SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 40648 / November 9, 1998 Admin. Proc. File No. 3-9494 __________________________________________________ : In the Matter of the Application of : : ROCKY MOUNTAIN POWER COMPANY : 1235 E. Arapahoe Road, T-ll, # 110 : Englewood, Colorado 80112 : : For Review of Action Taken by the : : NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. : __________________________________________________: OPINION OF THE COMMISSION REGISTERED SECURITIES ASSOCIATION -- REVIEW OF DENIAL OF NASDAQ SMALLCAP INCLUSION APPLICATION Total Assets Requirement Number of Shareholders Requirement Minimum Bid Price Requirement Company failed to demonstrate compliance with inclusion requirements for Nasdaq SmallCap Market. Held, review proceeding is dismissed. APPEARANCES: Ann Porath, for Rocky Mountain Power Company. Robert E. Aber, Sara Nelson Bloom, and Arnold P. Golub, for the Nasdaq Stock Market, Inc. Appeal filed: December 18, 1997 Last brief received: March 24, 1998 I. Rocky Mountain Power Co. ("Rocky Mountain" or the "Company") appeals the decision of the National Association of Securities Dealers, Inc. ("NASD") denying its application to include the Company's securities on the Nasdaq SmallCap Market. The NASD found that the Company did not meet the applicable listing criteria relating to minimum assets, number of shareholders, and bid price per share. The listing criteria in place when Rocky Mountain applied for inclusion in January 1997 stated that, for initial inclusion, a company must have, among other things, unrestricted and permanent assets of at least $4 million, at least 300 holders of its common stock, and common or preferred stock with a minimum bid price of $3 per share. In March 1997, after Rocky Mountain filed its application for inclusion, the NASD filed with us proposed rule changes revising the initial inclusion standards for listing on the Nasdaq SmallCap Market. We approved those criteria in August 1997. These criteria require a company to have, among other things, net tangible assets of at least $4 million, common or preferred stock with a minimum bid price of $4 per share, and at least 300 round lot [1] holders of its common stock. [2] Under the terms of our order approving the revision, companies like Rocky Mountain with inclusion applications pending before the NASD on March 3, 1997 (the date the NASD submitted its proposed rule change) had 90 days from that date to be approved for trading on the SmallCap Market under the superseded initial listing criteria. [3] Accordingly, to qualify under the superseded standards, Rocky Mountain was required to commence SmallCap Market trading in its stock by early June 1997. Based upon the information the Company provided during that 90-day period and in the course of an evidentiary hearing held shortly after the close of that period, the NASD concluded that Rocky Mountain did not meet the superseded standards. We base our findings on an independent review of the record. **FOOTNOTES** [1]: The rules define "round lot holder" as a holder of a normal unit of trading. A "normal unit of trading" is defined as 100 shares of a security unless the NASD determines that a normal unit of trading shall consist of other than 100 shares. NASD Marketplace Rules 4200(28) & (30). [2]:Securities Exchange Act Rel. No. 38469 (April 2, 1997), 64 SEC Docket 621 ("New Standards Proposing Release"); Securities Exchange Act Rel. No. 38961 (August 22, 1997), 65 SEC Docket 547 ("New Standards Adopting Release"). [3]:See New Standards Proposing Release, 64 SEC Docket at 630. II. In December 1996, Rocky Mountain, a Colorado corporation formed in 1958 and formerly engaged in the business of investing in Colorado water rights, entered into an agreement to effect a reverse subsidiary merger with Prime Rate Investment Management Enterprises, Inc. ("Prime"), a real estate investment business, whose wholly-owned subsidiary Prime Rate Income & Dividend Enterprises, Inc. owned a majority of Rocky Mountain's stock. Under the terms of the merger, which occurred in April 1997, Prime became a wholly-owned subsidiary of Rocky Mountain. Prior to the merger, Rocky Mountain was a shell corporation with $15,000 in cash, a large net operating loss carry forward, and several hundred shareholders. The Company's business now focuses on investing in real estate through foreclosure sales. On January 22, 1997, Rocky Mountain filed its application for inclusion on the Nasdaq SmallCap Market. In April 1997, the NASD staff notified Rocky Mountain that its application for initial inclusion on the SmallCap Market had been denied. The staff advised that it would not consider as a Company asset a $1 million loan the Company obtained in close proximity to the filing of its application, and that without the proceeds of this loan the Company failed to satisfy the minimum requirement of $4 million in total assets in superseded NASD Marketplace Rule 4310(c)(2). The staff also stated that the Company had not satisfied the requirement for a minimum of 300 shareholders in superseded Rule 4310(c)(6). The staff discounted 218 shareholders from the base of 395 shareholders Rocky Mountain claimed, noting that these 218 shareholders had been shareholders in the original Company and became shareholders only as a direct result of the merger and had no apparent economic interest in the post-reorganized Company. The staff specified that over half of the 395 shareholders held less than 100 shares. In addition, the staff also advised it had not received documentation to support compliance with the $3 bid price requirement in superseded Rule 4310(c)(4) despite the staff's formal written request for the information