Date: 6/1/98 7:28 PM U.S. Securities and Exchange Commission 450 5th Street, NW Washington, D.C. File Number S7-14-98 Gentlemen, On May 21, 1998, the Commission issued Release No. 33-7541 requesting public comment on whether Rule 504 of Regulation D needed to be strengthened to deter fraud in the micro-cap securities markets. While agree with the Commission's basic premise that Rule 504 needs to be improved in order to deter fraud, I am equally convinced that eliminating free transferability for securities issued in Rule 504 transactions would have a devastating impact on the small-business capital markets and effectively gut the exemption. The Release's Executive Summary makes clear the Commission's belief that fraudulent deals account for only a small percentage of the total volume of Rule 504 transactions. "While we believe that the scope of abuse is small in relation to the actual usage of the exemption, [The Commission's records indicate that approximately 1500 Forms D have been filed under Rule 504 in each of the past several years. NASD officials believe that between 300 to 500 applications for OTC Bulletin Board quotations were based upon the Rule 504 exemption in each of those years.] we also believe that a regulatory response may be necessary." Nevertheless, the Release proposes to completely eliminate one of the principal features that makes Rule 504 an attractive alternative for some small business issuers. In my view, there has to be a better way to combat a few instances of fraud. Just as it is difficult to make locks and alarm systems that will stop a determined thief, it is difficult to craft securities laws and regulations that will stop a determined con man. The fact of the matter is that if someone is intent on perpetrating an investment fraud, he will do so regardless of the legal framework. Since the fundamental premise of the securities laws is that full and fair disclosure of all material facts is the best protection against fraud, I believe that the best course of action will be to tighten the current information requirements for publicly traded micro-cap securities. Sadly, the Commissions current proposal will have the effect of penalizing all small-business issuers in attempt to regulate the conduct of a small minority. Small does not necessarily equal badóespecially in the case of new industries and emerging technologies. And the purpose of the securities law is not to protect all investors from all risk. Rather, the principal goal is to provide sufficient information to permit a reasonable man to make an informed determination of whether the level of risk in a particular enterprise is acceptable to him. There is a tremendous conflict between the need for capital in small businesses and the micro-cap investor's need for investment liquidity. While it's pleasant to believe in the existence of "investment angels" who are eager to invest in small companies without a concrete exit strategy, the first rule of small company investing is "make sure you know your way out before you invest." A secondary, but interrelated, problem arises when one considers the relative equity stake that is required to raise a specific sum of money. Private placements of restricted securities always go off at a significantly lower value than public sales of comparable securities. And this fact of life is not limited to the micro-cap markets. The dollar limits on Rule 504 were established in the early 1980's and over the intervening 16 or 17 years, inflation has significantly reduced the relative value of the exemption. As a result, many issuers are forced issuers to raise less money than they really need in order to fit within the dollar limitations of Rule 504. Rather than gutting the exemption, I would prefer to see an increase in the maximum amount of sales to perhaps $2 or $2.5 million, thereby giving issuers a better chance to raise adequate capital to grow their businesses. Since the Commission's staff is giving considerable attention to internal proposals to increase the standards for accredited investors, a similar increase in the dollar limits of Rule 504 would also seem to be in order. While the Rule 504 exemption does not presently require delivery of a specific form of disclosure document, every responsible Rule 504 offering I've encountered meets the minimum disclosure requirements of Form U-7 or Regulation A, especially when the issuer contemplates the creation of a secondary trading market. Even so, it always amazes me when a well prepared Rule 504 offering document will contain from 15 to 35 pages of deathless prose, but the only document required to support a public trading market is a 3 to 4 page summary document that satisfies the requirements of Rule 15c2-11. If the Commission really wants to clamp down on fraud in the micro-cap securities market, I believe the following specific and concrete steps should be taken: * Every issuer that intends to issue freely-transferable securities in a Rule 504 or Regulation A offering should be required, prior to the commencement of trading, to establish a Web-site on the internet that includes a disclosure document meeting the requirements of Form U-7 or Regulation A; * Every non-reporting issuer that intends to maintain a secondary trading market for its securities should also be required to post quarterly and annual updates to its Web-site within a reasonable period after the end of each reporting period so that the available information will continue to satisfy the requirements of Form U-7 or Regulation A; * Every brokerage firm that operates as a market maker for securities of a non-reporting issuer should be obligated to independently verify the availability of such information on a regular basis, but not less than quarterly; and * Every broker should be required to provide the URL of the issuer's web-site to his client prior to accepting an order for securities. I am a firm believer in the propositions that (1) a reasonable man given access to current and accurate information will usually make an informed decision and (2) that fraud can only exist in the absence of current and accurate information. If we truly want to reduce fraud in the micro-cap markets, information is the answer, not elimination. Sincerely John L. Petersen Attorney at Law 16755 Ella Boulevard Suite 177 Houston, Texas 77090