December 17, 1999
Via Facsimile and U.S. Mail
Mr. Merrill E. Weber
Red Oak Financial Corporation
770 Frontage Road, Suite 134
Northfield, Illinois 60093
Re: Sales on OTC Bulletin Board
Dear Mr. Weber:
Your letter of October 26, 1999 to Alden Adkins has been forwarded to me for reply. We understand that you are working with an issuer that has no public market for its common stock. The issuer intends to file a registration statement on Form SB-2. You asked whether the issuer can simultaneously engage a market maker to gather the documentation required by Rule 15c2-11 under the Securities Exchange Act of 1934 ("Exchange Act") and file a Form 211 for trading on the OTC Bulletin Board.
We spoke to the Office of Trading Practices in the Division of Market Regulation at the Securities and Exchange Commission regarding your inquiry. The staff explained to us that market makers should consider Regulation M when selling shares of stock into an illiquid market.
Regulation M imposes restrictions on a market maker when it effects transactions in securities that are part of a distribution. Generally, a distribution exists when a sufficient magnitude of shares is being sold and special selling efforts are employed to sell these shares. If a distribution exists, the persons involved in the distribution are prohibited from bidding for or purchasing the securities in distribution. The rule covers persons selling securities, their affiliates, and others participating in the distribution. Distribution participants, covered by Rule 101 of Regulation M, include broker-dealers assisting in selling the securities in distribution. Thus, a market maker that facilitates transactions by a selling shareholder may be covered by Rule 101. The restrictions of Rule 101 would prohibit the market maker from bidding for or purchasing the security in distribution.
A market maker should carefully analyze the facts surrounding the types of sales outlined in your letter to determine whether the security being sold is in distribution for the purposes of Regulation M. This analysis should specifically consider the actions taken by the market maker to facilitate the transactions. When an illiquid market exists, a market maker should also consider whether it dominates or controls the market for the security for purposes of determining compliance with Rule 101.
It is not apparent that all sales contemplated by your letter would be deemed distributions. We strongly encourage you, however, to analyze each transaction in light of all surrounding facts and circumstances.
I hope this letter is responsive to your inquiry. Please note that the opinions expressed in this letter are staff opinions only and have not been reviewed or endorsed by the Board of Directors of NASD Regulation. This letter responds only to the issues you have raised based on the facts as you have described them in your letter, and does not necessarily address any other rule or interpretation of the NASD or all the possible regulatory and legal issues involved.
Very truly yours,
Assistant General Counsel
NASD Regulation, Inc.
Ken L. Worm
David J. Sparks, Esq.