dated March 11, 1997. Finally, the staff raised public interest concerns pursuant to NASD Marketplace Rules 4300 and 4330(a) [4] based on the facts that the Company retained no regular employees and that the Company's president and vice president spent only 10% and 25% of their time, respectively, on the Company's business. In May 1997, the Company requested a hearing before a Nasdaq Listing Qualifications Panel ("the Panel") and responded in writing to the staff's concerns. At the June 5, 1997 Panel hearing the Company also presented additional information. The Company's president informed the Panel that Rocky Mountain had been working for two years to meet the Nasdaq listing requirements. The Company's president further advised that Rocky Mountain's plan had been to try to meet the requirements "over a period of time," but that plan changed and the Company "rushed [the application] toward the end" when it learned that the inclusion requirements soon would change. Suggesting that the Company was "very close" to meeting all of the inclusion requirements, the Company's president expressed his hope that the Panel would exercise its discretionary authority and permit inclusion of the Company's shares in the Nasdaq SmallCap Market. With respect to the specific inclusion requirements at issue, the Company admitted at the hearing that it had obtained the $1 million loan, in part, to satisfy the total assets requirement, but stated that the Company also needed the loan for working capital. The Company advised that at the time of the NASD application the lending bank required the Company to seek bank approval before using $600,000 of the loan, but the bank raised the unrestricted portion to $600,000 by the time of the hearing. Rocky Mountain admitted, however, that the bank refused to release its restrictions on the remaining amount of the loan. In addressing the staff's concerns regarding the Company's shareholder base, Rocky Mountain advised in its written submission that it had failed to include another 65 shareholders whose 22,000 shares were being held in trust by another shareholder. While the Company stated during the hearing that "not very many" of its original shareholders had invested with the intent of owning the post-merger Company, Rocky Mountain advised in its written submission that the shareholders in fact had an economic interest in the new Company that had carried over from their investment in the original Company. [5] In response to a Panel member's question about the number of shareholders holding 100 or more shares, the Company informed the Panel that it had approximately 250 shareholders holding 100 or more shares and that it could increase the number of "round lot" shareholders through a stock split. In addressing the Panel's concern that there would not be an adequate market for the stock if the Company were listed, the Company admitted that the initial market would be "very, very small." Rocky Mountain's president also admitted that only about 18,000 of its approximately 718,000 shares were unrestricted free-trading shares. Rocky Mountain also indicated that its book value per share was $3.07 and submitted letters from individuals identifying themselves as, respectively, an assistant director of an investment banker and broker firm, a potential investor, and a market consultant, all stating that a $3 bid price for the Company's shares was reasonable. Rocky Mountain's president further informed the Panel that the Company had no regular employees because it contracted with independent firms and individuals to supply services in order to keep expenses at a minimum. The Company's president pointed out that this type of employee arrangement is not unique. Finally, Rocky Mountain's president noted that he had increased his involvement in the Company from 10% to 25% of his time and that the vice president had increased his involvement from 25% to 50%. In June 1997, the Panel issued its decision denying the Company's request for listing on the SmallCap Market. The Panel was of the opinion that Rocky Mountain's application for listing was premature. Specifically, the Panel noted that the Company's compliance with the total assets requirement was marginal, and that the most recent audited financial statements contained a going concern opinion. [6] The Panel also was not persuaded that the Company would satisfy the minimum bid requirement and expressed its opinion that acceptance of the current shareholder base, and the methods used to develop that base, would not be consistent with superseded NASD Marketplace Rule 4310(c)(6). Finally, the Panel recognized the staff's public interest concerns as to the Company's lack of employees. By letter dated June 23, 1997, Rocky Mountain requested that the Nasdaq Listing and Hearing Review Committee ("Review Committee") review the Panel's decision. In its supplemental submission filed July 30, 1997, the Company provided audited financial statements for the period ended June 30, 1997, reflecting a book value of $3.17 per share, no intangible assets, and eight-month earnings per share of $0.18. Rocky Mountain explained that, subsequent to the Panel's decision, it had been listed on the OTC Bulletin Board with a quoted bid price of $3.25/$3.50 per share as of July 30, 1997. The Company advised that, through a modified stock split, virtually all of its shareholders now held 100 or more shares. In October 1997, the Review Committee, in a written decision, concluded that the Panel's determination to deny inclusion of the Company's shares was supported by the facts as they existed at the time of that determination. The Review Committee noted that Rocky Mountain's supplemental information addressed