==========================================START OF PAGE 1====== April 19, 1996 Mr. Jonathan Katz Secretary Securities and Exchange Commission 450 Fifth Street, NW Washington, D.C. 20549 File # S7-9-96 Dear Mr. Katz: On behalf of the Direct Public Offering Council the following comments are offered for consideration at the upcoming 19(C) conference. The Direct Public Offering Council is an organization that provides a forum for discussion by individuals, companies, and regulators interested in the direct marketing of small company s securities offerings to the public. The Council has identified two major areas of concern to those involved in the direct public offering of securities. Those areas are the creation of a secondary market for small corporate offerings and questions relating to the use of the Internet in the offer and sale of small corporate offerings. The comments contained in this letter will focus primarily on those two issues. However, since small business owners face many other problems in their struggle to find sufficient capital to grow their companies; some additional issues will be addressed at the end of the letter. SECONDARY MARKET EXEMPTION The biggest problem that is faced by small companies trying to raise capital is the lack of a secondary market for the investors who invest in these types of offerings. In order to encourage the creation of a secondary market in small corporate offerings we would offer four suggestions for consideration. As used in this letter, small corporate registrations are not limited to SCOR offerings at the state level, but would also include Reg A and SB-2 offerings at the federal level. The first suggestion is that the SEC and the states support the direct marketing of registered offerings of small businesses on the Internet. Efforts should be made to remove any barriers from the creation of a direct secondary market for small corporate registrations on the Internet. This market must provide investors with accurate, accessible, and complete information. It ==========================================START OF PAGE 2====== must also avoid unneeded costs associated with small offerings. It is essential that small companies be allowed to use the Internet to market their securities directly to the public and to create a place where investors in the company can buy and sell the company s stock. In order to ensure that investors are protected, requiring that a current prospectus, current financial information, and current information about trading be available to potential investors are essential requirements. However, requirements that stock transfers occur through independent third parties, or that those involved in these transactions register as a broker dealer will eliminate the ability of most small companies to use the Internet. These companies face a tremendous challenge to raise the $500,000 to a $1,000,000 they need to expand their business. The additional cost to register a broker dealer or to create independent stock transfers will take away money needed for the company s business, without providing additional investor protection. If the investor is being given current financial information about the company and the transactions, they should be able to make investments without using a broker. If the stock transfer process is publicly disclosed to investors, having the actual transfer performed by an independent transfer agent would appear to be unnecessary for offerings of small companies. Second, the states and the SEC should establish a uniform secondary market exemption for small corporate registrations. Small companies that can provide current financial information to potential investors whether on the Internet or through other means should be allowed to rely upon a secondary market exemption for trading in their securities. The financial information available should be accurate and complete, but the exemption should not be based on achieving a certain level of earnings or upon a certain number of transactions in the security. The essential element is information that is accurate and readily available. Third, efforts should be made to allow for the creation of investment funds and investment clubs whose purpose it is to invest in small startup businesses. One proposal would be to increase the dollar limit for Rule 147 offerings to 10 million dollars. This would allow closed-end funds of an intrastate nature to be sold within a state subject to state review for these purposes. The ten million dollar limit would provide the fund with adequate capital to engage in this type of activity. A fund investing in these types of companies must have sufficient capital because of the long term nature of the investments. An additional change to Rule 147 that of providing a safe harbor for sales in adjacent states when a major metropolitan area is located within thirty miles of the adjacent state, would create a broader funding source for many small startup companies ==========================================START OF PAGE 3====== and would provide a potential secondary market for small business offerings. Those states with large metropolitan centers on their borders are often faced with a potential problem that half the investors live in one state and half in another. Companies would still be required to register or qualify for an exemption in the states in which they made sales. Finally, self regulatory agencies should be encouraged to adopt rules which would make it easier for their members to become involved in offerings less than five million dollars. A change to the requirements that a state registered offering must also go through NASD Corporate Financing would be a step in the right direction. If states have reviewed the broker s compensation on such offerings, why not eliminate the duplication of efforts and remove a major cost associated with brokers being involved in these types of offerings. The states and the SEC have done much to encourage small business to raise capital in the securities market. However, until an exit strategy can be provided for investors, both entrepreneurs