The Securities and Exchange Commission (the "SEC") adopted amendments to the rules governing the purchase and sale of penny stocks. The term "penny stock" is defined in SEC Rule 3a51-1 promulgated pursuant to the Securities Exchange Act of 1934, as amended, as any equity security, other than a security that satisfies one or more of several listed exclusions. The SEC amended the exclusions from the definition of penny stock by adding certain quantitative listing standards for reported securities, which are modeled after the Nasdaq SmallCap Market standards, adding an exclusion for security futures products and deleting certain outdated provisions.

The amended rules provide for a two business day "cooling off period" before brokers and dealers can effect transactions in penny stocks. During the two day period, the broker or dealer must furnish the investor with a disclosure document which must be signed and returned by the investor. The SEC also updated Schedule 15G, the penny stock disclosure document required to be sent to investors during the two day period referred to above, to address, among other things, electronic delivery issues and to make the schedule more readable. The amendments will be effective September 12, 2005.

Exclusions from Definition of Penny Stock

Prior to amendment, a "penny stock" was defined as any equity security, other than a security that:

• is a reported a security¹;

• is issued by an investment company registered under the Investment Company Act of 1940, as amended;

• is a put or call option issued by the Options Clearing Corporation;

• has a price of $5 or more, as calculated in accordance with the rule;

• is registered, or approved for registration upon notice of issuance, on a national securities exchange that makes transaction reports available, subject to restrictions provided in the rule;

• is authorized, or approved for authorization upon notice of issuance, for quotation on NASDAQ, subject to restrictions provided in the rule; or

• whose issuer has: (i) net tangible assets (as calculated in accordance with the rule) in excess of $2.0 million, if the issuer has been in continuous operation for at least three years, or $5.0 million, if the issuer has been in continuous operation for less than three years; or (ii) average revenue (as calculated in accordance with the rule) of at least $6.0 million for the last three years.

The SEC amended the exclusion from the penny stock rules for reported securities by requiring the securities to satisfy one of two conditions. First, the reported securities qualify for the exclusion from the penny stock rules if registered on a "grandfathered" national securities exchange. A national securities exchange is "grandfathered" if it has been continuously registered since April 20, 1992, which is the date the SEC adopted Rule 3a51-1, and it has maintained quantitative initial and continued listing standards that are substantially similar to or more strict than those in place on January 8, 2004, which is the date the SEC proposed these amendments.

Alternatively, reported securities qualify for the exclusion if registered on a national securities exchange or quoted on an automated quotation system sponsored by a registered national securities association that has certain quantitative initial listing standards and continued listing standards that are reasonably related to the initial listing standards. The initial listing standards must meet or exceed the following criteria: (i) the issuer must have $5.0 million of stockholders' equity, market value of listed securities of $50.0 million for 90 consecutive days prior to applying, or net income of $750,000 (excluding extraordinary or non-recurring items) in the most recently completed fiscal year or in two or the last three most recently completed fiscal years; and (ii) the issuer must have an operating history of at least one year or a market value of listed securities of $50.0 million.

Additional required initial listing standards depend upon the type of security. For stock, common or preferred, the minimum bid price is $4 per share. For common stock, there must be at least 300 round lot holders and at least 1.0 million publicly held shares with a market value of at least $5.0 million. For convertible debt securities, at least $10.0 million of principal must be outstanding. For rights, warrants and put warrants, at least 100,000 must be issued and the underlying security must be registered on a national securities exchange or quoted on an automated quotation system. For units (one or more securities traded together), all components must be registered on a national securities exchange or quoted on an automated quotation system. For other equity securities, including hybrids and derivatives, the national securities exchange or automated quotation system must establish substantially similar listing standards.

The SEC added an exclusion for security futures products listed on a national securities exchange or quoted on an automated quotation system sponsored by a registered national securities association (SEC Rule 3a51-1(f)). This exclusion was added because these products are subject to other disclosure requirements, similar to put and call options.

