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U.S. Securities and Exchange Commission

SEC Approves Series of Measures in Ongoing Fight Against Microcap Fraud



Washington, D.C., February 19, 1999 – In its continuing fight against microcap stock fraud, the Securities and Exchange Commission today approved a series of regulatory measures that will provide additional investor protections while fostering the capital formation process. The Commission also issued a new investor education brochure that offers tips on how to detect and avoid microcap fraud.

Taken individually, these targeted measures will increase the amount of information available to brokers and investors, close avenues that allow "pump and dump" schemes, and reaffirm the important role that investors play in protecting themselves.

Chairman Arthur Levitt said, "As more and more first time investors enter the markets and the Internet plays a greater role in people's investment decisions, the Commission continues to be vigilant in the fight against microcap fraud. Today's regulatory measures will take a bite out of microcap fraud, but investors must be a part of the solution by doing their homework, asking the hard questions, and being skeptical, especially of get-rich- quick offers they see on the Internet and elsewhere."

In February of 1998 the Commission began a comprehensive and coordinated effort to fight microcap fraud. This four-pronged effort, which includes enforcement, inspections, education and regulation, has been quite successful, yielding dozens of enforcement actions and better educated investors.

The five actions taken today by the Commission:

  • Rule 504 – Adopted amendments to Rule 504 of Regulation D that will deter microcap fraud while preserving the ability of legitimate small businesses to raise capital. Rule 504 is the limited offering exemption designed to aid small businesses raise seed capital;

  • Form S-8 – Adopted amendments to Form S-8 that will deter abuse by issuers who have shown the greatest inclination to abuse the form in the past, as well as other amendments to facilitate other intra-family transfers of securities. Also proposed additional amendments to further deter abuse. Form S-8 is a short form used to register the offer and sale of securities to an issuer's employees;

  • Rule 15c2-11 – Re-proposed amendments to Rule 15c2-11 to deter fraud in the over-the-counter market by increasing the amount of information available to brokers and investors. This rule governs the publication of quotations for securities in a medium other than a national securities exchange or the Nasdaq, such as the Bulletin Board and Pink Sheets;

  • Rule 701 – Adopted amendments to Rule 701 to make the rule more useful and eliminate unnecessary restrictions, while preserving the protections to investors. Rule 701 allows private companies to distribute securities to their employees without filing a registration statement;

  • Investor Brochure – The Commission also released a new investor education brochure called "Microcap Stock: A Guide for Investors." The brochure, available on the Commission's website at www.sec.gov, is a primer on the world of microcap stocks and offers a variety of tips on how to detect and avoid microcap fraud. The brochure is also available in a printed booklet; to order, call (800) SEC-0330.

Nancy Smith, Director of the SEC's Office of Investor Education and Assistance, said, "While the Commission is doing all it can to detect and punish microcap scam artists, at the heart of investor protection is an educated investor. Our new booklet, `Microcap Stock: A Guide for Investors' is a helpful `how to' kit on understanding the microcap market, investing wisely and avoiding scams. It's a must-read for all microcap investors."

For more information about the SEC's four-pronged response to microcap fraud, visit the SEC's Microcap Fraud Information Center at http://www.sec.gov/news/extra/microcap.htm.

View the Chairman's Statement at today's open meeting.