Company Name: Precision Optics Corp, Inc.
Public Availability Date: Jan. 14, 1993

INQUIRY LETTER

Ropes & Gray

One International Place

Boston, Massachusetts 02110-2624

(617) 951-7000

December 29, 1992

Securities and Exchange Commission

Office of the Chief Counsel

Division of Corporation Finance

450 Fifth Street, North West

Washington, DC 20549

Attention: Martin Dunn

Re: Precision Optics Corporation, Inc.

Dear Sir:

On behalf of Precision Optics Corporation, Inc. (the "Company"), we respectfully request the Staffs concurrence in our interpretation of Rule 144, promulgated pursuant to the Securities Act of 1933, as amended (the "1933 Act") with respect to the sale of securities acquired by an underwriter as compensation. Specifically, we request your concurrence that under the circumstances described below, Rule 144 is available for the sale of unregistered securities acquired by an underwriter as compensation for services rendered in connection with both a private placement offering and a registered public offering, assuming the holding period of the securities and other requirements of Rule 144 are met. An abbreviated explanation of the transactions at issue is included here for your information.

BACKGROUND

On August 21, 1990, the Company completed a best efforts, private placement offering of 500,000 shares of its common stock, $0.01 par value (the "Common Stock"), at a purchase price of $0.50 per share. As partial compensation to the selling agent, Van Clemens & Co. Incorporated (the "Selling Agent"), the Company issued common stock purchase warrants for the purchase of 120,000 shares of Common Stock at a purchase price of $1.50 per share (the "Private Placement Warrants") to designated officers of the Selling Agent, Thomas Vanyo ("Vanyo") and Scott Long ("Long"). Vanyo and Long purchased such warrants for an aggregate purchase price of $50.00, which they paid in cash on August 21, 1990. The Private Placement Warrants became exercisable on February 21, 1992, at the original exercise price of $1.50 per share, and expire on August 21, 1995.

On November 20, 1990, the Company completed a best efforts, initial public offering of 1,000,000 shares of Common Stock, at a public offering price of $1.25 per share. As partial compensation to the Selling Agent, the Company issued common stock purchase warrants for the purchase of 100,000 shares of Common Stock at a purchase price of $1.50 per share (the "IPO Warrants," and, together with the Private Placement Warrants, the "Warrants") to the Selling Agents designees, who were again Vanyo and Long. Vanyo and Long purchased the IPO Warrants for an aggregate purchase price of $60.00, which they paid in cash on November 20, 1990. The IPO Warrants become exercisable on November 20, 1991, at the original exercise price of $1.50 per share, and expire on October 23, 1995.

The Warrants were issued in transactions exempt from registration under the 1933 Act. We have been advised by the Company that Vanyo and Long are not "affiliates" of the Company within the meaning of the 1933 Act and Rule 144.

Based on previous staff interpretations, we are of the view that, since the Private Placement Warrants were acquired by the underwriter as compensation in a transaction not involving a public offering, Rule 144 should be available for the sale of shares of common stock underlying such warrants assuming the holding period of the securities and other requirements of Rule 144 have been met. With regard to the sale of shares of common stock underlying the IPO Warrants, however, we understand that the Staff has indicated in the past that Rule 144 is not available, citing Question 10 of Securities Act Release No. 336099 (respectively, "Question 10" and "Release 6099") which states that Rule 144 is not available for the sale of securities acquired by an underwriter as compensation for services rendered in connection with a registered public offering.

For the reasons set out more fully below, we respectfully request that the Staff reexamine its interpretation of Rule 144 as expressed in Question 10. Further, we request that the Staff concur that Rule 144 is available for the sale of the unregistered shares of common stock underlying both the Private Placement Warrants and the IPO Warrants assuming the holding period of the securities and other requirements of Rule 144 have been met.

DISCUSSION

The interpretation of Rule 144 expressed in Question 10 of Release 6099 replaced an earlier interpretation contained in Securities Act Release 5306 ("Release 5306"). The earlier interpretation of Rule 144 stated that the Rule was not available when an underwriter acquired securities in connection with a registered public offering because, by definition, the securities were not "restricted securities." See Division of Corporate Finance Interpretation of Rule 144, Securities Act Release No. 5306, Fed. Sec. L. Rep. (CCH) "XD0 2705F (Sept. 26, 1972) (superseded in 1979 by Release No. 6099). The Division stressed that Guide 10 of the Guides for the Preparation and Filing of Registration Statements required registration of warrants as well as stock which was issued or sold to an underwriter in connection with a public offering notwithstanding a representation that the securities were acquired for investment purposes only.

Guide 10 stated that transferable warrants, and the stock to be issued upon the exercise of those warrants, acquired by an underwriter in connection with a registered public offering were to be considered a part of the offering, and must be registered notwithstanding the fact that the warrants were acquired for investment and not with a view toward distribution. Nontransferable warrants were not required to be registered, but, the underlying stock had to be registered along with the securities to be offered to the public. See Guides for Preparation and Filing of Registration Statements, Securities Act Release No. 4936, 33 Fed. Reg. 18,617, at 18,619 (1968) (rescinded Mar. 3, 1983). As a result, any type of security received by an underwriter as compensation had to be registered to comply with Guide 10.

Question 10 of Release 6099 again explains that securities received by an underwriter as compensation cannot be considered "restricted securities" because they were not acquired in a transaction or chain of transactions not involving any public offering. Footnote 8 to Question 10 ("Footnote 8"), however, explains that enforcement action will not be recommended if an underwriter sells the securities pursuant to the provisions of Rule 144 (except for filing a Form 144) if (1) the securities were originally registered as part of the public offering, and (2) at least two years have elapsed from the date of the last sale of securities under the registered public offering. See Resale of Restricted and Other Securities, Securities Act Release No. 6099, Fed. Sec. L. Rep. (CCH) "XD0 2705H (Aug. 2, 1979). Footnote 8 appears to incorporate the registration requirements of Guide 10 into the Rule 144 exception that the Division has created for underwriters.

