market the certificates exclusively for their aesthetic, historical or decorative value, possibly as either novelty items, as historic documents or as collectible items (generally referred to in the trade as "Scripophily"). Furthermore, the certificates will be sold with the express disclaimer in any literature (including any web site) that they are not redeemable securities and they will not be transferred in the name of the buyer. The disclaimer would be prominent in any literature offering the certificates for sale. For existing companies, either TTSTC or the Comptroller's Office will prominently mark the cancelled certificates with the words "cancelled."1
Texas law regarding unclaimed property requires financial institutions, businesses and government entities to report and remit to the state personal property they are holding that is considered abandoned or unclaimed according to statue.2 (See TEX. PROP. CODE ANN. Chapters 71-75, copy enclosed). Such property is turned over to the Comptroller's Office when the owner's whereabouts are unknown and the property has been inactive on the books of the reporting entity for a minimum of three years. Since the inception of the original Texas unclaimed property law in 1961, the Comptroller's Office (formerly the Office of the Treasurer3) has received many types of property resulting from the cleaning out of old or abandoned safe deposit boxes, etc. As a result, in addition to money, the Unclaimed Property Division of the Texas Comptroller's Office receives stocks, bonds, jewelry, old coins, and other such abandoned or unclaimed items. The types of stock and bond certificates received fall into the following general categories:
(1) Close corporation certificates of an existing and presumably solvent corporation;
Texas Government Code Chapter 74 authorizes the Comptroller to sell at public sale by auction "all personal property, other than money and marketable securities . . ." in accordance with the statutory requirements set forth in the chapter. The entity charged with acting as the repository for such property is the Comptroller's Office. The Comptroller's Office acts through the TTSTC with respect to the disposition of securities. The Comptroller's Office currently holds Internet auctions of unclaimed safe deposit box contents, including but not limited to jewelry, coins, and other miscellaneous items. The Comptroller's Office desires to add to the auction items it currently sells stock and bond certificates which are not "marketable" due to (a) cancellation of the certificates, or (b) their issuance by a now-dissolved or defunct corporation for which certificates were originally issued.
On July 6, 1993, the staff of the Commission issued a "no action" letter regarding the sale of decorative stock certificates pertaining to marketing and sale of framed single share stock certificates without broker-dealer registration in limited circumstances.5 This single share "no action" letter, and the previous letters issued by the staff to which the July 6 letter cites, "attempt[ed] to balance the broker-dealer registration requirements of the Exchange Act with a limited business model that did not raise many of the investor protection concerns that broker-dealer registration and regulation are designed to address.6" Combined, these "no action" letters were predicated on four conditions designed to ensure that securities purchased from these companies were not purchased for investment purposes. The four conditions were: (1) firms must offer and sell only single shares; (2) firms must offer and sell only mounted, matted and framed certificates; (3) firms must market the shares as gifts, not investments and (4) firms must offer and sell the framed shares for at least twice the value of the underlying share of stock.
Subsequently, the staff issued a related "no action" letter pertaining to a modification of these four conditions. In the "no action" letter dated August 14, 2002, regarding Scripophily.com, the staff responded to the company's proposition that it would follow two of the four listed conditions (sale of single shares only, and sale of certificates for at least twice the share's underlying value), and, in addition, follow three new conditions, namely: (1) the non-cancelled single share certificates would be issued in the name of the company; (2) the company would stamp the share certificates on the back with the words "non-redeemable" and "non-transferrable," and (3) the company would prominently disclose at the point of purchase that the company is not a registered broker-dealer, that the non-cancelled single share stock certificates are not being sold for investment purposes, and that the certificates are non-redeemable and non-transferrable. In both online and non-electronic transactions, this disclosure would be presented in writing at the point of purchase in a font that is no smaller than the biggest font on the page, and the company agreed to repeat the disclosure in a letter accompanying delivery of the share certificates. The staff took a "no action" position based on the modified conditions that Scripophily.com agreed to follow.
TTSTC believes its current proposed business differs from the examples described above because it seeks to sell cancelled certificates of existing companies and certificates originally issued for now-dissolved or defunct companies ("obsolete" certificates), not active shares. Furthermore, some if not many of the cancelled or obsolete certificates will have originally been issued for amounts greater than one share. TTSTC does not plan on selling the certificates as framed certificates, due to the possibility of purchase by collectors who may want to display or preserve the certificates in a manner of their choice. Finally, because the certificates are cancelled, or are otherwise obsolete, and due to the fact that the proposed sale may be in an online auction format, TTSTC does not believe it is possible to ensure that the shares will sell for at least twice the value of the underlying stock as listed on the certificate itself. While the certificate itself may have value as a collectible, that value is not tied to the value of the underlying stock, nor to the number of shares the certificate originally represented.
TTSTC proposes to comply with the following conditions regarding marketing and sale of such certificates to ensure that potential purchasers and market participants are not misled.
Thanks to you and your staff for assistance with this matter. Please feel free to call me at 512-305-4787 with any questions you may have.
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