Carefree Group Inc (CRFU)

[youhavenoidea]

April 24, 2006
Ms. Nancy M. Morris
Secretary
United States Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549
Subject: Petition for Commission Action to Protect the Investing
Public from Unlawful and Deceptive Securities
Promotions
Dear Ms. Morris:
Pink Sheets LLC (“Pink Sheets”) respectfully petitions the Securities and
Exchange Commission (the “Commission”) to take immediate action to protect
investors and prevent inequitable and unfair practices in the market for over-thecounter
(“OTC”) securities. Specifically, Pink Sheets requests that the
Commission exercise its authority under Section 19(a) of the Securities Act of
1933 (the “Securities Act”) to promulgate a rule (the “Proposed Rule”) under
Sections 5 and 17 of the Securities Act to expose and prevent unlawful and
deceptive activities by securities promoters and their sponsors.
Pink Sheets is the leading provider of pricing and financial information for the
over-the-counter (OTC) securities markets and, among other things, operates an
Internet-based, electronic quotation and trade negotiation service for OTC
equities and bonds for market makers and other broker-dealers registered under
the Securities Exchange Act of 1934.
The rule we propose primarily relies on disclosure to expose fraudulent stock
promoters and their sponsor, employing four straightforward strategies:
• Promotional materials must identify promoters and their sponsors, and the
nature and amount of consideration paid for the promotion.
• Adequate current information regarding the issuer must be publicly
available at the time the promotion takes place.
Pink Sheets LLC
304 Hudson Street, 2nd Floor, New York, NY 10013
212.896.4400 - 800 LIST OTC - Fax [phone] or 3828
Page 2
• Stock held by promoters and their sponsors at the time the promotion
takes place is restricted and cannot be sold without registration or an
appropriate exemption.
• Stock promoters must provide issuers of the stock subject to the
promotion with a copy of the promotional materials, and promoters, their
sponsors and issuers must inform transfer agents and broker-dealers that
stock registered to or held on behalf of promoters and their sponsors is
restricted.
We believe that the implementation of these requirements will provide the
transparency needed by investors to clearly identify fraudulent promotions,
depriving miscreants of easy prey. Other parts of the rule follow the money and
are intended to cut off the usual sources of funding for fraudulent promotions –
the ability to sell promoted stock into the market – by requiring transfer agents
and broker-dealers to block transfers of stock owned by stock promoters and
their sponsors. The rule is intended to make the activities of fraudulent stock
promoters transparent; exposure renders fraudulent promotions unprofitable.
The text of the Proposed Rule is set forth immediately below:
The Proposed Rule
Unlawful and Deceptive Securities Promotion Practices.
(a) Unlawful and deceptive securities promotion practices are prohibited.
(b) The term “securities promotion” shall mean “the use of any means or
instruments of transportation or communication in interstate commerce
or by the use of the mails, to publish, give publicity to, or circulate any
notice, circular, advertisement, newspaper, article, letter, investment
service, or communication which, though not purporting to offer a
security for sale, describes such security for a consideration received
or to be received, directly or indirectly, from an issuer, underwriter, or
dealer.”
(c) The terms “issuer”, “underwriter”, or “dealer” shall include any affiliates
thereof.
(d) Any person that finances or engages in a securities promotion, other
than the issuer of securities subject to a securities promotion, shall be
Pink Sheets LLC
304 Hudson Street, 2nd Floor, New York, NY 10013
212.896.4400 - 800 LIST OTC - Fax [phone] or 3828
Page 3
deemed an “underwriter” of the securities within the meaning of
Section 2(a)(11) of the Securities Act.
(e) It shall be an unlawful and deceptive practice for any person to engage
in securities promotion with respect to any security unless adequate
current public information is available with respect to the issuer of such
securities. Such information shall not be deemed available, unless one
of the following conditions is met:
(i) Filing of reports. The issuer has securities registered
pursuant to section 12 of the Securities Exchange Act of
1934 (the “Exchange Act”), has been subject to the reporting
requirements of section 13 of the Exchange Act for a period
of at least 90 days immediately preceding the sale of the
securities and has filed all the reports required to be filed
thereunder during the 12 months preceding such sale (or for
such shorter period that the issuer was required to file such
reports), other than Form 8–K reports; or has securities
registered pursuant to the Securities Act, has been subject
to the reporting requirements of section 15(d) of the
Exchange Act for a period of at least 90 days immediately
preceding the sale of the securities and has filed all the
reports required to be filed thereunder during the 12 months
preceding such sale (or for such shorter period that the
issuer was required to file such reports), other than Form 8–
K reports.
