March
22,
1996
Mr. Andrew D.
Klein President & Chief
Executive Officer
Spring
Street Brewing Company
113 University Place, Suite 11-B
New York,
New York 10003
Dear Mr.
Klein: This letter follows up
on the issues we discussed in our most recent telephone conversation concerning
Spring
Street Brewing Company's bulletin board-based stock trading mechanism,
Wit-Trade. We thought it was important to communicate our concerns quickly
following your suspension of activity earlier this week. Based on your
experience as a securities lawyer, you will understand that we have a number of
concerns about the Company's operation of Wit-Trade.
Innovation and
creativity are the hallmark of our nation's securities markets, contributing
enormously to the most efficient capital formation system in the world. We try
to encourage such modernization, but it is our job, first and foremost, to
insure protections for public investors. We recognize that Wit-Trade is an
innovative mechanism that has the potential to provide Company shareholders with
greater liquidity in their investments. We appreciate that the Company
[*2] is providing this service at its own
expense, and we understand that the Company is not involved in negotiating,
crossing or otherwise facilitating the execution of the bids and offers posted
on Wit-Trade. Nevertheless, we believe that, without certain modifications,
investors using your system may not be adequately protected. In particular, we
are concerned that investors' funds and securities be handled appropriately,
that investors understand the risks involved in purchasing illiquid and
speculative securities, that buyers are aware of last sale prices and that
investors are provided with ongoing disclosure about the Company.
Access
to and control of investor funds must be handled carefully to provide investors
using your system with adequate protections. As you are not a registered
broker-dealer, we suggest you modify your system to eliminate the Company's
control over these funds. At a minimum, the Company should use an independent
agent, such as a bank or escrow agent, to receive checks from buyers payable to
the seller of the security or the bank (rather than payable to
Spring Street Brewing Company).
Investors should send their checks directly to this independent agent, rather
[*3] than to
Spring
Street. To prevent customer confusion about the role of your
system, you should supplement the information currently provided by adding
information that is particularly relevant to first time investors, informing
them of the risks inherent in investing in illiquid securities. For example,
consistent with investor protection the Company should disclose that its shares
are not traded on any registered securities exchange or through Nasdaq.
Investors should be informed that the market for the Company's shares may be
highly illiquid and that there is no guarantee that they will be able to sell
the Company's shares at the price they paid for them, or at any particular
published indication of interest.
Users of the system should be informed
that if they choose to post quotations simultaneously on both the Buyer and
Seller Bulletin Boards they may be considered a "dealer" that is required to
register and comply with broker-dealer requirements under the federal securities
laws. All transactions facilitated through Wit-Trade are, of course, subject to
the antifraud provisions of the federal securities laws, including the
anti-manipulation provisions.
We also believe that a transaction
[*4] history
would allow investors to make more informed investment decisions. We believe
that the price and number of shares for recent transactions should be disclosed
through the system; we understand that you are planning to provide certain price
and volume information. To deter manipulation, it would be helpful if you kept
records of all quotations posted on Wit-Trade and of all securities transactions
effected through use of the system and make them available to us upon reasonable
request.
In addition, the sale of securities through Wit-Trade appears
to involve an offer or sale by
Spring Street for purposes of the
Securities Act of 1933. In this regard, please note that the Division of
Corporation Finance's views regarding the application of the registration
requirements of the Securities Act to services such as Wit-Trade are set forth
in the no-action response to
King & Spalding (November 17,
1992).
Absent an available exemption,
Spring Street would be required to
register under the Securities Act and undertake to keep the registration
statement "evergreen" during the existence of Wit-Trade It is our view that the
Regulation A exemption may be used in connection with a service
[*5] such as Wit-Trade. In this regard, the
offering circular used in connection with the Regulation A exemption should be
delivered and updated in accordance with Regulation A. We note that the Company
employed electronic delivery mechanisms in its original Regulation A offering.
This approach would continue to be acceptable, although you should consider the
Commission's interpretive guidance regarding electronic delivery released last
October.
We are available to answer any questions. Because of the
innovative nature of your system and the issues raised, we believe that
interpretive relief is appropriate for your situation, and we look forward to
working with you in anticipation of providing this relief.
Sincerely,
Abigail Arms
Associate Director - Legal
Division of Corporation Finance
202-942-2890
Catherine
McGuire
Associate Director
Division of Market Regulation
202-942-0061