some, but not all, of the Panel's concerns. The Review Committee determined that the Company could no longer rely on the superseded initial inclusion standards as the applicable 90-day period when the Company was eligible to trade under the old standards had ended. [7] The Review Committee accordingly dismissed Rocky Mountain's appeal. This appeal followed. III. Our review of this matter is governed by Section 19(f) of the Securities Exchange Act of 1934 ("Exchange Act"). [8] That provision directs us to dismiss an appeal if we determine that the specific grounds for the NASD's action exist in fact, that the action is in accordance with the NASD's rules, and that such rules are, and were applied in a manner, consistent with the purposes of the Exchange Act, unless we find that the NASD's action imposes an unnecessary or inappropriate burden on competition. Rocky Mountain challenges the NASD's determination that its application was premature and that the Company did not demonstrate compliance with the initial inclusion rules in place at the time of its application, specifically superseded Rules 4310(c)(2), 4310(c)(6), and 4310(c)(4). The Company contends that the NASD's action was not supported by the facts and was not in accordance with the NASD's applicable rules. We do not agree with Rocky Mountain's claims. We agree with the Review Committee that it would not be sufficient for the Company to demonstrate compliance with the superseded initial inclusion standards by means of information presented after the panel hearing. The 90-day period when Rocky Mountain permissibly could begin trading under the superseded rules ended on June 3, 1997. Thereafter, by operation of the revised rules, the Company was required to demonstrate compliance with the new standards, which Rocky Mountain does not contest that it did not meet. The NASD reasonably determined to consider facts presented to the Panel shortly after the close of the 90- day period -- the Panel hearing took place June 5, 1997, and the Panel's decision issued June 10, 1997. Our review here therefore focuses on whether the Panel's decision was supported by the facts presented to the Panel. Our review of the record leads us to conclude that, while Rocky Mountain made a good faith effort before the Panel to meet the superseded inclusion standards, the Company's application for its stock's inclusion in the Nasdaq SmallCap Market was, as the NASD determined, premature. Rocky Mountain simply came up short in its admitted rush to have its application considered under the superseded standards. We do not find, as Rocky Mountain urges, that the NASD's determination to deny inclusion of the Company's shares in the Nasdaq SmallCap Market was arbitrary or should be taken as any indication that Rocky Mountain is an unstable or "bad" company. Rather, the NASD reasonably determined that Rocky Mountain, during the period at issue, had too little capital and a paucity of freely-tradeable shares. While the Company desired to list its shares to aid in capital formation, the NASD was obligated to balance the Company's interests against the NASD's statutory obligations. We believe that the NASD acted reasonably here in denying inclusion of Rocky Mountain's shares. We agree with the Panel that Rocky Mountain failed to comply with the $4 million minimum assets requirement set forth in superseded Rule 4310(c)(2). As of April 30, 1997, Rocky Mountain's total assets, including the $1 million loan it obtained immediately prior to its application, amounted to $4,055,042. However, by Rocky Mountain's own admission, the lending bank restricted the Company's use of a significant portion of the loan (first $600,000, and later, $400,00) for real estate investments -- Rocky Mountain's essential business. Under the specific terms of superseded Rule 4310(c)(2), only unrestricted assets may be counted toward the $4 million minimum total asset requirement. [9] Discounting the restricted portion of the loan, we find that Rocky Mountain did not have the required $4 million of unrestricted total assets required by former Rule 4310(c)(2). [10] With regard to superseded Rule 4310(c)(6), which required "at least 300 holders' of an applicant's common stock, we do not find persuasive the Panel's concerns that many of the Company's shareholders initially were shareholders of the public shell that was the subject of the reverse merger. We further agree with Rocky Mountain that superseded Rule 4310(c)(6) did not specify that the required 300 shareholders had to be round lot holders (of 100 shares). Accordingly, we find that Rocky Mountain demonstrated its technical compliance with superseded Rule 4310(c)(6). However, despite this showing, we find reasonable the related concerns expressed by the Panel at the hearing regarding the Company's potential market and freely tradeable shares. We note that the requirement concerning the number of shareholders is not only an important listing criterion but is also a standard used in conjunction with other standards to ensure that a stock has the investor following and liquid market necessary for trading. [11] In response to the Panel's questions, the Company's president acknowledged that the market for Rocky Mountain's shares would be initially "very, very small," and that fewer than 20,000 of the Company's over 700,000 shares outstanding were freely tradeable. While Rocky Mountain, as a technical matter, complied with the shareholder requirement, it failed to demonstrate an adequate market for its shares, which is at the heart of this and other NASD inclusion requirements. Because Rocky Mountain was not publicly traded on any market when the Panel considered its application, the Company