June 8, 2000
Oil-N-Gas, Inc.
Re: Denial of No-Action Request to
Oil-N-Gas, Inc.
Dear
[Oil-N-Gas]:
In your letter dated February 24, 2000 (a copy of which is
enclosed), you requested assurance that the staff would not recommend
enforcement action to the Commission if Oil-N-Gas, Inc. ("Oil-N-Gas") engages in the activities
outlined in your letter without registering as a broker-dealer under Section
15(b) of the Securities Exchange Act of 1934 ("Exchange Act"), as an exchange
under Section 6 of the Exchange Act, or as an investment adviser under Section
203(a) of the Investment Advisers Act of 1940 ("Advisers Act").
We have
reviewed both the representations you have made in your letter and the
information posted on the Oil-N-Gas web site, located at www.oil-n-gas.com. We
are unable to offer you assurance that the staff of the Division of Market
Regulation would not recommend enforcement action by the Commission under
Section 15(a) of the Exchange Act if Oil-N-Gas engages in the activities
described in your letter without registering as a broker-dealer. [*2]
Section 15(a) of the Exchange Act
makes it unlawful for a broker or dealer "to effect any transactions in, or to
induce or attempt to induce the purchase or sale of, any security (other than an
exempted security or commercial paper, bankers' acceptances, or commercial
bills) unless such broker or dealer is registered" with the Commission. Section
3(a)(4) of the Exchange Act defines a "broker" as a person, other than a bank,
that is "engaged in the business of effecting transactions in securities for the
account of others."
A person effects transactions in securities if he or
she participates in such transactions "at key points in the chain of
distribution." n1 Such participation includes, among other activities assisting
an issuer to structure prospective securities transactions, helping an issuer to
identify potential purchasers of securities, soliciting securities transactions,
and participating in the order-taking or order-routing process (for example, by
taking transaction orders from customers). Factors indicating that a person is
"engaged in the business" include, among others: receiving transaction-related
compensation; holding oneself out as a broker, as executing trades, [*3] or as assisting others in settling
securities transactions; and participating in the securities business with some
degree of regularity. In addition to indicating that a person is "effecting
transactions," soliciting securities transactions is also evidence of being
"engaged in the business." n2
n1 Massachusetts Financial Services, Inc. v. Securities
Investor Protection Corp., 411 F. Supp. 411, 415 (D.Mass.), aff'd
545 F.2d 754 (1st Cir. 1976), cert. denied, 431 U.S. 904 (1977). See also SEC v. National Executive Planners, Ltd., 503 F.
Supp. 1066, 1073 (M.D.N.C. 1980).
n2 See, e.g., SEC v. Century Investment Transfer Corp., et
al., Fed. Sec. L. Rep. (CCH) P 93,232 (S.D.N.Y. Oct. 5, 1971).
Based upon your letter and information posted on the Oil-N-Gas web site, we believe that
Oil-N-Gas is a broker within the
meaning of Section 3(a)(4) of the Exchange Act. Oil-N-Gas operates a facility that
brings together issuers of oil and gas interests and investors. Among other
things, Oil-N-Gas actively solicits investors
to purchase [*4] oil and
gas interests (for example, by targeting potential investors with direct
mailings and follow-up e-mail) and provides advice to issuers on preparing
offering materials for posting to the web site. The precise nature of all the
fees that Oil-N-Gas receives for these services
from issuers, investors, and others is unclear. However, information posted on
the web site suggests that these fees will increase as Oil-N-Gas becomes more successful in
"marketing" securities to potential investors.
