Company Name:
European Assn. of Securities Dealers Automated Quotation N.V./S.A. ("EASDAQ")
Public Availability Date: July 27, 1999 

[LETTER OF INQUIRY]

July 22, 1999

Mr. Paul M. Dudek
Chief
Office of International Corporate Finance
United States Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

UNITED STATES OF AMERICA

Re: Regulation S--Equity Securities of Domestic Companies Traded on The European Association of Securities Dealers Automated Quotation (EASDAQ)

Dear Mr. Dudek:

The European Association of Securities Dealers Automated Quotation N.V./S.A. ("EASDAQ") was incorporated in 1995 as a limited liability company under Belgian law as the entity that would operate the first truly pan-European regulated securities market. It is a wholly screen-based market, operating without a trading floor. The EASDAQ market began operations in November 1996, and, on January 22, 1998, it was designated by the Securities and Exchange Commission (the "Commission") as a "designated offshore securities market" for purposes of Regulation S ("Regulation S") under the Securities Act of 1993, as amended (the "Securities Act").

Recently, certain U.S. companies have expressed strong interest in listing ¹ their securities on EASDAQ in connection with offerings made in reliance on the safe harbor provisions of Regulation S without simultaneous registration under the Securities Act (hereinafter "Regulation S Securities"). Because of the manner in which securities listed on EASDAQ are traded and settled, however, it is not possible for the offering, sale and resale of Regulation S Securities traded on EASDAQ to comply strictly with some of the requirements of Regulation S. This letter describes certain alternative arrangements that could be implemented in connection with offerings of EASDAQ-listed Regulation S Securities. EASDAQ believes that these arrangements meet the underlying investor protection concerns of Regulation S and provide reasonable procedures to prevent public distribution of Regulation S Securities in the United States.

Accordingly, EASDAQ respectfully requests confirmation that the Division of Corporation Finance will not recommend enforcement action to the Commission in connection with the registration requirements of the Securities Act if Regulation S Securities are offered, sold and traded on EASDAQ in accordance with the procedures and restrictions described in this letter.

ACCESS TO CAPITAL FOR CERTAIN U.S. ISSUERS THROUGH EASDAQ LISTING

EASDAQ believes that establishing a set of procedures under which U.S. issuers could offer and sell their EASDAQ-listed securities in reliance on Regulation S could have significant benefits for a particular class of U.S. companies--namely, smaller, privately-held, non-reporting, growth-oriented companies. Such companies may have difficulty competing for attention in the crowded U.S. securities markets, making it difficult to raise capital on advantageous terms through a U.S. public offering. At the same time, such companies face a potentially significant illiquidity discount in connection with any non-listed offering of their securities outside the United States.

Accordingly, certain U.S. companies are now expressing interest in carrying out EASDAQ-listed Regulation S offerings. They believe that EASDAQs limited size may give them greater visibility than they would have in a typical U.S. offering. They recognize that European institutional investors, the holders of the vast majority of the securities listed on EASDAQ, are showing a significant and increasing appetite for securities of U.S. growth companies, and that an EASDAQ listing can substantially enhance access to this investor base. Also, the liquidity promised by an EASDAQ listing can help lower their cost of capital relative to a non-listed offering in the European capital markets.

DESCRIPTION OF THE EASDAQ MARKET

EASDAQ is a Regulated Market

The creation of EASDAQ drew upon EU legislation for the harmonization and integration of European financial markets--including perhaps most importantly the Investment Services Directive (the "ISD") ² and the Second Banking Directive ³--and successful examples of screen-based securities markets elsewhere, in particular NASDAQ in the United States. EASDAQ is a "regulated market" under Belgian law. ⁴ "Regulated market" is a term of art under the ISD and the implementing legislation in Belgium. As it is defined in Article 1(13) of the ISD, the term includes markets for financial instruments that (i) have been designated as regulated markets by their home EU Member States, (ii) function on a regular basis, (iii) have rules approved by competent regulatory authorities (designated by an EU Member State in accordance with Article 22 of the ISD) governing the markets operations, access to the market and admission to trading, and (iv) require compliance with the recordkeeping and transparency requirements set forth in Articles 20 and 21 of the ISD.

