SEC Release 33-6339

Release No. 33-6339

ACTION: Proposed rulemaking.

SUMMARY: The Commission is publishing for comment a new regulation governing the offers and sales of certain securities without registration under the Securities Act of 1933. This action represents an effort by the Commission to coordinate the various limited offering exemptions and to streamline the existing requirements applicable to private offers and sales of securities. Proposed Regulation D, if adopted, would replace the existing limited offering exemptions contained in Commission Rules 146, 240, and 242.

The Commission is requesting comments on the specific provisions of the proposed rules and also whether the proposals considered together provide a more coordinated exemptive scheme for limited offering transactions particularly as they relate to the capital formation needs of small business.

DATE: Comments must be received on or before October 5, 1981.

ADDRESSES: All communications on this matter should be submitted in triplicate to George A. Fitzsimmons, Secretary, Securities and Exchange Commission, 500 North Capitol Street, Washington, D.C. 20549. Comments should refer to File No. S7-891 and will be available for public inspection and copying in the Commissions Public Reference Room, 1100 L Street, N.W., Washington, D.C. 20549.

FOR FURTHER INFORMATION CONTACT: Paula L. Chester, (202)/272-2644 Office of Small Business Policy, Division of Corporation Finance, Securities and Exchange Commission, 500 North Capitol Street, Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION: The Commission is proposing for comment Regulation D, a series of new rules governing the limited offer and sale of securities pursuant to the Securities Act of 1933 (the "Securities Act") 15 U.S.C. 77c(b), 77d(2). Proposed Regulation D is intended to result in a more coherent pattern of exemptive relief, particularly as it relates to the capital formation needs of small business. In this regard, proposed Regulation D brings together the current limited offering exemptions contained in Rules 146 17 CFR 230.146, 240 17 CFR 230.240, and 242 17 CFR 230.242. Thus, certain common terms such as "accredited investor" and "securities of the issuer" are defined as those terms are used throughout the regulation, and a common rule sets forth the informational requirements, the limitation on the manner of the offering, the limitations on resale, the safe harbor provision with respect to integration, and a uniform notice-of-sales for the three exemptions contained in the Regulation. In addition, proposed Regulation D would result in a number of significant substantive changes from present Rules 146, 240, and 242 as explained below.

Table of Contents

I. BACKGROUND

The registration requirements of the Securities Act and the exemptive scheme therefrom have been criticized by commentators as disproportionately burdensome for small issuers. Three years ago the Commission, in its concern that compliance with the Securities Act should not inadvertently operate to impair capital formation by small businesses, undertook an extensive and detailed examination of the federal securities laws as they relate to those businesses. The Commission held public hearings in April and May of 1978 for the purpose of determining the extent to which the burdens imposed on small businesses may be alleviated consistent with the protection of investors.

A study of the record developed at the hearings indicated that most of the problems faced by small businesses result from factors outside the scope of the federal securities laws. ¹ Witnesses did state, however, that a number of requirements under the Securities Acts are not justified as applied to small business. In response to some of those concerns, the Commission has taken a number of actions that are designed to assist small business capital formation and reduce the burdens imposed by the federal securities laws as applied to small businesses. For example, Rule 242 was adopted to respond to some of the criticisms of Rule 146; the aggregate amount of securities that may be offered pursuant to Regulation A 17 CFR 230.251-264 was increased from $500,000 to $1,500,000; an amendment to Regulation A was added to permit the use of a preliminary offering circular prior to the commencement of an offering; Rule 144 17 CFR 230.144 was amended to increase or eliminate under certain conditions the resale volume limitations; and Form S-18 17 CFR 239.28, a simplified registration statement for companies going public for the first time, was introduced. ²

Prior to the enactment of the Small Business Investment Incentive Act of 1980 (the "Incentive Act") Pub. L. No. 96-477 (October 21, 1980) Rules 146, 240, 242, Regulation A and Form S-18 provided the basic regulatory scheme most typically relied upon by small business. ³ The Incentive Act, however, included three statutory changes in the Securities Act that have an impact on small business capital formation. The first was the addition of Section 4(6) to the Securities Act ⁴, which provides an exemption from the registration requirements of that Act for offers and sales of securities by an issuer solely to accredited investors ⁵ without any public solicitation if the aggregate amount of securities offered is $5 million or less. In connection therewith, the issuer is required to file a notice of such sales with the Commission on such forms as the Commission shall prescribe. ⁶

The second amendment to the Securities Act added by the Incentive Act increased the ceiling from $2 million to $5 million of the Commissions authority under Section 3(b) to exempt small offerings from the registration requirements of the Securities Act.

In addition, Title V of the Incentive Act created new Section 19(c) of the Securities Act which, among other things, authorizes the Commission to work with state securities associations in effectuating greater uniformity in Federal-State securities matters. ⁷ Subparagraph (3) of Section 19(c) specifically provides for the development of a uniform exemption from registration for small issuers which can be agreed upon between the States and the Federal Government.

As a result of the Incentive Act, particularly the significant increase in the Section 3(b) ceiling and the authorization granted to the Commission to work with the states to develop a uniform exemption, the Commission determined to re-evaluate the Securities Act exemptive scheme. Thus, the Commission on December 23, 1980, announced that it was considering the relationship among certain exemptions from the registration provisions of the Securities Act and the efficacy of such exemptions as they relate to the capital formation needs of small business. ⁸ The Commission requested commentators to focus on the interrelationship between the recently enacted Section 4(6) exemption and the Commissions other exemptive rules, particularly Rules 146 and 242. ⁹ The Commission also requested comments on the adequacy of the present ceiling limitations included in the exemptions under Section 3(b) and the extent, if any, to which they should be increased.

Commentators were also requested to provide their views on the broader question of whether the exemptions under the Securities Act provided by Rules 240, 242, Regulation A, and Rule 146, along with the newly created Section 4(6) exemption considered together provide a coherent scheme for relieving issuers of the burdens of the registration provisions, particularly by smaller companies, consistent with adequate investor protection and, if not, what steps the Commission should take to make the scheme more coherent. The comments received were intended to assist the Office of Small Business Policy in the Division of Corporation Finance in the development of future rulemaking proposals.

The Commission received 38 letters of comment. Although commentators criticized the present exemptive scheme as unnecessarily complex, the recommendations for amendments to the exemptive scheme to correct these problems varied considerably. As a result of the comments received, which are discussed below, and discussions with the North American Securities Administrators Association ("NASAA") Subcommittee on Small Business Financing, the Commission is today proposing to significantly revise Rules 146, 240, and 242 and to consolidate them into one regulation that would govern transactions involving the limited offer and sale of securities. The Commission is also today adopting amendments to the disclosure provisions of Regulation A and is considering amendments to Form S-18 that would expand the availability of that Form to all issuers. As more fully discussed below, these amendments are intended to provide a basic component to other rulemaking initiatives that are part of the Commissions ongoing small business program.

II. DISCUSSION

Proposed Regulation D is a series of six rules, designated Rules 501-506 17 CFR §§ 230.501-230.506. Proposed Rules 501 and 502 would define common terms and set forth general conditions to be met which apply to the exemptions contained in the Regulation. Proposed Rule 503 would provide for a uniform notice of sales form, designated Form D 17 CFR 239.500 to be used for all exempt offerings under the Regulation and Section 4(6) of the Securities Act. Proposed Rules 504-506 would contain the specific exemptions from the registration provisions of the Securities Act and would replace current Rules 240, 242, and 146.

Proposed Rule 504 is an expansion of the Commissions current Rule 240. The principal differences between proposed Rule 504 and Rule 240 are: (1) an increase in the limitation on the amount that can be sold in any 12 month period under the Rule from $100,000 to $500,000; (2) removal of the prohibition in Rule 240 against the payment of brokerage commissions, provided such commissions are paid to broker-dealers registered both under the Exchange Act and pursuant to applicable regulations in those states in which the securities are to be offered or to any bank as defined in Section 3(a)(2) of the Securities Act; (3) elimination of the requirement that there be no more than 100 shareholders at the time the offer is completed and, in lieu thereof, a restriction on the availability of the rule to issuers not subject to the reporting requirements of the Exchange Act; and (4) elimination of restrictions concerning manner of offering and restrictions on resale where the offering is limited to states in which the offering is registered and a disclosure document is delivered pursuant to applicable law. As in current Rule 240, no specific disclosure requirements would be prescribed. This proposal reflects the unanimous opinion expressed by commentators, and the Commissions concurs, that there is a need for a de minimis exemption from federal regulation, and that state "Blue Sky" requirements and the antifraud provisions of the federal securities laws would afford adequate protection.

Proposed Rule 505 would replace current Rule 242 and continue to permit sales to an unlimited number of accredited investors and to 35 nonaccredited investors. The principal features of proposed Rule 505 include: (1) the expansion of the availability of the rule to all issuers regardless of legal structure or line of business; (2) a revision of the informational requirements to provide for information similar to that provided by Regulation A for offerings in amounts not exceeding $1,500,000 and Form S-18 type disclosure for offerings in amounts between $1,500,001 and $5,000,000; (3) an increase in the aggregate offering limitation from $2,000,000 in a six month period to $5,000,000 in a 12 month period; (4) a provision identical to that contained in proposed Rule 504 permitting the payment of brokerage commissions if such commissions are paid to broker-dealers registered both under the Exchange Act and pursuant to applicable regulations in those states in which the securities are to be offered; and (5) elimination of the availability of this rule for those issuers who have been subject to the reporting requirements under the Exchange Act for 36 calendar months preceding the offering.

Proposed Rule 506 would modify existing Rule 146 in several respects. Currently, Rule 146 requires the issuer to make a subjective determination prior to making any offers of securities that each offeree has such knowledge and experience in financial matters that he is capable of evaluating the merits and risks of the prospective investment or that such offeree is able to bear the economic risk of the investment. ¹⁰ The Commission is proposing to eliminate the requirement to determine the qualifications with respect to each offeree whether or not he purchases. The provision that no offer to sell the securities may be made by any form of general solicitation or general advertising will be retained and the Commission believes that this requirement is sufficient to assure that an offering is private in nature. The requirement that the issuer make a determination as to the qualifications of the purchaser will be retained in modified form. However, the Commission is proposing to incorporate the accredited investor concept into the rule. Thus, certain purchasers would be presumed to meet the purchase qualifications, thereby eliminating the need for subjective judgments by the issuer about the suitability of such investors. Proposed Rule 506 would also: (1) eliminate the need to deliver disclosure documents if only accredited investors participate in the transaction; (2) permit sales to an unlimited number of accredited investors and to 35 non-accredited investors provided such non-accredited investors meet certain qualifications; and (3) retain the "purchaser representative" concept to permit the continued participation by persons who, acting alone, may lack the requisite knowledge and experience to independently evaluate the merits and risks of the investment.

