Company Name: Capitol Securities, Inc.
Public Availability Date: 10-02-1987
INQUIRY LETTERBarnes & Thornburg
1313 Merchants Bank Bldg.,
11 South Meridian St.
Indianapolis, IN 46204-3599
TELEPHONE (317) 638-1313
May 29, 1987 Office of Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549 Re: Capitol Securities, Inc.
Securities Act of 1933/Rule 147 Gentlemen: This firm represents Capitol Securities, Inc., a corporation organized and
existing under the laws of the State of Indiana (the "Company"). On behalf of
the Company, we respectfully request your concurrence with our view that the
Company is "doing business within" the State of Indiana within the meaning of
subsection (c)(2) of Rule 147 ("Rule 147") promulgated under Section 3(a)(11) of
the Securities Act of 1933, as amended (the "Act"). FACTS The Company was incorporated in November 1986 for the purpose of organizing or
acquiring, financing and operating life insurance subsidiaries. The Company has
not yet organized or acquired any life insurance or other subsidiary. To date,
the only activities of the Company have been directed toward its organization
and capitalization. The Company's only offices are located in Indianapolis,
Indiana. All of the Company's officers and employees are residents of and
perform their services exclusively within the State of Indiana. The fiscal year
of the Company is the calendar year. The Company is currently engaged in a private placement (the "Private
Placement") of its common stock pursuant to Rules 505 and 506 promulgated under
Sections 3(b) and 4(2), respectively, of the Act. By its terms, the Private
Placement will terminate on or before June 18, 1987. The Company intends to use
a portion of the proceeds from the Private Placement to acquire or organize a
life insurance subsidiary. The Company intends to commence a public offering (the "Public Offering") of its
common stock during the six months ending December 31, 1987. The Public Offering
will not be commenced until at least six months have elapsed after termination
of the Private Placement, in order to assure that the two offerings will not be
integrated under subsection (a) of Rule 502 and subsection (b) of Rule 147.
Offers, offers to sell, offers for sale and sales of shares of the Company's
common stock in the Public Offering will be made only to persons resident within
the State of Indiana, in accordance with subsection (d) of Rule 147. During the
Public Offering and for a period of nine months from the date of the last sale
in the Public Offering, all resales of shares of the Company's common stock sold
in the Public Offering, by any person, will be made only to persons resident
within the State of Indiana, in accordance with subsection (e) of Rule 147. The
Company will, in connection with all shares of its common stock sold in the
Public Offering, take all precautions against interstate offers and sales set
forth in subsection (f) of Rule 147. It is anticipated that substantially all of the gross revenues of the Company
for the six months ending June 30, 1987, will be derived exclusively from the
Company's investment of funds raised in the Private Placement. These funds will
be invested in short-term, money market securities. Physical possession of the
certificates or other documents representing the ownership of such securities
will be maintained in the State of Indiana. It is anticipated that substantially all of the assets of the Company at June
30, 1987, and throughout the term of the Public Offering, will be located in the
State of Indiana. The Company's assets will consist primarily of securities and
cash, physical possession of the certificates or other documents representing
the ownership of which will be maintained in Indiana. The Company's assets will
also include certain office equipment and supplies, all of which will be
physically located in Indiana. The Company intends to use and will use at least 80% of the net proceeds from
the Public Offering to (i) retire any debt it may have incurred in connection
with the purchase of a life insurance company or otherwise, (ii) acquire an
additional life insurance company or companies, which company or each of which
companies is, at the date of acquisition, licensed to do business in the State
of Indiana and derived at least 80% of its gross revenues, and those of its
subsidiaries on a consolidated basis, during the period specified in subsection
(c)(2)(i) of Rule 147 ending prior to the date of acquisition, from the
operation of a business within Indiana, and/or (iii) further capitalize the life
insurance subsidiary which it then owns, which capital will be deposited into
such subsidiary's accounts in Indiana and will be used by such subsidiary in
Indiana. The Company is currently negotiating the purchase of a controlling interest in
an insurance company incorporated under the laws of the State of Michigan (the
"Insurance Company"). The Insurance Company was originally organized in 1928 as
a savings or investment association, and was converted into a legal reserve life
insurance company in 1954. Its principal offices and substantially all of its
