-------------------- BEGINNING OF PAGE #1 ------------------- SECURITIES AND EXCHANGE COMMISSION [Release Nos. 33-6949; 34-30968; 39-2287; FR-39] 17 CFR Parts 200, 228, 229, 230, 239, 240, 249 and 260 RIN: 3235-AD88 Small Business Initiatives AGENCY: Securities and Exchange Commission. ACTION: Final Rules. SUMMARY: The Securities and Exchange Commission ("Commission") today adopted rules and forms under the Securities Act of 1933 ("Securities Act"), the Securities Exchange Act of 1934 ("Exchange Act") and the Trust Indenture Act of 1939 ("Trust Indenture Act") to facilitate capital raising by small businesses and reduce the costs of compliance with the federal securities laws. Specifically, the Commission has revised its general small issues exemption from the Securities Act registration requirements, Regulation A, as well as the Rule 504 exemption, and has adopted simplified registration and reporting disclosure requirements for "small business issuers," as defined. The Commission also is soliciting further public comment on Rule 504 with respect to excluding blank check companies from the exemption as adopted. EFFECTIVE DATE: August 13, 1992. Although Form S-18 is hereby rescinded, filings on that form will be accepted for filing through December 31, 1992. Amendments to pending registration statements on Form S-18 or S-1 may be made on Form SB-2 by small business issuers eligible to use that Form. FOR FURTHER INFORMATION CONTACT: The Division of Corporation Finance, Securities and Exchange Commission, 450 Fifth Street, N. W., Washington, D.C. 20549: (1) Regulation A and Rule 504, Richard K. Wulff (202-272-2644); (2) Regulation S-B, Securities Act Rules and Forms, Exchange Act Rules and Forms and Trust Indenture Act Rules, Amy S. Bowerman and Martin P. Dunn (202-272-2573); and (3) Financial statement requirements, Teresa E. Iannaconi (202-272-2553). SUPPLEMENTARY INFORMATION: The Commission today adopted revisions to the Regulation A-[1]- exemption from the registration requirements of the Securities Act-[2]- and Forms 1-A-[3]- and --------- FOOTNOTES --------- -[1]- 17 CFR 230.251-230.262. -[2]- 15 U.S.C. Section 77a et seq. -------------------- BEGINNING OF PAGE #2 ------------------- 2-A-[4]- used for such offerings and repealed Forms 3-A,-[5]- 4-A,-[6]- 5-A,-[7]- 6-A-[8]- and 7-A.-[9]- Form F-X-[10]- has been amended to permit its use by Canadian issuers engaged in a Regulation A offering or a registered offering on Form SB-2. In connection with these revisions to Regulation A, Securities Act Rule 175-[11]- and Exchange Act Rule 3b-6,-[12]- the Commission's "safe harbor" provisions for forward looking statements, have been revised to apply to statements made in a Regulation A offering statement and any written material submitted to the Commission pursuant to new Securities Act Rule 254. Proposed revisions to Rule 504-[13]- of Regulation D have been adopted with an exclusion for offerings by "blank check" companies. The Commission today also adopted an integrated disclosure system for "small business issuers." The simplified disclosure requirements for small business issuers are contained in Regulation S-B.-[14]- Amendments to Rules 405-[15]- and 481- [16]- under the Securities Act and Rule 12b-2-[17]- under the Exchange Act-[18]- define the small business issuers that are eligible to use the simplified disclosure forms. Form S-18- [19]- has been repealed and replaced with Form SB-2.-[20]- Forms S-2,-[21]-S-3,-[22]- S-8-[23]- and S-4-[24]- have been amended to reflect --------- FOOTNOTES --------- -[3]-(...continued) -[3]- 17 CFR 239.90. -[4]- 17 CFR 239.91. -[5]- 17 CFR 239.92. -[6]- 17 CFR 239.93. -[7]- 17 CFR 239.94. -[8]- 17 CFR 239.95. -[9]- 17 CFR 239.96. -[10]- 17 CFR 239.42. -[11]- 17 CFR 230.175. -[12]- 17 CFR 240.3b-6. -[13]- 17 CFR 230.504. -[14]- 17 CFR 228.10-228.702. -[15]- 17 CFR 230.405. -[16]- 17 CFR 230.481. -[17]- 17 CFR 240.12b-2. -[18]- 15 U.S.C. Section 78a et seq. -[19]- 17 CFR 239.28. -[20]- 17 CFR 239.10. -[21]- 17 CFR 239.12. -[22]- 17 CFR 239.13. -------------------- BEGINNING OF PAGE #3 ------------------- the new disclosure requirements of Regulation S-B. New Forms 10-SB-[25]-, 10-KSB-[26]- and 10-QSB-[27]- have been created to satisfy registration, annual and quarterly reporting obligations under the Exchange Act. Further, Item 7 of Form 8-K-[28]- has been amended to provide consistent financial statement instructions regarding small business acquisitions. Parallel changes have been made to Schedule 14A,-[29]- Schedule 14C,- [30]- and Rule 14a-3-[31]- under the Exchange Act. Rule 4a-1-[32]- under the Trust Indenture Act,-[33]- which provides an exemption from the requirement to issue securities pursuant to an indenture, has been revised to increase the dollar ceiling of that exemption. Trust Indenture Act Rule 4a-2-[34]- has been redesignated Rule 4a-3-[35]- and amended to increase the dollar ceiling included in the exemption from the requirement that the securities be issued pursuant to a qualified indenture. The Commission also adopted new Rule 4a-2-[36]- which permits an exemption from the Trust Indenture Act for issuances of securities under Regulation A. Finally, the Commission amended Rule 4d-9-[37]- and Rule 10a-5-[38]- under the Trust Indenture Act to reflect the availability of Form SB-2 to Canadian issuers. I. EXECUTIVE SUMMARY Today, with the adoption of major revisions to Securities Act registration exemptions under Rule 504 and Regulation A and the inauguration of an integrated registration and reporting system for small business issuers, the Commission has completed the first of its Small Business Initiatives announced in March of this year.-[39]- The remaining regulatory initiatives have been --------- FOOTNOTES --------- -[23]-(...continued) -[23]- 17 CFR 239.16b. -[24]- 17 CFR 239.25. -[25]- 17 CFR 249.210b. -[26]- 17 CFR 249.310b. -[27]- 17 CFR 249.308b. -[28]- 17 CFR 249.308. -[29]- 17 CFR 240.14a-101. -[30]- 17 CFR 240.14c-101. -[31]- 17 CFR 240.14a-3. -[32]- 17 CFR 20.4a-1. -[33]- 15 U.S.C. Section 77aaa et seq. -[34]- 17 CFR 260.4a-2. -[35]- 17 CFR 260.4a-3. -[36]- 17 CFR 260.4a-2. -[37]- 17 CFR 260.4d-9. -[38]- 17 CFR 260.10a-5. -[39]- See Securities Act Release No. 6924 (March 11, 1992)("March Release"). -------------------- BEGINNING OF PAGE #4 ------------------- proposed for public comment,-[40]- and the Commission's proposed Small Business Incentive Act of 1992 has been introduced in both the House of Representatives-[41]- and Senate of the U.S. Congress.-[42]- The March proposals were enthusiastically received by the small business commenters as a significant step to facilitating access to the public market for start-up and developing companies, and reducing the costs for small businesses to undertake to have their securities traded in the public markets. The exemptions and small business integrated registration and reporting system adopted today are substantially in the form proposed in the March Release. Regulation A has been revised to exempt public offerings of non-reporting companies of up to $5 million in a 12-month period and to permit the use of a simplified question-and-answer disclosure document. Companies conducting a Regulation A offering will be able to "test the waters" for potential interest in the company before having to prepare the mandated offering circular. In response to comment, Regulation A will continue to be available to qualifying Canadian issuers. The revisions to Rule 504 are adopted with one change -- Rule 504 will not be available to "blank check" companies. Under New Rule 504, as adopted, non-reporting companies will be permitted to sell up to $1 million of securities in a 12-month period, subject to anti-fraud prohibitions. No specific disclosure document is prescribed, and there is no proscription on general solicitation. Investors purchasing Rule 504 securities will receive freely transferable securities. The small business integrated registration and reporting system, modeled after Form S-18, is adopted with some refinements in response to public comment. The definition of small business issuer has been revised to include companies with annual revenues of less than $25 million whose voting stock does not have a public float of $25 million or more. As with Regulation A, Canadian issuers will be eligible to use the small business registration and reporting forms. Form numbers and other rules have been changed in anticipation of adoption of additional small business registration and reporting forms, as set forth in the accompanying release proposing further regulatory simplification for small business issuers.-[43]- Finally, the proposed changes to the rules under the Trust Indenture Act to increase the levels of debt that may be offered without full compliance with that Act are adopted as proposed. II. SMALL BUSINESS INITIATIVES A. Regulation A As adopted, the dollar ceiling for a Regulation A offering is now $5 million in any 12-month period,-[44]- including no more --------- FOOTNOTES --------- -[40]- See Securities Act Release No. 6943 (July 16, 1992) and Investment Company Act Release No. 18736 (June 5, 1992). -[41]- H.R. 4938, 102d Cong. 2d Sess. (April 9, 1992). -[42]- S. 2518, 102d Cong., 2d Sess. (April 2, 1992). -[43]- See Securities Act Release No. 6950 (hereinafter referred to as the "Proposing Release".) -[44]- Regulation A has been adopted pursuant to the authority granted to the Commission under section 3(b) of the Securities Act [15 U.S.C. Section 77c(b)] to provide exemptions from the registration requirements for issues of (continued...) -------------------- BEGINNING OF PAGE #5 ------------------- than $1.5 million in non-issuer resales.-[45]- In response to comment, the rule has been revised to make clear that the dollar amount is determined with reference to the dollar amount sold in the 12 months preceding the offering. Use of other "small issues" exemptions do not reduce the Regulation A dollar ceiling.-[46]- 1. Scope of the Exemption The categories of companies eligible to use the Regulation A exemption has been expanded from that proposed to include qualifying Canadian issuers as well as those non-operating entities proposed to be excluded for the first time (other than blank check offerings). Although, as noted in the Proposing Release, in recent years Canadians have not relied on the exemption, the changes in Regulation A may make the exemption more attractive not only to domestic but also Canadian companies.-[47]- Partnerships or certain other entities organized primarily for the purpose of investing in properties, commodities or other investment vehicles have long been eligible to use Regulation A, and their proposed exclusion has not been adopted. After consideration of public comment, the Commission believes it appropriate to reduce the costs for these small non-reporting issuers, particularly in view of the direct oversight by the Commission of the disclosures made under Regulation A. The current exclusions of issuers of fractional undivided interests in certain oil, gas or mineral rights-[48]-, and investment companies-[49]- are continued and the exclusion for "blank check" companies-[50]- is adopted. As under current --------- FOOTNOTES --------- -[44]-(...continued) securities which do not exceed $5 million under conditions which further the public interest and protection of investors. -[45]- Secondary offerings by affiliates are ineligible for a Regulation A exemption where the issuer has had no net income for each of the two most recent fiscal years. The escrow rule, as well as the recommended format for escrow (Form 7-A), and the companion ceiling reduction provisions in old Rule 253 have been eliminated, just as proposed. -[46]- E.g., Securities Act Rules 236, 504, and 505 [17 CFR 230.236, 504 and 505] and Regulations B [17 CFR 230.300-230.346], E [17 CFR 230.601-230.610a] and F [17 CFR 230.651-230.656]. -[47]- Canadian persons had been required to consent to service of process on forms established by the Commission (Forms 3-A, 4-A, 5-A and 6-A), which are now rescinded. Form F-X has been amended to permit its use for this purpose by Canadian issuers engaged in a Regulation A offering. -[48]- Regulation B provides exemptive relief for such issuers. -[49]- These include companies registered or required to be registered under the Investment Company Act of 1940, 15 U.S.C. Section 80a-1 et seq. -[50]- A "blank check" company is one that has no specific business or plan except to locate and acquire a presently unknown business or opportunity. In response to public comment, the Commission has determined to use a definition (continued...) -------------------- BEGINNING OF PAGE #6 ------------------- Regulation A, an issuer's securities may not be sold in reliance on the exemption if the company or a controlling person or underwriter, is subject to one of a series of enumerated legal remedies and sanctions.-[51]- Although several commenters suggested the inclusion of reporting small business issuers in the list of eligible companies, the Commission is of the view that particularly in view of the small business integrated registration and reporting system adopted today the availability of Regulation A for reporting companies is not necessary. A number of commenters addressed the Commission inquiry as to whether offerings of "penny stocks" should be prohibited under the Regulation A exemption. Most were of the view that lower priced offerings by legitimate small business issuers would be the main beneficiaries of the revised exemption and that there are now adequate safeguards governing the penny stock market to counter marketing abuses which have arisen in this market in the past. The Commission is persuaded that exclusion of legitimate small business operating companies from the exemption because of the trading price of their securities is not necessary for investor protection and would foreclose significant financing options to small developing companies. 2. Disclosure and Procedure Requirements Regulation A requires the qualification of a prescribed offering statement which has been filed with the Commission, and delivery of a required offering circular, the form and content of which has been adopted as proposed. Corporate issuers now have the option to use a question-and-answer format, in addition to the more traditional disclosure formats.