October 29, 1996
 
Bruce D. Stuart, Esq.
Law Offices of Bruce D. Stuart
8501 Wilshire Blvd. - Suite 215
Beverly Hills, CA 90211
 
Re: The Flamemaster Corporation
 
Dear Mr. Stuart:

On the basis of the facts presented in your letter dated October 23, 1996 ("Letter"), the Division of Market Regulation will not recommend an enforcement action to the Commission under Sections 5, 6, or 15 of the Securities Exchange Act of 1934 ("Exchange Act") if The Flamemaster Corporation ("FAME") operates its trading system (the "System") in the manner described in that letter without registration as a national securities exchange under Section 6 or as a broker-dealer under Section 15 of the Exchange Act. This is a position of the Division of Market Regulation regarding enforcement action under Sections 5, 6, and 15 of the Exchange Act only, and does not express any legal conclusions regarding the applicability of Sections 5, 6, or 15 of the Exchange Act or other statutory or regulatory provisions of the federal securities laws. This no-action position is subject to changes in current law, regulation, and interpretations  [*2]  governing issuer-based bulletin boards; any change may require the Division of Market Regulation to reevaluate and revoke or modify this no-action position.

In reaching this position, the Division of Market Regulation notes the following: (1) FAME will provide the described notices regarding operation of and participation on the System that will be set forth or contained on the screens and/or hard copy by which System information is provided; (2) FAME is a Section 12 registrant that will retain that status or, if it should cease to be a Section 12 registrant, otherwise undertake to make publicly available the information required by Section 13(a) of the Exchange Act in the same manner that participants will obtain access to the System (e.g., electronic mail, facsimile, mail, FAME's World-Wide Web site, etc.); (3) FAME will keep records of all quotes entered into the System and make those records available to the Commission and the National Association of Securities Dealers, Inc. (or any regulated market on which FAME securities are listed); (4) FAME's advertising will comply with the representations set forth in your Letter; (5) neither FAME nor any affiliate of FAME will use the  [*3]  System, directly or indirectly, to offer to buy or sell securities, except in compliance with the securities laws, including any applicable registration requirements (absent an available exemption therefrom); and (6) neither FAME nor any affiliate of FAME will (i) receive any compensation for creating or maintaining the System; (ii) receive any compensation for the use of the System; (iii) be involved in any purchase or sale negotiations arising from the System; (iv) provide information regarding the advisability of buying or selling FAME common stock or any other securities; or (v) receive, transfer, or hold funds or securities as an incident of operating the System.

The Division of Market Regulation notes that the facts presented with respect to the establishment and maintenance of the System are substantially identical to those presented in the no-action requests from Real Goods Trading Corp. (available June 24, 1996) and PerfectData Corp. (available August 5, 1996). Having stated its views on the application of the registration requirements of the Exchange Act to such systems, the Division of Market Regulation no longer will respond to requests for no-action assurance with  [*4]  respect to systems that are established and maintained in a substantially similar manner, unless they present novel or unusual issues.

The Division of Corporation Finance has asked us to inform you that, based on the facts presented, the activities of FAME in connection with the establishment and maintenance of the System would not require that offers and sales made through the System be registered under the Securities Act of 1933 (the "Securities Act"). Further, the Division of Corporation Finance notes that the facts presented with respect to the establishment and maintenance of the System are substantially identical to those presented in the no-action requests from Real Good Trading Corp. (available June 24, 1996) and PerfectData Corp. (available August 5, 1996). Having stated its views on the application of the registration requirements of the Securities Act to such systems, the Division of Corporation Finance no longer will respond to requests for no-action assurance with respect to systems that are established and maintained in a substantially similar manner, unless they present novel or unusual issues.

Because these positions are based on the representations made to  [*5]  the Divisions, any different facts or conditions might require different conclusions.
 
Sincerely,
 
Catherine McGuire
Chief Counsel

INQUIRY-1:
 
LAW OFFICES OF
BRUCE D. STUART
 
8501 WILSHIRE BOULEVARD
SUITE 215
BEVERLY HILLS
CALIFORNIA
90211
310-358-2330
F 310-358-2344
 
October 23, 1996
 
VIA FAX & CERTIFIED MAIL
 
Catherine McGuire
Associate Director/Chief Counsel
Division of Market Regulation
Securities and Exchange Commission
450 Fifth Street, NW, Mail Stop 5-10
Washington, D.C. 20549
 
VIA FAX & U.S. MAIL
 
Martin P. Dunn
Chief Counsel
Division of Corporate Finance
Securities and Exchange Commission
450 Fifth Street NW, Mail Stop 3-3
Washington, D.C. 20549
 
Re: The Flamemaster Corporation
Securities Act of 1934 (Sections 3, 6 and 15);
Securities Act of 1933 (Section 5)
 
Dear Ms. McGuire and Mr. Dunn:

I am counsel to The Flamemaster Corporation ("FAME"), a Nevada Corporation. Its stock is traded on NASDAQ National Market System and is registered under Section 12 of the Securities Exchange Act of 1934, as Amended (the "Exchange Act"). FAME sells aircraft sealants and flame retardant coatings.
 