assets are located in Michigan. The Insurance Company is licensed to write
insurance in nine states, including the State of Indiana, and sells its
insurance products through independent agents not employed by the Insurance
Company. During the fiscal year ended December 31, 1986, more than 20% of the
Insurance Company's gross revenues were derived from sources outside of Indiana. If the Company purchases the Insurance Company, such purchase will be effected
during the six months ending December 31, 1987. While it is anticipated that a
portion of the proceeds from the Private Placement may be used to purchase the
Insurance Company, none of the proceeds from the Public Offering will be used to
purchase the Insurance Company. If the Company purchases the Insurance Company,
the Insurance Company will be redomiciled under Indiana law and its principal
offices will be moved from Michigan to Indiana promptly after such purchase. In
addition, the operations of the Insurance Company will be relocated from
Michigan to Indiana as soon as reasonably practicable after such purchase. From
the date of such relocation at least until completion of the Public Offering,
the business of the Company will be limited to managing the operations of the
Insurance Company and conducting its other affairs within Indiana, the business
of the Insurance Company will be limited to selling new insurance policies
primarily in Indiana and servicing its outstanding policies from its offices in
Indiana, any insurance policies issued by the Insurance Company outside of
Indiana will be sold only through independent agents not employed by the
Insurance Company, all officers and employees of the Company and the Insurance
Company will be residents of and perform their services within Indiana, no
offices of the company or the Insurance Company will be maintained outside
Indiana, all insurance, reinsurance, coinsurance and other contracts and
transactions of the Company and the Insurance Company, including the
underwriting of risks, will be entered into and performed in Indiana, all
insurance premium payments from the Insurance Company's policyholders will be
received by the Insurance Company in Indiana directly from such policyholders,
and all records of the Company and the Insurance Company will be maintained in
Indiana. After the Insurance Company has been redomiciled under Indiana law and
its principal offices have been moved to Indiana, and after the operations of
the Insurance Company have been relocated to Indiana, the Company may use a
portion of the proceeds from the Public Offering to retire any debt it may have
incurred in connection with the purchase of the Insurance Company. If the Company acquires the Insurance Company, the business activities of the
Company and the Insurance Company, after completion of the Public Offering, are
currently uncertain. While the Company and the Insurance Company may eventually
develop some interstate business, the Company intends to continue to conduct its
business and the business of the Insurance Company primarily within the State of
Indiana. ANALYSIS Section 3(a)(11) of the Act provides that the Act shall not apply to "XADa"XBDny
security which is a part of an issue offered and sold only to persons resident
within a single State or Territory, where the issuer of such security is a
person resident and doing business within or, if a corporation, incorporated by
and doing business within, such State or Territory." 15 U.S.C. §77c(a)(11)
(1982). Rule 147 offers a "safe harbor" under Section 3(a)(11) for offers and
sales which satisfy the terms and conditions of such rule. 17 C.F.R. §230.147(a)
(1986). The terms and conditions of Rule 147 include restrictions relating to
the residence and business of the issuer, the residence of offerees and
purchasers, and the residence of purchasers in any resale transactions. 17
C.F.R. §230.147(c),(d),(e),(f) (1986). With respect to the business of the
issuer, subsection (c)(2) of Rule 147 provides: The issuer of the securities shall at the time of any offers and the sales be a
person resident and doing business within the state or territory in which all of
the offers, offers to sell, offers for sale and sales are made. * * * (2) The issuer shall be deemed to be doing business within a state or territory
if: (i) The issuer derived at least 80% of its gross revenues and those of its
subsidiaries on a consolidated basis (A) For its most recent fiscal year, if the first offer of any part of the issue
is made during the first six months of the issuer's current fiscal year; or (B) For the first six months of its current fiscal year or during the twelve
month fiscal period ending with such six month period, if the first offer of any
part of the issue is made during the last six months of the issuer's current
fiscal year from the operation of a business or of real property located in or from the
rendering of services within such state or territory; provided, however, that
this provision does not apply to any issuer which has not had gross revenues in