A major change in the proposed exemptive scheme concerns the limited availability of the exemptions to issuers subject to the reporting requirements under the Exchange Act. Consistent with existing Rule 240, companies subject to the Exchange Act reporting requirements would not be able to use proposed Rule 504. Proposed Rule 505 would represent a departure from current Rule 242 in that issuers who have been reporting companies for 36 months would be excluded from its use. These restrictions represent the Commissions opinion that Rules 504 and 505 have been designed primarily for smaller issuers that are not subject to periodic disclosure requirements and for which the preparation of offering circulars and the expenses resulting from the registration process may be disproportionately burdensome.

Moreover, companies that have been subject to the reporting requirements for more than 36 months will benefit from the new simplified registration process which the Commission has proposed in Forms S-2 and S-3 ¹¹. The proposed new registration process will substantially reduce the burdens traditionally associated with registration by allowing existing reports to be used instead of extensive prospectuses. Because of the proposed alternative methods of registration and these attendant savings, the Commission believes public companies should be encouraged to register their offerings or rely on proposed Rule 506. In view of the unrestricted availability of the alternative statutory exemption to Rule 506 contained in Section 4(2) of the Securities Act, Rule 506 may be utilized by any reporting company.

In view of the proposals outlined herein, particularly the expanded availability of current Rule 242 to all issuers, the increase to $5 million of the aggregate amount of securities that can be sold as proposed in Rule 505, and the incorporation of the accredited investor concept in proposed Rule 506, the Commission recognizes that Regulation D, if adopted, may provide a more attractive alternative to registration for smaller issuers than the recently enacted Section 4(6) exemption. It should be noted, however, that purported reliance on the exemptions contained in proposed Regulation D will not act as election; the issuer can also claim the availability of the statutory exemption provided by Section 4(6). Thus, the uniform notice of sales form proposed herein would be used by any issuer claiming the availability of Section 4(6) as well as those securities sold in reliance on the proposed Regulation, or both. In addition, the Commission is proposing to define "accredited investor" for transactions effected in reliance on Section 4(6) pursuant to its authority under Section 2(15) of the Securities Act which would be identical to the definition contained in the proposed Regulation.

III. OTHER RELATED SMALL BUSINESS INITIATIVES

The structure of Regulation D has been coordinated with other small business initiatives proposed today and which the Commission anticipates proposing in the near future. These initiatives parallel similar requirements in proposed Regulation D and are designed to achieve a greater degree of uniformity with respect to such requirements.

In conjunction with the proposal of Regulation D, the Commission has issued a release adopting amendments to the rules, forms and disclosure requirements under Regulation A. ¹² The amendments, which involve a comprehensive revision and updating of the disclosure requirements, are designed to reduce the time spent in processing and thereby reduce costs by codifying the disclosure policies and practices currently followed on an administrative basis.

However, in view of the widespread acceptance of Form S-18 and the substantial similarities between the narrative disclosure requirements of Form S-18 and the amendments to Regulation A adopted today, it is the Commissions view that Form S-18 may obviate the continued need for such an exemption. Consequently, the Commission is considering the advisability of rescinding Regulation A and combining Form S-18 and Regulation A into one uniform registration form specifically tailored for public offerings by small issuers, with substantially reduced audited financial statements requirements for transactions involving less than $3,000,000 aggregate amount of securities. Before proceeding with a uniform registration statement for small public offerings, the Commission recognizes that it must also evaluate the impact of certain compliance burdens imposed by the periodic disclosure requirements mandated by the Exchange Act ¹³ for those issuers that would otherwise offer securities in reliance on Regulation A without automatically incurring such reporting burdens. If these requirements can be reduced by classifying companies so that defined classes of small issuers might be relieved of certain reporting and other requirements ¹⁴, the Commission will consider the feasibility of eliminating Regulation A.

In addition to the rulemaking proposals announced today, the Commission has under consideration certain amendments to Form S-18 which will be proposed in the near future. The Commission intends to expand the availability of Form S-18 to non-corporate issuers and to those issuers who engage or intend to engage in oil and gas related operations. The expansion of Form S-18 will parallel the availability of proposed Rule 505 and allow the continued use of coordinated disclosure provisions. In this regard, disclosure provisions applicable to these types of issuers will also be proposed.

IV. DEVELOPMENT OF UNIFORM LIMITED OFFERING EXEMPTIVE SCHEME

In conjunction with its examination of the exemptive rules the Commissions Division of Corporation Finance has had discussions with NASAA in order to achieve a greater degree of uniformity between the federal and state limited offering exemptive schemes. The Commission understands that the NASAA Board of Directors has approved for comment by the NASAA membership a coordinated regulatory approach with respect to proposed Rules 504, 505 and 506 and will simultaneously be soliciting comments on the proposed uniform exemptions from its members.

As currently envisioned, the Commission would defer to the states for the regulation of offerings meeting the conditions of proposed Rule 504. Because of the small amount of the offering and the likelihood that such sales will occur in a limited geographic area, the Commission and NASAA have agreed that greater emphasis on state blue sky laws is appropriate. Accordingly, in view of the limited federal interest in offerings below $500,000 by non-reporting companies, proposed Rule 504 would, in effect, apply only the Securities Act and Exchange Act anti-fraud provisions at the federal level.

Proposed Rule 505, plus the applicable definitions and conditions to be met contained in Rules 501, 502 and 503, would be adopted as a uniform exemption. The Commission and NASAA understand that certain states may wish to adopt additional requirements regarding the suitability of the investment for non-accredited investors. Accordingly, NASAA has developed a uniform suitability provision for non-accredited investors which could be adopted in an alternative formulation of Rule 505. The NASAA uniform suitability requirements which would generally require the issuer to meet one of the three following conditions:

(1) The investment is suitable for the purchaser upon the facts, if any, disclosed by such purchaser as to his other security holdings and as to his financial situation and needs. For the limited purpose of this condition only, it may be presumed that if the investment does not exceed 25% of the investors net worth, it is suitable;

(2) The purchaser either alone or with his purchaser representative(s) has such knowledge and experience in financial and business matters that he is or they are capable of evaluating the merits and risks of the prospective investment; or

(3) There is a relationship between the non-accredited investor and the principles, executive officers or directors of the issuer evincing trust between the parties. Such relationships as close business associates, family ties, and friends or acquaintances would be deemed to satisfy this condition.

Finally, proposed Rule 506 would also be adopted as a uniform rule specifying all requirements applicable to offerings in excess of $5 million.

The Commission and NASAA believe the uniform limited offering exemptive scheme as outlined herein will reduce the burdens on small issuers by eliminating most instances the multiplicity of regulations imposed at both the state and federal levels. Commentators are therefore requested to formulate their comments on Regulation D in light of the uniform concept.

Request for Comments

The Commission believes that proposed Regulation D in conjunction with the proposed amendments to Regulation A and Form S-18 and the development of a uniform limited offering exemptive scheme will, if adopted, provide a coherent scheme for the raising of capital by small businesses. Moreover, the coordinated design of Regulation D and the new simplified registration process will create a rational approach to the capital formation needs of issuers from early growth stages to maturity. Commentators are therefore requested to comment on the overall Securities Act registration and exemptive scheme as it relates to the raising of capital by small business.

V. SYNOPSIS

The following discussion of proposed Regulation D is included to assist all interested persons in their understanding of the proposed exemptive scheme under the Securities Act published herein. However, attention is directed to the text of proposed Regulation D for a more complete understanding.

A. Preliminary Notes

Proposed Regulation D contains six preliminary notes, all of which are found in one, two, or all of Rules 146, 240 and 242. As in the case of the current exemptive rules, these notes provide general guidance as to the scope and the applicability of exemptions provided. Certain preliminary notes currently in Rules 146, 240, and 242 have been deleted since they were inapplicable or considered to be unnecessarily repetitive of the provisions of the Regulation. Others have been relocated into the text of the Regulation.

The first preliminary note reminds issuers that transactions effected pursuant to Regulation D, while exempt from Section 5 of the Securities Act, are not exempt from the anti-fraud provisions of the federal securities laws, the civil liability provisions of Section 12(2) of the Securities Act or other provisions of the federal securities laws. In addition, the note reminds issuers that, in those instances where disclosure is furnished to investors, additional information may be required to be furnished in order to make the required disclosures, in the light of the circumstances under which they are furnished, not misleading. The second note indicates that reliance on Regulation D does not obviate the need to comply with any applicable state law relating to the offer and sale of securities. Note 3 makes clear that reliance on an exemption provided by Regulation D does not act as an election; the issuer may have the availability of any other applicable exemption.

Note 4 specifies that the exemptive rules contained in proposed Regulation D are available only to the issuer of securities and are not available to affiliates or other persons for resales of the issuers securities. The securities acquired in a transaction effected in reliance on this regulation, except as specifically provided in certain offerings pursuant to proposed Rule 504, are restricted securities and cannot be resold without registration under the Securities Act or an exemption therefrom.

Finally, the preliminary notes provide that the proposed regulation is not available to any issuer with respect to any transaction which, although in technical compliance with the rules contained herein, is part of a plan or scheme to evade the registration provisions of the Securities Act. In such cases, registration pursuant to the Securities Act is required.

B. Rule 501--Definitions and Terms Used in the Regulation

The majority of commentators in addressing the interrelationship of the private offering exemptions, advocated the use of uniform definitions in order to achieve a greater degree of clarity and to remove certain inconsistencies which are present in the current exemptive scheme. In response to these concerns, the Commission re-examined the definitions contained in current Rules 146, 240 and 242 and has eliminated existing inconsistencies by proposing common definitions to be included in Rule 501. Generally, the proposed definitions are similar to those contained in the existing rules. However, the definitions of "accredited investor" and "securities of the issuer" have been modified to reflect suggestions proffered by commentators and the Commissions experience.