You appear to base your
request on the staffs letter to Angel Capital Electronic
Network (Oct. 25, 1996) ("Angel Capital Letter"). That letter involved
unique facts. Although many of the representations in your letter appear to
closely track the representations in the Angel Capital Letter, the information
posted on the Oil-N-Gas web site appears to
contradict at least some of these representations. n3 We believe that
IPONET (July 26, 1996) may provide you with more pertinent
guidance. As the Commission noted in a recent interpretive release, the Division
of Market Regulation, in the context of IPONET's request for no-action relief
from the Division of Corporation Finance, "required [*5] that a registered broker-dealer maintain
overall supervision of IPONET's activities; otherwise, IPONET would have been
required to register[] as a brokerdealer under Section 15(a) of the Exchange
Act." n4
n3 For example, your letter suggests that the Oil-N-Gas web site is not yet in
operation even though the web site appears to be taking listings and membership
applications. In addition, you state in your letter that each investor "will be
required to certify that the investor is an 'accredited investor' within the
meaning of Rule 501." A review of the information posted on the Oil-N-Gas web site suggests that
investors who have prior investing experience in direct participation programs
and understand the risk associated with highly speculative securities could also
gain access if the investment amount contemplated was ten percent or less of
liquid net worth.
n4 Use of Electronic Media, Securities Act Release No.
7856 (Apr. 25, 2000), at 36 n. 94 (available on the Commission's web site at:
<http://www.sec.gov/rules/concept/34-42728.htm>).
Because we believe that Oil-N-Gas may already be acting as a
broker-dealer, we have enclosed a copy of Form BD (broker-dealer registration
[*6] package)
for your convenience.
In response to your request for assurances that
the staff will not recommend enforcement action against Oil-N-Gas if it does not register as an
exchange under Section 6 of the Exchange Act, please be advised that, in 1998,
the Commission adopted Regulation ATS, which provides a new framework for
alternative trading systems. n5 Regulation ATS allows alternative trading
systems to choose whether to register as national securities exchanges, or to
register as broker-dealers and comply with additional requirements depending on
their activities and trading volume. Accordingly, the Division of Market
Regulation no longer grants no-action relief from exchange registration.
n5 Regulation of Exchanges and Alternative Trading Systems, Exchange Act
Release No. 40,760 (Dec. 8, 1998) (available on the Commission's web Site at:
<http://www.sec.gov/rules/final/34-40760.txt>).
The staff of the Division of Investment Management has asked us to
advise you that, on a number of occasions, it has expressed its views regarding
the circumstances in which the operator of a service for matching entrepreneurs
and potential investors falls outside the definition of "investment [*7] adviser" set forth in Section 202(a)(11) of
the Advisers Act. n6 Having stated its views, the staff of the Division of
Investment Management no longer responds to letters seeking relief in connection
with such matching services unless they present novel or unusual issues. n7 In
addition, it appears that you are already engaged in providing matching
services. As a matter of policy, the staff grants no-action relief only
prospectively, not retroactively. n8
n6 E.g.,
Capital Resources Network (pub. avail. Apr. 23, 1993);
Technology Capital Network, Inc. (pub. avail. June 5, 1992).
n7 See Environmental Capital Network
(pub. avail. Dec. 28, 1995); The Colorado Capital Alliance,
Inc. (pub. avail. May 4, 1995).
n8 Letter to Ms. Patricia L.
Rizzo (pub. avail. Dec. 28, 1995).
Very truly yours,
Catherine McGuire
Chief Counsel
INQUIRY-1: Oil-N-Gas, Inc.
2/24/00
Securities and Exchange Commission
Washington, D.C. 20549
Division of Market Regulation
RE: No-Action Letter
Dear [*8] Sir or
Madam,
Please find a letter of inquiry under this cover, on the
behalf of my company, Oil-N-Gas, Inc. I wanted to take this
time to introduce myself and my company. My intent is to help small oil and gas
companies gain access to accredited investors.
I have attempted
to explain each facet in the attached letter of inquiry. If you have any
questions please feel free to contact me at the number on the letterhead at your
earliest convenience.
Sincerely,
Oil-N-Gas
President
ATTACHMENT
No-Action Letter, Oil-N-Gas, Inc. and
Oil-N-Gas.com
(2/23/00)
[Letter of Inquiry]
On
behalf of Oil-N-Gas, Inc. and the Oil-N-Gas.com web site (hereafter
O-N-G), we request confirmation from the Division of Investment Management that
the staff would not recommend enforcement action against O-N-G and various
listing companies that will participate in operating O-N-G if O-N-G does not
register as "investment advisers" under Section 203 (a) of the Investment
Advisers Act of 1940, as amended ("Investment Advisers Act").