Supervision of the EASDAQ Market

First-line regulatory and enforcement powers over the EASDAQ market are exercised by the EASDAQ Market Authority. The Market Authority is a "competent authority" within the meaning of the ISD, as implemented in the Belgian Law of April 6, 1995 on secondary markets, the legal status and supervision of investment firms, intermediaries and investment advisers (the "Belgian ISD Law"). The scope of its authority includes, among other matters, the admission, suspension or withdrawal of securities to or from trading, and the admission, suspension or revocation of membership privileges for EASDAQ members. The Market Authority is responsible for monitoring issuers compliance with reporting obligations and members compliance with conduct and trade reporting requirements. The Market Authority may request information from members, carry out investigations on members premises and request information from Belgian national or foreign financial markets supervisory authorities, and it may recommend criminal enforcement by the Belgian Public Prosecutors office. It has the power to impose administrative fines on EASDAQ members.

"Second-line" market supervision of the activities of the Market Authority and of certain decisions by the EASDAQ N.V./S.A. Board of Directors is exercised by the Belgian Banking and Finance Commission (the "BFC"), which also oversees Belgiums other securities markets. A final level of control is exercised by the Belgian Minister of Finance.

Requirements for Membership--U.S. Financial Institutions are Not Permitted to Participate in the EASDAQ Market

Membership in the EASDAQ market is required for institutions that wish to gain trading or market-making privileges. Members must be either investment firms qualifying for home state regulation under the ISD or credit institutions qualifying under corresponding provisions of the Second Banking Directive. U.S. firms are not permitted to participate in the EASDAQ market, either as brokers or as market-makers, and no EASDAQ trading screens may be placed in the United States.

Requirements for Admission to Trading

The Market Authority carefully scrutinizes applications for admission to trading for compliance with EASDAQs admission requirements. In general, these requirements are tailored to follow the NASDAQ model closely, and they apply equally to issuers from inside and outside the European Union.

A prospectus relating to each security must be approved by the EASDAQ Market Authority and by a competent authority pursuant to the EU Prospectus Directive. ⁵ EASDAQs Rule Book sets forth detailed prospectus requirements, which borrow extensively from the rules and regulations of the Commission. ⁶ The required financial statements may reflect International Accounting Standards, or, if the company intends to list or sell stock in the United States, U.S. GAAP may be used. The prospectus must be available in English. At least two qualified EASDAQ members must agree to act as market makers in the applicants securities.

EASDAQs periodic reporting requirements go well beyond the minimum standards established by EU law for exchange-listed companies. ⁷ EASDAQ requires, among other things: (1) an annual report containing audited consolidated financial statements filed within three months after the end of the financial year, and (2) unaudited quarterly reports filed within two months after the end of the relevant quarter. The EASDAQ Rule Book goes into considerable detail in explaining the minimum information that must be included in annual reports, including an MD&A. In addition to annual and quarterly reports, EASDAQ requires issuers to disclose promptly information that would be expected to be price sensitive or to affect the value of their securities or influence investors decisions.

Operation of the EASDAQ Market

Although EASDAQ is structured in many ways similar to NASDAQ, trading on EASDAQ is wholly independent of NASDAQ and all other securities markets.

EASDAQ is a screen-based market, with no trading floor. EASDAQ computer terminals currently operate via a connection to the TRAX network, the real-time cross-border quotation and trade reporting system used by members of the International Securities Market Association ("ISMA") for reporting Eurobond trades. The TRAX system has been modified under an arrangement with ISMA to allow for its use by EASDAQ for trade matching, confirmation and reporting.