-[52]- The Commission's safe harbor provisions relating to forward looking information have been specifically made applicable to Regulation A. Therefore, good faith projections, with a reasonable basis, of revenues, income, earnings per share, capital expenditures, dividends, capital structure and other financial items may be made in Regulation A filings and the "test the water" submissions and fall within the protection of the --------- FOOTNOTES --------- -[50]-(...continued) which precludes the use of Regulation A by any blank check issuer regardless of whether or not it is issuing a penny stock. See Section 7(b) of the Securities Act, 15 U.S.C. Section 77g(b). -[51]- The disqualification provisions describe specific sanctions against the issuer, its controlling persons and any underwriter in its employ which preclude reliance upon Regulation A. The Commission may, in appropriate circumstances, waive such disqualifications upon a showing of good cause. Because of the renumbering of the rules in Regulation A, a technical revision to the reference in Rule 505 of Regulation D, 17 CFR 230.505 which picks up the same disqualification provisions has been made. -[52]- The reintroduction of Canadian issuers into the list of Regulation A eligible companies necessitates a change to the instructions in Part F/S of the Form 1-A Offering Statement to require that Canadian financial statements be reconciled to U. S. generally accepted accounting principles. This position is consistent with a long-standing requirement in Regulation A. -------------------- BEGINNING OF PAGE #7 ------------------- Commission's safe harbor rules, under the same conditions as for other Commission filings.-[53]- Procedural and timing requirements for commencement of a Regulation A offering have been revised as proposed to conform to those used for registered offerings. Requirements as to form, legibility and signatures for the required offering statement have been adopted as proposed. The Commission has delegated to the staff the authority to grant requests to qualify offering statements under Regulation A.-[54]- The Commission retains the authority to deny such requests. The authority to act with respect to requests for withdrawals and abandonments of offering statements continues to be delegated to the staff.-[55]- As in the registration context, issuers may begin to offer the securities to be sold in a Regulation A offering as soon as the offering statement is filed. Once an offering statement is filed, a written offer can be made only through the use of a preliminary or final offering circular. As under the current Regulation, advertisements and radio and television broadcasts containing information specified by rule concerning the issuer and the securities being offered may be used, so long as they indicate from whom an offering circular may be obtained.-[56]- Sales may not be made under Regulation A until the offering statement is qualified. The timing of qualification of the offering statement has been conformed to that in registered offerings. Absent the use of a delaying notation procedure, an offering statement would be deemed qualified 20 calendar days after being first filed with the Commission.-[57]- The cover page of Form 1-A now contains the legend available under Rule 252(g)(2) which would have to be deliberately omitted by an issuer that wishes to be qualified 20 days after filing. Other Commission forms utilize this technique, which avoids unnecessary expense for issuers that inadvertently omit the legend. Delivery of a preliminary or final offering circular at least 48 hours prior to the confirmation of sale is required.-[58]- Offering circulars must be updated annually during the term of a continuous offering, as well as revised --------- FOOTNOTES --------- -[53]- In addition, the type of information called for by Items 4, 47, 48 and 49, relating to milestones and other forward looking information in the question-and-answer format would also be covered. -[54]- The authority has been delegated to the Director of the Division of Corporation Finance and the Regional Administrators. 17 CFR 200.30-1(c)(2); 17 CFR 200.30-6(b). -[55]- 17 CFR 200.30-1(c)(3); 17 CFR 200.30-6(b). -[56]- A note has been added to Rule 256 [17 CFR 230.256] to make clear that additional advertisements and scripts do not have to be filed if they are substantially the same as that previously filed. -[57]- Interim amendments to the offering statement would restart the 20 calendar day period. -[58]- This process is the same as that available with registered offerings. The preliminary offering circular must be substantially complete in order to satisfy this 48 hour rule. Pricing information, as defined in Rule 430A, 17 CFR2 30.430A, is not required to be included. -------------------- BEGINNING OF PAGE #8 ------------------- whenever the information presented has become false and misleading, material developments have occurred, or there has been a fundamental change in the information initially presented. Periodic information regarding the course of the distribution, as well as information about the application of the proceeds from the offering, must be filed with the Commission. Form 2-A has been amended to require data similar to that sought in connection with registered offerings. In response to comment, the provisions governing the filing of the Form 2-A to report sales and the use of proceeds, have been amended to clarify that the failure to file the Form 2-A does not cause the exemption to be lost. The failure continues to be a ground for suspension of the exemption by the Commission. A similar change has been made to the provisions regarding the filing of additional sales material. The bases for administratively suspending a Regulation A exemption have been adopted as proposed. Questions have been raised with respect to the impact of an administrative suspension upon prior offers and sales made in reliance upon Regulation A. The entry of a suspension in and of itself does not affect the exempt status of prior offers and sales under Regulation A. Of course, where the suspension is based on action or inaction that rendered the exemption unavailable, unregistered offers and sales would have to qualify for another exemption or would violate section 5 of the Securities Act. 3. Substantial and Good Faith Compliance The Commission has adopted the rule governing substantial and good faith compliance with the terms, conditions and requirements of Regulation A. Under this provision, an issuer will not necessarily lose the exemption with respect to a particular investor if the issuer failed to comply with a requirement under Regulation A, provided that the failure did not pertain to a provision of the rule directly intended to protect that person. The failure would, however, violate a Commission rule. Thus, for example, failure to deliver the mandated offering circular to a single investor, would preclude reliance on the exemption for that particular sale as a violation of Rule 251(d)(2), but would not, in and of itself, preclude reliance on the exemption for other offers and sales made in compliance with the Regulation. The exemption will not be lost if the issuer shows that the requirement was not intended to protect the particular investor, the violation was not material to the offering as a whole and the issuer had made a good faith attempt to comply with all of the requirements of Regulation A. The provisions regarding issuer qualification, as well as the requirements to file an offering statement and to stay within specified dollar limitations, are not subject to the substantial good faith compliance standard. B. "Testing the Waters" As discussed in the March Release, one of the major impediments to a Regulation A financing for a small start-up or developing company with no established market for its securities, is the cost of preparing the mandated offering statement. The full costs of compliance would be incurred without knowing whether there will be any investor interest in the company. To remedy this situation, the Commission proposed for the first time to permit companies relying on the Regulation A exemption to "test the waters" for potential interest in the company prior to filing and delivery of the mandated offering statement. All test the water documents are required to be -------------------- BEGINNING OF PAGE #9 ------------------- submitted to the Commission at the time of first use.-[59]- The proposal was enthusiastically endorsed by private sector commenters as a necessary and appropriate solution to a significant regulatory impediment to small business financing, and, as drafted, is consistent with investor protection interests. A number of refinements have been included in the test the water provisions in response to public comment. First, while the Regulation continues to require that the "testing of the waters" begin with a written solicitation of interest submitted to the Commission at the time of first use, the rules have been revised to make clear that submission of the document is not a condition to the exemption. Failure to comply with the requirement is a grounds for Commission suspension of the exemption. As proposed, the written test the water document was a free writing subject to the inclusion of two mandated statements - first, that no funds were being solicited or would be accepted, and secondly that a detailed offering document would follow. Some commenters suggested that even these few items should be deleted, while others suggested additional requirements or specific prescription of the content. The rule as adopted continues to provide for free writing with the inclusion of the following items: 1. a statement that no money is being solicited, or will be accepted; that no sales can be made until delivery and qualification of the offering circular, and that indications of interest involve no obligation or commitment of any kind; and 2. a brief, general identification of the company's business, products and chief executive officer. The rule has been revised to make clear that inclusion of these statements in the soliciting document is not a condition to the exemption, but failure to include the statements is a basis for Commission suspension of the exemption. An issuer may deliver the solicitation material to prospective investors, or publish it in a newspaper or other print media. In a change from the proposal and in response to public comments, the use of broadcast media for this purpose, whether on radio or television, is also permitted. At the time of submission to the Commission, the issuer must provide the name and telephone number of a person who can respond to questions regarding the document. The submission should be made at the Commission office (whether a Regional Office or Headquarters) where the issuer intends to file its Regulation A offering statement. In the case of a broadcast, any script should be submitted. Oral communications between the issuer and prospective investors are permitted but only after a solicitation of interest document has been submitted to the Commission. Once the offering statement required by Regulation A is filed with the Commission, the issuer may not continue to use its written "test the waters" solicitation materials. The rule requires that at least 20 calendar days elapse between the last use of the solicitation of interest document or broadcast and any sale of securities in the Regulation A offering. Compliance with the rules limiting the use of the test the water documents after filing of the offering statement is not a condition to the --------- FOOTNOTES --------- -[59]- The test the waters material submitted to the Commission will be a public document, placed in the Commission's files and subject to public inspection. The submission of subsequent soliciting material which is substantially the same as that already submitted to the Commission is not required. -------------------- BEGINNING OF PAGE #10 ------------------- exemption, but is a violation of the rule and is a basis for Commission suspension of the exemption. Questions have been raised as to the application of the Commission's integration doctrine to the situation where an issuer relies upon the test the water process, determines not to go forward with a Regulation A offering, but later decides to offer and sell securities either on some exempt basis or through registration under the Securities Act. The Commission does not believe it to be in either the investors' or the issuer's interest to deter resort to a registered offering because of a good faith change of plans. Thus, where an issuer decides to forego the Regulation A exempt offering and does not file a Regulation A offering statement with the Commission, but instead proceeds with a registered offering after testing the waters, the rules would treat the solicitations of interest made in reliance upon Rule 254 as exempt, provided that at least 30 days had elapsed between the issuer's last use of a written testing of the waters document and the filing of the registration statement, and that all written solicitation material had been submitted to the Commission. If the offering statement is filed, Rule 251(c) would apply. With respect to all other offerings, the provisions of Rule 251(c) would govern, whether or not test the water materials have been used pursuant to Rule 254. C. Rule 504 under Regulation D A significant number of commenters, particularly small businesses, favored the Commission's proposal to eliminate all restrictions on the Rule 504 exemption, and the revisions to Rule 504 are adopted as proposed, with one exception. Based upon its own experience and the views of certain commenters, the Commission has excluded blank check companies from Rule 504. While former Rule 504 now Rule 504a is still available to blank check companies,-[60]- The Commission is issuing a proposal that would revoke entirely their eligibility to conduct such offerings. Under new Rule 504, a public offering of up to $1 million in a 12-month period by a non-Exchange Act reporting company-[61]- is subject only to the anti-fraud and other civil liability provisions of the federal securities laws. While the filing of a Form D with the Commission continues to be required, the availability of the exemption is not contingent on that filing.-[62]- In light of the revisions to Rule 504, the special $100,000 exemption under Regulation A,-[63]- which permits offerings of that size to be made without the use of an offering --------- FOOTNOTES --------- -[60]- Rule 504a [17 CFR 230.504a] is a redesignated Rule 504. New Rule 504 reflects the changes made hereby. -[61]- Rule 504 is not available to investment companies. -[62]- See Securities Act Rules 504(b)(1), 505(a)(1) and 506(a)(1) [17 CFR 230.504(b)(1), 17 CFR 230.505(a)(1) and 17 CFR 230.506(a)(1)]. -[63]- In the past three years, only 6 of the 177 Regulation A filings made with the Commission were pursuant to the terms of Rule 257. -------------------- BEGINNING OF PAGE #11 ------------------- circular-[64]- is being eliminated. Commenters generally agreed that the changes to Rule 504 made Rule 257 unnecessary. D. Integrated Disclosure System for Registration and Reporting for Small Business Issuers 1. Introduction. The Commission is adopting an integrated registration, reporting and qualification system for small business issuers under the Securities Act, Exchange Act and Trust Indenture Act. Issuers that meet the definition of a small business issuer, are eligible to use this new small business integrated disclosure system. The system consists of specialized forms under the Securities Act and the Exchange Act that reference disclosure requirements located in one central depository - Regulation S-B. In addition, rules have been adopted to permit offerings of debt securities up to $10 million without full compliance with the Trust Indenture Act. The disclosure system adopted today is part of a two tiered system for small business issuers. In the Proposing Release, the Commission is proposing entry level, transitional disclosure for small business issuers entering the disclosure system and undertaking small offerings of securities. 