excess of $5,000 from the sale of products or services or other conduct of its
business for its most recent twelve month fiscal period; (ii) The issuer had at the end of its most recent semi-annual fiscal period
prior to the first offer of any part of the issue, at least 80 percent of its
assets and those of its subsidiaries on a consolidated basis located within such
state or territory; (iii) The issuer intends to use and uses at least 80% of the net proceeds to the
issuer from sales made pursuant to this rule in connection with the operation of
a business or of real property, the purchaser of real property located in, or
the rendering of services within such state or territory; and (iv) The principal office of the issuer is located within such state or
territory. 17 C.F.R. §230.147(c)(2) (1986). Based upon the facts set forth above, it is our
view that the Company will, at the time of any offers and sales in the Public
Offering, be "doing business within" the State of Indiana within the meaning of
subsection (c)(2) of Rule 147, for the following reasons. First, the gross revenues requirement of subsection (c)(2)(i) of Rule 147 is
inapplicable to the Company, because the Company will not have had gross
revenues in excess of $5,000 from the conduct of its business for its most
recent twelve month fiscal period. 17 C.F.R. §230.147(c)(2)(i) (1986). It is
anticipated that substantially all of the Company's gross revenues for such
period will be derived exclusively from its investment of funds raised in the
Private Placement. These funds will be invested in short-term, money market
securities. The business of the Company is organizing or acquiring, financing
and operating life insurance subsidiaries, not managing a portfolio of
investment securities. Therefore, the Company will not have had gross revenues
in excess of $5,000 from the conduct of its business for its most recent twelve
month fiscal period. Even if the Company's gross revenues from its investment of funds raised in the
Private Placement are deemed to be derived from the conduct of its business, the
Company will have derived at least 80% of its gross revenues and those of its
subsidiaries on a consolidated basis for the six months ending June 30, 1987,
from the operation of a business within the State of Indiana, as required by
subsection (c)(2)(i)(B) of Rule 147. 17 C.F.R. §230.147 (c)(2)(i)(B) (1986).
Physical possession of the certificates or other documents representing the
ownership of its investments will be maintained in Indiana. Therefore, any
revenues derived from such investments will be derived within the State of
Indiana. If the Corporation purchases the Insurance Company, such purchase will not be
effected until the second half of 1987. Therefore, the Company's gross revenues
for the six months ending June 30, 1987, on a consolidated basis, will not
include any of the Insurance Company's revenues. Moreover, at least until
completion of the Public Offering, the Company's gross revenues, and any of the
Insurance Company's revenues included in the Company's gross revenues, on a
consolidated basis, will be derived from the operation of a business within
Indiana. As described above, if the Company purchases the Insurance Company, the
Insurance Company will be redomiciled under Indiana law and its principal
offices will be moved from Michigan to Indiana promptly after such purchase. In
addition, the operations of the Insurance Company will be relocated from
Michigan to Indiana as soon as reasonably practicable after such purchase. From
the date of such relocation at least until completion of the Public Offering,
the business of the Company will be limited to managing the operations of the
Insurance Company and conducting its other affairs within Indiana, the business
of the Insurance Company will be limited to selling new insurance policies
primarily in Indiana and servicing its outstanding policies from its offices in
Indiana, any insurance policies issued by the Insurance Company outside of
Indiana will be sold only through independent agents not employed by the
Insurance Company, all officers and employees of the Company and the Insurance
Company will be residents of and perform their services within Indiana, no
offices of the Company or the Insurance Company will be maintained outside
Indiana, all insurance, reinsurance, coinsurance and other contracts and
transactions of the Company and the Insurance Company will be entered into and
performed in Indiana, all insurance premium payments from the Insurance
Company's such policyholders will be received by the Insurance Company in
Indiana directly from such policyholders, and all records of the Company and the
Insurance Company will be maintained in Indiana. The staff of the Division of
Corporation Finance has repeatedly emphasized that, for purposes of subsection
(c)(2)(i) of Rule 147, the location of an issuer's income-producing activities,
not the location of the sources from which its revenues originate, determines
whether the issuer is doing business within a particular state. See SEC Rel. No.