could not present the Panel with evidence of an existing bid price to establish satisfaction of the $3 minimum bid price requirement under superseded Rule 4310(c)(4). [12] The Company, rather, presented to the Panel independent evidence of its ability to satisfy the $3.00 minimum bid price by pointing to its book value and providing letters from an assistant director of an investment bank and broker firm, a potential investor, and a market consultant. [13] In other circumstances the NASD reasonably may consider such letters to be sufficient to demonstrate that a company can meet a minimum bid price. Here, however, the Company's book value was just pennies above the $3 minimum bid price. Moreover, the Company had only 18,000 freely tradeable shares, so that its initial market would be, as the Company's president recognized, "very, very small." Under these circumstances, we believe that the NASD reasonably did not rely on the Company's -- and its advisors' -- blanket assurances that a "$3.00 minimum bid price should not be a problem." Lastly, given the shortfalls in the Company's application, the NASD also acted within its discretion under Rules 4300 and 4330(a) in questioning the Company's viability without regular employees. IV. In light of the foregoing, and because we do not find that the NASD's action imposed an unnecessary or inappropriate burden on competition, [14] we have determined to dismiss Rocky Mountain's application. [15] An appropriate order will issue. [16] By the Commission (Chairman LEVITT and Commissioners JOHNSON, HUNT, CAREY and UNGER). Jonathan G. Katz Secretary **FOOTNOTES** [4]: Pursuant to NASD Marketplace Rule 4300, the NASD: may deny initial inclusion [in the Nasdaq SmallCap Market] or apply additional or more stringent criteria for the initial . . . inclusion of particular securities . . . based on any event, condition, or circumstance which exists or occurs that makes initial . . . inclusion of the securities in Nasdaq inadvisable or unwarranted in the opinion of [the NASD], even though the securities meet all enumerated criteria for initial . . . inclusion in [the Nasdaq SmallCap Market]. [5]: The Company quantified the shareholders' economic interest in the new Company at $500 each (contrasted with each investor's original $4,000 investment). [6]: A going concern opinion expresses substantial doubt about a company's ability to continue in existence for another year without additional capital or funding or other significant operational changes. [7]: The Review Committee also specified that Rocky Mountain did not comply with the revised initial inclusion criteria, specifically Rule 4310(c)(2) pertaining to net tangible assets, Rule 4310(c)(7), pertaining to public float, and Rule 4310(c)(4) pertaining to the minimum bid price. Rocky Mountain does not challenge this determination. [8]: 15 U.S.C. 78s(f). [9]: New Standards Proposing Release, 64 SEC Docket at 621. [10]: Because Rocky Mountain cannot demonstrate compliance with superseded Rule 4310(c)(2), we decline to reach Rocky Mountain's claim that nothing in the rules prohibits a company from obtaining a loan for the purpose of meeting the minimum assets requirement. [11]: Exchange Act Rel. No. 20902 (April 30, 1984), 30 SEC Docket 605, 608 (proposed changes to National Market System standards). [12]: As noted earlier, Rocky Mountain failed to address this matter in its initial application and offered assertedly supporting evidence -- the Company's book value -- only after the staff denied the application. Rocky Mountain advised the Panel that the Company had been working on obtaining evidence of a minimum bid price but had not been able to obtain its evidence in a timely fashion. [13]: Rocky Mountain now contends that it is listed on the OTC Bulletin Board and is quoted at $3.25/3.50 per share, which the Company holds out as ample indication that, had its shares been included on the Nasdaq SmallCap Market during the 90-day period, the Company would have met the $3 minimum bid price requirement. However, this information has no bearing on our analysis as we are considering only the information before the Panel at the time it made its decision. Further, market information appended to the NASD's brief, of which we take official notice, reflects that while on July 30, 1997, Rocky Mountain's shares were quoted on the OTC Bulletin Board with a bid price of $3.25, the bid price subsequently has declined, ending, as of March 6, 1998, at $1.125. From October 14, 1997, to January 5, 1998, ten trades of Rocky Mountain's shares were reported. [14]: In this regard, we note that the Company's shares presently trade on an alternative public market -- the OTC Bulletin Board. [15]:On October 27, 1998, the NASD sought to adduce additional evidence, the Company's Form 10-K for the fiscal year ended June 30, 1998. Given our decision in this matter, we have determined not to reach this issue. [16]:We have considered all of the contentions made by the parties. Their arguments are rejected or sustained to the extent that they are inconsistent or in accord with the views expressed in this opinion. UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Rel. No. 40648 / November 9, 1998 Admin. Proc. File No. 3-9494 In the Matter of the Application of ROCKY MOUNTAIN POWER COMPANY 1235 E. Arapahoe Road, T-ll, # 110 Englewood, Colorado 80112 For Review of Action Taken by the NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. ORDER DISMISSING REVIEW PROCEEDING On the basis of the Commission's opinion issued this day, it is ORDERED that the application for review filed by Rocky Mountain Power Company be, and hereby is, dismissed. By the Commission. Jonathan G. Katz Secretary