2. Definition of Small Business Issuer As proposed, the Commission is adopting a revenue-based definition of small business issuer. This definition was favored by a majority of commenters. Generally, those that favored a revenue-based definition of small business issuer requested that the threshold be higher than the proposed $15 million. Others favored a market capitalization-based definition. Several commenters suggested that a combination of tests be used. In response to these comments, a small business issuer is defined as a company with revenues of less than $25 million. However, if the aggregate market value of the issuer's voting stock held by non-affiliates (referred to as the "public float") equals or exceeds $25 million, the issuer does not qualify as a small business issuer. An estimated 3,000 reporting public companies fall within the definition of small business issuer.-[65]- The definition of small business issuer has been revised to include Canadian issuers. This revision was made in response to comment that Canadian issuers are eligible to use Form S-18 and should therefore be eligible to use Form SB-2. Accordingly, the definition of small business issuer was revised to include Canadian registrants that otherwise meet the definition of small business issuer. A general instruction has been added to Regulation S-B directing Canadian small business issuers to the applicable foreign issuer disclosure requirements of Regulation S-K. Technical amendments have been made to rules under the Trust Indenture Act so as to permit the use of a Canadian trustee --------- FOOTNOTES --------- -[64]- Current Rule 257 is not available for issues of assessable stock or by those within the descriptions of Rule 253(a), i.e., an entity incorporated or organized within one year prior to filing without a net income from operations, or if a longer existence but no net income from operations in at least one of the prior two fiscal years. -[65]- This figure is derived from publicly available data sources which do not include all reporting companies in their databases. Accordingly, the actual number of publicly held companies that meet definitional tests may be higher. -------------------- BEGINNING OF PAGE #12 ------------------- in connection with the offering of debt securities on Form SB-2.-[66]- Accordingly, as adopted, a small business issuer is defined as a U.S. or Canadian entity with revenues of less than $25,000,000 unless the issuer's public float (the aggregate market value of voting stock held by non-affiliates) is $25 million or more. Investment companies are excluded from the definition. Further, if the small business issuer is a majority owned subsidiary of another company, its parent must also meet the definition of small business issuer. 3. Registration Requirements of the Securities Act Form SB-2-[67]- is the designated Securities Act registration form for small business issuers. As proposed, there is no dollar limit for offerings on Form SB-2 and the Form may be used for both initial and repeat offerings, and for both primary and secondary offerings. Small business issuers may file initial public offerings on Form SB-2 with the regional office closest to the issuer's principal place of business or at the Commission's headquarters.-[68]- All subsequent filings will be made at the Commission's headquarters. 4. Registration and Reporting under the Exchange Act The Commission has adopted a new series of forms and amendments to forms under the Exchange Act for small business issuers. Specifically, the Commission has adopted an Exchange Act registration statement form for small business issuers -- Form 10-SB. Form 10-KSB and Form 10-QSB are the designated annual and quarterly reports for small business issuers. An instruction was added to Item 7 of Form 8-K relating to small business acquisitions and general instructions were added to Schedules 14A and 14C, and Rule 14a-3, relating to their use by small business issuers. a. Financial Information Required by Regulation S-B The financial information required by Regulation S-B is substantially the same as the financial statement requirements of Form S-18 but has a component to address interim financial statement requirements. Item 310 of Regulation S-B is being adopted with several modifications. First, additional requirement are added as necessary in order to accommodate the inclusion of Canadian issuers in the SB series. Second, at the suggestion of several commenters, the definition of a significant business found in Rule 405 of Regulation C is being incorporated into Item 310 of Regulation S-B in lieu of cross-referencing. Finally, the ability to use pro forma financial statements filed on Form 8-K as the basis for testing significance of acquired businesses is imported from Regulation S-X. One commenter requested clarification of whether filings by a registrant which no longer qualifies as a small business issuer would be required to contain all information and schedules required by Regulation S-X for those periods during which the --------- FOOTNOTES --------- -[66]- Revisions were made to Rules 4d-9 and 10a-5 under the Trust Indenture Act. 17 CFR 260.4d-9, 17 CFR 260.10a-5. -[67]- As proposed, this registration statement form was designated Form SB-1. It has been redesignated Form SB-2 in light of the Commission's concurrent proposal of new Form SB-1, as a transitional Securities Act registration form for small business issuers registering small offerings. -[68]- Post-effective amendments to initial public offerings on Form SB-2 would be filed with the Commission office in which the initial registration statement was filed. -------------------- BEGINNING OF PAGE #13 ------------------- issuer qualified and reported as a small business. Consistent with the approach for annual reports following a Form S-18, if a registrant was permitted to and filed financial statements which did not comply with Regulation S-X and the issuer later elects or is required to provide financial statements on forms which require compliance with Regulation S-X, such compliance will not apply to periods in which the registrant was not required to and did not present such information. A further clarification in response to a comment letter involves interim financial information of development stage companies. Consistent with staff administrative policy, if a development stage company is not readily able to provide financial information for comparative interim periods before filing its initial public offering, the requirement to provide such information is waived. In a separate release, the Commission is proposing two revisions to these financial statement requirements for small business issuers. First, the Commission is proposing an automatic waiver of financial statement requirements relating to specified significant acquisitions when audited financial statements are not readily available. Second, the Commission is proposing to extend to initial public offerings of small business issuers the ability to conduct a registered offering within 90 days of year end without audited financial statements for the latest fiscal year. b. Narrative Disclosure in SB Series of Forms The narrative disclosure requirements in Regulation S-B are applicable to all registration and reporting obligations of small business issuers. The disclosure requirements in Regulation S-B generally parallel those of Regulation S-K. However, where such requirements were simplified or not required by Form S-18, Regulation S-B generally tracks the substantive disclosure requirements of Form S-18. Regulation S-B is adopted in substantially the same form as proposed. The significant changes between Regulation S-B as adopted and as proposed are outlined below.-[69]- --------- FOOTNOTES --------- -[69]- In response to comments, the following revisions were also made to Regulation S-B: * "Common stock" in Item 10(c)(2) was replaced with the term "common equity"; * "Market value" in Item 10(c)(3) was replaced with the term "public market" and the definition thereof has been expanded; * "Small business issuer" was revised to state simply that the term refers to the issuer and its consolidated subsidiaries; * The last sentence of Item 10(d)(1) requiring disclosure of only material information was deleted; * Item 101(a)(4) (number of employees) was redesignated as Item 101(b)(12) so as not to require three years of employment disclosure; * Item 101(b) was revised so as not to require disclosure of backlog data or disclosure of the names of material customers; (continued...) -------------------- BEGINNING OF PAGE #14 ------------------- Item 10(b) was added to specify the circumstances under which issuers may enter and exit from the small business registration and reporting system. Item 101(a) was revised is response to comment to reduce from five to three years the period for which disclosure of the small business issuer's business development is required. This marks a departure from Regulation S-K which requires disclosure of an issuer's business development over the course of the past five years. Item 102 was revised to specifically include, rather than cross reference, the Items of Form S-11 to which issuers that are engaged in real estate activity are required to respond. In response to comment, Item 201(a)(2) was revised to require disclosure of the amount of securities that may be resold pursuant to Rule 144. As adopted, Item 201(a)(2) conforms to the disclosure requirement of Form S-18. Item 201(b) was revised in response to comment and requires disclosure only of record holders. Item 303 has been revised to require Management's Discussion and Analysis ("MD&A"), rather than business plan disclosure, where the issuer has had revenues in each of the last two years --------- FOOTNOTES --------- -[69]-(...continued) * Item 101(b)(11) was revised in order to distinguish between company sponsored and customer sponsored research and development expenses to parallel Regulation S-K; * Item 103(a)(5) of Regulation S-B was revised so as to not mandate disclosure of the amount of damages; * Instruction 2 to Item 103 was revised so as to require disclosure of bankruptcy and receivership proceedings only with respect to the registrant; * "Disclose" was added to instruction 4 to Item 103; * "Material" was added to Item 202(b); * The parenthetical in Item 401(a)(1) was deleted; * Item 401(a)(5) was revised so as to only require disclosure of directorships in other publicly held companies; * Item 501(a)(8) was revised to not require red-ink; * "More" replaced the word "less" in Item 506(a); * Item 506(b) was revised to add the phrase "or since its inception, whichever period is shorter"; * An instruction was added to Item 507 to state that selling securityholder information may be combined with disclosure under Item 403; * Item 510 was revised to delete the undertaking therein and to cross reference the identical undertaking in Item 512; * Item 511 was revised to specifically reference listing fees; and * Item 601(b)(13) was revised to reference the SB forms. -------------------- BEGINNING OF PAGE #15 ------------------- (or the last full year and latest interim period). In addition, amendments were made to MD&A in response to comments that proposed Item 303 of Regulation S-B could have been interpreted to require more disclosure than its Regulation S-K counterpart. Specifically, the proposed instruction to proposed Item 303, restating language from the Commission's interpretive release on MD&A, was deleted in response to the comment that incorporating the release into the text of the Item raised questions about the scope of the Item. As the interpretive guidance in the MD&A release applies equally to both small and large issuers, the SB Item was revised to avoid suggesting otherwise. In addition, language from Item 303 of Regulation S-K was added to clarify that the discussion and analysis shall focus specifically on material events, trends and uncertainties known to management that could cause reported financial information not to be necessarily indicative of future operating results or financial condition. The statement from Regulation S-K Item 303 that issuers are encouraged but not required to discuss forward looking information has also been included in response to comment. As proposed, Item 402 of Regulation S-B, which calls for disclosure of executive compensation, was modeled after Form S-18, rather than Item 402 of Regulation S-K. After the small business initiatives were issued in the March Release, the Commission issued proposals to amend executive compensation disclosure requirements, to require a clear and concise tabular presentation of compensation paid or awarded to executive officers, and the directors' bases for making their compensation decisions.-[70]- The Commission proposed to exclude small business issuers from certain of the proposed executive compensation amendments -- those requiring additional information concerning the relationships between compensation committee or board members and the registrant where the company either does not have a compensation committee composed entirely of outside directors or has cross-compensation committee memberships with another registrant.-[71]- Comment was requested as to whether the exclusion for small business issuers was appropriate-[72]- and whether small business issuers should also be excluded from the proposed table providing disclosure about option value under various rates of stock appreciation.-[73]- The Commission will consider comment on, and reach a determination concerning, the scope of small business issuer executive compensation disclosure in connection with its compensation initiative.-[74]- In that connection, commenters may wish to address whether small business issuers should be excluded from additional aspects of the proposed executive compensation proposals, including the proposed performance chart-[75]- and --------- FOOTNOTES --------- -[70]- See Securities Act Release No. 6940 (June 23, 1992). -[71]- Proposed Item 402(j) (2) (i) (A), (B); see Securities Act Release No. 6940, 57 FR at 29596, 29605. -[72]- Id. at 29597. -[73]- Id. at 29588; see proposed Item 402(c), 57 FR at 29600. -[74]- Comment letters should refer to File No. S7-16-92. -[75]- Proposed Item 402(k), 57 FR at 29607. -------------------- BEGINNING OF PAGE #16 ------------------- compensation committee report.-[76]- Should small business compensation disclosure be limited to the proposed summary table?