March, 2003

Private Offerings of Securities

Under 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. Generally, each state where the security is offered also has registration requirements.

There are a number of exemptions to the registration requirement under the 1933 Act. One such exemption is 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. The issuer does not have to make any filings in connection with this exemption.

Regulation D promulgated under the 1933 Act provides several safe harbors for issuances of securities without registration. 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.

Rule 506 provides an exemption for offerings to a limited number of people without regard to the dollar amount of the offering. The issuer can use this exemption for sales to an unlimited number of accredited investors plus no more than 35 non-accredited investors. 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.

In an offering exempt under Section 4(2) or Rule 504, the issuer does not have to provide the investors with any particular form of disclosure. The issuer must provide a detailed offering document to each non-accredited investor in a Rule 506 offering, but it is not required to provide any offering material to accredited investors in a Rule 506 offering. Any information provided by the Company, however, must be accurate and complete, and may not be misleading.

Under Section 4(2) and Rules 504 and 506, the issuer may not offer or sell the securities by any form of general solicitation or general advertising. Accordingly, in most instances, the issuer may only offer and sell stock in Section 4(2) and Rules 504 or 506 offerings to persons with whom the issuer or its officers and directors have a pre-existing relationship. In addition, the securities sold under the Section 4(2) or Rules 504 or 506 exemptions will be restricted securities, subject to the resale provisions of Rule 144 under the 1933 Act. Rules 504 and 506 require that the issuer file a Form D with the SEC within 15 days of the first sale.

State securities laws are required to honor the Rule 506 exemption and, depending upon the state, require a Form D filing either before or within 15 days after the first sale of securities. If the issuer relies upon the Section 4(2) or Rule 504 exemptions, then the issuer will need to find other application exemptions in each state where it is offering securities.