Date: July 24, 1998 To: Mr. Jonathan Katz, Secretary, Securities and Exchange Commission (fax202.942-9651) From: Ted Yong, President, GP Express (GPX), Inc. RE: S7-14-98 Dear Jonathan: Although our investment banking company has already submitted our general comments on S7-14-98, via e-mail dated 7/21/98, due to the importance of said subject matter on the investment banking industry and on the capital access for small businesses, our company wishes to forward additional comments on the S7-14-98 issue. Pursuant to S7-14-98 and the SEC's request for public comments on the potential revision of Rule 504, our company wishes to address the following questions your agency has posed in "IV. Other Possible Approaches to Reform Rule 504" and other sections of your website article on S7-14-98: 1. General Solicitation for Rule 504. In Section II "Background of Rule 504," paragraph 2, you stated that: "General solicitation and general advertising were permitted for all Rule 504 offerings." Our company wishes to inform the Commission that Washington State and many other states specifically stipulates in their state Rule 504 statutes that no general advertisement is permitted. For example, under Washington State's Small Offering Exemption (SOE; WAC 460-44A-504), it is stated under "Selling Constraints," that "you cannot advertise or attempt general solicitations of securities under this exemption. In addition, no sales commissions or payment of any kind, direct or indirect, can be made to anyone for soliciting potential purchasers." New York State is an exception from our knowledge, regarding this general advertisement and solicitation issue; Remedy 1.1: As an investment banking firm, which specializes in private placements and initial public offerings for small to medium size high-tech and medical companies, our company finds that there is a need for the SEC to take the leadership position to institute uniform rules applicable to Rule 504, which is less amenable to modification by individual states. Even seasoned securities counsels and investment bankers do not have a clear picture of all the variations of Rule 504 rules in our States. If the Commission does not know that Washington State permits no general advertisement and solicitation of an WAC 460-44A-504 issue, as cited above, imagine how difficult it is for the rest of us to comprehend and to comply to this issue. Federally instituted uniformity in Rule 504 regulations will mean easier implementation of the Rule 504 provision by the states and better compliance by the issuers, securities counsels, and investment banking firms; Remedy 1.2: Pertaining to the general solicitation and general advertisement issue related to Rule 504, our company supports the view that the offering information, once approved by the filing state and filed with the SEC, may be disseminated via general advertisement, including the Internet. However, prior to said grant for general advertisement, the SEC must reform the Rule 504 provision, requiring complete offering and financial disclosures of the issuer, which must include a comprehensive offering memorandum disclosing all potential risk factors (offering and business), capitalization, dilution factors, share description, current and future business plans, management back ground and renumerations, and all current corporate obligations and transactions. The disclosure should also include 18 months audited financial in S&P approved standard, subscription agreement with ample warnings of investment risks, executed Form U-2, and executed officer and director due diligence questionnaire forms. Personnel information of the management (e.g., social security number, home phone number, driver license number, ownership of shares in other companies), which may be abused by the public, should not be required for generalized disclosure on the Internet. In addition, issuers should not be permitted to utilize other documents and advertisement medium (e.g., video tapes, CDROM, or DVD) not previously approved by the presiding state securities agency. Furthermore, your agency may wish to institute SEC filing requirement for said offering documents by the issuer. Pertaining to the issue of general solicitation, our company is against general solicitations of Rule 504 offerings, especially those involving "cold calls" and "boiler room" sale approach, which undoubtedly will lead to abuse by promoters and brokerage houses, as it has in the past; Remedy 1.3: Pertaining to your question: "Should general solicitation and general advertising be contingent upon state registration and prospectus delivery to all investors before sale," our company supports the requirement of state registration (as long as the cost and approval time are reasonable) and prospectus delivery to all investors, accredited and non-accredited investors, as conditions for offering sale. Again, as previously stated, our company supports conditional general advertisement, but not general solicitation; 2. Filing Method and Public Disclosure of Rule 504 Issue. Pertaining to your question: "Since Forms D are not currently filed electronically with the Commission, should a change be made requiring electronic filing?", our company supports electronic filing of Forms D, if this would facilitate the storage and the review of the filing information by the SEC. However, prior to