1. Accredited Investor

The vast majority of commentators favored the adoption of a uniform definition of accredited investor for purposes of Rule 242 and Section 4(6) and endorsed introducing the concept into Rule 146. While interested persons were consistently in favor of uniformity, there was a difference of opinion as to how the definition of accredited investor should be formulated. ¹⁵ In response to these comments, the Commission has determined to propose for purposes of Section 4(6) and Regulation D a single definition of accredited investor which would include the institutional investors listed in Section 2(15)(i) of the Securities Act and 6 additional classes of accredited investors contained in proposed Rule 215 ¹⁶. By incorporating paragraph (i) of Section 2(15), this definition would, unlike current Rule 242(a)(1), include as accredited investors business development companies as defined in Section 2(a)(48) of the Investment Company Act of 1940 ("Investment Company Act") 15 U.S.C. 80a-2(a)(48). ¹⁷

Proposed Rule 2(15) would include current Rule 242(a)(1)(iii) (officers and directors of the issuer), modify subparagraph (ii) of Rule 242 (a)(1) ($100,000 purchasers), and propose four new categories of accredited investors. The proposals would modify Rule 242(a)(1)(ii) to allow the use of an unconditional obligation to pay to be discharged within two years of the first issuance of the securities if such obligation is secured by an unconditional letter of credit issued by a bank as defined in Section 3(a)(2) of the Securities Act. This provision is intended to replace current Rule 146(g)(2)(d) which provides that those individuals who purchase $150,00 of the issuers securities either in one lump sum or in installments will not be counted for purposes of the 35 purchaser limitation contained in the Rule. The Commission is concerned that in some instances installment obligations are being spread over such periods of time that, together with interest rates being charged, the present value of the note is substantially less than $150,000. Consequently, such a purchaser may not have adequate bargaining power, especially where there are a significant number of individual purchasers each executing comparable installment notes. See discussion of proposed Rule 502(b)(1) regarding information requirements. Therefore, the Commission is proposing to allow the continued use of the installment obligation for the purchase of securities in amounts of $100,000 or more provided that, among other things, the payment period does not extend beyond two years.

Under this proposal, such purchasers will be given the status of accredited investors and therefore continue to be excluded from the 35 purchaser computation. Although the Commission believes this proposal will provide the added degree of flexibility currently found in Rule 146 with respect to installment obligations, commentators are requested to provide their views with respect to the two year limitation, particularly in light of the additional categories of accredited investors discussed below.

The Commission is also proposing to add four new categories of accredited investors: (a) any entity organized for the purpose of making investments in securities described in Section 55(a)(1) through (3) of the Investment Company Act and which makes available significant managerial assistance with respect to the issuer of such securities. This new category will allow privately held entities which perform functions similar to those of business development companies to be treated as accredited investors; (b) any college or university endowment funds which at the time of investment have net assets in excess of $25 million; (c) any natural person whose individual net worth is in excess of $750,000; and, (d) any natural person whose most recent individual annual adjusted gross income exceeded $100,000 as reported for federal income tax purposes in his most recent tax return (individual not joint income). The last two proposals address the concerns of many commentators who believed the Commission should develop an objective tests for individuals who purchase less than $100,000. These commentators criticized the current definition of accredited investor as excluding many persons with financial experience and sophistication who invest sums of less than $100,000 who should nevertheless be included in the definition. These new categories which have been added in response to those concerns are consistent with similar types of exemptions followed under several state securities laws and have been developed in consultation with NASAA.

The Commission is specifically requesting comment as to whether the last two categories of accredited investor are desirable and, if so, whether the net worth and income requirements set forth are appropriate.

2. Securities of the Issuer

For purposes of defining securities of the issuer, Rule 501(j) incorporates the definitions contained in current Rule 242(a)(6) with one important modification. Any securities of an issuer who may be an affiliate of another issuer solely by virtue of a common affiliation with a business development company as defined in Section 2(a)(48) of the Investment Company Act or with any entity as described in Rule 501(a)(2) shall not be deemed to be securities of the issuer for purposes of this Regulation. The exception of securities issued by an affiliate or common affiliates with a business development company should alleviate the concerns expressed by many commentators of potentially aggregating the offering of a venture capital firm with the offering of one of its portfolio companies, or the offering of one portfolio company with the offering of another.

3. Other Definitions

The Commission proposes to retain for purposes of Regulation D the definitions of "affiliate," ¹⁸ "business combination," ¹⁹ "executive officer," ²⁰ "issuer" ²¹ and "predecessor" ²² as they are currently defined in the current exemptive rules. The definition of "purchaser representative" in paragraph (i) is identical to the definition of "offeree representative" found in current Rule 146(a)(1) with the term "purchaser" substituted for "offeree." This change reflects the elimination of the offeree qualification requirements.

Finally, the Commission is proposing to consolidate two definitions which appear in more than one exemptive rule. First, current Rules 146(g)(2)(i) and 242(e)(2) each contain provisions regarding the types of purchasers that may be excluded in calculating the number of purchasers for purposes of the 35 purchaser limitation. Proposed Rule 501(d) would provide one set of provisions for purposes of Rules 505 and 506. The uniform provision would modify the existing provisions in three respects: (1) the exclusion for accredited investors would apply to offers and sales pursuant to Rule 506; (2) as suggested by commentators, the requirement that a purchaser have a 100% beneficial interest in any trust, estate or corporation would be reduced to any amount in excess of 50%; and (3) the current exclusion under 146(g)(2)(i)(d) for any person who purchases, in installments, securities in the aggregate amount of $150,000 would be modified as explained above.

Proposed Rule 501(e) would also consolidate the definitions currently included in the notes to Rules 240(e) and 242(c) regarding the computation of aggregate offering price. The proposed definition is identical to the note in Rule 242(c).

C. Rule 502--General Conditions to Be Met

In order to coordinate further the exemptive scheme, Rule 502 sets forth the general conditions which apply to all exempt offers and sales effected pursuant to Rules 504, 505 and 506. The conditions under this rule relate to integration, information requirements, limitations on manner of offering, and limitations on resale.

1. Integration

In order to obtain the protection of the exemptive rules proposed herein, all sales which are part of the same issue must meet all applicable conditions of the rules. However, the term "issue" is not defined in the Securities Act or in any rule thereunder. Integration is a concept by which two or more offerings which are intended to be exempt from registration could be combined into one offering with a resulting violation of the registration provisions of the Securities Act. Generally, the determination as to whether separate sales are part of the same issue and are, therefore, deemed to be integrated depends on the particular facts and circumstances. The Commission has announced that, in determining whether offers and sales should be regarded as a part of a larger offering and thus should be integrated, the following factors should be considered:

1) Whether the offerings are part of a single plan of financing;

2) Whether the offering involves issuance of the same class of security;

3) Whether the offerings are made at or about the same time;

4) Whether the same type of consideration is to be received; and

5) Whether the offerings are made for the same general purpose. ²³

In order to add a degree of certainty to the integration concept, the Commission is proposing a uniform safe harbor provision applicable to Regulation D. Paragraph (a) of Rule 502 provides that, in determining which securities constitute a single issue for purposes of the exemptive rules, sales of securities occurring more than six months prior to and six months subsequent to the subject offering will not be considered part of the same issue if, during either of the six-month periods, there were no offers or sales of securities by or for the issuer of the same or a similar class as those of the subject offering. However, during the six month "window periods" offers and sales pursuant to certain employee plans ²⁴ will be permitted and will not destroy the safe harbor. ²⁵ The uniform safe harbor provision, which was supported by the majority of the commentators, is identical to those contained in Rules 146(b)(1) and 242(b) with one exception. Sales pursuant to any Section 3(b) exemption during the six month "window periods" as currently provided by paragraph (b) of Rule 242 will not longer be permitted for the safe harbor.

In those instances where the safe harbor provision is not available, the factors set forth in Securities Act Release No. 4552 discussed above would be applicable.

2. Information Requirements

The Commission is proposing new information requirements which would provide for a more logical and coherent structure than that contained in the present exemptive scheme. Under the proposed rule, the necessity of furnishing information would depend upon the type of investors participating in the offering, and the level of disclosure required would, in the case of an issuer not subject to the reporting requirements under the Exchange Act, be modified to reflect the amount of the offering. An issuer subject to the periodic reporting requirements would, as explained below, generally be required to furnish purchasers with is most recent annual report to shareholders, proxy statement and any subsequent monthly or quarterly reports, and undertake to furnish its most recent annual report on Form 10-K on request.

Pursuant to Rule 502(b)(1) no specific information would be required to be furnished for offers and sales effected pursuant to proposed Rule 504 or offers and sales effected in reliance on proposed Rules 505 and 506 which are made solely to accredited investors. If a Rule 505 or 506 offering involves non-accredited investors, the issuer would be required to furnish specified information to all investors in the same manner as currently required by Rule 242. However, the Commission proposes to modify this requirement in those instances where 60% or more of the total offering is purchased by one or more accredited institutions as defined by paragraphs (a)(i), (ii) and (iii) of Rule 501 and all other persons purchase on the same or better terms. If this 60% test is met, the issuer, in lieu of providing the information called for by paragraph (b)(2) of Rule 502 to all purchasers, may elect to provide individual non-accredited investors upon their written request with the same written information provided to such institutions and the same information as the issuer would be required to provide if only non-accredited investors were involved in the transaction. Consequently, a disclosure document would not be required to be furnished to non-accredited investors unless specifically requested in writing.

Based on the experience of its membership, the National Venture Capital Association ("Association") stated that non-accredited investors are often excluded in private financing due to the costs associated with the delivery of a disclosure document. Therefore, the Association suggested the "60% provision" which is premised on the theory that, where 60% or more of the purchasers are accredited institutions, it may be appropriate to rely on such accredited investors, negotiating in their own interest, to assure the fairness of the transaction to the remaining investors so that delivery of a disclosure document need not be mandated, thereby reducing the cost of the offering. Further, the Association stated that, "as a practical matter, the non-accredited purchasers rely upon the judgment of the accredited purchaser, and the delivery of information does not allow this result." ²⁶ Paragraph (b)(1)(ii) does provide, however, that the remaining purchasers may obtain on an individual basis, upon written request, the same disclosure that would have been furnished to them as if the "60% provision" were not utilized by the issuer. In addition, Rule 502(b)(2)(v) requires the issuer to inform purchasers at a reasonable time prior to purchase of their opportunity to obtain such information.