-[77]- Item 501 was revised in response to comment that inclusion of a separate column in the offering proceeds table is more burdensome on small business issuers. Accordingly, footnote disclosure of offering expenses, now required under Item 501, has been continued. As suggested by one commenter, the exhibits required by Items 601(b)(20) and (23) of Regulation S-K will also be required under Regulation S-B. These exhibits are required to be filed only if a small business issuer incorporates into its annual report on Form 10-KSB or quarterly report on Form 10-QSB a report submitted to shareholders. The Commission also adopted the redesignation of Item 17A of Form S-18 as Guide 7 under the Securities Act and Exchange Act. Accordingly, all issuers engaged in mining operations, including small business issuers, should refer to Guide 7 for industry specific disclosure requirements.-[78]- Small business issuers engaged in real estate operations, banking activities and oil and gas should also refer to the applicable industry guide. c. Operation of SB Reporting System For a company entering the Commission's disclosure system, either through a Securities Act or an Exchange Act registration statement, its eligibility to use the optional SB system will depend on the level of its revenues in its last full fiscal year, and its capitalization as of a date within 60 days prior to the offering in a Securities Act registration statement or the filing of the registration statement under the Exchange Act. Continued eligibility to use the system will be made at the commencement of each fiscal year. Once reporting, a company may continue to report under the small business integrated disclosure system until it exceeds the $25 million revenues for two consecutive years or public float test for two consecutive years, based on its annual report on Form 10-KSB. The two-year test is adopted to avoid the possibility that temporary changes in the level of revenues or public float, may force a small business to exit prematurely the small business disclosure system. Accordingly, a small business issuer must exceed one of the two tests, for two consecutive years, in order to become eligible for the small business disclosure system. In order for a reporting company to enter the small business disclosure system, it must meet the definition of small business issuer for two consecutive years. In entering the disclosure system, the issuer must meet both prongs of the test, revenues and public float, for two consecutive years. d. Use of Forms S-2, S-3, S-4 and S-8 by Small Business Issuers The Commission's proposal to add instructions to Forms S-2, S-3 and S-8 to enable small business issuers to use those forms while maintaining the SB level of disclosure has been adopted. Under these amendments, small business issuers are permitted to register securities on Forms S-2, S-3 and S-8 if the otherwise --------- FOOTNOTES --------- -[76]- Proposed Item 402(j)(1), 57 FR at 29605. -[77]- See proposed Item 402(b), 57 FR at 29599-600. -[78]- See proposed Items 801(g) and 802(g) of Regulation S-K [17 CFR 229.801(g) and 802(g)]. -------------------- BEGINNING OF PAGE #17 ------------------- meet the eligibility requirements for use of those forms.-[79]- References in those forms to the disclosure requirements of Regulation S-K will be deemed to be references to Regulation S-B for small business issuers. With respect to the continuous reporting eligibility requirements of Forms S-2 and S-3, the SB series of periodic reports filed by small business issuers are deemed to satisfy those requirements. Form S-4, the Securities Act registration form for business combinations, has been amended as proposed to permit its use by small business issuers through satisfaction of the Regulation S-B requirements.-[80]- Form S-4 is available to Form S-2 eligible small business issuers which are registering securities or are being acquired in the business combination transaction. e. Form 8-K Revisions. As proposed, an instruction has been added to Item 7 of Form 8-K, which requires the filing of historical and pro forma financial statements for significant business acquisitions. Item 7 refers to Regulation S-X for the determination of the periods for which the financial statements are required. A parallel instruction is included in Form SB-2 but the criteria for significance and the periods for which financial statements are required differ from Regulation S-X. The amendments incorporate an instruction in Form 8-K cross referencing financial statement requirements in Regulation S-B, which track the standard of significance which is found in Form SB-2, and derived from Form S-18. E. Amendments to Rules Under Trust Indenture Act. The Commission has adopted the proposed amendments to rules under the Trust Indenture Act that parallel the limited offering exemptions discussed above. Specifically, Rule 4a-1 has been amended to increase to $5 million the aggregate principal amount of securities that may be issued without an indenture.-[81]- The --------- FOOTNOTES --------- -[79]- The proposed inclusion of a small business issuer in Form S-3 is intended to recognize the potential use of that Form by small business issuers for offerings which do not require the non-affiliated public float specified in General Instruction B.1. to Form S-3; primary offerings of debt and on-convertible preferred securities, secondary offerings, rights offerings, dividend or interest reinvestment plans, and conversions or warrants. -[80]- Form SB-2 will be available only in "for cash" offerings of securities. Accordingly, small business issuers wishing to enter business combination transactions which involve the offer and sale of securities will continue to be required to register those transactions on Form S-4 or Form S-1. Small business issuers using Form S-1 are subject to the disclosure requirements of Regulation S-K. Small business issuers engaged in roll-up transactions on Form S-4 are also required to furnish the disclosure required by Item 901 et seq. of Regulation S-K. See Securities Act Release No. 6922, n.15 (October 30, 1991). -[81]- See Rule 4a-1 [17 CFR 260.4a-1] promulgated under Section 304(a)(8) of the Trust Indenture Act. Section 304(a)(8) exempts from the provisions of the Trust Indenture Act any security issued otherwise than under an indenture. This exemption is limited within a 12-month period to the $5 million amount of securities specified in Section 3(b) of the Securities Act, or such lesser amount as the Commission shall establish by rule. Rule 4a-1 currently limits the (continued...) -------------------- BEGINNING OF PAGE #18 ------------------- Commission also has adopted new Rule 4a-2 to exempt from compliance with the Trust Indenture Act any offering of debt securities that is exempt from registration under Regulation A. Former Rule 4a-2 has been redesignated as Rule 4a-3 and amended to increase to $10 million the aggregate principal amount of debt securities that may be issued under an indenture which need not be qualified under the Act.-[82]- Technical amendments also were made in order to permit Canadian issuers of debt securities to use a Canadian trustee in connection with a qualified indenture.-[83]- Small business issuers are reminded that an indenture, pursuant to which registered debt securities are offered, should be filed as an exhibit to the registration statement.-[84]- F. Other Amendments The Commission has adopted an amendment to Rule 481(b)(2) which requires a red-inked legend to be placed on a preliminary prospectus and a prospectus used in connection with Rule 430A to delete the reference to red ink. Thus the information required by Rule 481(b)(2) may be in any color ink. G. Availability of the Final Regulatory Flexibility Analysis The Commission has prepared a Final Regulatory Flexibility Analysis, pursuant to the requirements of the Regulatory Flexibility Act,-[85]- regarding the rules adopted today. This analysis indicates that the revisions should aid small businesses in their effors to raise capital while being consonant with the --------- FOOTNOTES --------- -[81]-(...continued) Section 304(a)(8) exemption to $2,000,000. -[82]- See Rule 4a-2 [17 CFR 260.4a-2] promulgated under Section 304(a)(9) of the Trust Indenture Act. The rights of the holders of the securities issued would be evidenced by the instrument sold to the holder and contract (indenture) under which that instrument was issued. See Division of Corporation Finance interpretive letter to Allied-Carson Corporation (February 12, 1976) with respect to debt securities issued without qualification of an indenture in reliance upon Section 304(a)(9) of the Trust Indenture Act: Among the provisions which we believe should be included in the indenture are the usual covenants, events of default, and the procedures by which the collective rights of security holders may be enforced. Although it is possible that a provision for the enforcement of collective rights might be effected without providing an indenture trustee, as a practical matter such collective rights are best enforced by a trustee who is accorded specific powers for this purpose. Such trustee need not meet the qualification and conflict requirements of Section 310 of the 1939 Act. -[83]- Specifically, Trust Indenture Act Rules 4d-9 and 10a-5 were amended to add Form SB-2 to the list of forms pursuant to which offerings of debt securities with a Canadian trustee may be made. -[84]- The indenture, which is an "[i]nstrument affecting the rights of security holders," is required to be filed as an exhibit to the registration statement by Item 601(b)(4) of Regulation S-K [17 CFR 229.601(b)(4)]. -[85]- 5 U.S.C. Section 604. -------------------- BEGINNING OF PAGE #19 ------------------- needs of and the protection of investors. The amendments are designed to minimize costs but do not sacrifice the important concerns of investors. A copy of the Final Regulatory Flexibility Analysis may be obtained from Twanna M. Young, Office of Small Business Policy, Division of Corporation Finance, Securities and Exchange Commission, 450 Fifth Street, N.W., Stop 7-8, Washington, D.C. 20549, (202) 272-2644. H. Cost-Benefit Analysis No specific empirical data was submitted in response to the Commission's invitation to provide information on the costs and benefits of the proposed revisions. However, the vast majority of the public commenters were of the view that the proposals if adopted would work some cost savings to issuers that chose to use the new procedures; further that investors would have adequate safeguards in the new system. I. Certain Other Findings As required by section 23(a) of the Exchange Act, the Commission has specifically considered the impact that these rulemaking actions would have on competition and has concluded that they would not impose a significant burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act. The Commission finds, in accordance with section 553(b) of the Administrative Procedure Act-[86]- that the action taken with respect to certain delegations of authority to the Director of the Division of Corporation Finance and the Regional Administrators relate solely to agency organization, procedure or practice, and that such section makes unnecessary the notice and prior publication ordinarily required by the Act.-[87]- J. Effective Date The rules and forms relating to the integrated registration and reporting system for small business issuers as well as the revisions to Rule 504 of Regulation D and Regulation A are effective August 13, 1992. Pursuant to 5 U.S.C. 553(d) (1), immediate effectiveness is appropriate because the rules being adopted grant new exemptions and relieve restrictions for small business issuers and certain securities offerings. The benefits of this system to both persons subject to the federal securities laws as well as potential investors should be available at the earliest possible time. III. STATUTORY BASIS, TEXT OF PROPOSALS AND AUTHORITY The amendments to the Commission's rules and forms are being adopted pursuant to sections 3(b), 6, 7, 8, 10, and 19(a) of the Securities Act, Sections 12, 13, 15(d) and 23(a) of the Exchange Act, and Sections 304(a) (8), 304(a) (9), 304(d) and 319 of the Trust Indenture Act. List of Subjects 17 CFR Parts 200, 228, 229, 230, 239, 240 and 249 Organization and program management, Reporting and recordkeeping requirements, Securities. 17 CFR Parts 260 Trusts and trustees. For the reasons set out in the preamble, title 17, chapter II of the Code of Federal Regulations is amended as follows: --------- FOOTNOTES --------- -[86]- 5 U.S.C. Section 553(b). -[87]- 5 U.S.C. Section 553. -------------------- BEGINNING OF PAGE #20 ------------------- PART 200 - ORGANIZATION; CONDUCT AND ETHICS; AND INFORMATION AND REQUESTS 1. The authority citation for part 200 continues to read as follows: Authority: 15 U.S.C. 77s, 78d-1, 78d-2, 78w, 79t, 77sss, 80a-37, 80b-11, unless otherwise noted. 2. By revising paragraph (c) of Section 200.30-1 to read as follows: Section 200-30-1 Delegation of authority to Director of Division of Corporation Finance. * * * * * (c) With respect to the Securities Act of 1933 (15 U.S.C. 77a, et seq.) and Regulation A thereunder (Section 230.251, et seq. of this chapter): (1) to authorize the granting of applications under Rule 262 (Section 230.262 of this chapter) upon a showing of good cause that it is not necessary under the circumstances that an exemption under Regulation A be denied; (2) to authorize the issuance of orders qualifying offering statements pursuant to Rule 252(g) (Section 230.252(g) of this chapter); and (3) to issue orders declaring offering statements withdrawn or abandoned pursuant to Rule 259 (Section 230.259 of this chapter). * * * * * 3. By revising paragraph (b) of Section 200.30-6 to read as follows: Section 200.30-6 Delegation of authority to Regional Administrators. * * * * * (b) With respect to the Securities Act of 1933, 15 U.S.C. 77a et seq. and Regulation A thereunder, Section 230.251 et seq. of this chapter, the same authority as that delegated to the Director of the Division of Corporation Finance in paragraphs (c)(2) and (c)(3) of Section 200.30-1. * * * * * 4. Part 228 is added to read as follows: PART 228 - INTEGRATED DISCLOSURE SYSTEM FOR SMALL BUSINESS ISSUERS Subpart A - Regulation S-B Section 228.10 (Item 10) General. Section 228.101 (Item 101) Description of Business. -------------------- BEGINNING OF PAGE #21 ------------------- Section 228.102 (Item 102) Description of Property. Section 228.103 (Item 103) Legal Proceedings. Section 228.201 (Item 201) Market for Common Stock and Related Stockholder Matters. Section 228.202 (Item 202) Description of Securities. Section 228.303 (Item 303) Management's Discussion and Analysis or Plan of Operation. Section 228.304 (Item 304) Changes In and Disagreements With Accountants on Accounting and Financial Disclosure. Section 228.310 (Item 310) Financial Statements. Section 228.401 (Item 401) Directors, Executive Officers, Promoters and Control Persons. Section 228.402 (Item 402) Executive Compensation. Section 228.403 (Item 403) Security Ownership of Certain Beneficial Owners and Management. Section 228.404 (Item 404) Certain Relationships and Related Transactions. Section 228.405 (Item 405) Compliance With Section 16(a) of the Exchange Act. Section 228.501 (Item 501) Front of Registration Statement and Outside Front Cover of Prospectus. Section 228.502 (Item 502) Inside Front and Outside Back Cover Pages of Prospectus. Section 228.503 (Item 503) Summary Information and Risk Factors. Section 228.504 (Item 504) Use of Proceeds. Section 228.505 (Item 505) Determination of Offering Price. Section 228.506 (Item 506) Dilution. Section 228.507 (Item 507) Selling Security Holders. Section 228.508 (Item 508) Plan of Distribution. Section 228.509 (Item 509) Interest of Named Experts and Counsel. Section 228.510 (Item 510) Disclosure of Commission Position on Indemnification for Securities ActLiabilities. -------------------- BEGINNING OF PAGE #22 ------------------- Section 228.511 (Item 511) Other Expenses of Issuance and Distribution. Section 228.512 (Item 512) Undertakings. Section 228.601 (Item 601) Exhibits. Section 228.701 (Item 701) Recent Sales of Unregistered Securities. Section 228.702 (Item 702) Indemnification of Directors and Officers. Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77aa[25], 77aa[26], 77ddd, 77eee, 77ggg, 77hhh, 77jjj, 77nnn, 77sss, 781, 78m, 78n, 78o, 78w, 80a-8, 80a-29, 80a-30, 80a-37, 80b-11, unless otherwise noted. Section 228.10 (Item 10) General. (a) Application of Regulation S-B. Regulation S-B is the source of disclosure requirements for "small business issuer" filings under the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act"). (1) Definition of small business issuer. A small business issuer is defined as a company that meets all of the following criteria: (i) has revenues of less than $25,000,000; (ii) is a U.S. or Canadian issuer; (iii) is not an investment company; and (iv) if a majority owned subsidiary, the parent corporation is also a small business issuer. Provided however, that an entity is not a small business issuer if it has a public float (the aggregate market value of the issuer's outstanding securities held by non-affiliates) of $25,000,000 or more. NOTE: The public float of a reporting company shall be computed by use of the price at which the stock was last sold, or the average of the bid and asked prices of such stock, on a date within 60 days prior to the end of its most recent fiscal year. The public float of a company filing an initial registration statement under the Exchange Act shall be determined as of a date within 60 days of the date the registration statement is filed. In the case of an initial public offering of securities, public float shall be computed on the basis of the number of shares outstanding prior to the offering and the estimated public offering price of the securities. (2) Entering and Exiting the Small Business Disclosure System. (i) A company that meets the definition of small business issuer may use Form SB-2 for registration of its securities under the Securities Act; Form 10-SB for registration of its securities under the Exchange Act; and Forms 10-KSB and 10-QSB for its annual and quarterly reports. -------------------- BEGINNING OF PAGE #23 ------------------- (ii) For a non-reporting company entering the disclosure system for the first time either by filing a registration statement under the Securities Act on Form SB-2 or a registration statement under the Exchange Act on Form 10-SB, the determination as to whether a company is a small business issuer is made with reference to its revenues during its last fiscal year and public float as of a date within 60 days of the date the registration statement is filed. See Note to paragraph (a) of this Item. (iii) Once a small business issuer becomes a reporting company it will remain a small business issuer until it exceeds the revenue limit or the public float limit at the end of two consecutive years. For example, if a company exceeds the revenue limit for two consecutive years, it will no longer be considered a small business. However, if it exceeds the revenue limit in one year and the next year exceeds the public float limit, but not the revenue limit, it will still be considered a small business. See Note to paragraph (a) of this Item. (iv) A reporting company that is not a small business company must meet the definition of a small business issuer at the end of two consecutive fiscal years before it will be considered a small business issuer for purposes of using Form SB-2, Form 10-SB, Form 10-KSB and Form 10-QSB. See Note to paragraph (a) of this Item. (v) The determination as to the reporting category (small business issuer or other issuer) made for a non-reporting company at the time it enters the disclosure system governs all reports relating to the remainder of the fiscal year. The determination made for a reporting company at the end of its fiscal year governs all reports relating to the next fiscal year. An issuer may not change from one category to another with respect to its reports under the Exchange Act for a single fiscal year. A company may, however, choose not to use a Form SB-2 for a registration under the Securities Act. (b) Definitions of terms. (1) Common Equity - means the small business issuer's common stock. If the small business issuer is a limited partnership, the term refers to the equity interests in the partnership. (2) Public market - no public market shall be deemed to exist unless, within the past 60 business days, both bid and asked quotations at fixed prices (excluding "bid wanted" or "offer wanted" quotations) have appeared regularly in any established quotation system on at least half of such business days. Transactions arranged without the participation of a broker or dealer functioning as such are not indicative of a "public market." (3) Reporting company - means a company that is obligated to file periodic reports with the Securities and Exchange Commission under section 15(d) or 13(a) of the Exchange Act. (4) Small business issuer - refers to the issuer and all of its consolidated subsidiaries. (c) Preparing the disclosure document. (1) The purpose of a disclosure document is to inform investors. Hence, information should be presented in a clear, concise and understandable fashion. Avoid unnecessary details, -------------------- BEGINNING OF PAGE #24 ------------------- repetition or the use of technical language. The responses to the items of this Regulation should be brief and to the point. (2) Small business issuers should consult the General Rules and Regulations under the Securities Act and Exchange Act for requirements concerning the preparation and filing of documents. Small business issuers should be aware that there are special rules concerning such matters as the kind and size of paper that is allowed and how filings should be bound. These special rules are located in Regulation C of the Securities Act (17 CFR 230.400 et seq.) and in Regulation 12B of the Exchange Act (17 CFR 240.12b-1 et seq.). (d) Commission policy on projections. The Commission encourages the use of management's projections of future economic performance that have a reasonable basis and are presented in an appropriate format. The guidelines below set forth the Commission's views on important factors to be considered in preparing and disclosing such projections. (See also 17 CFR 230.175 and 240.3b-6). (1) Basis for projections. Management has the option to present in Commission filings its good faith assessment of a small business issuer's future performance. Management, however, must have a reasonable basis for such an assessment. An outside review of management's projections may furnish additional support in this regard. If management decides to include a report of such a review in a Commission filing, it should also disclose the qualifications of the reviewer, the extent of the review, the relationship between the reviewer and the registrant, and other material factors concerning the process by which any outside review was sought or obtained. Moreover, in the case of a registration statement under the Securities Act, the reviewer would be deemed an expert and an appropriate consent must be filed with the registration statement. (2) Format for projections. Traditionally, projections have been given for three financial items generally considered to be of primary importance to investors (revenues, net income (loss) and earnings (loss) per share), projection information need not necessarily be limited to these three items. However, management should take care to assure that the choice of items projected is not susceptible to misleading inferences through selective projection of only favorable items. It generally would be misleading to present sales or revenue projections without one of the foregoing measures of income. The period that appropriately may be covered by a projection depends to a large extent on the particular circumstances of the company involved. For certain companies in certain industries, a projection covering a two or three year period may be entirely reasonable. Other companies may not have a reasonable basis for projections beyond the current year. (3) Investor understanding. Disclosures accompanying the projections should facilitate investor understanding of the basis for and limitations of projections. The Commission believes that investor understanding would be enhanced by disclosure of the assumptions which in management's opinion are most significant to the projections or are the key factors upon which the financial results of the enterprise depend and encourages disclosure of assumptions in a manner that will provide a frame-work for analysis of the projection. Management also should consider whether disclosure of the accuracy or inaccuracy of previous -------------------- BEGINNING OF PAGE #25 ------------------- projections would provide investors with important insights into the limitations of projections. (e) Commission policy on security ratings. In view of the importance of security ratings ("ratings") to investors and the marketplace, the Commission permits small business issuers to disclose ratings assigned by rating organizations to classes of debt securities, convertible debt securities and preferred stock in registration statements and periodic reports. In addition, the Commission permits, disclosure of ratings assigned by any nationally recognized statistical rating organizations ("NRSROs") in certain communications deemed not to be a prospectus ("tombstone advertisements"). Below are the Commission's views on important matters to be considered in disclosing security ratings. (1)(i) If a small business issuer includes in a filing any rating(s) assigned to a class of securities, it should consider including any other rating assigned by a different NRSRO that is materially different. A statement that a security rating is not a recommendation to buy, sell or hold securities and that it may be subject to revision or withdrawal at any time by the assigning rating organization should also be included. (ii)(A) If the rating is included in a filing under the Securities Act, the written consent of any rating organization that is not a NRSRO whose rating is included should be filed. The consent of any NRSRO is not required. (See Rule 436(g) under the Securities Act (Section 230.436(g) of this chapter.) (B) If a change in a rating already included is available before effectiveness of the registration statement, the small business issuer should consider including such rating change in the prospectus. If the rating change is material, consideration should be given to recirculating the preliminary prospectus. (C) If a materially different additional NRSRO rating or a material change in a rating already included becomes available during any period in which offers or sales are being made, the small business issuer should consider disclosing this information in a sticker to the prospectus. (iii) If there is a material change in the rating(s) assigned by any NRSRO(s) to any outstanding class(es) of securities of a reporting company, the registrant should consider filing a report on Form 8-K (Section 249.308 of this chapter) or other appropriate report under the Exchange Act disclosing such rating change. Section 228.101 (Item 101) Description of Business. (a) Business Development. Describe the development of the small business issuer during the last three years. If the small business issuer has not been in business for three years, give the same information for predecessor(s) of the small business issuer if there are any. This business development description should include: (1) Form and year of organization; (2) Any bankruptcy, receivership or similar proceeding; and -------------------- BEGINNING OF PAGE #26 ------------------- (3) Any material reclassification, merger, consolidation, or purchase or sale of a significant amount of assets not in the ordinary course of business. (b) Business of Issuer. Briefly describe the business and include, to the extent material to an understanding of the issuer: (1) Principal products or services and their markets; (2) Distribution methods of the products or services; (3) Status of any publicly announced new product or service; (4) Competitive business conditions and the small business issuer's competitive position in the industry and methods of competition; (5) Sources and availability of raw materials and the names of principal suppliers; (6) Dependence on one or a few major customers; (7) Patents, trademarks, licenses, franchises, concessions, royalty agreements or labor contracts, including duration; (8) Need for any government approval of principal products or services. If government approval is necessary and the small business issuer has not yet received that approval, discuss the status of the approval within the government approval process; (9) Effect of existing or probable governmental regulations on the business; (10) Estimate of the amount spent during each of the last two fiscal years on research and development activities, and if applicable the extent to which the cost of such activities are borne directly by customers; (11) Costs and effects of compliance with environmental laws (federal, state and local); and (12) Number of total employees and number of full time employees. Section 228.102 (Item 102) Description of Property. (a) Give the location of the principal plants and other property of the small business issuer and describe the condition of the property. If the small business issuer does not have complete ownership of the property, for example, others also own the property or there is a mortgage or lien on the property, describe the limitations on the ownership. Instructions to Item 102(a). 1. Small business issuers engaged in significant mining operations also should provide the information in Guide 7 (Section 229.801(g) and Section 229.802(g) of this chapter). 