Only EASDAQ member firms with trading or market-making privileges are permitted to purchase and sell securities directly on EASDAQ on their own behalf or on behalf of their customers. EASDAQ software offered by ISMA includes security display facilities which can be accessed by EASDAQ members for viewing quotes and published details of EASDAQ trades. Actual trading takes place via telephone, where members agree on trades with market makers on the basis of quoted prices. After an agreement has been reached, each party confirms the trade by entering it into TRAX. Entry of trades into TRAX requires, among other things, mandatory disclosure of the trade date and time and of the identity of the broker-dealer counterparty to the trade. Upon registration of an entry, TRAX automatically searches for the corresponding entry and then matches and confirms the trade. After matching, TRAX transfers the details of the trade for subsequent settlement and automatically makes the details of the trade available on-screen to all EASDAQ members.

Information on EASDAQ trading is available to the general public in real time on Reuters, Bloomberg, Telerate, TIJD Information Services and Telekurs.

EASDAQ Clearing And Settlement Service

Settlement of all trades on EASDAQ is effected through the EASDAQ Clearing and Settlement Service (the "ECSS"). The ECSS is an entirely paperless settlement system, similar to that operated by The Depository Trust Company. EASDAQ-listed securities, which are typically issued and held in global form, are deposited with a custodian for the ECSS. Such securities are cleared and settled by EASDAQ member-firms through book-entry clearance facilities provided by Morgan Guaranty Trust Company of New York, Brussels Office, as operator of the Euroclear System ("Euroclear") and Cedelbank S.A., a societe anonyme under Luxembourg law ("Cedelbank"). ⁸ Beneficial ownership of such securities by the customers for whom EASDAQ member firms are acting is shown only on the books and records of such member firms.

COMPLIANCE WITH AMENDED REGULATIONS

As a result of the manner in which securities are traded and settled on EASDAQ, strict compliance with certain aspects of Regulation S--specifically, the requirements of Rule 903(b)(3)(iii)(B), Rule 903(b)(3)(iv) and Rule 904(b)(1)(ii)--is not feasible in connection with the initial offering and secondary-market trading of EASDAQ-listed securities of U.S. issuers. The certifications, agreements and monitoring obligations could be met only by requiring EASDAQ securities to be held in definitive registered form, which is inconsistent with the operational rules of the ECSS. The clearing systems referred to above do not have facilities that allow participants to obtain transaction-by-transaction representations or certifications from purchasers. The purchaser representations required by Rules 903(b)(3)(iii)(B)(1) and (2) cannot be obtained in the context of a book-entry system. By the same token, the stop-transfer requirements of Rule 903(b)(3)(iii)(B)(4) cannot be complied with in the case of transfers of beneficial interests in a global security.

Moreover, EASDAQ has investigated the possibility of complying with the notification requirements contained in Rules 903(b)(3)(iv) and 904(b)(1)(ii) through language added to confirmations or placed on the computer screens employed in trading. EASDAQ has been informed by its members, however, that their computer systems are not configured in a way that would permit strict compliance with Rules 903(b)(3)(iv) and 904(b)(1)(ii): there is simply no field in which the required language could be placed. EASDAQ has also been informed that the programming changes that would be required to create a field for such language would be expensive, time-consuming and in conflict with important EU-wide priorities relating to the conversion to the euro and Year 2000 problems.

Accordingly, unless it is possible to implement alternative means of achieving the purposes underlying the provisions referred to above, U.S. issuers seeking to raise capital in the offshore public markets will be denied access to the potential advantages associated with EASDAQ-listed offerings.

PROPOSED ALTERNATIVE RESTRICTIONS AND PROCEDURES

As a basis for the relief requested by this letter, EASDAQ is proposing the following alternative restrictions and procedures for US non-reporting companies that are conducting initial public offerings offshore in connection with admission to trading on EASDAQ to satisfy the requirements of Rule 903(b)(3)(iii)(B), Rule 903(b)(3)(iv) and Rule 904(b)(1)(ii). Compliance with all other applicable requirements of Regulation S would be required in order to come within the safe harbor.