The 60% test would be particularly helpful in those situations where the issuer is certain that sufficient institutional interest in the offering will be present. However, where the extent of institutional interest is uncertain, this approach will be of reduced value since issuers will have to provide information to all purchasers regardless of the subsequent makeup of the investors to avoid the possibility of noncompliance with the informational delivery requirements of Rule 502(b)(1)(ii).

Because of the novel approach of the 60% provision, commentators are specifically requested to submit their views as to whether the investment interests of accredited institutions are sufficient consistent with the investment interest of the remaining purchasers to assure adequate investor protections in the absence of a mandated disclosure document.

As stated above, in those instances where information must be furnished, the level of disclosure would, in the case of an issuer not subject to the reporting requirements of the Exchange Act, be based on the size of the offering. For offerings up to $500,000 where the issuer is relying on proposed Rule 504, no federal information requirements would be specified ²⁷. This proposal is consistent with the recommendations of a majority of the commentators who favored an increase in the Rule 240 ceiling without the establishment of mandated disclosure requirements. The Commission agrees with these views and therefore is not proposing to mandate specific disclosure requirements. Moreover, reliance on state regulation for offerings below $500,000 is consistent with the Commissions desire to coordinate the regulation of such offerings on the state and federal levels. ²⁸

With respect to offerings under Rules 505 or 506 by issuers who are not subject to the Exchange Act reporting requirements, the information requirement would be tiered according to the size of the offering. The Commission believes that, by structuring the information requirements in this manner, it will inject a degree of simplicity into the exemptive scheme and eliminate any disparity among the various exemptions in those instances where aggregate offering prices are identical.

First, for offerings up to $1,500,000, the issuer would provide the same kind of information as that specified in Part II of Form 1A under Regulation A ²⁹ to the extent material to an understanding of the issuer, its business, and the securities being offered. However, unlike the requirements under Regulation A, the issuers financial statements for its most recent fiscal year must be audited in accordance with generally accepted accounting principles unless they cannot be obtained without undue burden or expense. If such audited financial statements are not available, only the issuers balance sheet need be audited as of a date within 120 days of the commencement of the offering. This provision represents a modification of the current Rule 242 requirements which do not allow for the alternative of requiring only the balance sheet to be audited for offerings below $1.5 million.

Second, for offerings of $1,500,001 to $5,000,000, the issuer would provide the same kind of information as that specified in Part I of Form S-18 to the extent material to an understanding of the issuer, its business, and the securities being offered. However, only the issuers financial statements for the most recent fiscal year must be audited. This requirement is identical to current Rule 242(f)(1)(i).

Finally, for offerings in excess of $5,000,000, the issuer would provide the same kind of information as would be required to be included in Part I of a registration statement filed under the Securities Act on a form which the issuer would be entitled to use, to the extent material to an understanding of the issuer, its business, and the securities being offered. This provision is similar to the information requirements provided by current Rule 146(e)(1)(ii)(b) except that audited financial statements must be provided. Although most commentators favored allowing the use of unaudited financial statements where audited statements are unavailable, the Commission believes that it is inconsistent with the concept of investor protection to allow issuers to offer securities in amounts in excess of $5,000,000 without audited financial statements. Further, the use of unaudited financial statements in such offers and sales is inconsistent with the proposed disclosure provisions relating to offers and sales in lower amounts which, in most instances, would require the use of audited financial statements.

In those instances where the issuer is subject to the reporting requirements of Sections 13 or 15(d) of the Exchange Act, the informational provisions require the issuer to furnish its most recent annual report to shareholders, prepared in accordance with Rules 14a-3 and 14c-3, and the information contained in any definitive proxy statement required to be filed pursuant to Section 14A of the Exchange Act and in any reports or documents required to be filed by the issuer pursuant to Sections 13(a) or 15(d) of the Exchange Act and furnish to prospective investors on request its most recent report on Form 10-K. If the issuer has not prepared an annual report to shareholders meeting the requirements of Rules 14a-3 or 14c-3 for its most recent fiscal year, Rule 502(b)(2)(ii)(B) specifies that the issuer shall furnish the information contained in a registration statement on Form S-1 under the Securities Act or on Form 10 under the Exchange Act or its annual report on Form 10-K, whichever is the most recent required to be filed, and the information contained in any subsequent documents or reports required to be filed pursuant to Section 13(a) or 15(d).

The requirement to use the issuers most recent annual report to shareholders is consistent with the new registration procedures available to reporting companies described above. The information to be furnished if an annual report to shareholders has not been prepared is consistent with the requirements of current Rule 146.

In addition to the above information requirements, certain general provisions presently found in Rules 146 and 242 have been included and apply to all offerings in excess of $500,000. Subparagraph (b)(2)(iv) of proposed Rule 502 contains a provision currently found in Rules 146(e)(2) and 242(f)(2) which requires the issuer to provide an opportunity for the purchaser to ask questions and receive answers concerning the terms and conditions of the offering and provide, if available without unreasonable expense or effort, any additional information necessary to verify the information furnished pursuant to this rule. Rule 502(b)(2)(v) would required the issuer, as currently set forth in Rule 242(f)(3), to furnish all non-accredited purchasers with a description of any written information obtained from the issuer in connection with the offering by any accredited person. Further, with respect to those instances where 60% of the offering is purchased by accredited investors as defined by paragraphs (a)(i), (ii) and (iii) of proposed Rule 501, the issuer would have to inform all non-accredited purchasers of their opportunity to obtain the same information as the issuer would have been required to provide if only non-accredited investors were involved in the transaction. Finally, the proposed rule would include the additional information requirements relating to business combinations currently found in Rule 146(f)(4).

3. Limitation on Manner of Offering

Proposed Rule 502(c) would prohibit the issuer and any person acting on its behalf (except as specifically provided in certain offerings pursuant to proposed Rule 504) from offering or selling securities by means of any form of general solicitation or general advertising. This is similar to the provision contained in Rule 146(c) except that the prohibition against seminars and meetings has been modified to reflect the elimination of the qualified offeree concept of Rule 146. Paragraph (c)(2) would now prohibit any seminar or meeting whose attendees have been invited by means of any general solicitation, mailing, advertisement, notice, or other communication published in any print or broadcast media. ³⁰

4. Limitations on Resale

The Commission is proposing to adopt the provisions regarding limitations on resales found in present Rule 242(g). These provisions would require the issuer to exercise reasonable care in assuring that each purchaser is acquiring the securities for his own account, that each purchaser is informed that the securities cannot be resold unless they are subsequently registered under the Securities Act or an exemption therefrom is available, and that a legend referring to the restrictions on transferability and sale of the securities is placed on each certificate or document. Rule 502(d) would apply to all limited offering exemptions, except as specifically provided in certain offerings pursuant to proposed Rule 504, and would delete the requirement currently found in Rule 146(h) regarding stop transfer instructions to the issuers transfer agent. The Commission believes such instructions, while they should be given, should not be a condition to the availability of the rule in view of the requirement to appropriately legend the securities.

5. Remuneration Paid for Solicitations or for Sales

Proposed Rule 502(e) would provide that no commission or similar remuneration can be paid or given for soliciting prospective buyers in connection with sales of securities in reliance on this regulation unless such commission or similar transaction related remuneration is paid or given to a broker-dealer registered both under Section 15(b) of the Exchange Act and pursuant to applicable regulations in those states in which the securities are to be offered, or to a bank as defined in Section 3(a)(2) of the Securities Act, as permitted by law. The Commission believes the requirement with respect to broker-dealers will provide safeguards for investor protection since a registered broker-dealer, pursuant to its suitability obligations, must make a determination as to whether participation in the offering is appropriate for each investor. Further, this provision would, unlike current Rule 240(d), permit commissions to be paid in connection with offers and sales of securities made in reliance on proposed Rule 504. This will allow professionals to provide needed technical assistance to small issuers who are often unsophisticated in the methods of raising capital.

Although this proposal imposes an additional requirement regarding the payment of commissions under proposed Rules 505 and 506, the Commission does not believe it will add any burdens to the issuer since in most instances persons soliciting prospective buyers or selling the securities of the issuer would be subject to broker-dealer registration provisions under applicable state and federal laws. ³¹

D. Rule 503--Filling of Notice Sales

The Commission is proposing to adopt one uniform notice of sales for Regulation D and Section 4(6) offerings. The notice would request information similar to that presently contained in Form 242 ³² and Form 4(6) except that a new item has been added which calls for the issuer to disclose those states in which the offering is to be made. This new requirement will allow the Commission and the various states to assess their efforts in implementing a coordinated regulatory scheme for the small offering exemptions. In addition, the new form would require issuers to disclose, with respect to sales of securities to accredited investors, the extent to which such sales are made to accredited institutions. This will allow the Commission to determine the degree of institutional participants in exempt offerings and whether the new information requirements in those instances where 60% of the offering is purchased by accredited institutions are beneficial to small business. The new form will allow the issuer to check appropriate boxes on the facing page to indicate which exemptions are being used. In addition, the design of the form will remain the same so as to allow the issuer generally to respond to questions by checking boxes or by filling in blanks. Finally, the undertaking by the issuer to furnish to the Commission the information provided to any non-accredited investor currently required by Rule 242(h)(2) will be retained for the sale of securities pursuant to proposed Rule 505. However, the undertaking has been modified to provide that such information also be furnished, upon written request, to any state regulatory authority having jurisdiction over the offering.

An important purpose of the notice, as stated in the release adopting Rule 242, is to collect empirical data which will provide a basis for further action by the Commission either in terms of amending existing rules and regulations or proposing new ones. ³³ Further, the proposed Form will allow the Commission to elicit information necessary in assessing the effectiveness of Regulation D as a capital raising device for small businesses. For example, the expenses of the offering would be studied together with comparable data for registered offerings to determine to what extent, if any, the capital formation process under proposed Regulation D produces cost savings. Information about the number of purchasers and dollar amount of their purchases by category will enable the Commission to determine whether the expanded concept of "accredited investor" is a useful one. The importance of collecting this information is evidenced by a recent study of Rule 242 prepared by the Directorate of Economic and Policy Analysis which was released by the Commission in November of 1980. ³⁴ This study, which analyzed the characteristics of those issuers who offered securities pursuant to Rule 242 provided needed information in the Commissions consideration of proposed Regulation D.