2. Small business issuers engaged in oil and gas producing activities also should provide the information in Guide 2 (Section 229.801(b) and Section 229.802(b) of this chapter). -------------------- BEGINNING OF PAGE #27 ------------------- 3. Small business issuers engaged in real estate activities should, in addition to Guide 5 (Section 229.801(e) of this chapter) provide responses to the following Items: (b) Investment Policies Describe the policy of the small business issuer with respect to each of the following types of investments. State whether there are any limitations on the percentage of assets which may be invested in any one investment, or type of investment, and indicate whether such policy may be changed without a vote of security holders. State whether it is the small business issuer's policy to acquire assets primarily for possible capital gain or primarily for income. (1) Investments in real estate or interests in real estate. Indicate the types of real estate in which the small business issuer may invest, for example, office or apartment buildings, shopping centers, industrial or commercial properties, special purpose buildings and undeveloped acreage, and the geographic area(s) of these properties. Briefly describe the method, or proposed method, of operating and financing these properties. Indicate any limitations on the number or amount of mortgages which may be placed on any one piece of property. (2) Investments in real estate mortgages. Indicate the types of mortgages, for example, first or second mortgages, and the types of properties subject to mortgages in which the small business issuer intends to invest, for example, single family dwellings, apartment buildings, office buildings, unimproved land, and the nature of any guarantees or insurance. Describe each type of mortgage activity in which the small business issuer intends to engage such as originating, servicing and warehousing, and the portfolio turnover policy. (3) Securities of or interests in persons primarily engaged in real estate activities. Indicate the types of securities in which the small business issuer may invest, for example, common stock, interest in real estate investment trusts, partnership interests. Indicate the primary activities of persons in which the small business issuer will invest, such as mortgage sales, investments in developed or undeveloped properties and state the investment policies of such persons. (c) Description of Real Estate and Operating Data. This information shall be furnished separately for each property the book value of which amounts to ten percent or more of the total assets of the small business issuer and its consolidated subsidiaries for the last fiscal year. With respect to other properties, the information shall be given by such classes or groups and in such detail as will reasonably convey the information required. (1) Describe the general character and location of all materially important properties held or intended to be acquired by or leased to the small business issuer and describe the present or proposed use of such properties and their suitability and adequacy for such use. Properties not yet acquired shall be identified as such. -------------------- BEGINNING OF PAGE #28 ------------------- (2) State the nature of the small business issuer's title to, or other interest in such properties and the nature and amount of all material mortgages, liens or encumbrances against such properties. Disclose the current principal amount of each material encumbrance, interest and amortization provisions, prepayment provisions, maturity date and the balance due at maturity assuming no prepayments. (3) Outline briefly the principal terms of any lease of any of such properties or any option or contract to purchase or sell any of such properties. (4) Outline briefly any proposed program for the renovation, improvement or development of such properties, including the estimated cost thereof and the method of financing to be used. If there are no present plans for the improvement or development of any unimproved or undeveloped property, so state and indicate the purpose for which the property is to be held or acquired. (5) Describe the general competitive conditions to which the properties are or may be subject. (6) Include a statement as to whether, in the opinion of the management of the small business issuer, the properties are adequately covered by insurance. (7) With respect to each improved property which is separately described, provide the following in addition to the above: (i) Occupancy rate; (ii) Number of tenants occupying ten percent or more of the rentable square footage and principal nature of business of each such tenant and the principal provisions of each of their leases; (iii) Principal business, occupations and professions carried on in, or from the building; (iv) The average effective annual rental per square foot or unit; (v) Schedule of the lease expirations for each of the ten years starting with the year in which the registration statement is filed, stating: (A) the number of tenants whose leases will expire, (B) the total area in square feet covered by such leases, (C) the annual rental represented by such leases, and (D) the percentage of gross annual rental represented by such leases; (vi) Each of the properties and components thereof upon which depreciation is taken, setting forth the: (A) federal tax basis, (B) rate, (C) method, and -------------------- BEGINNING OF PAGE #29 ------------------- (D) life claimed with respect to such property or component thereof for purposes of depreciation; (vii) The realty tax rate, annual realty taxes and estimated taxes on any proposed improvements. Instruction If the small business issuer has a number of properties, the information may be given in tabular form. Section 228.103 (Item 103) Legal Proceedings. (a) If a small business issuer is a party to any pending legal proceeding (or its property is the subject of a pending legal proceeding), give the following information (no information is necessary as to routine litigation that is incidental to the business): (1) name of court or agency where proceeding is pending; (2) date proceeding began; (3) principal parties; (4) description of facts underlying the proceedings; and (5) relief sought. (b) Include the information called for by paragraphs (a)(1) through (5) of this Item for any proceeding that a governmental authority is contemplating (if the small business issuer is aware of the proceeding). Instructions to Item 103. 1. A proceeding that primarily involves a claim for damages does not need to be described if the amount involved, exclusive of interest and costs, does not exceed 10% of the current assets of the small business issuer. If any proceeding presents the same legal and factual issues as other proceedings pending or known to be contemplated, the amount involved in such other proceedings shall be included in computing such percentage. 2. The following types of proceedings with respect to the registrant are not "routine litigation incidental to the business" and, notwithstanding instruction 1 of this Item, must be described: bankruptcy, receivership, or similar proceeding. 3. Any proceeding that involves federal, state or local environmental laws must be described if it is material; involves a damages claim for more than 10% of the current assets of the issuer; or potentially involves more than $100,000 in sanctions and a governmental authority is a party. 4. Disclose any material proceeding to which any director, officer or affiliate of the issuer, any owner of record or beneficially of more than 5% of any class of voting securities of the small business issuer, or security holder is a party adverse to the small business issuer or has a material interest adverse to the small business issuer. -------------------- BEGINNING OF PAGE #30 ------------------- Section 228.201 (Item 201) Market for Common Equity and Related Stockholder Matters. (a) Market information. (1) Identify the principal market or markets where the small business issuer's common equity is traded. If there is no public trading market, so state. (i) If the principal market for the small business issuer's common equity is an exchange, give the high and low sales prices for each quarter within the last two fiscal years and any subsequent interim period for which financial statements are required by Item 310(b). (ii) If the principal market is not an exchange, give the range of high and low bid information for the small business issuer's common equity for each quarter within the last two fiscal years and any subsequent interim period for which financial statements are required by Item 310(b). Show the source of the high and low bid information. If over-the-counter market quotations are provided, also state that the quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. (2) If the information called for by paragraph (a) of this Item is being presented in a registration statement relating to a class of common equity for which at the time of filing there is no established public trading market, indicate the amount(s) of common equity: (i) that is subject to outstanding options or warrants to purchase, or securities convertible into, common equity of the registrant; (ii) that could be sold pursuant to Rule 144 under the Securities Act or that the registrant has agreed to register under the Securities Act for sale by security holders; or (iii) that is being or has been proposed to be, publicly offered by the registrant unless such common equity is being offered pursuant to an employee benefit plan or dividend reinvestment plan), the offering of which could have a material effect on the market price of the registrant's common equity. (b) Holders. Give the approximate number of holders of record of each class of common equity. (c) Dividends. (1) Discuss any cash dividends declared on each class of common equity for the last two fiscal years and in any subsequent period for which financial information is required. (2) Describe any restrictions that limit the ability to pay dividends on common equity or that are likely to do so in the future. Instruction Canadian issuers should, in addition to the information called for by this Item, provide the information in Item 201(a)(1)(iv) of Regulation S-K and Instruction 4 thereto. Section 228.202 (Item 202) Description of Securities. (a) Common or Preferred Stock. -------------------- BEGINNING OF PAGE #31 ------------------- (1) If the small business issuer is offering common equity, describe any dividend, voting and preemption rights. (2) If the small business issuer is offering preferred stock, describe the dividend, voting, conversion and liquidation rights as well as redemption or sinking fund provisions. (3) Describe any other material rights of common or preferred stockholders. (4) Describe any provision in the charter or by-laws that would delay, defer or prevent a change in control of the small business issuer. (b) Debt Securities. (1) If the small business issuer is offering debt securities, describe the maturity date, interest rate, conversion or redemption features and sinking fund requirements. (2) Describe all other material provisions giving or limiting the rights of debtholders. For example, describe subordination provisions, limitations on the declaration of dividends, restrictions on the issuance of additional debt, maintenance of asset ratios, etc. (3) Give the name of any trustee(s) designated by the indenture and describe the circumstances under which the trustee must act on behalf of the debtholders. (4) Discuss the tax effects of any securities offered at an "original issue discount." (c) Other Securities To Be Registered. If the small business issuer is registering other securities, provide similar information concerning the material provisions of those securities. Section 228.303 (Item 303) Management's Discussion and Analysis or Plan of Operation. Small business issuers that have not had revenues from operations in each of the last two fiscal years, or the last fiscal year and any interim period in the current fiscal year for which financial statements are furnished in the disclosure document, shall provide the information in paragraph (a) of this Item. All other issuers shall provide the information in paragraph (b) of this Item. (a) Plan of operation. (1) Describe the small business issuer's plan of operation for the next twelve months. This description should include such matters as: (i) a discussion of how long the small business issuer can satisfy its cash requirements and whether it will have to raise additional funds in the next twelve months; (ii) a summary of any product research and development that the small business issuer will perform for the term of the plan; -------------------- BEGINNING OF PAGE #32 ------------------- (iii) any expected purchase or sale of plant and significant equipment; and (iv) any expected significant changes in the number of employees. (b) Management's Discussion and Analysis of Financial Condition and Results of Operations. (1) Full fiscal years. Discuss the small business issuer's financial condition, changes in financial condition and results of operations for each of the last two fiscal years. This discussion should address the past and future financial condition and results of operation of the small business issuer, with particular emphasis on the prospects for the future. The discussion should also address those key variable and other qualitative and quantitative factors which are necessary to an understanding and evaluation of the small business issuer. If material, the small business issuer should disclose the following: (i) Any known trends, events or uncertainties that have or are reasonably likely to have a material impact on the small business issuer's short-term or long-term liquidity; (ii) Internal and external sources of liquidity; (iii) Any material commitments for capital expenditures and the expected sources of funds for such expenditures; (iv) Any known trends, events or uncertainties that have had or that are reasonably expected to have a material impact on the net sales or revenues or income from continuing operations; (v) Any significant elements of income or loss that do not arise from the small business issuer's continuing operations; (vi) The causes for any material changes from period to period in one or more line items of the small business issuer's financial statements; and (vii) Any seasonal aspects that had a material effect on the financial condition or results of operation. (2) Interim Periods. If the small business issuer must include interim financial statements in the registration statement or report, provide a comparable discussion that will enable the reader to assess material changes in financial condition and results of operations since the end of the last fiscal year and for the comparable interim period in the preceding year. Instructions to Item 303 1. The discussion and analysis shall focus specifically on material events and uncertainties known to management that would cause reported financial information not to be necessarily indicative of future operating results or of future financial condition. 