Robert Seber
(212) 408-2486

FEDERAL EXPRESS/E-MAIL

Mr. Jonathan G. Katz
Secretary
Securities and Exchange Commission
450 Fifth Avenue, N.W.
Washington, D.C. 20549

Comments with respect to File No. S7-07-97

Dear Mr. Katz:

We are writing in response to several questions raised by
the Commission in its proposal to add a "bright-line test"
to the definition of "affiliate" in Rule 144.  We use
capitalized terms as defined in the Commission's Release No.
33-7391.

Is there a need to provide more objective guidance as to who
is an affiliate for purposes of Rule 144?

Should a facts and circumstances test be retained in order
to reflect the different ways a control relationship can be
established with an issuer?

We regularly represent venture capital funds and other
private equity investors in restricted securities, many of
whom rely on Rule 144 as the primary vehicle to exit their
investment after an initial public offering by the portfolio
company.  We have found that the current definition of
affiliate in Rule 144(a)(1) creates considerable uncertainty
and, in light of the purpose of Rule 144, appears to be
unnecessarily broad.  While private equity investors are
frequently in a position to exert control over the portfolio
company prior to an initial public offering, the offering
typically results not only in substantial dilution of
ownership but also in a termination or significant reduction
of involvement in the affairs of the issuer.  Private equity
investors in these situations often face the question of
whether they are deemed an affiliate under Rule 144 (i) by
virtue of their percentage ownership, even when they are no
longer represented on the board of directors of the issuer
or otherwise direct its management, or (ii) by virtue of
their continued presence on the board of directors, even
when the respective individual serves at the request of the
issuer after the termination of any contractual
representation rights.

The interpretation of the current definition of affiliate,
which is used throughout the securities laws in a variety of
contexts, must often rely on precedents that arose under
provisions that serve purposes different from those of Rule
144.  Even within Rule 144, the interpretation may result in
outcomes that are difficult to reconcile.  While significant
holders of registered securities may take a less restrictive
view with respect to their status in the context of Rule
144(e), the removal of the private placement legend from
restricted securities is typically conditioned upon a legal
opinion.  Conservative interpretations may force investors
who wish to sell restricted securities under Rule 144(k) to
deem themselves affiliates of the issuer even when the
result does not serve any apparent policy goal.  We
therefore support the Commission in its effort to provide
more objective guidance and separate the affiliate concept
within Rule 144 from the standard definition used in other
contexts of the securities laws.  We are against the
retention of a facts and circumstances test, because the
need for greater certainty outweighs the concerns over the
treatment of situations close to the "bright line."

Supporters of a subjective test could also argue that the
Rule 144 holding period fails to take into account all the
"facts and circumstances" of a securities distribution,
thereby ignoring that frequently applied and highly
technical provisions must establish clear parameters in
order to provide reliable guidance.  In the context of Rule
144, the benefits of a straightforward application are
greater than the costs of occasional error.

Is reliance on the Section 16 insider test over-inclusive or
under-inclusive?

We believe that reliance on the standards of Section 16 of
the Exchange Act is over-inclusive with respect to directors
and stockholders and, instead, support a test based on the
recommendation of the Advisory Committee.

The primary reason for our support of the Advisory Committee
test is to permit private equity investors to take greater
advantage of Rule 144(k).  It has previously been observed
that the exclusion of affiliates from Rule 144(k) "may be
more burdensome than necessary" and that this burden should
be eased for securityholders "who do not clearly control the
issuer."  Steinberg/Kempler, The Application and
Effectiveness of SEC Rule 144, 49 Ohio St. L.J. 473, 498
(1988).  The ramifications of the disparate treatment of
affiliates and non-affiliates under Rule 144(k) are even
more relevant after the shortening of the Rule 144 holding
periods, because in the typical capital formation process
all or a substantial part of the two-year holding period
will have lapsed at the time the standard lock-up period
following the issuer's initial public offering expires.  A
broader definition of affiliate would leave Rule 144(k)
intact, but indirectly permit more private equity investors
to take advantage of market windows that are currently only
available to small stockholders.

For affiliate status based on shareholdings, is the 10% test
appropriate, or should it be higher (such as 20%), or lower
(such as 5%)?  Should the shareholdings test be combined, at
a certain level of ownership, with the ability to place
persons on the board of directors?  For example, as
recommended by the Advisory Committee, should the safe
harbor exclude only those 10% holders that also have the
ability to place at least one director on the board?
Should the definition of affiliate exclude non-employee
directors?  Should non-employee directors be excluded from
the definition only if they have less than a specified
amount of shareholdings, such as 2%, 3% or 5%?

The Commission proposed the adoption of paragraph (k) of
Rule 144 in 1980 as an extension of the general "recognition
of the fact that a non-affiliate who has held his securities
for a considerable length of time has provided a substantial
indication that he did not acquire his securities with a
view to distribution, and is therefore not an underwriter
who must register his securities for resale," while noting
that any such resale would be "subject, of course, to the
antifraud provisions of the Securities Act and the Exchange
Act" (Sec. Act Release No. 6252).  We believe that the
foregoing premise applies equally to affiliates (as
currently defined) in the absence of a relationship with the
issuer that is so close that the affiliate may be acting as
a conduit of the issuer.  We share the view of the Advisory
Committee that its proposed thresholds of 20% for regular
stockholders and 10% for stockholders with at least one
director representative, and its inclusion of employee
directors only, are sufficient to ensure that these persons
are not acting as conduits.  While the Advisory Committee
proposed its test in the context of a broad overhaul of the
registration process, its reasoning conforms to the
philosophy behind current Rule 144 as well.

Adherence to the sole premise underlying Rule 144 also
diffuses several arguments that are sometimes used to
justify the narrow application of Rule 144(k).  The argument
that investors with substantial share ownership or
representation on the board of directors do not need Rule
144(k) because they can obtain the issuer's assistance in
completing a registration ignores not only the direct and
indirect costs of any Securities Act registration, but also
that Rule 144 is not an "as-needed" concept.  Similarly,
investors (below the 10% threshold) with board
representation should not be required to opt into Rule
144(k) by resigning from the board in advance of any
disposition solely to alleviate concerns that they may be a
conduit of the issuer.

Should the exclusion from the definition of affiliate
include an express presumption that those persons not so
excluded are affiliates?  If so, should such a presumption
be rebuttable?

We believe that the Commission will not be able to
accomplish its goal of a "bright-line test" for the
affiliate definition unless it includes an express
presumption that those persons not excluded are affiliates.

We therefore support such a presumption in the interest of
clarity.

Both the Section 16 and the Advisory Committee tests are
necessarily arbitrary as applied to stockholders, because
they focus on thresholds below the majority level without
taking into account the residual ownership structure.
Similarly, the inclusion of each director under the proposed
Section 16 test ignores the composition of the entire board
of directors.  If the Commission were to adopt the Section
16 test, we think that the proposed presumption should be
rebuttable by directors and stockholders in order to permit
exceptions for situations where a control relationship is
clearly absent.  If the Commission were to adopt the
affiliate definition recommended by the Advisory Committee
and supported by us, we believe that the presumption need
not be rebuttable.  While, as indicated above, the ownership
test would still rely on an arbitrary cut-off, the benefits
resulting from the higher threshold offer a fair trade-off
in the interest of increased certainty.

We appreciate the opportunity to comment on the Commission's
proposed rules, which are of great importance to the private
equity industry and to corporate capital formation in
general.  Please feel free to contact the undersigned at
(212) 408-2486 if we can be of further assistance.

Very truly yours,

/s/ Robert Seber

Robert Seber