(ii) Other public information. If the issuer is not subject to
section 13 or 15(d) of the Exchange Act, there is publicly
available the information concerning the issuer specified in
paragraphs (a)(5)(i) to (xiv), inclusive, and paragraph
(a)(5)(xvi) of Rule 15c2–11 under the Exchange Act, or if the
issuer is a “foreign private issuer” as defined in Rule 3b-4
under the Exchange Act, the information concerning the
issuer specified in Rule 12g3-2(b) under the Exchange Act
or, if the issuer is an insurance company, the information
specified in section 12(g)(2)(G)(i) of the Exchange Act.
Information shall be deemed “publicly available” if it can be
viewed on an Internet site accessible without charge by
members of the public that is maintained by the principal
market where the issuer’s securities are quoted for purchase
or sale.
Pink Sheets LLC
304 Hudson Street, 2nd Floor, New York, NY 10013
212.896.4400 - 800 LIST OTC - Fax [phone] or 3828
Page 4
(f) It shall be an unlawful and deceptive practice for any person to engage
in securities promotion with respect to any security unless the
promotional message contains all of the following information and is
provided by such person to the issuer of such security by certified mail,
return receipt requested:
(i) a description of the Internet site where adequate current
public information regarding the issuer can be viewed;
(ii) the name and a true and correct address and telephone
number, and email address, if available, of such person;
(iii) the identity of the source of funds for the securities
promotion, including a true and correct address of the
person or persons paying for such securities promotion;
(iv) the nature and amount of consideration paid for such
promotion, whether in cash, securities or otherwise;
(v) the names in which any person that finances or engages in a
securities promotion directly hold or have a beneficial
ownership in securities subject to the securities promotion;
(vi) the name and address of any brokerage firm or bank where
any person that finances or engages in a securities
promotion hold securities subject to the securities promotion;
(vii) a statement that, upon the request of any recipient of the
securities promotion, the person that engages in the
securities promotion will remove the name of the recipient
from any distribution list used to deliver promotional
materials to the recipient and that the CAN-SPAM Act of
2003 provides penalties and civil remedies for the unlawful
use of email to send commercial messages.
(g) It shall be unlawful for any person financing or engaging in a securities
promotion to sell securities subject to such promotion without
registration under the Securities Act or an exemption therefrom. Any
such person shall notify any broker-dealer or bank that holds such
securities on their behalf that such securities have not been registered
under the Securities Act and may not be resold without registration or
an exemption therefrom. The issuer of such securities shall exercise
reasonable care to assure that the securities are not sold in violation of
Section 5 of the Securities Act, which reasonable care may be
demonstrated as follows:
Pink Sheets LLC
304 Hudson Street, 2nd Floor, New York, NY 10013
212.896.4400 - 800 LIST OTC - Fax [phone] or 3828
Page 5
(i) by placement of a legend on the certificate or other
document that evidences the securities beneficially owned
by any person that finances or engages in a securities
promotion stating that such securities have not been
registered under the Securities Act and setting forth or
referring to the restrictions on transferability and sale of the
securities, and
(ii) by written notification to the issuer’s transfer agent and any
broker-dealer that holds such securities that the securities
are held by a person financing or engaged in a securities
promotion, are not registered under the Securities Act and
cannot be sold without registration under the Securities Act
or an exemption therefrom.
Investors Need Protection from Unsolicited Spam Emails and Faxes
Unlawfully Promoting Securities
The deceptive promotion of securities using the Internet and fax transmission has
reached epidemic proportions. There is hardly a household in America with
Internet access that has not been inundated with spam emails making fantastic
claims of easy profits, “guaranteed” to any purchaser of some obscure stock.
The limited requirements under 17(b) of the Securities Act that securities
promotions identify the nature and amount of consideration paid to the promoter
for disseminating such information are inadequate for the protection of investors
in the electronic age. Today’s spammers do not provide information about the
identity of the spammer, or of the persons paying for the promotion. Little
information is generally available regarding the issuer or its securities, and the
information that is available is often from questionable sources.
