Summary of Rule 504 Proposals

What is Rule 504?

     Rule 504 of Regulation D provides an exemption from
Securities Act registration when non-reporting issuers make
securities offerings that do not exceed an aggregate annual
amount of $1 million.

     As currently crafted, Rule 504:

  *    Allows for the sale to an unlimited number of persons;

  *    Permits general solicitation or advertising to market the
  securities; and

  *    Allows purchasers to receive securities that are not
  "restricted."  Purchasers may resell their securities without
  registration or other sales limits imposed on privately placed
  securities.

     These offerings are not reviewed by the Commission, but are
subject to the antifraud and other civil liability provisions of
the federal securities laws as well as the requirement to file a
Form D with the Commission 15 days after the first sale.  State
securities regulation plays an important role in the oversight of
these transactions.

What are today's proposals?

     Under today's proposal, all securities issued under Rule 504
would be "restricted securities" as the term is used in Rule 144.
As such, these securities could only be resold:

     (1) after the holding period imposed by Rule 144,
     (2) through registration, or
     (3) through another exemption (such as Regulation A), if
     available.

     Today's proposals attempt to strike a balance between the
need to combat microcap fraud and the needs of small businesses
to raise "seed capital" in an efficient manner.

Why are the proposed changes needed?

     The Commission is engaged in efforts to deter microcap
fraud.  Based on recent reports from the Commission's examination
and enforcement programs, it appears that the freely tradable
nature of securities issued in reliance upon Rule 504 may have
facilitated some later fraudulent secondary transactions in the
over-the-counter market for securities of microcap companies.