Date: 8/17/98 4:04 PM Subject: S7-14-98 CHARLES W. BARKLEY Attorney at Law 7808 Pineville-Matthews Road (704) 543-8806 Suite 11 (704) 543-8863(Fax) Charlotte, NC 28226 Hon. Jonathan G. Katz, Secretary U.S. Securities and Exchange Commission Mail Stop 6-9 450 Fifth Street, N.W. Washington, D.C. 20549. Re: Proposed Rule Change - S7-14-98 Dear Mr. Katz: I submit the following response to the Commission's request for public comment on proposed revisions to Rule 504 of Regulation D. I suggest that a less drastic regulatory revision would be to permit the Issuer to select from two alternatives: (a) a 504 offering of restricted securities as proposed in the release or (b) a 504 offering that would continue the freely tradeable characteristics of the securities issued, provided that the Issuer abides by prospectus delivery requirements and voluntarily abides by the public disclosure requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934. The Staff notes that in calendar year 1997, 1,505 Forms D were filed by 1,397 companies with the Commission claiming a Rule 504 exemption. Approsimately 1500 Forms D claiming a Rule 504 exemption have been filed in each of the past two years. I strongly suspect that the number of filings prior to the 1992 amendments were substantially lower. The Staff further notes that "Officials at the NASD estimate that between 300 and 500 applications for quotation on the OTC Bulletin Board annually have been based on the Rule 504 exemption." Also, the NASD is submitting proposals of its own. The "seed capital" policies of the 1992 amendments have been well received and have filled a demonstrated need for capital formation by small business. These statistics demonstrate that thousands of small businesses avail themselves of this exemption and that only between 20-33% of those ever apply for OTC Bulletin Board quotation. Presumably, only a small percentage of those that ultimately attain quotation are the subject of fraud. The Staff states in the release that ..."we are proposing to implement the same resale restrictions on securities issued in a Rule 504 transaction as apply to transactions under the other Regulation D exemptions." The proposed rule would clearly limit the economic value of the Rule 504 offering as noted in the release. Conversely, it would not eliminate the perceived abuses, but merely delay them for a period of one year, until the securities became tradeable under Rule 144. The release describes the perceived abuses that it intends to eliminate as follows: "In some cases, those who prey on investors through fraudulent schemes make prearranged "sales" of securities under Rule 504 to nominees in states that do not have registration or prospectus delivery requirements. As a part of this arrangement, these securities are subsequently placed with broker-dealers who use cold-calling techniques to sell the securities at ever-escalating prices to unsuspecting investors. When their inventory of shares has been exhausted, these firms permit the artificial market demand they have created to collapse, causing investors to lose much, if not all, of their investment. [ This technique is sometimes colloquially referred to as "pump and dump."] The release further states that "securities sold under Rule 504 were not deemed "restricted securities" and thus were available for immediate resale by non- affiliates of the issuer, as long as the non-affiliates were not "underwriters." First, it is hard to imagine that the non-affiliates described in this scheme are not underwriters. If the facilitators are underwriters, then the securities are not freely tradeable and a well developed legal and regulatory framework exists for sanctions. Secondly, the scenario clearly demonstrates that the true culprit is the broker dealer and the abusive cold calling techniques that make the fraud viable. The same tactics could occur, with the same results, by use of securities originally offered under a Regulation A filing or an SB-2. The Staff notes "...the lack of widely-distributed public information about companies making Rule 504 offerings and the freely tradable nature of Rule 504 securities may have exacerbated the opportunities for microcap fraud." The only principal differences between a 504 and an SB-2 offering would be the prospectus delivery requirement and the ongoing dissemination of information. The SCOR offering process includes a Form U-7 in most states that contains the information required by Form 1-A. I believe that all of these states require delivery of the disclosure document. Therefore, if Rule 504 offerings are more inherently subject to fraud, then either all small offerings should be subject to some lock-up period, or the furnishing of a disclosure document and ongoing public information should be sufficient to rectify the aspects of Rule 504 that are more "inherently" subject to fraud. If this analysis is correct, then perhaps the issuer could simply be afforded a choice. For issuers that are not concerned about the limitations on freely trading securities, the 504 offering could occur with the issuance of restricted securities. For issuers that find the freely trading securities to be an important aspect, an option could be available to retain that feature by requiring an undertaking of compliance with the delivery requirement of the Form U-7 disclosure document and a voluntary submission to the ongoing disclosure obligations of Section 13 or 15(d) of the Securities Exchange Act of 1934. To be eligible, perhaps the rule could require filing in a state that reviews such filings or participates in a regional approach; a standardized Form U-7 must be prepared and delivered in a fashion similar to the prospectus delivery requirements; and the issuer becomes obligated to provide ongoing disclosure. Perhaps a corollary could be an NASD requirement that quotations can be made in such securities only if those conditions have been undertaken. The statistical fact that 3,000 companies have filed Forms D in the past two years indicates that the amendments to Rule 504 struck a useful and important chord. It has been my experience that for every company that actually files an offering under Rule 504, at least ten others consider it in their capital formation decisions. The freely tradeable aspect of Rule 504 is important to small issuers because it permits the issuer to solicit capital contributions from less well to do friends, families and neighbors, some of whom may appreciate the possibility of liquidity. For the reasons stated, I believe that the proposed revisions to Rule 504 are excessive and that a less restrictive response to the perceived problems should be achieved. Very truly yours, Charles Barkley