the mplementation of this filing format, the SEC needs to investigate further into different software formats in this area, since there is no recognized convention. Also, if the filing information were to be transmitted in ASCII, most formatting in the documents would fail to transmit. The current EDGAR system may be used for this purpose, although our company believes the EDGAR system has flaws. Alternatively, to facilitate electronic filing with uniform convention, the SEC may sell certain transmission software package to the securities counsels and investment banking firms, at a reasonable price of $50 or less. If the SEC needs assistance in this area, our company can provide assistance and recommendation. Our company has developed proprietary software for offering information acquisition and processing, which could compile complete state and federal Reg. D required offering documents, in as fast as 5 hours, including S&P Listing and Form 211. Our software system may be reconfigured for SB-2 and S-1 filing documents; Pertaining to your question: "Should these documents be provided to the Commission for its information only? What issues would this type of procedure raise under the Freedom of Information Act [ 5 U.S.C. 552.] ? Should a confidential treatment process be developed to protect some of the information contained in these documents?", our company believes that all offering information of an issuer should be made available to the public, in its entirety without reservation, except those personal information of the management, which may be abused by the public; 3. Aggregate Offering Size of Rule 504. Pertaining to your questions: "Should a lower aggregate dollar amount, such as $500,000, be implemented with different requirements in order to provide a more effective compliance system?", our company recommends no change in this area, since most of the Rule 504 we have prepared are under $500,000 because clients are concerned about the potential erosion of the insider controlling interest, caused by a larger initial round of public financing, if the offering size is greater. If the Commission so determines that the reduction in aggregate size limit, from $1 million every 12 months to $500,000, would reduce potential abuses involving Rule 504 offerings, our company would support such revision; 4. Conditional Increase in Rule 504 Aggregate Offering Limit After 18 to 24 Months. Pertaining to your questions, "For example, should the measuring period for determining the scope of an offering be shortened to six months? Should the dollar limitation in the Rule be increased to $5 million or some higher dollar amount if accompanied with additional compliance requirements such as specified disclosure requirements or state registration requirements? The Task Force, among other matters, recommended that the Commission raise the offering amount in Rule 504 offerings to $10 million pursuant to its new authority under Section 28 of the Securities Act (15 U.S.C. 77z-3)," our company is of the view that the aggregate offering size of a Rule 504 should remain at $1 million maximum for a period of 12 to 24 months, after the initial public offering of the issuer. After 12 to 24 months, the issuer may conduct a secondary offering of shares, reliant on Rule 504, to the limit of $5 million, with share registration with the states of sale, if the issuer meets the following conditions: 4.1 The issuer has gross revenue of $1 million from actual business operation, not including extraordinary one-time non-recurrent income; 4.2 The issuer has maintained a bid price of $2 or greater during the quarter preceding the filing and during the course of the secondary offering; 4.3 The issuer is not in litigation with investors and has not been cited by the SEC and/or the NASD for irregularity in trade or for any reason; 4.4 After the completion of the $5 million offering, the insiders must still retain 51% controlling interest of the issuer. Furthermore, the owners of the insider shares must agree to the re-restriction of their shares for one year, pursuant to Rule 144, to obviate the potential of "pumping and dumping" by the insiders with unrestricted shares; With some works on the issuer's part and with the $5 million raised, the issuer may qualify for NASDAQ Small Cap, on its way of becoming a real public company; 5. Regional Qualification System for Rule 504. Pertaining to your questions: "Should public offerings under Rule 504 be limited to only those offerings registered in and made in states participating in NASAA's regional review program? [ NASAA and a number of states have developed regional review procedures that permit an issuer to file in each state, but to indicate with the filing that regional review is requested. Under those circumstances, the issuer will receive only one set of comments, and the filing can become effective simultaneously in all states in the region in which filings have been made. To date, the regional system has been set up in the following areas: Western States (Alaska, Arizona, California, Colorado, Idaho, Oregon, Utah and Washington); New England States (Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont); and Midwestern States (Illinois, Indiana, Iowa, Kansas, Michigan, Missouri, and Wisconsin)," our company does not support the limitation of Rule 504 offerings to offerings