The Commission recognizes that the proposed uniform notice increases the amount of information requested with respect to offers and sales under proposed Rule 506. However, the Commission believes that, for a limited period of time, information is needed to study the impact of the revisions of current Rule 146. It is anticipated that the proposed expanded notice requirement for Rule 506 offerings will be eliminated after a reasonable period for evaluation.

In addition to the proposed amendments to the Form, the filing requirements have been changed in two respects. First, in order to ease the burden on issuers, the Commission is proposing to extend the time of filing of the notice from 10 days to 30 days. Thus the issuer would have to make an initial filing no later than 30 days after the first sale is made in any issue offered in reliance on the Regulation and submit a final filing no later than 30 days after the completion date of the issue. Issuers would still have to file periodic updates every six months until a final notice is filed upon completion of the offering. It should be noted that, although the revised filing requirements do not require that the issuer also file a notice with the state(s) in which the offering is to be sold, it is anticipated that the Commission will routinely furnish copies of the notice forms to the appropriate state commissions.

Second, in order to obtain the notice of sales form on a timely basis, the provision contained in Rule 240(h)(2) has been eliminated. This provision provides that Rule 240 will be available for the first $100,000 of the securities sold by the issuer if the sales of such securities complied with all the conditions of Rule 240 other than the notice requirement. However, prior to any further sales in reliance on Rule 240, the issuer would have to file a notice of sales form covering the first sales. The Commission requests commentators to provide their views as to whether a similar provision should be provided for sales pursuant to proposed Rule 504, and whether the Commission should eliminate the requirement to file a notice of sales form for offerings below some de minimis amount. The Commission does not believe that the filing requirement should be removed in its entirety from the operation of proposed Rule 504. As with the other exemptive rules, information is needed concerning the use of proposed Rule 504 in order to assess its usefulness as a capital raising device. However, the Commission realizes that the full Form D notice requirement may impose an undue burden on offerings below some small amount such as $100,000.

Several commentators suggested that the forms required to be filed in connection with the exemptions should not be conditions precedent to the availability of the exemption in question. However, as indicated above, the information contained in the proposed form is of great value in monitoring the use of the exemption and in the Commissions continuing effort to improve the usefulness of the exemptive scheme. Therefore, in order to assure timely receipt of these forms, the Commission is proposing to keep the filing requirements as a condition precedent to the availability of an exemption. It should be noted however, that after a reasonable period of experience with Regulation D the Commission may reduce or modify the amount of information required in the notice or, as in the case of proposed Rule 506, eliminate the need to file such a notice.

E. Rule 504--Exemption for Limited Offers and Sales of Securities Not Exceeding $500,000

Proposed Rule 504, which would replace current Rule 240, provides an exemption from registration for limited offers and sales of securities not exceeding an aggregate amount of $500,000. Witnesses at the Small Business Hearings and numerous commentators agreed that $100,000, the current Rule 240 limit, often is an insufficient amount to be useful to even the smallest businesses in need of financing, and that an increase in the ceiling would not only assist financings during an enterprises infancy but would also be valuable to a small business in securing expansion venture capital. The Commission agrees with these commentators and, therefore, proposes to increase the ceiling limitations to $500,000.

In calculating the aggregate offering price in reliance on the rule, proposed Rule 504 specifies that all sales within the preceding 12 months offered and sold (1) pursuant to this rule, Regulation A or proposed Rule 505; and (2) in violation of Section 5(a) of the Securities Act, shall be included in the aggregate ceiling limitation. The aggregation limitations proposed herein expand the current Rule 240 provision which requires that all sales effected without registration must be included in the aggregate amount. Under the current rule, nonconvertible notes or similar evidences of indebtedness representing a purchase money mortgage or issued to certain specified institutional investors, and securities sold to promoters, directors, executive officers or full-time employees are excluded from the calculation of the aggregate amount provided, however, that such securities were sold in reliance on an exemption other than Rule 240. The Commission is proposing to eliminate the above exclusion, however, in view of the significant increase in the ceiling limitation and the expanded aggregation provision which includes only those securities offered in reliance on the proposed rule and any other Section 3(b) exemptions.

As in current Rule 240, the proposed rule does not mandate specific disclosure requirements. This is consistent with the opinions expressed by many commentators that there is a need for a de minimis exemption from federal regulation and that state "Blue Sky" requirements and the antifraud provisions of the federal securities laws would afford adequate protection. The exemption herein would not obviate the need to comply with any state requirements with respect to disclosure.

The proposed rule requires that all offers and sales of securities effected in reliance on the rule must be made in accordance with all of the terms and conditions of the exemption as well as the general conditions to be met as specified in proposed Rules 501 to 503. However, in an effort to achieve an added degree of uniformity between federal and state regulation throughout the entire exemptive scheme, the rule provides that Rule 502(c), relating to limitations on the manner of the offering, and Rule 502(d), relating to limitations on resale, shall not be applicable if offers and sales pursuant to the proposed rule are made exclusively in states which provide for the registration of such securities and require the delivery of a disclosure document. It appears that offerings of up to $500,000 made to an unlimited number of offerees would be required to be registered in a number of states. Issuers so registering under Blue Sky provisions would then have the ability to conduct a general solicitation sales effort and the securities sold would not be restricted. Absent the provision included in proposed Rule 501(a)(1) these issuers would not be able to claim the Rule 504 exemption.

It is the view of both the Commission and NASAA that in those instances where an offering is made in reliance on the proposed rule in states exercising appropriate regulatory control, and such securities are registered in accordance with applicable state law, adequate investor protections will be preserved through state regulation for offerings below $500,000. Accordingly, the Commission is proposing that, in offerings registered with each state in which the securities are to be offered that require the delivery of a disclosure document, the limitations on the manner of the offering and nature of the securities as prescribed by proposed Rules 502(c) and (d) will not be applicable.

The Commission is also proposing to eliminate the limitation on the number of beneficial owners as currently provided by paragraph (f) of Rule 240. In lieu thereof, the Commission intends to limit the availability of the rule to issuers that are not subject to the reporting requirements of Sections 13 or 15(d) of the Exchange Act. The Commission believes that, because of the limited amount of capital that can be raised under the proposed rule, the existing limitation regarding the number of beneficial owners is inconsistent with the proposition of a de minimis exemption. However, it is the Commissions intention that the proposed rule be used to facilitate the capital formation needs of the small start-up company seeking venture capital, and not seasoned issuers for which information is readily available by means of Exchange Act documents. Therefore, the Commission is proposing to restrict the availability of the exemption to issuers that are not subject to the periodic disclosure requirements of the Exchange Act.

Finally, the prohibition against the payment of commissions set forth in current Rule 240 has been eliminated to the extent that such commission may be paid to registered broker-dealers.

The Commission specifically invites comment on the proposed exemption described herein and the extent to which such exemption will enhance the ability of smaller businesses to enter the capital markets.

F. Rule 505--Exemptions for Limited Offers and Sales of Securities Not Exceeding $5,000,000

Proposed Rule 505 would replace current Rule 242 and make significant changes with respect to the operation of that exemption. First, the restrictions of availability contained in present Rule 242(a)(5) have been significantly amended. These restrictions have consistently followed the availability of Form S-18 since its disclosure requirements reference to Part I of Form S-18. The Commission in adopting Form S-18 noted its experimental nature and indicated that it would move cautiously in expanding its usage. However, the elimination of such issuer qualifications was unanimously supported by commentators who cited Congressional intent in enacting the Incentive Act to encourage the development of small business without unnecessary restrictions on the type of business conducted or the form in which the business is conducted.

Based on the comments received resulting from its prior concept release and the Commissions own experience to date in administering Form S-18, it is anticipated that proposals to broaden the availability of Form S-18 will be published in the near future. Accordingly, the Commission is proposing to expand the availability of Rule 242 to foreign issuers, ³⁵ non-corporate issuers, and issuers engaged in significant oil and gas operations.

However, investment companies, ³⁶ and those issuers subject to certain disqualification provisions similar to those contained in current Rule 252(c), (d), (e), or (f) of Regulation A under the Securities Act would continue to be prohibited from using the exemption provided by proposed Rule 505. In addition, the Commission is proposing to add to the disabilities contained in Rules 252(c), (d) and (e), the making of a false filing with any state, the conviction of any felony involving fraud or deceit, and any state administrative cease and desist order for certain state securities violations. As proposed, there are no disqualifying limitations on issuers effecting transactions in reliance on proposed Rule 504. Commentators are requested to provide their views as to whether proposed Rule 504 should be available to issuers subject to such disqualifications. The Commission feels such a restriction may be appropriate in light of the significant increase in the offering aggregate amount and the lack of any specific disclosure requirements under that rule.

Finally, as discussed above, the Commission is proposing to limit the availability of proposed Rule 505 to those issuers who have not been subject to the reporting requirements of Sections 13 and 15(d) of the Exchange Act for 36 consecutive months preceding the offering in reliance on this rule. Based on a review of the Form 242 notice of sales forms filed since the adoption of Rule 242 in January 1980, approximately ten percent of the issuers using the rule have been subject to Exchange Act reporting requirements. Thus, it appears that the exemption currently provided by Rule 242 is utilized primarily by small unseasoned issuers for which the exemption was originally intended.

The second change in the proposed Rule 505 exemption would increase the limitation on the aggregate offering price to $5,000,000 in any 12 month period. This proposal was supported by most commentators who believed that the current six month interval for Rule 242 offerings was counter-productive when per offering costs are evaluated. The proposed rule would retain the requirement in current Rule 242(c) which provides that, in calculating the aggregate offering price in reliance on the rule, all sales within the preceding 12 months offered and sold in reliance on this rule, Regulation A, and proposed Rule 504 be included for purposes of determining the aggregate ceiling limitation. In addition, offers and sales of securities made in violation of Section 5(a) of the Securities Act would be included in the calculation. Although such offers and sales are not included in current Rule 242(c), their inclusion in proposed Rule 505 is consistent with similar provisions contained in proposed Rule 504, Regulation A, and Form S-18. Further, in light of the simplified exemptive scheme contained in proposed Regulation D, the Commission believes it is appropriate to include such offers and sales for purposes of calculating the aggregate offering price under proposed Rule 505.