I. BACKGROUND

In 1959, FAME went public through an S-1 offering under the Securities  [*6]  Act of 1933. The offering was fully subscribed. Its shares have been traded on NASDAQ National Market System since 1987. The shares of FAME Common Stock are registered under Section 12 of the Exchange Act. U.S. Stock Transfer is the transfer agent of the Common Stock.

Trading in the Common Stock is approximately 800 - 1,600 shares per day.

FAME now proposes to establish an "off the grid" trading system (the "System") for the Common Stock. The System would function as a passive "bulletin board" providing information to prospective sellers and buyers of Common Stock ("Participants"). The information to be listed on the System would include: (i) the names, address and telephone numbers (or other contact mechanisms, such as electronic mail addresses) of interested buyers and sellers; (ii) the number of shares of Common Stock that are offered for sale or desired to be purchased; (iii) the price at which the Common Stock is offered for sale or desired to be purchased; and (iv) the date on which the information was entered into the System. Participants would transmit the above information either (i) by direct interface using FAME's World Wide Web site or (ii) by telephone, facsimile, mail  [*7]  or electronic mail directed to FAME, which would enter the data into the System. The information would remain in the System until such time as a Participant indicates that a transaction was completed or the Participant no longer is interested in buying or selling, although FAME also may put a time limit on how long the information will be posted. FAME anticipates that Participants will obtain access to the System primarily by electronic mail, although information may also be relayed by telephone, facsimile, mail or any other method, including via FAME's World Wide Web site.

No transactions would be effected by the System itself, and FAME will have no role in effecting transactions between Participants; rather all transactions would be effected only by direct contact between the Participants. Although FAME would have no transactions records, it will retain records of the quotations listed for not less than three years and make them available to the staff of the Securities and Exchange Commission (the "Commission") and to the NASDAQ Stock Exchange (or any other regulated market on which the shares are listed) on reasonable request thereof. Each Participant would be required to rely  [*8]  on its own exemption under the Securities Act including, without limitation, Section 4(1) thereof. FAME proposes to advertise to shareholders and other members of the public the availability and possible benefits of the System. The System may be free standing or may be integrated into FAME's World Wide Web site or both.

Neither FAME nor any affiliate of FAME will (i) receive any compensation for creating or maintaining the System; (ii) receive any compensation for the use of the System; (iii) be involved in any purchase or sale negotiations arising from the System; (iv) give advice regarding the merits or shortcomings of any particular trade; (v) use the System directly or indirectly, to offer to buy or sell securities, except in compliance with the securities laws, including any applicable registration requirements (absent an available exemption therefrom) n1; or (vi) receive, transfer or hold funds or securities as an incident of operating the System.

n1 Offers and sales of nonrestricted securities by persons other than FAME or affiliates of FAME could be made in reliance upon the exemptions from registration provided by Section 4(1), 4(3), or 4(4), as appropriate. Offers and sales of controlled or restricted securities may be made through a registered offering or in reliance upon an exemption from registration, such as the Section 4(1) exemption, if the requirements of Rule 144 are satisfied. In this regard, it is recognized that the "manner of sale" requirements of Rule 144 would be applicable to such transactions. Offers or sales of securities by FAME may be made either in registered transactions or in accordance with an available exemption, such as Regulation A or Rule 504 of Regulation D under the Securities Act.  [*9] 

The screens and hard copy by which the System data is provided to Participants will include the following information:

. Identification of the national securities exchange or other regulated securities market that lists FAME Common Stock;
 
. FAME is not a registered national securities exchange, securities information processor, broker, dealer or investment adviser;
 
. The information set forth on the System does not consist of firm quotes, but rather is merely a list of the names, addresses and telephone numbers of interested sellers and buyers, the number of shares of Common Stock offered or desired to be purchased, and the price at which the proposed transaction would occur. FAME does not assure that any particular transaction will occur as to any particular number of shares or at any particular price. All transactions between Participants must be executed by the Participants independent of FAME or any of its affiliates;
 
. All applicable state and federal securities laws (including the anti-fraud and anti-manipulation provisions) apply to any offer made or transaction consummated using the System;
 
. The name, address and telephone number of FAME's transfer agent;
 
 [*10]  . Any person that is a broker-dealer, an associated person of a broker-dealer, or who has a state securities license is responsible for identifying that fact;
 
. "Two sided quotes" in which a person indicates a bid to buy at one price and an offer to sell at a higher price are prohibited. n2
 
. The registration requirements of the federal securities laws apply to all offers and sales through the System, absent an available exemption. Offers and sales of controlled or restricted securities may be made in reliance upon the Section 4(1) exemption if the requirements of Rule 144, including the "manner of sale" requirements, are salified. Please note that the public information, volume, manner of sale and notification requirements of Rule 144 do not apply to transactions that satisfy the requirements of Rule 144(k).

