DAR File No. 41465

Commerce, Securities

Section R164-14-2b

Manual Listing Exemption

Notice of Proposed Rule

(Amendment)

DAR File No.: 41465
Filed: 04/10/2017 10:55:43 AM

RULE ANALYSIS

Purpose of the rule or reason for the change:

Standard and Poor's Financial Services, a major financial services and research provider, has recently announced that it will discontinue publication of its securities manual, a resource listing financial and other information on companies with outstanding securities. By submitting their data to such a manual, companies can obtain an exemption from state securities registration that facilitates trading in their securities. In response to this development, OTC Markets Group has requested that the Utah Division of Securities (Division) include two of its listing services, OTCQX and OTCQB, as recognized securities manuals under this rule. In addition, the Division has received feedback from companies and service providers that certain provisions governing when an exemption under this rule might expire are creating uncertainty in the markets and causing the exemption to use much of its utility.

Summary of the rule or change:

This amendment accomplishes the following: 1) deletion of the now-discontinued Standard and Poor's manual from the list of approved securities manuals; 2) insertion of the OTCQX and OTCQB listing services of OTC Markets Group to the list of approved securities manuals; 3) deletion of provisions requiring the expiration of the exemption following changes in a company's board of directors or after other significant changes in the issuer; and 4) insertion of a provision clarifying the financial materials to be provided to investors in the event of a merger or reorganization.

Statutory or constitutional authorization for this rule:

• Section 61-1-14

Anticipated cost or savings to:

the state budget:

No net change to the state budget is anticipated as this amendment simply removes an expired securities manual and adds the OTCQX and OTCQB markets maintained by OTC Markets Group Inc.

local governments:

Local governments do not act in this area of regulation.

small businesses:

For small business entities that intend to place their securities in the two newly designated marketplaces, the fees are as follows: for QTCQX, a $5,000 one-time application fee and an annual fee of $20,000; and for OTCQB, a $2,500 application fee and an annual fee of $10,000. The source for this data is the OTC Markets Group website accessed on 04/20/2017.

persons other than small businesses, businesses, or local governmental entities:

Costs for other entities seeking listing will be identical to those listed under small businesses costs above.

Compliance costs for affected persons:

The Division anticipates that the only change in compliance costs will be any difference in filing costs between the discontinued securities manual and those newly included by this amendment (as disclosed under small businesses costs above).

Comments by the department head on the fiscal impact the rule may have on businesses:

In a world dominated by larger securities markets such as NASDAQ and NYSE, smaller listing services such as those maintained by OTC Markets Group have a key role to play in facilitating capital formation by smaller Utah businesses. By providing lower-cost trading opportunities for companies, as well as important financial information to inform and protect investors, these online resources represent a more efficient evolution from the hardcopy manuals of the past. Also, by clarifying and streamlining the expiration provisions of the rule, the Division hopes to greatly increase the usefulness of this exemption for small and medium-sized businesses throughout the state.

Francine Giani, Executive Director

The full text of this rule may be inspected, during regular business hours, at the Office of Administrative Rules, or at:

Commerce
Securities
HEBER M WELLS BLDG
160 E 300 S
SALT LAKE CITY, UT 84111-2316

Direct questions regarding this rule to:

• Benjamin Johnson at the above address, by phone at 801-530-6134, by FAX at 801-530-6980, or by Internet E-mail at bnjohnson@utah.gov

Interested persons may present their views on this rule by submitting written comments to the address above no later than 5:00 p.m. on:

05/31/2017

This rule may become effective on:

06/07/2017

Authorized by:

Keith Woodwell, Director

R164. Commerce, Securities.

R164-14. Exemptions.

R164-14-2b. Manual Listing Exemption.

(A) Authority and purpose

(1) The Division enacts this rule under authority granted by Subsection 61-1-14(2)(b) and Section 61-1-24.

(2) The rule specifies recognized securities manuals.

(3) The rule prescribes the information upon which each listing must be based to qualify for the exemption.

(4) The rule sets forth the exclusive method of claiming the transactional exemption contained in Subsection 61-1-14(2)(b).

(4)(a) Except as provided in Paragraph (H), the exemption is not self-executing and may not be relied upon until the Division confirms the exemption as provided below.

(4)(b) A confirmation may only be requested by a broker-dealer licensed with the Division or by the issuer of the securities for which the exemption is sought.

(B) Definitions

(1) "Blank-check company" means a development stage company that:

(1)(a) has no business plan or purpose;

(1)(b) has not fully disclosed its business plan or purpose; or

(1)(c) has only indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies.

(2) "Blind-pool company" means a development stage company that has generally disclosed its business plan or purpose, but such business plan or purpose has not identified specific properties or products to be purchased, constructed or developed.

(3) "Confirmation" means written confirmation of the exemption from registration from the Division.

(4) "Development stage company" means a company that is devoting substantially all of its efforts to acquiring or establishing a new business and either of the following conditions exists:

(4)(a) planned principal operations have not commenced; or

(4)(b) planned principal operations have commenced, but there has been no significant revenues therefrom.

(5) "Division" means the Division of Securities, Utah Department of Commerce.

(6) "Dormant company" means a company which does not pursue nor has the financial capacity to pursue a business plan or purpose, whether or not it is a development stage company.

(7) "Exemption" means the exemption provided in Subsection 61-1-14(2)(b) of the Act.