Finally, in view of the increase in the offering limit, the proposed Rule would delete the Rule 242 exclusion from the aggregation formula for securities of the issuer sold pursuant to Regulation A pursuant to any employee plan as defined in paragraph (d)(1) of Rule 16b-3 under the Exchange Act. The aggregation provision proposed herein is consistent with a similar provision contained in proposed Rule 504.

The third change in proposed Rule 505 is the requirement contained in Rule 504 that the payment of sales commissions or similar remuneration can only be made to registered broker-dealers.

Finally, Proposed Rule 505 will retain the limitation on number of purchasers currently found in Rule 242(e). This will allow the issuer to sell its securities to an unlimited number of accredited investors and to 35 non-accredited investors. Although the aggregate offering amount has been substantially increased, the Commission believes the purchaser limitations should not be raised in order to preserve the private nature of the offering.

The Commission specifically invites comments on the proposed exemption described herein and the extent to which such an exemption provides a viable method of financing.

G. Rule 506--Exemption for Limited Offers and Sales of Securities Without Regard to Dollar Amount of Offering

Proposed Rule 506 would modify present Rule 146 in several respects. The most significant modification to Rule 146 is a proposal to eliminate the qualification requirements with respect to offerees. Many commentators have expressed the view that it is impossible to evaluate an offerees qualifications without providing the offeree basic information concerning the offering. Moreover, participants in the Small Business Hearings believed that the test for offerees was complicated and difficult for a small business to observe, particularly in light of the danger of inadvertently making an offer while trying to elicit facts about an offerees qualification and thereby losing the protection of Rule 146. It was maintained by these participants that eliminating the provisions for offeree qualifications would not result in a loss of protection to investors since an investor would still have to be qualified before purchasing the securities. In light of the comments received, the Commission is proposing to eliminate the requirement to determine the qualifications of each offeree. The Commission believes that the limitation as to the manner of the offering and the limitations as to disposition set forth in proposed Rule 502(c) and (d) are sufficient to assure that the offering is private in nature. However, as discussed below, the requirement that the issuer make a determination as to the purchasers qualifications will be retained in modified form.

The Commission is proposing to retain for purposes of Rule 506 the requirements contained in current Rule 146 relating to number and nature of purchasers. However, such requirements would be modified in two respects. First, with regard to the number of purchasers, proposed Rule 506 would be identical to proposed Rule 505 in that the issuer would be allowed to sell its securities to an unlimited number of accredited investors and to 35 other persons meeting the qualifications discussed below. The second modification of the Rule 146 requirements concerns the nature of the purchasers. Rule 506(b)(1) as proposed would require the issuer to make a determination prior to any sale that each non-accredited purchaser either alone or with his purchaser representative(s) has such knowledge and experience in financial and business matters that he is or they are capable of evaluating the merits and risks of the prospective investment. This requirement differs from current Rule 146 in that the economic risk test set forth in paragraph (d)(2)(ii) of Rule 146 has been eliminated. Commentators believed that where the purchaser is represented by person(s) meeting the sophistication standards, given information substantially equivalent to a registration statement and fully appraised of restrictions regarding resale, it is inappropriate to make a separate judgment concerning the investors ability to bear economic loss. The Commission agrees with these commentators and believes that the protections preserved in proposed Rule 506 are adequate to protect investors and, therefore, the economic risk test is not needed.

Proposed Rule 506 also amends current Rule 146(d) by incorporating the accredited investor in the rule. This approach is based on the presumption that accredited investors can fend for themselves without the protections afforded by registration and thereby satisfy the requirements of proposed Rule 506(b)(1) without a separate subjective determination by the issuer. The majority of commentators believed accredited investors as defined in proposed Rule 501(a) have the ability to fend for themselves in larger offerings contemplated under a Section 4(2) exemptive rule. The Commission agrees with these commentators and further would like to keep the accredited investor concept identical for purposes of proposed Rules 505 and 506. However, due to the novel approach of including the concept in a 4(2) exemptive rule, the Commission is requesting comment as to whether each category of accredited investor, specifically $100,000 purchasers and those persons who meet the net worth or income test, can sufficiently fend for themselves. Commentators are asked to focus upon those instances in which an offering pursuant to proposed Rule 506 is offered and sold solely to accredited investors and no information requirements are specified.

Finally, based on comment received, proposed Rule 506 would provide for the use of purchaser representatives. The requirements concerning purchaser representatives would be identical to those presently applicable to offeree representatives under Rule 146.

SUMMARY OF REGULATORY FLEXIBILITY ANALYSIS

The Commission has prepared an Initial Regulatory Flexibility Analysis in accordance with 5 U.S.C. §603 regarding Rule 215 and Regulation D proposed herein.

The analysis notes that Rule 215 and Regulation D are being proposed as a result of comments received in response to the Commissions inquiry relating to the effectiveness of the current Securities Act exemptive scheme and as a result of consultations with NASAA. The objective of proposed Rule 215 and Regulation D is to coordinate the various limited offering exemptions on both the state and federal levels, and to streamline the existing requirements applicable to private offers and sales of securities thereby creating a more coherent pattern of exemptive relief, particularly as it relates to the capital formation needs of small business.

The Commission recognizes the need to formulate compliance and reporting requirements that take into account the various costs involved in raising capital and recognizes the need to clarify and simplify the provisions currently contained in Rules 146, 240 and 242. In some cases proposed Regulation D will increase the burden to issuers currently using Rules 146, 240, and 242 as indicated in the Initial Regulatory Flexibility Analysis. Nevertheless, the Commission believes the increased benefits of Regulation D outweigh the increased burdens and, therefore, deems it appropriate to consider the proposals contained herein.

A copy of the Initial Regulatory Flexibility Analysis may be obtained by contacting Paula L. Chester, Office of Small Business Policy, Division of Corporation Finance, U.S. Securities and Exchange Commission, 500 North Capitol Street, Washington, D.C. 20549 at (202) 272-2644.

TEXT OF PROPOSED RULES

17 CFR Chapter II is proposed to be amended as follows:

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

1. By rescinding §230.146.

2. By rescinding §230.240.

3. By rescinding §230.242.

4. By adding a new §230.215 to read as follows:

§230.215 The term "accredited investor" as used in section 2(15)(ii) of the Securities Act of 1933 15 U.S.C. 77b(15)(ii) (the "Act") shall include the following persons:

(a) Any entity organized for the purpose of making investments in securities described in sections 55(a)(1) through (3) of the Investment Company Act of 1940 and which makes available significant managerial assistance as defined in section 2(a)(47) of that Act with respect to the issuers of such securities;

(b) Any college or university endowment fund with assets in excess of $25 million;

(d) Any person who purchases $100,000 or more of securities of the issuer per issue for any combination of (1) cash, (2) an obligation to pay which provides for full resource against the purchaser of the securities and for discharge of the obligation within 60 days of the first issuance of the securities, (3) an unconditional obligation to pay to be discharged within two years of the first issuance of the securities and which is secured by an unconditional letter of credit issued by a bank as defined in section 3(a)(2) of the Act, or (4) the cancellation of any indebtedness owed by the issuer to the purchaser;

(e) Any natural person who, at the time of the offering, has a net worth in excess of $750,000; and

(f) Any natural person who had an adjusted gross income in excess of $100,000 as reported for Federal income tax purposes in his most recent tax return.

5. By adding a new Regulation D, §§230.501 to 230.506 to read as follows:

REGULATION D --RULES GOVERNING THE LIMITED OFFER AND SALE OF SECURITIES WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933

Preliminary Notes

1. The following rules relate to transactions exempted from the registration requirements of section 5 of the Securities Act of 1933 (the "Act") 15 U.S.C. 77a et seq., as amended. Such transactions are not exempt from the antifraud provisions of the federal securities laws or from the civil liability provisions of section 12(2) of the Act or other provisions of the federal securities laws. Pursuant to such provisions, issuers are reminded of their obligation to provide such further material information, if any, as may be necessary to make the information required under this regulation, in light of the circumstances under which it is furnished, not misleading.

2. Nothing in these rules obviates the need to comply with any applicable state law relating to the offer and sale of securities.

3. Reliance on any rule herein does not act as an election; the issuer can also claim the availability of any other applicable exemption.

4. These rules are available only to the issuer of the securities and are not available to affiliates or other persons for resales of the issuers securities. The rules provide an exemption only for the transactions in which the securities are offered or sold by the issuer, not for the securities themselves. Except as provided by paragraph (a) of Rule 504, the securities acquired in a transaction effected in reliance on the rules contained herein are unregistered securities and have the same status as if they were acquired in a transaction pursuant to section 4(2) of the Act.

5. In view of the objective of the rules contained herein and the purposes and policies underlying the Act, the regulation is not available to any issuer with respect to any transaction which, although in technical compliance with the rules contained herein, is part of a plan or scheme to evade the registration provisions of the Act. In such cases registration pursuant to the Act is required.

§230.501 Definitions and terms used in §§230.501 to 230.506.