registered with the NASAA's regional review program. However, our company would embrace any revision by the SEC and the state securities divisions to streamline the filing and review process of the NASAA's regional program, to promulgate the availability and the filing criteria of said regional review process on the Internet, and to enact uniform filing requirements for NASAA filing in all regions. To achieve these ends, the SEC must firstly arrive at specific uniform requirements for Rule 504 in all states, as aforestated. Our company is especially concerned about the time required for the regional review process, since time is of the essence in most of our offerings; 6. Types of Issuers, Issuer Capitalization, Issuer Market Capitalization. Pertaining to your questions: "Should the types of issuers eligible to use the exemption be changed? For example, should particular types of "penny stock" issues be excluded, e.g., offerings for less than $1 per share? Should issuers with total assets or market capitalization below a minimum amount be precluded from using the rule, e.g., $1 million? Would such a limit be consistent with a stated purpose of the exemption: for raising "seed capital"?", our company wishes to recommend no alteration, since the suggested revisions may alter the purpose of Rule 504, which is to provide "seed capital" for small businesses and startups. However, our company would support the following requirements: 6.1 All Rule 504 issuer must operate a predefined business with stated purpose of the business, which is not related to the definition of a "blind pool"company (this is already a regulation for Rule 504); 6.2 The offering per share price must be set minimally at 25 cents per share. Many of the "pump and dump" schemes involve issues priced at 1 cent per share or per unit, especially those involving a scheme in which the promoters would conduct an initial Rule 504 offering at one penny a share or unit for a small amount (e.g., $100,000), to be purchased by the insiders and nominees, which is followed by a larger secondary offering to be sold to the general public, after the initial shares are "pumped" to multiples from the initial penny offering price, all within a period of 12 months; 7. Rule 504 SEC Monitoring, Additional Filing Information, States of Filing. Pertaining to your questions: "Should the Commission take a more active role in monitoring Rule 504 transactions to ensure compliance with the antifraud requirements of the federal securities laws? Should additional information be mandated in Form D? For example, should Form D be required to indicate the state(s) where the offering was made?", our company wishes to reply as follows: 7.1 Our company, as previously stated, supports the view of increased involvement of the SEC with increased monitoring of the appropriate filing of Rule 504 offerings and the trading of these issues, especially in matters related to the correlation between bid price upswing and trade volume, during a given period; 7.2 Our company advocates the implementation of uniform state requirements for Rule 504 filings, by the SEC, in terms of the disclosure standards, involving the offering memorandum structures, subscription agreement, audited financial, and due diligence disclosures of all directors and officers of the issuer; 7.3 Pertaining to your question regarding filing state disclosure, said disclosure is already required on Page 7 and Page 8 of Form D; 8. Periodic Disclosure of Issuer's NASD Filing Information and NASD Market Makers. Pertaining to your questions: "Or, should Form D filers be required to amend their filings periodically (whether quarterly, annually or some other increment of time) to disclose: (1) whether they have prepared or provided information to facilitate trading such as the NASD's Form 211, which is required prior to inclusion on the OTC Bulletin Board; and (2) whether they have provided other information to potential or existing market makers for their securities?", our company believes in the need for a semi-annual disclosure of issuers' current business description, current products and services, management description, audited financial, and market related information (e.g., bids, volume, market makers). Said information should be made available on the Internet for the investing public; During this past week, our company called seven past and current clients concerning the intended revision of S7-14-98. According to our finding, in this informal gathering of opinion data from small businesses and startups, we have not found one small business we surveyed agreeing with the SEC's proposed revision specified in S7-14-98. Our finding suggests that S7-14-98 would be unpopular among small business owners and entrepreneurs alike, and would present a definitive burden on startups and small businesses, if enacted. Our company has asked these companies to forward the SEC their comments on S7-14-98 by July 27, 1998. Due to their busy schedules and the small size of these companies, our company is uncertain whether our clients have found the time and personnel availability to implement their comments to the SEC. If you have question, pertaining to the above information, please do not hesitate to call 805-297-1985, fax to 805-297-7256, or E-mail to gpxi@aol.com. Cordially, Theodore Yong President, GP Express, Inc.