The Commission has indicated a general receptiveness to arrangements of the type EASDAQ is proposing. In response to the observation that, in its current form and as applied to U.S. domestic issuers, Regulation S may be inconsistent with offshore public offering practices and the requirements of foreign trading markets, the Commission has stated that it "believes that offering practices can be adopted to allow ... a public offering by domestic issuers" to proceed offshore in reliance on Regulation S. Sec. Act Release No. 7505, 63 FR 9632 (February 25, 1998) (the "1998 Adopting Release"). EASDAQ respectfully submits that the procedures and restrictions described below are precisely the kind of "offering practices" to which the Commission was referring: they are designed to put market participants on notice of the restrictions applicable to Regulation S Securities and to prevent "flowback" into the United States.

A. Deemed Representations.

The prospectus relating to an offering of a Regulation S Security will prominently disclose that all purchasers of the securities from a distribution participant will be deemed to have made specified representations (as to non-U.S., QIB or other permissible exempt status) and agreements (as to restrictions on resale and hedging) pursuant to Regulation S (and, where appropriate, Rule 144A).

B. Requirements Applicable to EASDAQ Members

In connection with the admission to trading of any Regulation S Security, EASDAQ will advise its members that, during the one-year distribution compliance period, no EASDAQ member may execute a transaction on EASDAQ in a Regulation S Security if such member has knowledge that the buyer is a U.S. person (as defined in Regulation S) or is acting for the account or benefit of a U.S. person. EASDAQ will also advise its members that they must make reasonable efforts to ascertain whether such a buyer is a U.S. person or is acting for the account or benefit of a U.S. person, and that they must implement measures designed to assure reasonable compliance with this requirement.

C. Legending Requirements

The 1998 Adopting Release contemplates the development of "measures like those required in Category 3" to prevent the abusive practices at which the 1998 Amendments to Regulation S were aimed. 1998 Adopting Release, 63 FR at 9636. The release specifically permits "[n]otices of the restrictions to investors on the confirmation or allotment telex, use of global securities held in a depository, and restrictions on trading in the United States through the use of restricted CUSIP numbers" as alternative sufficient to satisfy the legending requirements of Rule 903(b)(3)(iii)(B)(3). Id., 63 FR at 9636, n. 31.

1. Securities Held in Global Form.

Equity securities of domestic issuers issued pursuant to Regulation S will be held in global certificated, registered form directly or indirectly by a depository for the ECSS. Offshore purchasers will hold interests in the global security through direct or indirect participants in such facilities, including other offshore book-entry clearance facilities. The requirement that securities be held in global form will be subject to customary exceptions such as the unwillingness of the depository to continue in such capacity.

2. Restrictive Legends on Certificated Securities: Certifications.

Any certificated securities, including global securities, certificates into which global certificates may be subdivided, and any physical certificated securities issued to holders prior to the expiration of the distribution compliance period, will bear the restrictive legend required by Rule 903(b)(3)(iii)(B)(3). This condition will apply to the global certificate deposited directly or indirectly with the ECSS. Such certificated securities will also bear a restrictive legend to the extent required by Rule 144. In addition, any definitive securities issued during the distribution compliance period will satisfy all the requirements of Rule 903(b)(3)(iii)(B), including the legending and certification requirements.

3. Restricted CUSIP/ISIN Numbers.

Regulation S Securities will be identified in the records maintained by entities such as the CUSIP Bureau ("CUSIP") as restricted under the Securities Act. ⁹ CUSIP and other similar entities assign a number to each security that identifies the issuer and each outstanding security of that issuer. Each number has an associated security description, which, in the case of Regulation S Securities, will include an indication that such securities are subject to restrictions under the Securities Act. The security description associated with each CUSIP/ISIN number is also included in an electronic data field provided by Euroclear and Cedelbank to its participants. ¹⁰ Therefore, participants in book entry clearance facilities and others that trade the securities will be aware that transfers of the securities to purchasers in the United States are restricted and must qualify under an available exemption. In addition, in its Admission Agreements EASDAQ will require that statements or communications confirming or summarizing the terms of any new issuance of such securities by the issuer or managing underwriters to publishers of publicly available databases will include a statement that such securities have not been registered under the Securities Act and are subject to Regulation S. ¹¹

