Subject: File No. S7-15-97 Date: 4/22/97 10:39 AM Mr. Jonathan Katz Secretary Securities and Exchange Commission 450 Fifth Street, NW Washington, D.C. 20549 File # S7-15-97 Dear Mr. Katz: On behalf of the Small Business Capital Access Association I would offer the following comments for consideration at the upcoming 19(c) conference. The Small Business Capital Access Association, formerly the Direct Public Offering Council, is an organization that provides a forum for discussion by individuals, companies, and regulators interested in issues effecting capital raising by small businesses. The SBCAA offered comments last year regarding several areas of concern to those involved in the direct public offering of securities. The major areas of concern were the creation of a secondary market for small corporate offerings and questions relating to the use of the Internet in the offer and sale of small corporate offerings. Over the past year t h ere have been a number of developments that have increased the use of the Internet, including the potential for limited solicitation of accredited investors. There has also been more evidence of the need for a limited license for broker dealers or some o ther designation for companies dealing with small businesses. The need for a secondary market for small business securities offerings also remains a focus of the SBCAA. SECONDARY MARKET EXEMPTION As the SBCAA stated last year, the biggest problem faced by small companies trying to raise capital is the lack of a secondary market for the investors who invest in these offerings. In order to encourage the creation of a secondary market in small cor p orate offerings we would offer the following suggestions for consideration. As used in this letter, small corporate registrations are not limited to SCOR offerings at the state level, but would also include Reg A and SB-2 offerings at the federal level . The first suggestion is that the SEC and the states support the direct marketing of registered offerings of small businesses on the Internet. The offering of initial public offerings on the Internet has become an effective tool for small businesses see k ing to raise capital. However the efforts to create secondary markets have been limited to individual companies creating a trading area in their own securities. Efforts should be made to remove any barriers from the creation of a direct secondary mark e t for small corporate registrations on the Internet. Such a market must provide investors with accurate, accessible, and complete information. It must also avoid unneeded costs. It is essential that small companies be allowed to use the Internet to mar k et their securities directly to the public and to create a place where investors in the company can buy and sell the company's stock. In order to ensure that investors are protected, requiring that a current prospectus, current financial information, a n d current information about trading be available to potential investors are essential requirements. While a registered broker dealer or third party will be necessary to complete a transaction, the creation of an auction type or bulletin board posting of i ndividuals interests to buy or sell shares in small business offerings should be encouraged. Second, the states and the SEC should establish a uniform secondary market exemption for small corporate registrations. Small companies that can provide current financial information to potential investors whether on the Internet or through other means should be allowed to rely upon a secondary market exemption for trading in their securities. States exempt offerings where certain information is provided in recognized securities manuals. These manuals are often not readily available to Investors. I f the information is available on line at the place where transactions occur, investors will get better information than from manuals. The financial information available should be accurate and complete, but the exemption should not be based on achieving a certain level of earnings or upon a certain number of transactions in the security. The essential element is that the information is accurate and readily available. The states and the SEC have done much to encourage small business to raise capital in the securities market. However, until an exit strategy can be provided for investors, both entrepreneurs and investors will face difficulties involving small corpora t e offerings. The issue of secondary markets for small business should be a top consideration of the conference. PRIVATE PLACEMENTS The ability of small business to attract private placement money is essential. The adoption of an exemption for limited solicitation of accredited investors by California and Texas, the allowance of offers and sales to accredited investors in Missouri, Iowa and other states and the adoption of Rule 1001 by the SEC are steps in the right direction. The adoption of the proposed NASAA Accredited Investor exemption should be encouraged in all states. The SEC should make it clear that Rule 1001 applies to all states that have exemptions for offers and sales to accredited investors with limited public solicitation. The SBCAA would encourage a discussion by the participants regarding the recommendation to change the scope of all securities laws to not focus on offers but upon sales. This would be a major change for securities laws in the United States. This is a n issue that has been raised repeatedly by attendees at the White House Conference on Small Business as well as the Commission's Conference on Small Business. It is an idea that would simplify the burden on small business. Given the communications avai l able in today's world consideration of this issue is important. Investor protection should not suffer since liability for any violations would attach when money was invested and a sale occurred. However, small companies would no longer have to worry ab o ut where offers are being made. They could focus upon making sure that sales do not occur in any