n2 FAME may in the future permit two-sided quotes. If FAME chooses to permit two-sided quotes, the screens and hard copy by which the System data is provided to Participants will include a statement that: Any person providing "two-sided quotes" in which a person indicates a bid to buy at one price and an offer to sell at a higher price, may in certain circumstances, be considered a dealer who is required to register with the SEC and comply with applicable provisions of the federal securities laws.  [*11] 

FAME may make announcements relating to, and advertise or otherwise publicize, the existence and availability of the System and Provide information about the use and benefits of the System. FAME may use any mechanism for providing information about the System. In its communications with the public FAME will not characterize itself or the System as being a "broker", a "dealer", or an "exchange." To the same extent as required of any company whose securities are traded on a national securities exchange or NASDAQ, FAME will be mindful of the statutory provisions relating to solicitations of any offer to buy. If FAME provides information about FAME or the System during an offering of its securities that is registered with the Commission, FAME also will be sensitive to and abide by the general limitations of the federal securities laws regarding publicity by a company that is "in registration." Of course, all information provided by FAME regarding either the System or FAME will be consistent with the antifraud and antimanipulation requirements of the federal securities laws.

We respectfully request that the staff (the "Staff") of the commission concur with our view that FAME may establish  [*12]  and operate the System as described herein without (i) FAME, or any of its personnel who will manage and operate the System, registering as a "broker" and/or "dealer" under Section 15(a) of the Exchange Act; (ii) the registration of the System as a "national securities exchange" under section 6 of the Exchange Act; or (iii) the registration of offers and sales made through the System under the Securities Act.
 
II. REGISTRATION ISSUES

Broker and Dealer

Subject to certain exceptions, Section 15 (a) of the Exchange Act requires registration of any broker or dealer. Section 3(a)(5) of the Exchange Act defines a "dealer" as "any person engaged in the business of buying and selling securities for his own account." Section (3)(a)(4) defines a "broker" "any person engaged in the business of effecting transactions in securities for the accounts of others . . ." FAME will not be engaging in any activities requiring it to register as a broker or dealer under Section 15(a). This conclusion is consistent with the Staff's determination regarding a system similar to the System in Farmland Industries, Inc. (August 26, 1991).

Requiring FAME to register as a broker-dealer would not provide  [*13]  the Participants with any additional protection. Because FAME will not handle or hold funds or shares of Common Stock of any Participant, a minimum capital requirement is unnecessary. Any financial failure of FAME would result only in the loss of the Participants' access to the System, and not a loss of their funds. Furthermore, the costs of compliance with the record keeping and periodic reporting requirements would far outweigh any benefits.

National Securities Exchange

Section 5 of the Exchange Act provides that it is unlawful for an exchange to effect any transaction in a security unless such exchange is registered as a national securities exchange under Section 6 of the Exchange Act or is exempted from such a registration upon application to the Commission.

Section 3(a)(1) of the Exchange Act defines "exchange" as:

any organization, association or group of persons, whether incorporated or unincorporated which constitutes, maintains, or provides a market place or facilities bringing together purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange as that term is generally understood, and  [*14]  includes the market place and the market facilities maintained by such exchange.

Based on the law and the foregoing facts, we are of the opinion that the System would not be an "exchange" within the meaning of the Exchange Act. In addition, FAME notes that it is a Section 12 registrant and will retain that status or, if it should cease to be a Section 12 registrant, otherwise undertake to make publicly available the information required by Section 13(a) of the Exchange Act in the same manner that Participants will obtain access to the System (e.g. electronic mail, facsimile, mail, FAME's World Wide Web site, etc). Consequently, there are no issues raised regarding the necessity of providing information to System Participants.

Securities Act of 1933

Section 5 of the Securities Act makes it unlawful for any person to offer, sell, or solicit an offer to purchase any security unless a registration statement has been filed with respect to that security, absent an available exemption. In view of the manner in which the System will be established and operated, FAME believes that the operation of the System does not constitute an offer to sell or the solicitation of an of for to buy FAME  [*15]  Common Stock on the part of FAME. As such, FAME activities in connection with the establishment and maintenance of the System would not require Securities Act registration of offers or sales made through the System.
 
III. CONCLUSION

For the foregoing reasons, we request that the Staff concur with our view that FAME may establish and operate the System without (i) FAME, or any of its personnel who will manage and operate the System, registering as a "broker" and/or "dealer" under Section 15(a) of the Exchange Act; (ii) the registration of the System as a "national securities exchange" under Section 6 of the Exchange Act; or (iii) registering offers and sales made through the System under the Securities Act.

In the event that the Staff does not concur with any of our views, we kindly request an opportunity to discuss the matter prior to any final decision thereon. If you have any questions or wish to receive any further information, please contact me at 310-358-2330.
 
Very truly yours,
 
Bruce D. Stuart