4. Identifier Indicating Restricted Status Added to Trading Symbol.

The letters (commonly known as the trading "symbol") that are used to identify particular securities on the EASDAQ trading screens and elsewhere will be modified during the distribution compliance period by adding a common identifier, such as "RS," at the end thereof. For example, a company whose trading symbol would be ABCD would be modified to ABCDRS during the distribution compliance period and would revert to ABCD once the distribution compliance period terminates.

a. Periodic Publication of Identifier

Beginning a reasonable period prior to the first listing of any Regulation S Security on the EASDAQ market and continually thereafter, EASDAQ will publish widely, e.g., in its periodic publications and on its Internet website, an explanation of the restricted stock identifier, identifying Regulation S Securities as having restricted status under the U.S. securities laws.

b. Inclusion of Identifier on Confirmation and Other Notices

During the one-year distribution compliance period, each sale of a Regulation S Security will be reflected by a confirmation that will include a notice that such security is subject to the restrictions of Regulation S. Such notice will be accomplished by including in the confirmation the restricted stock identifier discussed above.

In the context of discussing the Category 2 issuer safe harbor, Release No. 33-6863 specifically recognized that "screen notices [stating that the purchaser is subject to the same restrictions on offers and sales that apply to the distributor] may be given in summary form, provided all subscribers to the screen-based system are sent, prior to first use and periodically thereafter, a key that indicates what each summary notice represents and includes the full text of each notice." Sec. Act Release No. 6863 (April 24, 1990) at Section III.B.2.b.(1)(d). In footnote 129 to such release, the Commission recognized that the confirmation delivery requirements in the third issuer safe harbor category were the same, implying that screen notices might be employed in the context of Category 3.

D. Issuer Instructions to Registrar and Transfer Agent

The issuer of Regulation S Securities will be required to provide assurances that no securities bearing the legend required by Rule 903(b)(3)(iii)(B)(3) may be transferred by the issuers transfer agent without a favorable opinion of counsel or other assurance that the transfer is in full compliance with the Securities Act.

E. Issuer Notifications to Shareholders

The Admission Agreement between EASDAQ and an issuer of Regulation S Securities will require the issuer to provide to its securityholders notification of the Regulation S status of its securities in its annual report, its quarterly reports, its dividend notices and its notices of shareholder meetings.

CONCLUSION AND REQUEST FOR RELIEF

EASDAQ hereby respectfully requests that the Division of Corporation Finance confirm that it will not recommend enforcement action to the Commission in connection with the registration requirements of the Securities Act, if Regulation S Securities are offered, sold and traded on EASDAQ in accordance with the procedures and restrictions described in this letter.

If you have any questions or comments concerning this request, please contact the undersigned at Rue des Colonies 56, Box 15, B-1000 Brussels, Belgium, tel. 32-2-227-65-20 and fax 32-2-227-65-67, or Dana T. Ackerly II of Covington & Burling, EASDAQs U.S. counsel, at 1201 Pennsylvania Avenue, N.W., P.O. Box 7566, Washington, D.C. 20044-7566, tel. 202-662-5296 and fax 202-778-5296.

Sincerely yours,

Dirk P. Tirez

General Counsel

[STAFF REPLY LETTER]

July 27, 1999

RESPONSE OF THE OFFICE OF INTERNATIONAL CORPORATE FINANCE
DIVISION OF CORPORATION FINANCE

Re: Regulation S--Initial Public Offerings of U.S. Companies on The

European Association of Securities Dealers Automated Quotation N.V./S.A.

