At least the government is working !!! Floyd says welcome to hell boys
U.S. SEC Adopts Rule Changes Seeking to Curb Micro-Cap Fraud
Washington, Feb. 19 (Bloomberg) -- The U.S. Securities and Exchange Commission approved rule changes aimed at curbing schemes in which ''micro-cap'' company stocks are fraudulently sold to investors at inflated prices.
''I believe we are striking a balance between capital formation and investor information,'' SEC Chairman Arthur Levitt said.
The changes, which go into effect in about 30 days, restrict the distribution of company stock that is to be used as an employee benefit and as seed capital for start-up businesses.
One new rule seeks to check abuse of an employee benefits program in which companies can file streamlined ''S-8'' forms to register stock provided to employees and consultants. Some companies have issued this stock to stock promoters who have been designated as ''consultants.'' These promoters then allegedly hype the security to investors and pump up the value of their own holdings.
Another change would restrict trading of shares sold privately by small companies trying to raise seed capital under a regulation known as Rule 504. These companies now are exempt from federal registration requirements, and can advertise and sell stock to an unlimited number of people. Some broker-dealers who have obtained the stock at a discount have been charged with driving up the price by pressuring investors to buy it.
''I'm hoping the S-8 proposal won't have adverse consequences for small technology companies, and I'm pretty sure the 504 proposal won't have any,'' SEC Commission Isaac Hunt said.
Unanimous Vote
The commission approved the changes by a 4-0 vote today. The S-8 changes would forbid companies from issuing stock to promoters and market-makers of the security.
The Rule 504 plan requires companies that sell as much as $1 million a year in stock to make financial disclosures by registering the sale with a state. While most states now require such registration, one important state -- New York -- does not. Sale of the stock would be restricted to ''accredited investors,'' which typically includes institutions such as pension and mutual funds.
The rule changes are part of the SEC's multipronged attack on micro-cap fraud, which regulators say has mushroomed during the prolonged bull market. The commission has joined with federal prosecutors and other securities regulators to file hundreds of fraud cases against companies, brokerages, and stock promoters in recent years.
In other actions today, the commission:
Re-issued a proposal requiring brokerages that make markets in small stocks to provide more information about these securities. The new proposal, which will be offered for public comment, would set caps that limit its applicability to smaller companies. The comment period is 30 days.
Consultant Disclosure
Extended the public comment period on a rule proposal issued last year that would require company disclosure of the consultants who receive S-8 stock and the services they provided. Some small technology companies have complained that this proposal calls for disclosure of privileged information that could benefit their competitors. The comment period was extended for 30 days.
Approved a rule change aimed at giving private companies greater access to a registration exemption for the sale of securities to their employees, as long as the companies meet some disclosure requirements.
Released a new investor brochure providing tips on how to avoid micro-cap fraud.
The re-issued proposal on small stocks generally requires market-makers, who match buyers and sellers on the Nasdaq Stock Market, to first review company information for accuracy and reliability. They also would have to update that information annually and make it available to the public.
Brokerages have criticized that plan, saying it would increase their exposure to lawsuits filed when stocks collapse. Some market makers would stop trading these stocks, reducing the liquidity of these issues, they argued. The Securities Industry Association, the brokerage trade group, has urged the commission to subject only the smallest companies to enhanced monitoring.
Most Common Abuses
The most common micro-cap abuses have involved the S-8 and the 504 rule programs, as well as so-called ''Regulation S'' stock, said Phil Feigin, executive director of the North American Securities Administrators Association, a trade group of state regulators. These securities are sold at a discount overseas and then re-sold back to the United States. A year ago, the SEC adopted a rule to make investors wait longer before they can re- sell the stock in the U.S.
In one case of alleged S-8 fraud, former Systems of Excellence Inc. chairman Charles Huttoe was charged with manipulating the price of 43 million shares that he distributed to companies he controlled and to his relatives.
Huttoe, who was sentenced to 46 months in prison, fabricated consulting agreements under which he issued S-8 stock, the SEC alleged in its November 1996 complaint.
In a case of alleged Rule 504 fraud, former broker Michael Lipkin and associates were charged with defrauding investors through the sale of $1 million of unregistered Mugs Plus Inc. stock in 1996. New York state regulators alleged that the stock of this purported souvenir maker was worthless because its only asset, a New Jersey warehouse, was destroyed by fire. Lipkin agreed to a lifetime ban from the securities industry.
11:50:38 02/19/1999
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