In
addition, we also request confirmation from the staff of the Division of Market
Regulation that it would not recommend enforcement action against O-N-G and the
listing [*9]
companies if the O-N-G does not register as "brokers" or "dealers" under section
15(b) of the Securities Exchange Act of 1934, as amended ("Exchange Act"), and
if the O-N-G and O-N-G listing companies do not register as exchanges under
section 6 of the same Act.
BACKGROUND
The Office
of Advocacy of the U. S. Small Business Administration has the statutory
responsibility to represent the interests of small businesses within the federal
government. Related to this, the Office is working to implement the
recommendation from the 1995 White House Conference on Small Business.
Access to capital was one of the top issues at the 1995 White
House Conference on Small Business. Fifteen of the top 60 recommendations were
related to capital formation. These recommendations received 24% of the total
votes, more than any other issue topic. At the conference, many small business
owners voiced their frustrations with seeking capital through the equity
markets. Access to the equity markets appeared to be even more troublesome for
owners of small innovation- and high technology-based businesses.
In the past year, the Office of Advocacy held nine focus groups across the
country with small business [*10]
owners, venture capitalists, angel investors, attorneys, accountants, capital
formation leaders, academicians, state securities regulators and state economic
development agencies to discover the problems small businesses confront when
seeking to issue securities.
In addition to the focus groups, the
Office of the Advocacy contacted with the Center for Venture Research,
University of New Hampshire, to study the contributions of accredited investors,
or "angels," to capitalization of small firms.
We found that the
greatest obstacles a small corporation confronts are: 1) limited exposure to
experienced, accredited investors and 2) high transaction costs of soliciting
and/or obtaining equity capital.
Based upon the recommendations
of the 1995 White House Conference on Small Business, the issues raised by the
focus group meetings, and the findings from our completed research, we believe
that the creation of an electronic listing service available over the Internet
indexing small corporate offerings will facilitate small companies access to
accredited investors.
PROPOSAL
It is our intention
to create O-N-G as an Internet World Wide Web site that will list small company
listings [*11] under
a categorical drill type heading ( ie. Horizontal, Offset, or Re-entry, etc.).
The O-N-G World Wide Web homepage will allow accredited investors to access a
password-controlled listing of small company oil and gas offerings by a
respective category. We currently have many information-related links to support
greater understanding of the oil and gas industry.
Listings on
O-N-G's homepage will consist of small company listings exempt from federal
registration under Regulation A or Regulation D, Rule 504. Accredited investors
registered with O-N-G will be able to access through 0-N-G's homepage a small
companies "tombstone" advertisement and in some eases other geological
information. These documents will be prepared by the small company. It will be
the responsibility of the small company to be in full compliance with the
appropriate filing and registration requirements of federal and state securities
laws and regulations.
Upon subscribing to 0-N-G, the small
company will receive an entrepreneur number (sequentially generated) when the
information is entered into 0-N-G's data base. Any and all tables generated by
the data base will display 0-N-G's listings in the chronological [*12] order in which the information was
entered into the data base.
Access to information regarding the
small companies listed on 0-N-G will be available only to "accredited investors"
through a password system. Before being given a password, each investor will be
required to certify that the investor is an "accredited investor" within the
meaning of Rule 501 of Regulation D under the Securities Act of 1933. Investors
will be required to provide this certification on an annual basis as part of an
investor's subscription renewal. It will be the responsibility of the small
company to determine independently, before completion of any sale, whether the
investor satisfies the criteria for an "accredited investor" within the
appropriate jurisdiction.
0-n-G will be the initial contact for small
companies that want to list their offering on 0-N-G and for accredited investors
who want to subscribe to 0-N-G. To be listed on
0-N-G, small
companies will be required to have a qualified or registered offering pursuant
to federal and/or state securities laws and regulations or be qualified for an
exemption from registration.
In addition, each company must
certify as part of the entrepreneur subscription [*13] form that it does not fall under the
"Disqualifications" provisions as adopted by the North American Securities
Administrators Association (NASAA) in its "Statement of Policy Regarding Small
Company Registrations," on April 28, 1996.