("EASDAQ")

Incoming letter dated July 22, 1999

Based on the facts presented, and noting that (1) U.S. firms are not permitted to participate in the EASDAQ market, either as brokers or as market-makers, and (2) no EASDAQ trading screens will be placed in the United States, the Division will not recommend enforcement action to the Commission if equity securities of non-reporting, U.S. companies are offered and sold in initial public offerings offshore pursuant to Regulation S in connection with a listing on EASDAQ ("Regulation S Securities") without implementation of the stop-transfer provisions and other procedures set forth under Rule 903(b)(3)(iii)(B), Rule 903(b)(3)(iv) and Rule 904(b)(1)(ii). In reaching this conclusion, the Division is relying on your opinion as counsel that the alternative restrictions and arrangements described in your letter provide reasonable procedures to prevent public distribution of the Regulation S Securities in the United States. The alternative arrangements include the following restrictions during the applicable distribution compliance period:

(1) the offering circular used in the offering of Regulation S Securities will disclose that all purchasers from a distributor in the offering will be deemed to have made representations regarding their non-U.S. status (or other exempt status, such as qualified institutional buyer status under the Rule 144A exemption from registration) and agreements regarding restrictions on resale and hedging under Regulation S (and, where appropriate, Rule 144A);

(2) no EASDAQ member may execute a transaction on EASDAQ in Regulation S Securities if that member knows that the purchaser is a U.S. person or is acting for the account or benefit of a U.S. person, and EASDAQ members must make reasonable efforts to ascertain whether a purchaser is a U.S. person or is acting for the account or benefit of a U.S. person, and implement measures designed to assure reasonable compliance with this requirement;

(3) any certificated securities, including global securities, certificates into which global certificates may be subdivided, and any physical, certificated securities issued to holders prior to the expiration of the distribution compliance period, will bear the restrictive legend required by Rule 903(b)(3)(iii)(B)(3). Thereafter these certificated securities will bear a restrictive legend to the extent consistent with Rule 144. Any definitive securities that are issued during the distribution compliance period (other than in a transaction in compliance with Rule 144A) must satisfy all of the requirements of Rule 903(b)(3)(iii)(B), including the legending and certification requirements;

(4) the Regulation S Securities will be identified in the records maintained by entities such as the CUSIP Bureau as restricted, as described in your letter, so that participants in book-entry clearance facilities and others that trade the securities will have notice that transfers of the securities to U.S. purchasers are restricted and must qualify under an appropriate exemption (absent registration);

(5) any information provided by the issuer or managing underwriters to publishers of publicly available databases about the terms of any new issuance of Regulation S Securities will include a statement that the securities have not been registered under the Securities Act and are subject to restrictions under Regulation S;

(6) the trading symbol that identifies particular securities on EASDAQ trading screens and elsewhere will be modified by adding a common identifier to indicate that the Regulation S Securities are restricted;

(7) beginning a reasonable period prior to the initial listing of any Regulation S Security on EASDAQ and continually thereafter, EASDAQ will publish widely an explanation of the restricted stock identifier;

(8) the confirmation sent to each purchaser of Regulation S Securities in either the initial offering or in the secondary market trading will include a notice that the securities are subject to the restrictions of Regulation S;

(9) the issuers of Regulation S Securities must provide assurances that no securities bearing the legend required by Rule 903(b)(3)(iii)(B)(3) may be transferred by the issuers transfer agent without a favorable opinion of counsel or other assurance that the transfer complies fully with the Securities Act; and

(10) the issuer of Regulation S Securities must provide to its securityholders notification of the Regulation S status of its securities in its annual reports, periodic interim reports, dividend notices and its notices of shareholder meetings.

Because these positions are based on the representations set forth in your letter, it should be noted that any different facts or conditions might require a different conclusion. Furthermore, this response represents the Divisions position as to enforcement action, and does not express any legal conclusions with respect to the specific questions presented.

Sincerely,

Felicia H. Kung

Special Counsel

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