As used in §§230.501 to 230.506, the following terms shall have the meaning indicated:

(a) Accredited investor. The term "accredited investor" shall mean any person who the issuer and any person acting on the issuers behalf with respect to such investors have reasonable grounds to believe and do believe, after reasonable inquiry, comes within any of the following categories at the time of the sale of the securities of the issuer pursuant to §§230.505 or 230.506:

(1) Any bank as defined in section 3(a)(2) of the Act whether acting in its individual or fiduciary capacity; insurance company as defined in section 2(13) of the Act; investment company registered under the Investment Company Act of 1940 ("Investment Company Act") or a business development company as defined in section 2(a)(48) of that Act; Small Business Investment Company licensed by the U.S. Small Business Administration under section 301 (c) or (d) of the Small Business Investment Act of 1958; employee benefit plan within the meaning of Title I of the employee Retirement Income Security Act of 1974, if the investment decision is made by a plan fiduciary, as defined in section 3(21) of such Act, which is either a bank, insurance company, or registered investment adviser;

(2) Any entity organized for the purpose of making investments in securities described in sections 55 (a)(1) through (3) of the Investment Company Act of 1940 and which makes available significant managerial assistance as defined in sections 2(a)(47) of the Act with respect to the issuers of such securities;

(3) Any college or university endowment fund with assets in excess of $25 million;

(4) Any director or executive officer of the issuer of the securities being offered or sold;

(5) Any person who purchases $100,000 or more of securities of the issuer per issue for any combination of (i) cash, (ii) an obligation to pay which provides for full recourse against the purchaser of the securities and for discharge of the obligation within 60 days of the first issuance of the securities, (iii) an unconditional obligation to pay to be discharged within two years of the first issuance of the securities and which is secured by an unconditional letter of credit issued by a bank as defined in section 3(a)(2) of the Act, or (iv) the cancellation of any indebtedness owned by the issuer to the purchaser;

(6) Any natural person whose individual net worth at the time of the offering is in excess of $750,000; and

(7) Any natural person who had an individual adjusted gross income in excess of $100,000 as reported for Federal income tax purposes in his most recent tax return.

(b) Affiliate. The term "affiliate" of a person shall mean a person that directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with such persons.

(c) Business Combinations. The term "business combination" shall mean any transaction of the type specified in paragraph (a) of Rule 145 under the Act 17 CFR §230.145 and any transaction involving the acquisition by one issuer, in exchange solely for all or a part of its own or its parents voting stock, of stock of another issuer if, immediately after the acquisition, the acquiring issuer has control of the other issuer (whether or not it had control before the acquisition).

(d) Calculation of number of purchasers. The following shall apply in calculating the number of purchasers under §230.505(b) and §230.506(b).

(1) For purposes of computing the number of purchasers only, the following purchasers shall be excluded:

(i) Any relative, spouse, or relative of the spouse of a purchaser who has the same home as the purchaser;

(ii) Any trust or estate in which a purchaser or any of the persons related to him as specified in paragraphs (d)(1)(i) or (d)(1)(iii) of this section collectively have 50 percent of the beneficial interest (excluding contingent interests);

(iii) Any corporation or other organization of which a purchaser or any of the persons related to him as specified in paragraphs (d)(1)(i) or (d)(1)(ii) of this section collectively are the beneficial owners of more than 50 percent of the equity securities (excluding directors qualifying shares) or equity interests; and

(iv) Any accredited investor.

(2) There shall be counted as one purchaser any corporation or other organization except that, if such entity was organized for the specific purpose of acquiring the securities offered, each beneficial owner of equity interests or equity securities in such entity shall count as a separate purchaser for all provisions of this rule.

Note: The issuer must satisfy all the other provisions of this regulation with respect to all purchasers whether or not they are included in computing the number of purchasers. Clients of an investment adviser or customers of a broker or dealer shall be considered to be the "purchasers" for purposes of the rule regardless of the amount of discretion given to the investment adviser or broker or dealer to act on behalf of the client or customer.

(e) Calculation of aggregate offering price. The aggregate offering price shall be calculated including all consideration received for the issuance of securities of the issuer, including cash, services, property, notes, cancellation of debt, or other consideration. Where securities which have no determinable market value are offered in exchange for outstanding securities, claims, property, or services, the aggregate offering price thereof shall be computed at the public offering price of securities of the same class for cash, or if no cash offering is to be made, then upon the basis of the value of the securities, claims, property, or services to be received in exchange, as established by bona fide sales made within a reasonable time, or in the absence of such sales, upon the basis of the fair value of the securities, claims, property, or services to be received in exchange as determined by some accepted standard.

(f) Executive officer. The term "executive officer" shall mean the president, secretary, treasurer, any vice president in charge of a principal business function (such as sales, administration, or finance) and any other person who performs similar policy-making functions for the issuer. Executive officers of subsidiaries may be deemed executive officers of the issuer if they perform such policy functions for the issuer.

(g) Issuer. The definition of the term "issuer" in section 2(4) of the Act shall apply, Provided, That, notwithstanding that definition, in the case of a proceeding under the Bankruptcy Act, the trustee, receiver, or debtor in possession shall be deemed to be the issuer in an offering for purposes of a plan of reorganization or arrangement, if the securities offered are to be issued pursuant to the plan, whether or not like securities are offered under the plan in exchange for securities of, or claims against, the debtor.

(h) Predecessor. A "predecessor" of an issuer shall mean (1) a person the major portion of whose assets has been acquired directly or indirectly by the issuer or (2) a person from whom the issuer acquired directly or indirectly the major portion of its assets.

(i) Purchaser representative. The term "purchaser representative" shall mean any person or persons, each of whom the issuer and any person acting on the issuers behalf with respect to such person or persons, after making reasonable inquiry, have reasonable grounds to believe and believe satisfies all of the following conditions:

(1) Is not an affiliate, director, officer or other employee of the issuer, or beneficial owner of 10 percent or more of any class of the equity securities or 10 percent or more of the equity interest in the issuer, except where the purchaser is:

(i) Related to such purchaser representative by blood, marriage or adoption, no more remotely than as first cousin;

(ii) Any trust or estate in which such purchaser representative or any persons related to him as specified in paragraphs (i)(1)(i) or (i)(1)(iii) of this section collectively have 100 percent of the beneficial interest (excluding contingent interests) or of which any such purchaser representative serves as trustee, executor, or in any similar capacity; or

(iii) Any corporation or other organization in which such purchaser representative or any persons related to him as specified in paragraphs (i)(1)(i) or (i)(1)(ii) of this section collectively are the beneficial owners of 100 percent of the equity securities (excluding directors qualifying shares) or equity interests;

(2) Has such knowledge and experience in financial and business matters that he, either alone or together with other purchaser representatives of the purchaser, is capable of evaluating the merits and risks of the prospective investment;

(3) Is acknowledged by the purchaser, in writing, during the course of the transaction, to be his purchaser representative in connection with evaluating the merits and risks of the prospective investment; and

(4) Discloses to the purchaser in writing, prior to the acknowledgement specified in paragraph (i)(3) of this section, any material relationship between such person or its affiliates and the issuer or its affiliates which then exist or is mutually understood to be contemplated or which has existed at any time during the previous two years, and any compensation received or to be received as a result of such relationship.

Note 1: Persons acting as purchaser representatives should consider the applicability of the registration and anti-fraud provisions relating to brokers and dealers under the Securities Exchange Act of 1934 ("Exchange Act") and relating to investment advisers under the Investment Advisers Act of 1940.

Note 2: The acknowledgement required by paragraph (i)(3) of this section and the disclosure required by paragraph (i)(4) of this section must be made with specific reference to each prospective investment. Advance blanket acknowledgement, such as for "all securities transactions" or "all private placements," is not sufficient.

Note 3: Disclosure of any material relationships between the purchaser representative or its affiliates and the issuer or its affiliates does not relieve the purchaser representative of its obligation to act in the interest of the purchaser.

(j) Securities of the issuer. The term "securities of the issuer" shall mean:

(1) All securities issued by an issuer;

(2) All securities issued by any predecessor of an issuer; and

(3) All securities issued by an affiliate of an issuer which was organized or became such an affiliate within the preceding twelve months, Provided, however, That any securities of an issuer who may be an affiliate of another issuer solely by virtue of a common affiliation with a business development company as defined in section 2(a)(48) of the Investment Company Act or with any entity described in §230.501(a)(2), shall not be deemed to be the "securities of an issuer" for purposes of this Regulation.

§230.502. General conditions to be met.

The following conditions shall be applicable to offers and sales made pursuant to §§230.504 to 230.506:

(a) Integration. All sales which are part of the same issue must meet all of the conditions of the rules contained in this regulation. For purposes of identifying which securities constitute a single issue, sales of securities and offers in connection therewith occurring more than six months prior to the commencement of an issue of securities pursuant to this regulation and sales of securities and offers in connection therewith occurring at any time after six months from the completion date of the issue pursuant to this regulation shall not be considered part of the same issue so long as there are during neither of said six-month periods any offers or sales of securities by or for the issuer of the same or similar class as those offered or sold pursuant to this regulation other than offers or sales of securities pursuant to any employee plan as defined in paragraph (d)(1) of Rule 16b-3 under the Exchange Act 17 CFR §240.16b-3 which meets the conditions in paragraphs (a) through (c) of that rule.

NOTE: The term "issue" is not defined in the Act or in the Regulation. In the event that the issuer offers or sells securities as to which the safe harbor described in paragraph (a) of this section is unavailable, the determination as to whether separate sales of securities are part of the same issue (i.e., are deemed to be "integrated") depends on the particular facts and circumstances. The following factors should be considered in determining whether offers and sales should be integrated for purposes of the exemptions under sections 3(b), 4(2) and 4(6) of the Act:

(a) whether the sales are part of a single plan of financing;

(b) whether the sales involve issuance of the same class of securities;

(d) whether the same type of consideration is received; and

(e) whether the sales are made for the same general purpose.

See Securities Act Release No. 4552 (November 6, 1962) (27 FR 11316).

(b) Information requirements.

(1) When information must be furnished.

(i) If the issuer sells an issue of securities either pursuant to §230.504 or only to accredited persons, this rule does not require that specific information must be furnished to purchasers.

(ii) In connection with an offering of securities pursuant to §§230.505 or 230.506, if the issuer sells an issue of securities only to non-accredited persons, or to both non-accredited and accredited persons, the issuer must furnish the information specified in paragraph (b)(2) of this section to all purchasers during the course of such offering and prior to sale. However, if 60% or more of the total offering is purchased by one or more institutions as defined by paragraphs (a)(i), (ii) and (iii) of §230.501 and all other persons purchase on the same or better terms, the issuer, in lieu of providing the information called for by paragraph (b) (2) to all purchasers, may elect to provide to individual non-accredited investors upon written request the same written information provided to such institutions and the information required by paragraph (b)(2).

(2) Type of information to be furnished.