33-5450 (Jan. 7, 1974) (Example 4); Peter Powell Associates, SEC No-Action
Letter (Jan. 19, 1984); Interstate Financial Services, SEC No-Action Letter
(Sept. 14, 1981); Eastern Leasing Corporation, SEC No-Action Letter (Apr. 20,
1979); Southland Capital Investors, Inc., SEC No-Action Letter (Mar. 18, 1977);
Provident Credit Corporation, SEC No-Action Letter (Oct. 6, 1975). Cf.
Interstate Securities Corporation, SEC No-Action Letter (Oct. 15, 1982); Prepaid
Legal Services, Inc., SEC No-Action Letter (May 17, 1976). Therefore, the fact
that more than 20% of the Insurance Company's gross revenues may originate from
sources outside Indiana should not vitiate the intrastate character of the
Company's business. Second, the Company will have had, at June 30, 1987, and throughout the term of
the Public Offering, at least 80% of its assets and those of its subsidiaries on
a consolidated basis located within the State of Indiana, as required by
subsection (c)(2)(ii) of Rule 147. 17 C.F.R. §230.147(c)(2)(ii) (1986). The
Company's assets will consist primarily of securities and cash, physical
possession of the certificates or other documents representing ownership of
which will be maintained in Indiana. The Company's assets will also include
certain office equipment and supplies, all of which will be physically located
in Indiana. Third, the Company intends to use and will use at least 80% of the net proceeds
to the Company from the Public Offering in connection with the operation of a
business within the State of Indiana, as required by subsection (c)(2)(iii) of
Rule 147. 17 C.F.R. §230.147(c)(2)(iii) (1986). The Company intends to use and
will use at least 80% of the net proceeds from the Public Offering to (i) retire
any debt it may have incurred in connection with the purchase of the Insurance
Company or otherwise, (ii) acquire an additional life insurance company or
companies, which company or each of which companies is, at the date of
acquisition, licensed to do business in Indiana and derived at least 80% of its
gross revenues, and those of its subsidiaries on a consolidated basis, during
the period specified in subsection (c)(2)(i) of Rule 147 ending prior to the
date of the acquisition, from the operation of a business within Indiana, and/or
(iii) further capitalize the life insurance subsidiary which it then owns, which
capital will be deposited into such subsidiary's accounts in Indiana and will be
used by such subsidiary in Indiana. Fourth, the principal office of the Company will be located within the State of
Indiana, as required by subsection (c)(2)(iv) of Rule 147. 17 C.F.R.
§230.147(c)(2)(iv) (1986). The Company's only office is currently located, and
throughout the term of the Public Offering will continue to be located, in
Indianapolis, Indiana. REQUEST On the basis of the foregoing, we hereby respectfully request your concurrence
with our view that the Company is "doing business within" the State of Indiana
within the meaning of subsection (c)(2) of Rule 147. Negotiations for the
purchase of the Insurance Company and preparations for the Public Offering are
proceeding rapidly. Therefore, a prompt response to our request will be greatly
appreciated. Seven copies of this letter are enclosed for your convenience. If you have any
questions or comments, please call the undersigned at (317) 231-7257. Sincerely, Neal W. Steinbart NWS:cjs cc: Catherine L. Bridge, Esquire
Mr. Ronald D. Hunter VIA FEDERAL EXPRESS STAFF REPLY LETTERSeptember 2, 1987 RESPONSE OF THE OFFICE OF CHIEF COUNSEL
DIVISION OF CORPORATION FINANCE Re: Capitol Securities, Inc. ("Company")
Incoming letter dated May 29, 1987 On the basis of the facts presented, it is the Division's view that the Company
will not be doing business within the State of Indiana within the meaning of
Rule 147(c)(2) promulgated under Section 3(a)(11) of the Securities Act of 1933,
as amended. In reaching this position, we note that more than 20% of the
Company's consolidated revenues may come from insurance premiums on policies
sold outside the State of Indiana and that more than 20% of the proceeds to be
received from the offering may be used in connection with services provided
outside the State of Indiana. Because this position is based on the representations made to the Division in
your letter, it should be noted that any different facts or conditions may
require a different conclusion. Sincerely, Abigail Arms
Attorney Adviser
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