Subject: S7-2-98  S-8 proposals
Date:    4/27/98 7:14 PM
     
     
     
 Ladies and Gentlemen, 
     
  On February 17, 1998 the Commission published a series of proposed
amendments to Form S-8 and related rules and solicited public comments 
thereon.  Release No. 33-7506. While the Executive Summary stated that " the 
first set of proposals is intended to eliminate the abuse of Form S-8 
purportedly to register offerings to consultants and advisors who then act 
as statutory underwriters to sell the securities to the general public, and 
to register securities issued as   compensation to consultants who promote 
the registrant's securities"

    Capston Incorporated is gravely concerned that adoption of the
proposals in their present form would significantly impair the ability of 
small issuers to use equity based compensation in a wide variety of 
situations, and place small issuers at a distinct disadvantage to larger 
issuers. 
     
    A careful review of Release No. 33-7506 and the related Release 33-7511
make it abundantly clear that the Staff has two overriding concerns that 
arise in the context of both Form S-8 and Rule 701. The first of these 
concerns involves the deliberate abuse of Form S-8 and Rule 701 in thinly 
disguised capital raising transactions where bargain priced options are 
issued to a "consultant" who then exercises the options for cash and 
immediately resells the underlying securities to the public. The second 
concern involves the issuance of securities to "consultants" whose primary 
function to promote the issuer's securities. 
     
    In the first case, it is clear that a purported "consultants" may in
fact be acting in the capacity of a statutory underwriter when he purchases 
securities from the issuer for cash and then resells the securities to the 
public without the disclosure and other investor protections afforded by a 
full registration statement under the Act. Capston fully supports the 
Commission's position that Rule 701 and Form S-8 should not be available 
for this type of transaction. Nevertheless, Capston believes that the 
Commission already has ample authority under the Act to question and 
commence enforcement action with respect to any transaction that, although 
in technical compliance with the rules, is part of a plan or scheme to 
evade the registration provisions of the Act. Moreover, if the Commission 
is truly concerned that a purported "consultant" may in fact be acting as a 
statutory underwriter, would not the purposes of the Act be better served 
by requiring (i) a brief identification of the recipient of the registered 
shares, (ii) a brief description of the services rendered and an estimate 
of the fair market value of such services, and (iii) inclusion of the 
underlying consulting agreement as an Exhibit to the Registration 
Statement? This alternative approach would have the dual benefit of 
permitting reasonable consulting arrangements while highlighting 
unreasonable arrangements, or arrangements that might have an abusive 
intent. It would also avoid the problems inherent in creating a regulatory 
"prior restraint" on an entire spectrum of transactions that ranges from 
the purely legitimate to the patently abusive. 
     
    In the second instance, it appears that the Commission is reluctant to
accord special status to securities that are issued to persons whose 
principal function is to influence the public market for an issuer's 
securities, as opposed to providing services that are not directly related 
to the securities markets. As presently configured, the rules prohibit the 
use of Form S-8 to compensate consultants for services rendered in a 
capital raising transaction. The justification is abundantly clear because 
without these limitations, a broker dealer acting as a "consultant" could 
theoretically arrange a private capital transaction and be paid for such 
services with registered stock. As the consultant rules expand beyond the 
capital raising transaction itself, however, the potential issues become 
much more problematic. In the case of investor relations services, Form S-8 
would be readily available to large issuers with in-house investor 
relations departments but unavailable to small issuers who traditionally 
out source such services. Similarly, in the case of M&A services, Form S-8 
will be available for equity based compensation in connection with 
acquisition transactions effected for cash but unavailable for acquisition 
transactions that include an equity component. More troubling still is the 
case of attorneys and other persons who render ordinary and necessary 
professional services that are one or two steps removed from the actual 
capital raising process. At what point does the Commission intend to make 
Form S-8 unavailable. 
     
    Notwithstanding the potential for abuse, Capston believes the current
test of "services rendered in connection with a capital raising 
transaction" at least provides a "bright-line" standard to help issuers and 
their counsel determine what services can be compensated with shares 
registered on Form S-8. Accordingly, Capston believes that the needs of the 
market and the needs of the Commission would be better served by one or 
more interpretive releases, than by prohibiting entire classes of 
transactions without regard to the facts and circumstances. 
     
Sincerely 
Sally A. Fonner 
Capston