and investors will face difficulties involving small corporate offerings. The issue of secondary markets for small business should be a top consideration of the conference. INTERNET OFFERINGS The use of the Internet for initial public offerings has received much publicity. Several companies have either begun or are in the process of using the Internet for the initial public sale of their securities. Small businesses have found that most broker dealers are unwilling to handle offerings less than five million dollars. This is particularly true of SCOR offerings. These types of securities must be able to be sold directly to the public by the company. The Internet provides a ready and inexpensive method to accomplish that goal. NASAA should be commended for the adoption of a clear policy on Internet offers. All states should be encouraged to adopt the NASAA Resolution on Internet Offers in their state s rules. Market Regulation and the states should ensure that only persons dealing directly with investors would need registration as brokers, dealers, or agents. Internet services that post information about Internet offerings should not be required to register as brokers, dealers or agents. In addition, states should recognize that the persons selling such offerings should not be required to take and pass exams regarding the general sale ==========================================START OF PAGE 4====== of securities. While requiring information and ensuring that the person selling the offering is not subject to disqualification, requiring a small business owner, who is marketing his own securities, to take an exam does not provide additional investor protection in relation to its cost to the business. In addition, some uniformity regarding approval of advertising for the Internet should be considered. The regional review of SCOR offerings should be a good model to use. If advertising is approved by one state for use on the Internet in conjunction with a registration in that state, the advertising should be accepted in all other states. The SEC should undertake discussions with foreign jurisdictions about policies regarding offers on the Internet to and from foreign jurisdictions. In addition, efforts should be made to allow reciprocity for small business offerings registered either in the states or with the SEC with those registered in foreign jurisdictions. The Internet provides a world wide access to information, it should also provide a world wide access to capital if the regulations of the home jurisdiction are being complied with. OTHER AREAS OF INTEREST The recommendations of the Disclosure Simplification Task Force should be adopted as they relate to small business. Increasing the limit on Reg A offerings to five million over a six-month time period is an idea that could encourage more broker s to become involved in these offerings. Increasing offerings under Section 504 of Regulation D, with a corresponding increase at the state level to five million a year would assist small offerings and increase the ability of either a direct market for these securities to be established or encourage broker dealers to become involved in offering and making markets in such securities. The creation of a special designation for persons who are in the business of selling only SCOR, Reg A, or SB-2 offerings and who work directly for the issuer on each offering should be considered. Such persons should be exempt from the need to be a member of the NASD or to register as a broker dealer and meet net capital requirements. However, providing information about these individuals to regulators and more importantly to investors is necessary. The requirement that such individuals take a general securities exam seems unnecessary. The requirement that such individuals should have a basic understanding of the law regarding securities transactions is appropriate since these individuals, unlike the small business person is in the business of selling these offerings. ==========================================START OF PAGE 5====== Finally, a discussion should be had by the participants regarding the recommendation to change the scope of all securities laws to not focus on offers but upon sales. This would be a major change for securities laws in the United States. This is an issue that has been raised repeatedly by attendees at the White House Conference on Small Business as well as the Commission s Conference on Small Business. It is an idea that would simplify the burden on small business. Given the communications available in today s world consideration of this issue is important. Investor protection should not suffer since liability for any violations would attach when money was invested and a sale occurred. However, small companies would no longer have to worry about where offers are being made. They could focus upon making sure that sales do not occur in any jurisdiction in violation of the law. Conclusion Many excellent changes have been made over the fast five years to encourage small businesses in raising capital. However, many other changes are needed. The Direct Public Offering Council invites all state and federal regulators to participate in discussions with leaders in the small business area. The Council is holding its next meeting in Los Angeles on Friday, May 3 from 2-5pm. Representatives from small businesses engaged in direct public offerings, professionals assisting in those offerings, and regulators will participate in the meeting. We believe only through an open dialogue can meaningful solutions be arrived at. We hope your conference is a success. The work that you do is essential to making sure that investors are protected and that the capital markets are available to all types of issuers. We thank you for the opportunity to provide our views and we welcome your views regarding the issues raised in this letter. We look forward to working with you in making the capital raising process easier for entrepreneurs and safer for investors. Sincerely, John R. Perkins Chairman ==========================================START OF PAGE 6====== DPO Council