(8) "Financial statements" means a balance sheet, an income statement or statement of operations, a statement of cash flows, a statement of stockholders' equity, if a corporation or partners' capital, if a partnership, and appropriate notes to the financial statements.

(9) "Shell company" means a company which does not pursue nor has the financial capacity to pursue a business plan or purpose, whether or not it is a development stage company.

(10) "Significant change" means any change involving a reorganization, merger, acquisition, or other change which causes the issuer to increase its issued and outstanding shares of stock by at least 40% of the issued and outstanding shares before the change.

(C) Recognized securities manuals

(1) The Division recognizes the following securities manuals:

(1)(a) [Standard and Poor's Corporation Records]The OTCQX and OTCQB markets maintained by OTC Markets Group Inc.

(1)(b) Mergent's Industrial Manual

(1)(c) Mergent's Bank and Finance Manual

(1)(d) Mergent's Transportation Manual

(1)(e) Mergent's OTC Industrial Manual

(1)(f) Mergent's Public Utility Manual

(1)(g) Mergent's OTC Unlisted Manual

(1)(h) Mergent's International Manual

(D) Information upon which listing must be based

(1) A listing must be based upon the following information, which must be filed with the selected recognized securities manual:

(1)(a) the issuer's name, current street and mailing address and telephone number;

(1)(b) the names and titles of the executive officers and members of the board of directors of the issuer;

(1)(c) a description of the issuer's business;

(1)(d) the number of shares of each class of stock outstanding at the balance sheet date; and

(1)(e) (i) the issuer's annual financial statements as of a date within 18 months which have been prepared in accordance with generally accepted accounting principles, and audited by an independent certified public accountant who has issued an unqualified opinion; if the issuer has been organized for less than one year, the financial statements must be for the period from inception ; or

(1)(e)(ii) in the case of a reorganization or merger where the parties to the reorganization or merger had an audited balance sheet and an audited income statement, a pro forma balance sheet for the combined organization and a pro forma income statement.

(E) Confirmation requirement

(1) Except as provided in Paragraph (H), confirmation must be obtained prior to relying upon the exemption.

(2) A request for confirmation must include:

(2)(a) all information filed with the selected recognized securities manual;

(2)(b) a copy of the listing with the recognized securities manual which is based upon the information filed under paragraph (D); and

(2)(c) a filing fee as specified in the Division's fee schedule.

(3) In response to a request for confirmation which complies with this rule, the Division will issue a letter confirming the exemption.

(4) The Division will issue a copy of the letter confirming the exemption to any person so requesting in writing or in person for the cost of the photocopying, and mailing if necessary.

(F) Term of exemption

(1) Except as provided in Subparagraph (F)(2), the exemption becomes effective on the date confirmed by the Division.

(2) The exemption for the securities of an issuer which qualify under Paragraph (H) becomes effective on the date a listing, based upon the information required under Paragraph (D), is published in a recognized securities manual.

(3) The exemption shall expire upon the earliest of:

(3)(a) A date 18 months from the date of the annual financial statements required under paragraph (D); or

(3)(b) The date of a new annual issue or edition of the recognized securities manual which does not contain a listing based upon the information required under paragraph (D)[.];

[(3)(c) A date 45 calendar days from a change in the Chairman of the Board of Directors or a change in any two other members of the Board of Directors unless the recognized securities manual has published this information within the 45 days; or

(3)(d) A date 90 calendar days after a significant change in the issuer unless the recognized securities manual has published, at a minimum, an audited balance sheet and income statement reflecting the significant change within the 90 days.]

(G) Blank-check, blind-pool, dormant, or shell company

(1) The exemption is not available to a blank-check, blind-pool, dormant, or shell company which has not previously registered its securities with the Division.

(2) A company which has not previously registered its securities with the Division which, within the past three fiscal years of the company, has merged with or been acquired by a blank-check, blind-pool, dormant, or shell company, which has not previously registered its securities with the Division, must file:

(2)(a) with the recognized securities manual, the information required under paragraph (D), as to all parties to such transaction;

(2)(b) with the Division, the shareholders list reflecting the initial public offering of the blank-check, blind-pool, dormant or shell company; and

(2)(c) with the Division, the shareholders list of the company, current within thirty days of the request for confirmation of the exemption.

(H) Exceptions to confirmation requirement

(1) Confirmation prior to relying upon the exemption shall not be required for any security if at the time of the transaction:

(1)(a) the security is sold at a price reasonably related to the current market price of such security;

(1)(b) the security does not constitute the whole or part of an unsold allotment to, or subscription or participation by, a broker-dealer as an underwriter of the security;

(1)(c) the security has been outstanding in the hands of the public for at least 90 days;

(1)(d) the issuer of the security is a going concern, actually engaged in business and is not in the development stage, in bankruptcy or receivership;

(1)(e) the issuer of the security has been in continuous operation for at least five years; and

(1)(f) the information required by Paragraph (D) is contained in a recognized securities manual listed in Paragraph (C).

 

KEY: securities, securities regulation

Date of Enactment or Last Substantive Amendment: [August 3, 2010]2017

Notice of Continuation: July 25, 2012

Authorizing, Implemented, or Interpreted Law: 61-1-7; 61-1-8; 61-1-9; 61-1-10; 61-1-20; 61-1-22; 61-1-24