The small company will
send the subscription form and the subscription fee (as applicable) to 0-N-G.
0-N-G will add the listing to 0-N-G's data base.
Accredited
investors will be required to fill out a form which will require the investor to
self-certify as to accredited investor status. The form and subscription fee
will be mailed to 0-N-G or charged on their credit card. After the form has been
received, 0-N-G will direct that the password be sent electronically to the
investor subscriber. In addition, the investor may send the subscription form
electronically; however, a password will not be released until 0-N-G has
received the self-certify form. After the investor has received the password, he
or she may log on to 0-N-G's Password Protected page.
It is
anticipated that many investors will subscribe to 0-N-G's listing or matching
service. 0-N-G will clearly inform potential subscribers that the listings
available on 0-N-G are separate from those [*14] available through any other listing or
matching service, and that investors will be required to subscribe separately to
0-N-G.
Subscribers to the listing and/or matching services
operated by 0-N-C who have not subscribed separately to 0-N-G and have not
provided the required certification regarding their status as "accredited
investors" will not be given access to O-N-G's small corporate listings. Such
persons will, however, be able to view 0-N-G's homepage which will provide
general information to the public about 0-N-G as well as information regarding
qualifications for becoming an O-N-G subscriber.
Investors who
have registered with 0-N-G will be able to access 0-N-G's password-protected
page and review the lists of companies. The investor may review the information
of the listed companies. If an investor wishes to purchase working interest from
a small company listed on 0-N-G, the investor must contact the small company
directly.
No trading will take place on the 0-N-G and O.N.G. will
not participate in any sales transaction between the listings company and the
investor.
To help accredited investors review the listings on
0-N-G's password protected page, the subscriber [*15] may choose all listings of a particular
type under each respective drilling heading.
In addition, 0-N-G
will be able to notify the accredited investor via the Internet when a company
that lists on 0-N-G has characteristics that correlate to the investor's
specified basic criteria.
0-N-G will establish an Advisory Board
for 0-N-G. The Advisory Board will establish 0-N-G's homepage specifications,
Internet access specifications, and overall 0-N-G operating procedures. In
addition, the Advisory Board will be responsible for approving the designation
of additional links and/or other non-profit entities as 0-N-G affiliates.
0-N-G will be funded, in part, by nominal, flat fees that will be
charged to the participating small companies and accredited investors. It is
expected that such fees will cover part of the administrative expenses
associated with operating 0-N-G. These fees will not be made contingent upon the
outcome or completion of any securities transaction resulting from a listing on
0-N-G. (During the initial "trial period" of 0-N-G, fees may be Waived for small
companies and accredited investors.) Additional 0-N-G funding may be sought from
individual sponsors.
0-N-G [*16] sponsors will be allowed a box located on
the screen of 0-N-G's homepage. This box will contain either advertising
information furnished by the sponsor and/or will connect the viewer to the
sponsor's homepage (very much like what is currently available on the World Wide
Web portion of the Internet). Sponsorship of O-N-G will not grant a sponsor
either special access to O-N-G's listings or decision-making authority over
0-N-G.
DISCUSSION
The Investment Advisers Act of
1940
0-N-G and 0-N-G supporters do not believe that they are
required to register as "investment advisers" as set forth under Section 203(a)
of the Investment Advisers Act of 1940.
0-N-G will not be engaged
in the business of advising others concerning the advisability of investing in
the small companies listed on the Internet World Wide Web password-protected
page nor will they be in the regular business of issuing or promulgating
analyses or reports concerning securities.
0-N-G will not make
any recommendations concerning any offering of securities listed on 0-N-G. 0-N-G
will not (i) advise any listing companies or investors on the merits of any
investment opportunity, (ii) participate in negotiating the terms [*17] of any investment, (iii) hold themselves
out as providing any securities-related services other than a listing or
matching service, (iv) directly assist investors or listing companies with the
completion of any transaction, for example, through the provision of closing
documentation or paid referrals to attorneys or other professionals, or (v)
handle funds or securities involved in completing the transaction. In addition,
no fees, other than the nominal fees to cover administrative costs, will be
assessed and no fee will be made contingent upon the completion of any
securities transaction resulting from a listing on 0-N-G.