2. Small business issuers are encouraged, but not required, to supply forward looking information. This is distinguished from presently known data which will impact upon future operating -------------------- BEGINNING OF PAGE #33 ------------------- results, such as known future increases in costs of labor or materials. This latter data may be required to be disclosed. Section 228.304 (Item 304) Changes In and Disagreements With Accountants on Accounting and Financial Disclosure. (a)(1) If, during the small business issuer's two most recent fiscal years or any later interim period, the principal independent accountant or a significant subsidiary's independent accountant on whom the principal accountant expressed reliance in its report, resigned (or declined to stand for re-election) or was dismissed, then the small business issuer shall state: (i) Whether the former accountant resigned, declined to stand for re-election or was dismissed and the date; (ii) Whether the principal accountant's report on the financial statements for either of the past two years contained an adverse opinion or disclaimer of opinion, or was modified as to uncertainty, audit scope, or accounting principles, and also describe the nature of each such adverse opinion, disclaimer of opinion or modification; (iii) Whether the decision to change accountants was recommended or approved by the board of directors or an audit or similar committee of the board of directors; and (iv)(A) Whether there were any disagreements with the former accountant, whether or not resolved, on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to the former accountant's satisfaction, would have caused it to make reference to the subject matter of the disagreement(s) in connection with its report; or (B) The following information only if applicable. Indicate whether the former accountant advised the small business issuer that: (1) internal controls necessary to develop reliable financial statements did not exist; or (2) information has come to the attention of the former accountant which made the accountant unwilling to rely on management's representations, or unwilling to be associated with the financial statements prepared by management; or (3) the scope of the audit should be expanded significantly, or information has come to the accountant's attention that the accountant has concluded will, or if further investigated might, materially impact the fairness or reliability of a previously issued audit report or the underlying financial statements, or the financial statements issued or to be issued covering the fiscal period(s) subsequent to the date of the most recent audited financial statements (including information that might preclude the issuance of an unqualified audit report), and the issue was not resolved to the accountant's satisfaction prior to its resignation or dismissal; and (C) The subject matter of each such disagreement or event identified in response to paragraph (a) (1) (iv) of this Item; -------------------- BEGINNING OF PAGE #34 ------------------- (D) Whether any committee of the board of directors, or the board of directors, discussed the subject matter of the disagreement with the former accountant; and (E) Whether the small business issuer has authorized the former accountant to respond fully to the inquiries of the successor accountant concerning the subject matter of each of such disagreements or events and, if not, describe the nature of and reason for any limitation. (2) If during the period specified in paragraph (a) (1) of this Item, a new accountant has been engaged as either the principal accountant to audit the issuer's financial statements or as the auditor of a significant subsidiary and on whom the principal accountant is expected to express reliance in its report, identify the new accountant and the engagement date. Additionally, if the issuer (or someone on its behalf) consulted the new accountant regarding: (i) The application of accounting principles to a specific completed or contemplated transaction, or the type of audit opinion that might be rendered on the small business issuer's financial statements and either written or oral advice was provided that was an important factor considered by the small business issuer in reaching a decision as to the accounting, auditing or financial reporting issue; or (ii) Any matter that was the subject of a disagreement or event identified in response to paragraph (a) (1) (iv) of this Item, then the small business issuer shall: (A) Identify the issues that were the subjects of those consultations; (B) Briefly describe the views of the new accountant given to the small business issuer and, if written views were received by the small business issuer, file them as an exhibit to the report or registration statement; (C) State whether the former accountant was consulted by the small business issuer regarding any such issues, and if so, describe the former accountant's views; and (D) Request the new accountant to review the disclosure required by this Item before it is filed with the Commission and provide the new accountant the opportunity to furnish the small business issuer with a letter addressed to the Commission containing any new information, clarification of the small business issuer's expression of its views, or the respects in which it does not agree with the statements made in response to this Item. Any such letter shall be filed as an exhibit to the report or registration statement containing the disclosure required by this Item. (3) The small business issuer shall provide the former accountant with a copy of the disclosures it is making in response to this Item no later than the day that the disclosures are filed with the Commission. The small business issuer shall request the former accountant to furnish a letter addressed to the Commission stating whether it agrees with the statements made by the issuer and, if not, stating the respects in which it does not agree. The small business issuer shall file the letter as an exhibit to the report or registration statement containing this disclosure. If the letter is unavailable at the time of filing, -------------------- BEGINNING OF PAGE #35 ------------------- the small business issuer shall request the former accountant to provide the letter so that it can be filed with the Commission within ten business days after the filing of the report or registration statement. Notwithstanding the ten business day period, the letter shall be filed within two business days of receipt. The former accountant may provide an interim letter highlighting specific areas of concern and indicating that a more detailed letter will be forthcoming within the ten business day period noted above. The interim letter, if any, shall be filed with the report or registration statement or by amendment within two business days of receipt. (b) If the conditions in paragraphs (b)(1) through (b)(3) of this Item exist, the small business issuer shall describe the nature of the disagreement or event and the effect on the financial statements if the method had been followed which the former accountants apparently would have concluded was required (unless that method ceases to be generally accepted because of authoritative standards or interpretations issued after the disagreement or event): (1) In connection with a change in accountants subject to paragraph (a) of this Item, there was any disagreement or event as described in paragraph (a)(1)(iv) of this Item; (2) During the fiscal year in which the change in accountants took place or during the later fiscal year, there have been any transactions or events similar to those involved in such disagreement or event; and (3) Such transactions or events were material and were accounted for or disclosed in a manner different from that which the former accountants apparently would have concluded was required. Instructions to Item 304. 1. The disclosure called for by paragraph (a) of this Item need not be provided if it has been previously reported as that term is defined in Rule 12b-2 under the Exchange Act (Section 240.12b-2); the disclosure called for by paragraph (a) of this Item must be provided, however, notwithstanding prior disclosure, if required pursuant to Item 9 of Schedule 14A (Section 249.14a-101 et seq.). The disclosure called for by paragraph (b) of this Item must be furnished, where required, notwithstanding any prior disclosure about accountant changes or disagreements. 2. When disclosure is required by paragraph (a) of this Item in an annual report to security holders pursuant to Rule 14a-3 or Rule 14c-3 (Section 240.14a-3 or 240.14c-3 of this chapter), or in a proxy or information statement filed pursuant to the requirements of Schedule 14A (Section 240.14a-101 et seq.) or 14C (Section 240.14c-101 et seq.), in lieu of a letter pursuant to paragraph (a)(2)(ii)(D) or (a)(3) of this Item, before filing such materials with or furnishing such materials to the Commission, the small business issuer shall furnish the disclosure required by paragraph (a) of this Item to each accountant who was engaged during the period set forth in paragraph (a) of this Item. If any such accountant believes that the statements made in response to paragraph (a) of this Item are incorrect or incomplete, it may present its views in a brief statement, ordinarily expected not to exceed 200 words, to be included in the annual report or proxy or information statement. -------------------- BEGINNING OF PAGE #36 ------------------- This statement shall be submitted to the small business issuer within ten business days of the date the accountant receives the small business issuer's disclosure. Further, unless the written views of the newly engaged accountant required to be filed as an exhibit by paragraph (a)(2)(ii)(D) of this Item have been previously filed with the Commission, the small business issuer shall file a Form 8-K (17 CFR 249.308 of this chapter) along with the annual report or proxy or information statement for the purpose of filing the written views as exhibits. 3. The information required by this Item need not be provided for a company being acquired by the small business issuer if such acquiree has not been subject to the filing requirements of either section 13(a) or 15(d) of the Exchange Act, or, because of section 12(i) of the Exchange Act, has not furnished an annual report to security holders pursuant to Rule 14a-3 or Rule 14c-3 (Section 240.14a-3 or 240.14c-3 of this chapter) for its latest fiscal year. 4. In determining whether any disagreement or reportable event has occurred, an oral communication from the engagement partner or another person responsible for rendering the accounting firm's opinion (or their designee) will generally suffice as the accountant advising the small business issuer of a reportable event or as a statement of a disagreement at the "decision-making level" within the accounting firm and require disclosure under this Item. Section 228.310 (Item 310) Financial Statements. NOTES- 1. Financial statements of a small business issuer, its predecessors or any businesses to which the small business issuer is a successor shall be prepared in accordance with generally accepted accounting principles in the United States. 2. Regulation S-X [17 CFR 210.1 - 210.12] Form and Content of and Requirements for Financial Statements shall not apply to the preparation of such financial statements, except that the report and qualifications of the independent accountant shall comply with the requirements of Article 2 of Regulation S-X [17 CFR 210.2], Articles 3-19 and 3-20 shall apply to financial statements of foreign private issuers and small business issuers engaged in oil and gas producing activities shall follow the financial accounting and reporting standards specified in Article 4-10 of Regulation S-X [17 CFR 210.4-10] with respect to such activities. To the extent that Article 11-01 [17 CFR 210.11-01] (Pro Forma Presentation Requirements) offers enhanced guidelines for the preparation, presentation and disclosure of pro forma financial information, small business issuers may wish to consider these items. Financial statements of foreign private issuers shall be prepared and presented in accordance with the requirements of Item 18 of Form 20-F except that Item 17 may be followed for financial statements included in filings other than registration statements for offerings of securities unless the only securities being offered are: (a) upon the exercise of outstanding rights granted by the issuer of the securities to be offered, if such rights are granted by the issuer of the securities to be offered, if such rights are granted on a pro rata basis to all existing securities holders of the class of securities to which the rights attach and there is no standby underwriting in the United States or similar arrangement; or (b) pursuant to a dividend or interest reinvestment plan; or (c) upon the conversion of outstanding convertible securities or upon the exercise of outstanding transferrable warrants issued by the -------------------- BEGINNING OF PAGE #37 ------------------- issuer of the securities being offered, or by an affiliate of such issuer. 3. The Commission, where consistent with the protection of investors, may permit the omission of one or more of the financial statements or the substitution of appropriate statements of comparable character. The Commission by informal written notice may require the filing of other financial statements where necessary or appropriate. (a) Annual Financial Statements. Small business issuers shall file an audited balance sheet as of the end of the most recent fiscal year, or as of a date within 135 days if the issuers existed for a period less than one fiscal year, and audited statements of income, cash flows and changes in stockholders' equity for each of the two fiscal years preceding the date of such audited balance sheet (or such shorter period as the registrant has been in business). (b) Interim Financial Statements. Interim financial statements, which may be unaudited, shall include a balance sheet as of the end of the issuer's most recent fiscal quarter and income statements and statements of cash flows for the interim period up to the date of such balance sheet and the comparable period of the preceding fiscal year. Instructions to Item 310(b) 1. Where Item 310 is applicable to a Form 10-QSB (Section 249.308b) and the interim period is more than one quarter, income statements must also be provided for the most recent interim quarter and the comparable quarter of the preceding fiscal year. 2. Interim financial statements must include all adjustments which in the opinion of management are necessary in order to make the financial statements not misleading. An affirmative statement that the financial statements have been so adjusted must be included with the interim financial statements. (1) Condensed Format. Interim financial statements may be condensed as follows: (i) Balance sheets should include separate captions for each balance sheet component presented in the annual financial statements which represents 10% or more of total assets. Cash and retained earnings should be presented regardless of relative significance to total assets. Registrants which present a classified balance sheet in their annual financial statements should present totals for current assets and current liabilities. (ii) Income statements should include net sales or gross revenue, each cost and expense category presented in the annual financial statements which exceeds 20% of sales or gross revenues, provision