SEC Hot Topics Institute June 2008

1. SEC Hot Topics InstituteJune 2008 Small Business Capital Raising and Private Offering Reform

2. 2 Overview Small Business Capital Raising and Private Offering Reform Rule 144 and Rule145 Amendments Proposed Regulation D Changes Eligibility to Use Form S-3 / F-3

3. 3 Revision of Rule 144 and Rule 145: Goals and Factors Considered Goals: Simplify Rule 144, reduce burdens on investors where consistent with investor protection, and facilitate capital formation Factors Considered: Appropriate to distinguish between �34 Act reporting and non-reporting issuers Undue complexity of the resale restrictions Most abuses in the sales of unregistered securities involve affiliates of issuers and securities of shell companies

4. 4 Rule 144 Changes for Affiliates Minor changes to manner of sale requirements Debt securities: eliminate manner of sale requirement and increase volume limitation Increased threshold for filing Form 144 BUT . . . Affiliates remain subject to volume limitations, current public information, manner of sale, filing of Form 144 _______________________________ Most important change: holding period for restricted securities

5. 5 Restricted Securities

6. 6 Changes to Rule 145 Registered 145 transactions Elimination of the �presumptive underwriter� doctrine for target affiliates Shares issued to target�s affiliates are freely resalable unless target affiliates become affiliates of issuer No change from old rule: shares issued to non-affiliates are freely resalable Unregistered 145 transactions: no change All shares are restricted and subject to Rule 144

7. 7 Implications of 144 and 145 Changes Registration rights agreements PIPEs without registration rights, at either higher discounts or with more warrant coverage Increased market share for �144A for life� offerings as compared to 144A offerings with registration rights Covenant to maintain current public information during second six months in lieu of registration M&A Increased use of unregistered stock in acquisitions

8. 8 Definition of Shell Company i. An issuer that has: A. No or nominal operations; and B. Either: No or nominal assets; Assets consisting solely of cash and cash equivalents; or Assets consisting of any amount of cash and cash equivalents and nominal other assets; or ii. An issuer that has been at any time previously a shell company.

9. 9 Shell Companies Rule 144 Not available for shell companies Available to former shells one year after filing Form 10 information Subject 13 or 15(d) Filed all required 10-Ks and 10-Qs Rule 145 Presumptive underwriter doctrine applies in registered offerings No sales for 90 days; sales subject to current public information, volume limitations, and manner of sale for next 90 days; sales subject to current public information for next six months

10. 10 New & Proposed Regulation D Rules SEC adopted new filing & disclosure requirements for Form Reg D effective 9/15/08 with 6 month transition period: Mandate electronic filing of Form D Revisions to Form D content (less disclosure) & clarification on when amendments to Form D are required SEC proposed additional changes to Reg D: Create a new category of investors �large accredited investors� Lessen the general solicitation restrictions on private offerings to these large accredited investors Reduce the integration safe harbor from 6 months to 90 days Revise the current definition of accredited investor

11. 11 Proposed Regulation D Changes New Exemption for �Large Accredited Investor�: Annual income $400,000 individual or $600,000 joint or $2.5 million in �investments owned� (cash, cash equivalents, securities & real estate investments but excluding real estate used as residence or business) Banks, trusts, corporations, LLCs, etc. with $10 million in investments Private business development companies Directors, executive officers, general partners or managing members of the issuer New Exemption Permits Limited Advertising: Can make limited written announcement of offering --name, 25 word description of business, type of securities, contact info

12. 12 Proposed Regulation D Changes (cont) Other Proposed Changes: Current accredited investor definition expanded to include a $750,000 �investments owned� test as an alternative to $1.0 million net worth test Codify Staff interpretative position that accredited investor test for self-directed plans (IRA�s) is based on $1.0 million individual test not $5.0 million entity test. Income, net worth and investments owned standards adjusted for inflation beginning in 2012, and every 5 years thereafter. Integration safe harbor reduced from 6 months to 90 days.

13. 13 Eligibility to Use Form S-3 / F-3 Companies with <$75 million in public float can now register primary offerings on Form S-3 or F-3 if they: do not sell more than one third of their public float in primary offerings on Form S-3 or F-3 over any 12-month period meet the other eligibility conditions for the use of Form S-3/F-3 have a class of common equity securities listed and registered on a national securities exchange are not a �shell company� and have not been a shell company for at least 12 months before filing the registration statement Intended to allow smaller public companies greater flexibility and efficiency in accessing the public securities markets afforded by Forms S-3 and F-3 Amendments to Forms S-3 and Form F-3 are comparable

14. 14 Eligibility to Use Form S-3 / F-3 (cont�d) Advantages of Form S-3 for Primary Offerings Incorporation by reference of subsequently filed Exchange Act reports (�forward incorporation�) Permits automatic updating of R/S without the need to file new R/S or post-effective amendment Enables primary offerings �off the shelf� under Rule 415 Provides flexibility and control over timing in accessing public securities markets Can do a registered direct primary offering on Form S-3 (rather than a PIPE transaction followed by registration of resales) Can register primary debt offerings on Form S-3