2. Securities Exchange Act of 1934
In order to foster competition among accounting firms, the Commission should exempt smaller companies from any Commission accounting regulations relating to 1934 Act reports that are imposed over and above AICPA/FASB requirements until these smaller companies reach a certain size.
The NASD should eliminate, or substantially relax, underwriting compensation limitations of offerings that cannot satisfy the quantifiable listing standards of the exchanges or NASDAQ.
Liquidity for small companies should be encouraged by amending the registration provisions of the Exchange Act to facilitate limited trading of securities of small businesses through Internet matching services.
To enhance liquidity of smaller issuers, the Commission should grant approval to a passive, Internet-based electronic "bulletin board" in which individuals that own securities of smaller issuers would post offers to buy and sell directly on the Internet web site. The participants would contract with a single transfer agent to facilitate clearance and settlement of all securities offered to purchase or sell on the web site. Selling shareholders would be required to place the securities offered for sale on deposit with the transfer agent. There would be no listing or maintenance standards other than a requirement that issuers would provide a "hyperlink" to its Form U-7, which the issuer would be required to update continuously as a condition of approval for investors to post offers with respect to that issuer's securities on the web site. As part of this information requirement, issuers also would be required to post reviewed quarterly financial statements and audited year-end financial statements on the web site. Broker-dealer telephone solicitation would be prohibited in connection with any offer posted on the web site: investors themselves would place offers to buy and sell directly on the web site. It is recommended that this "bulletin board" be implemented on a pilot basis with a specified number (e.g., initially permit shareholders of between 100 to 500 issuers to post offers to buy or sell on the "bulletin board").
The Commission is encouraged to review the regulations promulgated under the Penny Stock Reform Act of 1992 and to consider changes to those rules to facilitate secondary trading in the securities of smaller issuers.
Any new penny stock rules that are adopted by the Commission should concentrate on the sales practices of brokers; they should not have the effect of excluding small businesses from capital formation.
Rule 3a4-1 of the Exchange Act should be amended to create a presumption that would clarify that officers and directors of small businesses would be free to engage in sales of the securities of their company under all circumstances. Conforming changes to state broker-dealer registration provisions should be encouraged.
The Commission should study the issuer market for dislocation caused by trading practices and self-regulatory organization rules, such as the NASD "hot issue" rule.
Some periodic mandatory reporting obligations should be applied to all electronic bulletin board quoted stock.
The NASD should modify its computer system to enable the NASD to identify whether a security is an electronic bulletin board quoted security.
To encourage use of the electronic bulletin board market, the NASD should implement constructive improvements to the electronic bulletin board to improve liquidity and stock tradeability of small companies by considering the imposition of new listing standards to include: a special symbol, special limited information standards, the escrow of insiders' stock and the requirement of a promotional shares escrow agreement and options and warrants agreements, and an "evergreen" Form U-7.
To discourage "bear raids," the Commission should establish rules prohibiting short selling in the over-the-counter market after a security has crossed a certain downward trigger; this would be analogous to current rules for listed securities.
The same "uptick" rules should apply to all stocks (Bulletin Board, SmallCap) as a requirement to make a short sale.
Broker-dealers should be strictly required to meet the same coverage requirements for naked shorts as applied to customers and a 100% haircut on such shorts should be strictly enforced against violators.
A system should be implemented to determine accurately through reporting requirements the number of shares that have been shorted and vigorously enforce the rule.
As applied to broker-dealers and the general public, shorting of Bulletin Board stocks quoted below $2.50 and NASDAQ SmallCap and NMS stocks below $3.50 should be prohibited.
The shorting of all stock within ten business days after effectiveness of an initial public offering should be prohibited.
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