After the adoption of Release 6099 in 1979, the Division consistently required the registration of shares received as underwriter compensation. In 1981 the Division denied a no action request made by an underwriter who had failed to include the shares underlying a warrant as a part of the registration statement. See Dicomed Corporation, SEC No Action Letter "XADLEXIS 4086"XBD (Sept. 3, 1981). The underwriters no action request explicitly mentioned their failure to comply with Guide 10, and the Divisions response noted that the shares were not registered as required. Id.

In 1982 the Commission rescinded Guide 10. See Recision of Guides and Redesignation of Industry Guides, Securities Act Release No. 6384, Fed. Sec. L. Rep. (CCH) "XD0 3760 (Mar. 3, 1982). When this recision was proposed the Commission stated that registration of securities issued to underwriters would no longer be required in all cases. See Proposed Revision of Regulation S-K and Guides for the Preparation and Filing of Registration Statements and Reports, Securities Act Release No. 6276, 21 SEC Docket 1,052, at 1,081 (Jan. 6, 1981). Furthermore, the recision proposal stated that if Guide 10s mandatory registration requirement was eliminated, "the staff would be inclined not to apply "XADthe registration requirement of Footnote 8"XBD as a condition to use of Rule 144 by underwriters with respect to sale of securities obtained in connection with a public offering." Id. n. 100. Guide 10s mandatory registration requirement was eliminated when Guide 10 was rescinded on March 3, 1982. Nevertheless, the Division appeared to continue to require the registration of securities received as underwriters compensation as a basis for the subsequent availability of Rule 144 for their resale. See e.g. The Canterbury Press, Inc., SEC No Action Letter "XADLexis 1469"XBD (October 28, 1988).

The registration requirement of Footnote 8 of Release 6099 should no longer be deemed applicable because underwriters are no longer required by Guide 10 to register securities simply because they are acquired as compensation for services relating to a public offering. Since the elimination of Guide 10, there appears to be no policy basis under Rule 144 for treating unregistered securities received as underwriters compensation differently from registered securities. Further, the underlying purposes of Rule 144 would seem to be equally satisfied regardless of whether the shares were acquired as compensation for a private placement or a public offering or were initially registered or unregistered.

Rule 144 was designed as a safe harbor for limited public sales of privately placed securities for which adequate public information is available after specified holding period requirements have been met. See Preliminary Note to Rule 144, Fed. Sec. L. Rep. (CCH) "XD0 5718. The Company fully disclosed the IPO Warrant transaction in its November 1990 prospectus as compensation paid to the Selling Agent. There would be no material difference between the prospectus as it now appears and the prospectus as it would have appeared had the shares underlying the warrants been registered.

In light of the foregoing, we respectfully request that you concur that Rule 144 is available for a sale of the unregistered shares of common stock underlying both the Private Placement Warrants and the IPO Warrants assuming that the holding period for the securities and all other requirements of Rule 144 are met.

Eight additional copies of this request are enclosed. We would appreciate your acknowledging receipt by stamping one such copy and returning it in the enclosed self-addressed, stamped envelope. Please do not hesitate to contact the undersigned at (617) 951-7434 or Jennifer Toolin McAuliffe of this office at (617) 951-7305.

Sincerely,

Edward A. Benjamin

JXMLTSEC.PO

STAFF REPLY LETTER

January 14, 1993

RESPONSE OF THE OFFICE OF CHIEF COUNSEL

DIVISION OF CORPORATION FINANCE

Re: Precision Optics Corporation, Inc. (the "Company")

Incoming letter dated December 29, 1992

Your letter raises interpretive issues regarding the availability of Rule 144 to securities received by an underwriter as compensation in registered public offerings and private placements. The Divisions responses to these issues are as follows:

1. Pursuant to the terms of a written underwriting agreement, a company may distribute its warrants and underlying common stock to an underwriter as underwriting compensation ("Compensation Securities") in connection with either a registered public offering or a private placement offering under Section 4(2) of the Securities Act of 1933.!¹ Where, in either such offering, an underwriter acquires the Compensation Securities from the issuer in a transaction not involving a public offering, such Compensation Securities would be restricted securities within the meaning of Rule 144(a)(3). Therefore, Rule 144 would be available for resales of such Compensation Securities, provided all the conditions of the rule are satisfied.

2. Alternatively, the underwriter may receive the Compensation Securities in a transaction covered by a Securities Act registration statement. While these Compensation Securities are not restricted securities within the meaning of Rule 144(a)(3), the Division has traditionally taken the position that such Compensation Securities may be sold pursuant to Rule 144 provided all the conditions of that rule (other than the filing of a Form 144) are satisfied.!² This position is premised upon at least two years having elapsed from the date of the last sale of the public offering.

3. The holding period of securities underlying warrants may be "tacked" to that of the exercised warrants for purposes of satisfying the holding period provisions of Rule 144(d)(3)(ii), provided that the underlying securities are received in a "cashless exercise" of the warrants in which only those warrants are exchanged for the underlying securities, with no other form of consideration involved.

Because these positions are based upon the representations made to the Division in your letter, it should be noted that any different facts or conditions might require a different conclusion.

Sincerely,

Martin P. Dunn

Special Counsel

!¹It is noted that securities received as compensation in connection with a public offering, whether or not those Compensation Securities are registered as being part of that public offering, would be described in the registration statement in accordance with Item 508(e) of Regulation S-K.

!²See Securities Act Release No. 33-6099, Question 10, note 8 (August 2, 1979).