for income taxes, discontinued operations, extraordinary items and cumulative effects of changes in accounting principles or practices. (Financial institutions should substitute net interest income for sales for purposes of determining items to be disclosed.) Dividends per share should be presented. (iii) Cash flow statements should include cash flows from operating, investing and financing activities as well as cash at the beginning and end of each period and the increase or decrease in such balance. -------------------- BEGINNING OF PAGE #38 ------------------- (iv) Additional line items may be presented to facilitate the usefulness of the interim financial statements including their comparability with annual financial statements. (2) Disclosure required and additional instructions as to Content. (i) Footnotes. Footnote and other disclosures should be provided as needed for fair presentation and to ensure that the financial statements are not misleading. (ii) Material Subsequent Events and Contingencies. Disclosure must be provided of material subsequent events and material contingencies notwithstanding disclosure in the annual financial statements. (iii) Significant Equity Investees. Sales, gross profit, net income (loss) from continuing operations and net income must be disclosed for equity investees which constitute 20% or more of a registrant's consolidated assets, equity or income from continuing operations. (iv) Significant Dispositions and Purchase Business Combinations. If a significant disposition or purchase business combination has occurred during the most recent interim period and the transaction required the filing of a Form 8-K (Section 249.308 of this chapter), pro forma data must be presented which reflects revenue, income from continuing operations, net income and income per share for the current interim period and the corresponding interim period of the preceding fiscal year as though the transaction occurred at the beginning of the periods. (v) Material Accounting Changes. Disclosure must be provided of the date and reasons for any material accounting change. The registrant's independent accountant must provide a letter in the first Form 10-QSB (Section 249.308b of this chapter) filed subsequent to the change indicating whether or not the change is to a preferable method. Disclosure must be provided of any retroactive change to prior period financial statements, including the effect of any such change on income and income per share. (vi) Development Stage Companies. A registrant in the development stage must provide cumulative from inception financial information. (c) Financial Statements of Businesses Acquired or to be Acquired. (1) Financial statements for the periods specified in paragraph (c)(3) of this Item should be furnished if any of the following conditions exist: (i) Consummation of a significant business combination accounted for as a purchase has occurred or is probable (the term "purchase" encompasses the purchase of an interest in a business accounted for by the equity method); or (ii) Consummation of a significant business combination to be accounted for as a pooling is probable. (2) A business combination is considered significant if a comparison of the most recent annual financial statements of the business acquired or to be acquired and the small business -------------------- BEGINNING OF PAGE #39 ------------------- issuer's most recent annual financial statements filed at or prior to the date of acquisition indicates that the business acquired or to be acquired meets any of the following conditions: (i) The small business issuer's and its other subsidiaries' investments in and advances to the acquiree exceeds 10 percent of the total assets of the small business issuer and its subsidiaries consolidated as of the end of the most recently completed fiscal year (for a proposed business combination to be accounted for as a pooling of interests, this condition is also met when the number of common shares exchanged or to be exchanged by the small business issuer exceeds 10 percent of its total common shares outstanding at the date the combination is initiated) or (ii) The small business issuer's and its other subsidiaries' proportionate share of the total assets (after intercompany eliminations) of the acquiree exceeds 10 percent of the total assets of the registrants and its subsidiaries consolidated as of the end of the most recently completed fiscal year, or (iii) The small business issuer's equity in the income from continuing operations before income taxes, extraordinary items and cumulative effect of a change in accounting principles of the acquiree exceeds 10 percent of such income of the small business issuer and its subsidiaries consolidated for the most recently completed fiscal year. Computational note: For purposes of making the prescribed income test the following guidance should be applied: If income of the small business issuer and its subsidiaries consolidated for the most recent fiscal year is at least 10 percent lower than the average of the income for the last five fiscal years, such average income should be substituted for purposes of the computation. Any loss years should be omitted for purposes of computing average income. (3)(i) Financial statements shall be furnished for the periods prior to the date of acquisition, for those periods for which the small business issuer is required to furnish financial statements. (ii) The financial statements covering fiscal years shall be audited. (iii) The separate audited balance sheet of the acquired business is not required when the small business issuer's most recent audited balance sheet filed is for a date after the acquisition was consummated. (iv) If none of the conditions in the definitions of significant subsidiary in paragraph (c)(2) of this Item exceeds 20%, income statements of the acquired business for only the most recent fiscal year and any interim period need be filed. (4) If consummation of more than one transaction has occurred or is probable, the significance tests shall be made using the aggregate impact of the businesses and the financial statements may be presented on a combined basis, if appropriate. (5) If the small business issuer made a significant business acquisition subsequent to the latest fiscal year end and filed a report on Form 8-K which included audited financial statements of such acquired business for the periods required by paragraph -------------------- BEGINNING OF PAGE #40 ------------------- (c)(3) and the pro forma financial information required by paragraph (d) of this Item, the determination of significance may be made by using the pro forma amounts for the latest fiscal year in the report on Form 8-K rather than by using the historical amounts for the latest fiscal year of the registrant. The tests may not be made by "annualizing" data. (d) Pro Forma Financial Information. (1) Pro forma information shall be furnished if any of the following conditions exist (for purposes of this Item, the term "purchase" encompasses the purchase of an interest in a business accounted for by the equity method): (i) During the most recent fiscal year or subsequent interim period for which a balance sheet is required by paragraph (b) of this Item, a significant business combination accounted for as a purchase has occurred; (ii) After the date of the most recent balance sheet filed pursuant to paragraph (a) or (b) of this Item, consummation of a significant business combination accounted for as a purchase or a pooling has occurred or is probable. (2) The provisions of paragraphs (c)(2) and (4) of this Item apply to paragraph (d) of this Item. (3) Pro forma statements should be condensed, in columnar form showing pro forma adjustments and results and should include the following: (i) If the transaction was consummated during the most recent fiscal year or subsequent interim period, pro forma statements of income reflecting the combined operations of the entities for the latest fiscal year and interim period, if any, or; (ii) If consummation of the transaction has occurred or is probable after the date of the most recent balance sheet required by paragraph (a) or (b) of this Item, a pro forma balance sheet giving effect to the combination as of the date of the most recent balance sheet. For a purchase, pro forma statements of income reflecting the combined operations of the entities for the latest fiscal year and interim period, if any, and for a pooling of interests, pro forma statements of income for all periods for which income statements of the small business issuer are required. (e) Real Estate Operations Acquired or to be Acquired. If, during the period for which income statements are required, the small business issuer has acquired one or more properties which in the aggregate are significant, or since the date of the latest balance sheet required by paragraph (a) or (b) of this Item, has acquired or proposes to acquire one or more properties which in the aggregate are significant, the following shall be furnished with respect to such properties: (1) Audited income statements (not including earnings per unit) for the two most recent years, which shall exclude items not comparable to the proposed future operations of the property such as mortgage interest, leasehold rental, depreciation, corporate expenses and federal and state income taxes; Provided, -------------------- BEGINNING OF PAGE #41 ------------------- however, That such audited statements need be presented for only the most recent fiscal year if: (i) the property is not acquired from a related party; (ii) material factors considered by the small business issuer in assessing the property are described with specificity in the registration statement with regard to the property, including source of revenue (including, but not limited to, competition in the rental market, comparative rents, occupancy rates) and expenses (including but not limited to, utilities, ad valorem tax rates, maintenance expenses, capital improvements anticipated); and (iii) the small business issuer indicates that, after reasonable inquiry, it is not aware of any material factors relating to the specific property other than those discussed in response to paragraph (e)(1)(ii) of this Item that would cause the reported financial information not to be necessarily indicative of future operating results. (2) If the property will be operated by the small business issuer, a statement shall be furnished showing the estimated taxable operating results of the small business issuer based on the most recent twelve month period including such adjustments as can be factually supported. If the property will be acquired subject to a net lease, the estimated taxable operating results shall be based on the rent to be paid for the first year of the lease. In either case, the estimated amount of cash to be made available by operations shall be shown. Disclosure must be provided of the principal assumptions which have been made in preparing the statements of estimated taxable operating results and cash to be made available by operations. (3) If appropriate under the circumstances, a table should be provided which shows, for a limited number of years, the estimated cash distribution per unit indicating the portion reportable as taxable income and the portion representing a return of capital with an explanation of annual variations, if any. If taxable net income per unit will be greater than the cash available for distribution per unit, that fact and approximate year of occurrence shall be stated, if significant. (f) Limited Partnerships. (1) Small business issuers which are limited partnerships must provide the balance sheets of the general partners as described in paragraphs (f)(2) through (f)(4) of this Item. (2) Where a general partner is a corporation, the audited balance sheet of the corporation as of the end of its most recently completed fiscal year must be filed. Receivables, other than trade receivables, from affiliates of the general partner should be deducted from shareholders' equity of the general partner. Where an affiliate has committed itself to increase or maintain the general partner's capital, the audited balance sheet of such affiliate must also be presented. (3) Where a general partner is a partnership, there shall be filed an audited balance sheet of such partnership as of the end of its most recently completed fiscal year. (4) Where the general partner is a natural person, there shall be filed, as supplemental information, a balance sheet of -------------------- BEGINNING OF PAGE #42 ------------------- such natural person as of a recent date. Such balance sheet need not be audited. The assets and liabilities should be carried at estimated fair market value, with provisions for estimated income taxes on unrealized gains. The net worth of such general partner(s), based on such balance sheet(s), singly or in the aggregate, shall be disclosed in the registration statement. (g) Age of Financial Statements. At the date of filing, financial statements included in filings other than filings on Form 10-KSB must be not less current than financial statements which would be required in Forms 10-KSB and 10-QSB if such reports were required to be filed. If required financial statements are as of a date 135 days or more prior to the date a registration statement becomes effective or proxy material is expected to be mailed, the financial statements shall be updated to include financial statements for an interim period ending within 135 days of the effective or expected mailing date. Interim financial statements should be prepared and presented in accordance with paragraph (b) of this Item: (1) When the anticipated effective or mailing date falls within 45 days after the end of the fiscal year, the filing may include financial statements only as current as the end of the third fiscal quarter; Provided, however, That if the audited financial statements for the recently completed fiscal year are available or become available prior to effectiveness or mailing, they must be included in the filing; (2) If the effective date or anticipated mailing date falls after 45 days but within 90 days of the end of the small business issuer's fiscal year, the small business issuer is not required to provide the audited financial statements for such year end provided that the following conditions are met: (i) The small business issuer is a reporting company and all reports due have been filed; (ii) For the most recent fiscal year for which audited financial statements are not yet available, the small business issuer reasonably and in good faith expects to report income from continuing operations before taxes; and (iii) For at least one of the two fiscal years immediately preceding the most recent fiscal year the small business issuer reported income from continuing operations before taxes. Section 228.401 (Item 401) Directors, Executive Officers, Promoters and Control Persons. (a) Identify directors and executive officers. (1) List the names and ages of all directors and executive officers and all persons nominated or chosen