From: John Petersen [jlp@ipo-law.com] Sent: Monday, May 03, 2004 5:33 AM To: rule-comments@sec.gov Subject: File No: S7-19-04 Ladies and Gentlemen, This is our first comment on the proposed changes contemplated by Release Nos. 33-8407 and 34-49566 and deals primarily with the proposed definition of a "shell company." Time permitting, we hope to submit additional comment on other aspects of the Proposed Rules. We believe the Staff's proposal to require the timely filing of full Form 10-SB disclosure in the event of a business combination between a public shell and a non-reporting company is a positive step toward reconciling the applicable regulatory standards with what is generally viewed by securities lawyers as "best practice." Nevertheless, we believe the staff's proposed definition of a shell company as: "A company with no or nominal operations, and with no or nominal assets consisting solely of cash and cash equivalents" provides little useful guidance for reporting companies and their securities lawyers and while creating tremendous potential for abuse by promoters of problematic shell transactions. There is an almost infinite variety of reporting companies that have been used as public shells. When a blank check company engages in a business combination, that is a shell transaction. When a public mining company abandons the pick and shovel, engages in a business combination, and emerges as a marketer of cellular telephones, that is a shell transaction. When a public software company abandons the keyboard, engages in a business combination, and emerges as a manufacturer of auto parts, that is a shell transaction. Given the tremendous variety of potential transactions, we believe a simplistic attempt to create a formulaic definition of "what a public shell is" can never result in the desired regulatory outcome. In our view the only reliable way to determine whether a particular company is a "shell company" is to analyze its transactional behavior. While there may be other important factors, we would suggest that the following factors are present in every business combination that is properly classified as a shell transaction: 1. There is a change in voting control; 2. There is an abandonment of the assets and ideas that were the basis for company's original business; 3. There is an infusion of assets and ideas that will become the basis for a new business; and 4. There is a change in the management team that will implement the new business plan. When one of these elements is present, a simple report on Form 8-K might be appropriate. But when two or more of these elements are present and you have a fundamental change in the nature of a reporting company's business, a much higher level of disclosure should be required. If the proposed definition of a shell company is adopted, the mining company will always assert that its properties had more than a nominal value, as will the software company. To further complicate matters, the staff will be free to make ad hoc determinations of what the word "nominal" means on a case by case basis. We respectfully submit that any rule that attempts to create a bright line definition of "shell company" that is not directly linked to transactional behavior will merely add to the level of confusion because the only companies that are certain to fall within the definition are companies that openly admit to being shells in the first place. The Commission has established multiple element analytical tools to provide reliable guidance on whether private placement transactions should be integrated. See Release 33-4552. If the goal is to provide meaningful guidance for reporting companies and their lawyers, we believe a similar multiple element analytical tool is required. John L. Petersen Petersen & Fefer, Attorneys Chateau de Barbereche Switzerland 1783 Barbereche 4126-684-0500 Telephone 4126-684-0505 Facsimile 4179-308-5181 Cellular US Voicemail and Fax (281) 596-4545 Houston (212) 401-4750 New York NOTICE: This communication (including attachments) is covered by the Electronic Communication Privacy Act, U.S.C. Sections 2510-2521, is confidential, may contain privileged information and may be the subject of certain Confidentiality or Nondisclosure Agreements. If you are not the intended recipient or believe that you have received this communication in error, please e-mail, fax or telephone the sender immediately and delete this e-mail communication. Please do not print, copy, retransmit or otherwise duplicate, disseminate or otherwise use this information.