The SEC deleted the former exclusion for securities quoted on NASDAQ that was contained in Rule 3a51-1(f) because these securities are now reported securities within the meaning of Rule 3a51-1(a) and the former exception in Rule 3a51-1(a) for AMEX's Emerging Company Marketplace because it no longer exists.

Two Business Day "Cooling Off Period"

Brokers and dealers subject to the penny stock rules² are required to comply with two separate disclosure requirements. SEC Rule 15g-2(a) provides that, prior to effecting a transaction in a penny stock, a broker or dealer must furnish a disclosure document, the Schedule 15G, to its customer and receive a signed acknowledgement of receipt. Schedule 15G contains information an investor must receive from the broker or dealer such as the offer and bid price for the stock and the compensation the broker or dealer and the individual salesperson will receive for the trade. It also contains warnings to the potential investor regarding the risks associated with trading in penny stocks and other precautions the investor should consider prior to trading in these securities.

SEC Rule 15g-9(a)(2) provides that, prior to effecting certain transactions in penny stocks, brokers and dealers must approve an investor's account for transactions in penny stocks and receive a written agreement from the investor that provides the quantity of the particular stock to be purchased. In order to approve an investor's account, the broker or dealer must obtain information regarding the investor's financial situation, investment experience and investment objectives. Based on this information, the broker or dealer must determine whether transactions in penny stocks are suitable for the investor and whether the investor, or his or her adviser, has sufficient knowledge and experience to evaluate the associated risks. This determination must be delivered to the investor in writing and must be signed by the investor and returned to the broker or dealer prior to the broker or dealer effecting the trade.

Brokers and dealers are not required to make this suitability determination for transactions: (i) that are already exempt under SEC Rule 15g-1; (ii) pursuant to Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act"); (iii) that meet the requirements of Securities Act Rules 505 or 506; or (iv) in which the purchaser is an established customer. An established customer is an investor who has effected a securities transaction or deposited funds or securities with the broker or dealer more than one year prior to the penny stock transaction or has made three purchases of penny stocks on separate days that involved different issuers.

The amended rule requires a broker or dealer to wait two business days after sending a Schedule 15G to an investor before effecting a transaction in penny stocks for that investor. Similarly, the SEC amended Rule 15g-9 to require a broker or dealer to wait two business days after sending its suitability determination and the transaction agreement to an investor before effecting a transaction. The SEC amendments are designed to provide investors with the same period of time to digest and understand the information regardless of whether the documents are delivered electronically or in paper form. Prior to amendment, the penny stock rules contained an implicit waiting period for documents delivered in paper form, but no waiting period for documents delivered electronically.

Schedule 15G

The SEC amended Rule 15g-100, which contains the complete text of Schedule 15G, to update and streamline the document. The most significant changes to the Schedule 15G include the information that is now required to be included in messages when the schedule is sent electronically or through a link to the SEC's Web site. Electronic mail containing Schedule 15G must have a subject line of "Important Information on Penny Stocks." If Schedule 15G is delivered through a link to the SEC's Web site, the electronic mail must have the same subject line, but the link must be preceded by the following language:

We are required by the U.S. Securities and Exchange Commission to give you the following disclosure statement: http://www.sec.gov/investor/schedule15g.htm. It explains some of the risks of investing in penny stocks. Please read it carefully before you agree to purchase or sell a penny stock.

In addition, no other information can be included in the electronic mail other than instructions on how to provide the broker or dealer with a signed acknowledgement of receipt and a standard privacy or confidentiality message typically included in the broker's or dealer's electronic mail.

FOOTNOTES

^1. Pursuant to SEC Rule 11Aa3-1(a), a reported security includes any security or class of securities for which reports containing the price and volume associated with a transaction involving the purchase or sale of one or more round lots of a security are collected, processed and made available pursuant to an effective transaction reporting plan.

^2. SEC Rule 15g-1 exempts certain transactions from the rules.

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