The
Securities Exchange Act of 1934
0-N-G does not believe that they
are required to register as "brokers" or "dealers" under Section 15(b) of the
Exchange Act of 1934. In addition, it is believed that 0-N-G is not required to
register as "exchanges" under Section 6 of the same Act.
While a
"broker" is defined in Section 3(a)(4) of the Exchange Act as a person engaged
"in the business of effecting transactions in securities for the account of
others," and a "dealer" is defined in Section 3(a)(5) of the Exchange Act as a
person engaged "in the business of buying [*18] and selling securities for his own
account, 0-N-G neither effect the transactions in securities listed on 0-N-G nor
are in the business of buying and selling securities listed on 0-N-G
Specifically, 0-N-G will not: (i) provide advice about the merits of
particular opportunities or ventures, (ii) receive compensation from 0-N-G users
other than the nominal, flat fees to cover administrative costs, (iii)
participate in any negotiations between investors and listing companies, (iv)
directly assist investors or listing companies with the completion of any
transaction, for example, through the provisions of closing documentation or
paid referrals to attorneys or other professionals, (v) handle funds or
securities involved in completing a transaction, or (vi) hold themselves out as
providing any securities-related services other than a listing or matching
service.
0-N-G officials, participants, and employees and
directors with direct or indirect operation or supervisory control over 0-N-G
will not participate as entrepreneurs or investors in any company listed on
0-N-G, except in compliance with the federal securities laws and unless such
participation is disclosed to users of 0-N-G. [*19] Also, such persons will not discuss any
matters with listing companies, investors, or other persons that might require
familiarity with securities or the exercise of judgment concerning securities
activities. No transactions or negotiations will occur by or through 0-N-G. In
addition, 0-N-G will not maintain possession of the funds, securities, or
property of any user of 0-N-G.
0-N-G will not receive
compensation other than the nominal, flat fees to cover administrative expenses.
No other fees, commissions or compensation will be due from the investors or the
listing companies. The fees will not be made contingent upon the outcome or
completion of any securities transaction resulting from a listing on O-N-G.
With regard to the registration of 0-N-G as "exchanges" under
Section 6 of the Exchange Act, 0-N-G does not believe that they are required to
register. 0-N-G will not perform the functions commonly performed by a stock
exchange. 0-N-G will only be a listing service for small companies and will not
effect any transaction in a security nor report any such transaction for
companies listed on 0-N-G. Once an accredited investor decides to invest in a
company listed on 0-N-G. [*20] the
investor must contact the small company directly.
In particular,
we believe that operation of 0-N-G, as proposed, will not entail operation of an
"exchange" for the purposes of Section 3(a)(1) of the Exchange Act. See Delta
Government Options Exchange, Securities Exchange Act Release No.17611 (January
12, 1990). We believe that the proposed operation of 0-N-G will not involve an
"exchange" within the Commission's articulated reasoning because it merely
facilitates access to information about the listed companies to accredited
investors, and neither centralizes trading nor provides buy and sell quotations
about particular securities.
The Commission further stated that
the term "exchange" was not intended to encompass markets that "serve as
bulletin boards for the episodic display, by broker-dealers and institutions, of
buying and selling interest. 0-N-G, in bringing together potential investors and
small companies in need of capital.
CONCLUSION
1)
0-N-G should not be required to register under Section 203 of the Investment
Advisers Act since 0-N-G will not be engaged in the business of dispensing
advice to investors on the worthiness of small companies listed on 0-N-G.
[*21]
2)
0-N-G should not be required to register under Section 15(b) of the Exchange
Act. 0-N-G will not be engaged in the business of effecting securities
transactions nor will they be engaged in the business of buying and selling
securities.
3) 0-N-G should not be required to register as
exchanges under Section 6 of the Exchange Act. 0-N-G is solely a listing service
and does not effect any transactions in securities or report any such
transaction to third parties.
ACTION REQUESTED
We
respectfully request that the staff of the Commission confirm that it will not
recommend enforcement action against 0-N-G.