jurisdiction in violation of the law. In addition, a change to Rule 147 that provides a safe harbor for sales in adjacent states when a major metropolitan area is located within thirty miles of the adjacent state, would create a broader funding source for many small startup companies and w o uld provide a potential secondary market for small business offerings. Those states with large metropolitan centers on their borders are often faced with a potential problem that half the investors live in one state and half in another. Companies would still be required to register or qualify for an exemption in the states in which they made sales. LIMITED LICENSE BROKER DEALER The need of small businesses to have someone assist them with the sale of securities in small offerings is apparent to all those involved in capital raising for small business. While SCOR and Reg A offerings have allowed companies to sell their own sec u rities, most companies find selling their own securities to be a challenge. Self regulatory agencies should be encouraged to adopt rules which would make it easier for their members to become involved in offerings less than five million dollars. A chang e to the requirements that a state registered offering must also go through NASD Corporate Financing would be a step in the right direction. If states have reviewed the broker's compensation on such offerings, why not eliminate the duplication of effort s and remove a major cost associated with brokers being involved in these types of offerings. In addition, thought should be given to providing an exclusion from complying with the Penny Stock rules when there is a limited market available and if certain information is being made public. The Penny Stock rules were not written because all stocks less than $5.00 were bad, but because those securities were most subject to manipulation. Small issuers and these limited license broker dealers should be granted an exclusion from the penny stock provisions if the public trading in the stock is less th a n one million shares. The creation of a special designation for persons who are in the business of selling only SCOR, Reg A, or SB-2 offerings and who work directly for the issuer on each offering should be considered. Such persons should be exempt from the need to be a mem b er of the NASD or to register as a broker dealer and meet net capital requirements. However, providing information about these individuals to regulators and more importantly to investors is necessary. The requirement that such individuals take a general securities exam seems unnecessary. The requirement that such individuals should have a basic understanding of the law regarding securities transactions is appropriate since these individuals, unlike the small business person is in the business of sellin g these offerings. INTERNET OFFERINGS NASAA should be commended for the adoption of a clear policy on Internet offers. All states should be encouraged to adopt the NASAA Resolution on Internet Offers in their state's rules. Market Regulation and the states should ensure that only person s dealing directly with investors would need registration as brokers, dealers, or agents. Internet services that post information about Internet offerings should not be required to register as brokers, dealers or agents. In addition, states should recog n ize that the persons selling such offerings should not be required to take and pass exams regarding the general sale of securities. While requiring information and ensuring that the person selling the offering is not subject to disqualification, requiri n g a small business owner, who is marketing his own securities, to take an exam does not provide additional investor protection in relation to its cost to the business. In addition, some uniformity regarding approval of advertising for the Internet should be considered. The regional review of SCOR offerings should be a good model to use. If advertising is approved by one state for use on the Internet in conjunction w i th a registration in that state, the advertising should be accepted in all other states. The SEC should undertake discussions with foreign jurisdictions about policies regarding offers on the Internet to and from foreign jurisdictions. In addition, efforts should be made to allow reciprocity for small business offerings registered either i n the states or with the SEC with those registered in foreign jurisdictions. The Internet provides a world wide access to information, it should also provide a world wide access to capital if the regulations of the home jurisdiction are being complied wi t h. OTHER AREAS OF INTEREST The recommendations of the Disclosure Simplification Task Force should be adopted as they relate to small business. The SBCAA would recommend increasing the limit on Reg A offerings to five million over a six-month time period. In addition, the SEC sho u ld increase offerings under Section 504 of Regulation D, with a corresponding increase at the state level to five million a year. This would assist small offerings and increase the ability of either a direct market for these securities to be establishe d or encourage broker dealers to become involved in offering and making markets in such securities. CONCLUSION Many excellent changes have been made over the fast five years to encourage small businesses in raising capital. However, many other changes are needed. We hope your conference is a success. The work that you do is essential to making sure that inves t ors are protected and that the capital markets are available to all types of issuers. We thank you for the opportunity to provide our views and we welcome your views regarding the issues raised in this letter. We look forward to working with you in mak i ng the capital raising process easier for entrepreneurs and safer for investors. Sincerely, John R. Perkins Chairman Small Business Capital Access Association " A lawyer is either a social engineer or a parasite on society." Charles Hamilton Houston John R. Perkins