March, 2003

Private Offerings of Securities

Under Section 5 of the Securities Act of 1933 ("1933 Act"), it is unlawful to offer or sell a security unless the security is registered with the Securities and Exchange Commission ("SEC") or is exempt from registration. The 1933 Act defines "sale" to include "every contract of sale of disposition of a security or an interest in a security, for value." Accordingly, if any consideration is given for the issuance of the security, the security must either be registered or exempt from registration.

There are a number of exemptions to Section 5. Issuances may be exempt from registration under Section 4(2) of the 1933 Act, which exempts sales "not involving a public offering." While there are no definitive guidelines as to what makes an offering a "public offering," this exemption can be used in limited circumstances when, among other things, each offeree has a high level of sophistication, and each investor has access to, or is in the position to demand access from the issuer, the same type of information that the issuer could provide in an SEC-registered offering. Whether an issuer's sale of securities meets the Section 4(2) exemption is a matter of factual interpretation and the SEC has provided little guidance to assist issuers in making a determination as to whether their offerings meet the requirements of Section 4(2). The issuer does not have to make any filings in connection with this exemption.

Regulation D promulgated under the 1933 Act provides three safe harbors for issuances of securities without registration. First, Rule 504 provides an exemption from registration under the 1933 Act for offers and sales of securities where the aggregate offering price of the securities does not exceed $1 million, less the aggregate offering price of all securities sold within the 12 months before the start of and during the offering. In a Rule 504 offering, the issuer may sell to an unlimited number of investors, whether or not they are "accredited" investors (as defined in Regulation D, Rule 501), and the issuer does not have to provide the investors with any particular form of disclosure. Any information provided by the Company, however, must be accurate and complete, and may not be misleading.

Under Rule 504, the issuer may not offer or sell the securities by any form of general solicitation or general advertising unless the offering is made in a state which requires registration or that requires the public filing of and delivery to investors of a substantive disclosure document. In addition, unless the offering is made in a state which requires registration or that requires the public filing of and delivery to investors of a substantive disclosure document, the securities will be restricted securities, subject to the resale provisions of Rule 144 under the 1933 Act. According, in most instances the issuer may only offer and sell stock in a Rule 504 offering to persons with whom the officers and directors have a pre-existing relationship.

SEC rules may require that subsequent offers and sales of securities be combined or "integrated" with a Rule 504 offering in determining the offerings as combined meet an applicable exemption. For example, an offering raising $900,000 made to 40 non-accredited investors may satisfy the Rule 504 exemption and a subsequent offering raising $4 million under Rule 506 of the 1933 Act made to 50 accredited investors, while otherwise separately exempt from registration, may each be non-exempt from registration if deemed to be integrated with each other, since the total sales of $4,900,000 would be too high for a Rule 504 exemption and the 40 non-accredited investors would violate a Rule 506 exemption.

The SEC has set forth guidelines under Rule 502 of the 1933 Act as to when offerings are integrated. Although offers and sales that are made more than six months before the start of a Regulation D offering or more than six months after the completion of a Regulation D offering will not be considered to be part of that offering as long as during those six month periods there are no offers or sales of securities by or for the issuer that are of the same or a similar class as those being sold in the offering. For sales that are made within the six month period, Rule 502 looks at the following factors in considering whether separate offerings or sales of securities should be integrated:

(a) are the sales part of a single plan of financing;
(b) do the sales involve issuance of the same class of securities;
(c) have the sales been made at or about the same time;
(d) do the sales involve the same type of consideration; and
(e) are the sales made for the same general purpose.

Rule 505 (for offerings note exceeding $5 million) and Rule 506 (for offerings without regard to the dollar amount of the offering) exempt sales to all accredited investors plus no more than 35 non-accredited investors. The issuer must provide a detailed offering document to each non-accredited investor in a Rule 505 or 506 offering, but it is not required to provide any offering material to accredited investors in a Rule 505 or 506 offering.

An investor is accredited if one or more of the following qualifications are met:

If an individual, his/her individual net worth, or joint net worth with his/her spouse, at the time of this purchase exceeds $1,000,000,
If an individual, he/she had an individual income in excess of $200,000 in each of the two most recent years or joint income with his/her spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year,
If an individual, he/she is a director or officer of the issuer,
It is an organization described in section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000,
It is a trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in 17 CFR 230.506(b)(2)(ii), and/or
It is an entity in which all of the equity owners are accredited investors.

If the offering is made solely to accredited investors, no particular type of information must be provided. Any information provided by the Company, however, must be accurate and complete, and may not be misleading.

If the offering includes non-accredited investors, the Company must provide, "to the extent material to an understanding of the issuer, its business and the securities being offered," detailed information to each investor. See, Regulation D, Rule 502(b). The information to be provided includes the types of information that would be provided to the investors if the offering was made under Regulation A, such as: risk factors; a narrative description of the business, including the business done and intended to be done, the general development of the business over the past 5 years, the principal products and services offered, research and development costs, the number of employees, and the cost of compliance with laws (if material); a description of how the securities are being offered and how much commissions, if any, will be paid on the sale of the securities; the use of proceeds; a description of material real estate owned or leased by the issuer; the names ages, salaries and equity ownership in the company of each of the directors and certain executive officers; and a description of transactions involving the company in which any director, officer or significant employee was a party. The Company must also provide audited financial statements.

Rules 504, 505 and 506 each requires that the issuer file a Form D with the SEC within 15 days of the first sale. While the SEC has not conditioned the exemption upon timely filing, in order to ensure that the issuer is in compliance with the federal securities laws requirements, it should file a Form D with the SEC claiming the applicable exemption under Regulation D within 15 days after the first sale of the security.

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