(i) If the issuer is not subject to the reporting requirements of section 13 or section 15(d) of the Exchange Act 15 U.S.C. 78m and 78o(d) the following information must be furnished to purchasers during the course of the offering and prior to sale:

(A) Offerings Up to $1,500,000. The same kind of information as that specified in Part II of Form 1A of Regulation A, to the extent material to an understanding of the issuer, its business, and the securities being offered; Provided, however, That financial statements for its most recent fiscal year prepared in accordance with generally accepted accounting principles and certified to by an independent public accountant or certified public accountant shall be furnished if obtainable without unreasonable effort or expense and, if not, the issuers balance sheet shall be audited as of a date within 120 days of the commencement of the offering.

(B) Offerings of $1,500,001 to $5,000,000. The same kind of information as that specified in Part I of Form S-18, to the extent material to an understanding of the issuer, its business, and the securities being offered; Provided, however, That only the financial statements for the issuers most recent fiscal year must be certified by an independent public accountant or a certified public accountant.

(C) Offerings over $5,000,000. The same information as would be required to be included in a registration statement filed under the Act on the form which the issuer would be entitled to use, to the extent material to an understanding of the issuer, its business, and the securities being offered.

(ii) If the issuer is subject to the reporting requirements of sections 13 or 15(d) of the Exchange Act the following information must be furnished during the course of the offering and prior to sale:

(A) The issuers annual report to shareholders for the most recent fiscal year, which meets the requirements of §§240.14a-3 or 240.14c-3 under the Exchange Act, the information contained in any definitive proxy statements required to be filed pursuant to section 14 of the Exchange Act and in any reports or documents required to be filed by the issuer pursuant to sections 13(a) or 15(d) of the Exchange Act since the distribution of such annual report, and, if requested in writing, a copy of its most recent Form 10-K.

(B) If the issuer has not prepared an annual report to shareholders for the most recent fiscal year meeting the requirements of §§240.14a-3 or 240.14c-3, the issuer shall provide in lieu of the information specified in paragraph (A) the information contained in an annual report required to be filed on Form 10-K under the exchange Act or in a registration statement on Form S-1 under the Act or under Form 10 under the Exchange Act, whichever filing is the most recent required to be filed, and the information contained in any reports or documents required to be filed by the issuer pursuant to sections 13(a) or 15(d) of the Exchange Act since the filing of such annual report or registration statement.

(C) In addition to information specified in paragraphs (A) or (B), the issuer shall provide a brief description of the securities being offered, the use of the proceeds from the offering, and any material changes in the issuers affairs which are not disclosed in the documents furnished;

(iii) Notwithstanding paragraphs (b)(2)(i)(C) and (b)(2)(ii)(A)-(B) of this section, exhibits required to be filed with the Commission as part of a registration statement or report, other than an annual report to shareholders or parts thereof incorporated by reference in a Form 10-K report, need not be furnished to each purchaser if the contents of the exhibits are identified and such exhibits are made available to the purchaser prior to sale.

(iv) The issuer also shall make available to each purchaser at a reasonable time prior to the purchase of securities in a transaction pursuant to §§230.505 or 230.506 the opportunity to ask questions of, and receive answers from, the issuer or any person acting on its behalf concerning the terms and conditions of the offering and to obtain any additional information, to the extent that the issuer possesses such information or can acquire it without unreasonable effort or expense, necessary to verify the accuracy of the information obtained pursuant to paragraphs (b)(2)(i) and (ii).

(v) At a reasonable time prior to the purchase of securities by any non-accredited person in a transaction pursuant §§230.505 or 230.506 the issuer shall: (A) furnish such purchaser a brief description in writing of any written information obtained from the issuer in connection with the offering by any accredited person; and (B) inform such purchaser, in those instances where 60% or more of the offering is purchased by accredited investors as defined by paragraph (a)(1), (2) and (3) of §230.501, of his opportunity to obtain the same information as the issuer would be required to provide if only non-accredited investors were involved in the transaction. The issuer shall furnish any portion or all of such information to such non-accredited person upon his written request if made prior to the date of his purchase.

(vi) With respect to business combinations, in addition to information required by this paragraph, the issuer shall provide, in writing, to each purchaser at the time the plan is submitted to security holders or, in the case of an exchange, during the course of the transaction and prior to the sale, information about any terms or arrangements of the proposed transaction relating to any security holders that are not identical to those relating to all other security holders.

(c) Limitation on manner of offering. Except with respect to certain offers and sales made pursuant to §230.504(a), neither the issuer nor any person acting on its behalf shall offer or sell the securities by means of any form of general solicitation or general advertising, including, but not limited to, the following:

(1) Any advertisement, article, notice or other communication published in any newspaper, magazine or similar media or broadcast over television or radio; and

(2) Any seminar or meeting whose attendees have been invited by means of any general solicitation, mailing, advertisement, article, notice or other communication published in any of the medias described in paragraph (c)(1).

(d) Limitations on resale. Except with respect to certain offers and sales made pursuant to §230.504(a), in determining the availability of an exemption from registration for resale of securities acquired in a transaction pursuant to this regulation, such securities shall be deemed to have the same status as if they had been acquired in a transaction pursuant to section 4(2) of the Act and cannot be resold without registration under the Act or exemption therefrom. The issuer shall exercise reasonable care to assure that the purchasers of the securities are not underwriters within the meaning of section 2(11) of the Act, which reasonable care shall include, but not necessarily be limited to:

(1) Making reasonable inquiry to determine if the purchaser is acquiring the securities for his own account or on behalf of other persons;

(2) Disclosing to each purchaser in writing prior to sale that the securities have not been registered under the Act and, therefore, cannot be sold unless they are subsequently registered under the Act or an exemption from such registration is available; and

(3) Placing a legend on the certificate or other document evidencing the securities stating that the securities have not been registered under the Act and setting forth or referring to the restrictions on transferability and sale of the securities.

(e) Remuneration paid for solicitation or for sales. No commission or similar remuneration shall be paid or given directly or indirectly for soliciting any prospective buyer or in connection with sales of the securities in reliance on this regulation unless such commission or similar transaction related remuneration is paid or given to a broker-dealer who is registered both under section 15(b) of the Exchange Act and pursuant to applicable regulations in those states in which the securities are to be offered or to a bank as such term is defined in section 3(a)(2) of the Act, as permitted by law.

§230.503. Filing of notice of sales.

(a) The issuer shall file with the Commission five copies of a notice on Form D 17 CFR 239.500:

(1) No later than 30 days after the first sale of securities in any issue is made in reliance on this regulation;

(2) No later than 30 days after the completion date of the offering of such issue; Provided, however, That only one notice need be filed for purposes of paragraphs (a)(1) and (2) under this rule if the offering of the issue is completed within the 30 day period described in paragraph (a)(1) and the notice is filed no later than at the conclusion of that period but subsequent to the completion of the offering of the issue; and

(3) Every six months after the first sale of securities in the issue is made in reliance on this regulation unless the final notice by paragraph (a)(2) of this rule has been filed.

(b) Every notice on Form D shall be signed by a duly authorized officer of the issuer.

(c) If sales are made pursuant to §230.505, the notice shall contain an undertaking by the issuer to furnish to the Commission or to the securities administrator in any state which has jurisdiction over the offering, upon the written request of the staff, the information furnished by the issuer to any non-accredited person pursuant to paragraph (b)(2) of Rule 502.

(d) If more than one notice is required to be filed pursuant to paragraph (a) of this rule as to any issue of securities offered in reliance thereon, notices other than the original notice need only report the information required by Part C and any material change in the facts from those set forth in Parts A and B of the original notice.

(e) A notice on Form D shall be deemed to be filed with the Commission for purposes of paragraph (a) of this rule:

(1) As of the date on which it is received at the Commissions principal office in Washington, D.C.; or

(2) As of the date on which the notice is mailed by means of United States registered or certified mail to the Commissions Office of Small Business Policy, Division of Corporation Finance, at the Commissions principal office in Washington, D.C., if the notice is delivered to such office after the date on which it is required to be filed.

§230.504. Exemption for limited offers and sales of securities not exceeding $500,000.

(a) Offers and sales of securities made in accordance with all the terms and conditions of this rule and §§230.501 to 230.503 by an issuer who is not subject to the reporting requirements of sections 13 or 15(d) of the Exchange Act and who is not an investment company shall be exempt from the provisions of section 5 of the Act; Provided, however, That the provisions of §230.502(c) and (d) shall not be applicable to offers and sales of securities pursuant to this rule which are made exclusively in states which provide for the registration of such securities and require the delivery of a disclosure document prior to the time of sale and such securities are so registered in such states in accordance with the applicable rules.

(b) The aggregate offering price of an issue of securities of the issuer, as defined in paragraph (e) of §230.501, conducted in reliance on this rule shall not exceed $500,000, less the aggregate gross proceeds from any securities sold: (1) pursuant to this rule, §230.505, or §§230.251--230.264; and (2) in violation of section 5(a) of the Act in the twelve months preceding the commencement and during the offering of the issue of securities pursuant to this rule.

Note 1: The calculation of the aggregate offering price may be illustrated as follows. If an issuer sold $200,000 of its securities on June 1, 1981, in reliance on this rule, and an additional $100,000 on September 1, 1981, the issuer would be permitted to sell only $200,000 more until June 1, 1982, since until that date the issuer must count both prior sales toward the $500,000 limit. However, if the issuer made its third sale on June 1, 1982, the issuer could then sell $400,000 of its securities since the June 1, 1981, sale would not be within the preceding twelve months.

Note 2: If an issuer sold $100,000 of its securities on June 1, 1981, in reliance on this rule and an additional $4,500,000 on December 1, 1981 in reliance on §230.505 of this regulation, the issuer could not sell any of its securities pursuant to this rule until December 1, 1982, since the issuer must count the December 1, 1981 sale toward the $500,000 within the preceding twelve months limit.

Note 3: If a transaction relying on this rule fails to meet the limitation on the aggregate offering price, it does not affect the availability of the rule for the other transactions considered in applying such limitation. For example, if the issuer in note 1 made its third sale on May 31, 1982, in the amount of $250,000, the rule would not be available for that sale; but the exemption for the prior two sales would be unaffected.

§230.505. Exemption for limited offers and sales of securities not exceeding $5,000,000.

(a) Conditions to be met.

(1) Offers and sales of securities made in accordance with all the terms and conditions of

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