Securities promoters may be paid by issuers or affiliates of the issuer, or
increasingly often third parties that may or may not be affiliates of the issuer. In
most cases, securities promoters and those who finance their activities hope to
make a quick profit when investors buy securities in the market in response to
the questionable claims made in promotional materials. There is often no
fundamental basis for the optimistic claims made by promoters, but investors are
left in the dark with no source of adequate current information regarding the
issuer’s financial position or business. In “pump and dump” schemes, when the
promoter’s stock is sold, the promotion ceases. The stock soon plummets,
Pink Sheets LLC
304 Hudson Street, 2nd Floor, New York, NY 10013
212.896.4400 - 800 LIST OTC - Fax [phone] or 3828
Page 6
leaving the hard-earned money of investors in the pockets of unscrupulous
swindlers.
Fraudulent stock promotions are like “bad money that chases away the good.”
Legitimate investment research is drowned out by the flood of questionable
information flowing into the market. Recent years have witnessed a decline in
research activities by investment houses, particularly with respect to smaller
public companies. At the same time, there is greater investor interest in these
issuers and therefore a greater need for good research materials. Unfortunately,
this vacuum has been partly filled with spam securities promotions, many of
which are fraudulent. The proposed rule is intended to restore order. The
removal of questionable spam securities promotions from the market should
enable legitimate investor relations devices to develop. Investors will benefit
from an increase in legitimate information for smaller public companies.
It has been argued that more enforcement resources should to be devoted to rid
the OTC equity markets of spammers and the securities promotion scourge. We
agree. But we also believe, along with the late Justice Brandeis, that
transparency is the most effective protection for investors: “Sunlight is the best of
disinfectants; electric light the most efficient policeman.” As recently as 1998, the
Commission pointed out that fraudulent activities in the securities of smaller
public companies flourish because of the lack of good disclosure: “Microcap
fraud frequently involves issuers for which public information is limited, especially
when issuers are not subject to reporting requirements. Without information, it is
difficult for investors, securities professionals, and others to evaluate the risks
presented by microcap securities. Investors consequently can fall prey to
persons who make false representations and unrealistic predictions about these
securities.”
The proposed rule is intended to make the spam activities of securities promoters
transparent. In some cases, issuers may not be aware of or involved in (or may
claim to be unaware of) securities promotion targeting their securities. The
proposed rule will enable issuers to know who is promoting their stock and who is
paying for the promotion. Issuers will be obligated to deprive spammers of
unlawful gain. By placing restrictions on the transferability of securities, issuers
can deprive spammers and their financiers of illicit profits from “pump and dump”
schemes.
It may be true that “pump and dump” schemes are already illegal under existing
rules forbidding market manipulation. The proposed rule is nonetheless required
to provide greater clarity regarding widespread illegal practices. Moreover, the
proposed rule will mandate disclosures that are not currently required under
existing rules prohibiting market manipulation, thereby exposing spam securities
promotions to the spotlight of increased transparency.
Pink Sheets LLC
304 Hudson Street, 2nd Floor, New York, NY 10013
212.896.4400 - 800 LIST OTC - Fax [phone] or 3828
Page 7
On the other hand, an issuer and its affiliates that finance promotional activities
ought to make adequate current information about the issuer publicly available to
investors. It has long been a principle of US securities law that issuers
encouraging trading in their securities should be required to made adequate
disclosure to investors. The value of increased trading in an issuer’s securities
extends beyond the obvious increased ability to raise capital. In addition, the
issuer’s products are advertised, it is more attractive as an employer, and it can
more readily finance expansion activities using its own securities. For those
reasons, from its inception, the Exchange Act has required issuers that list on
national securities exchanges to make adequate current information publicly
available to investors. 1 Under the same principle, issuers and their affiliates that
finance securities promotions should also be required to make adequate
information publicly available. Engaging in promotion is a choice; no promoter
has to engage in promotion and can easily desist if adequate current information
is not publicly available.
Our proposal is intended to bring sunlight to bear where securities are the subject
of promotional activities. The activities of securities promoters should be entirely
transparent. Legitimate securities promotions will disclose to investors the
location of current adequate public information about the issuer. The legitimate
promoter will provide its identity and information about the source and funding of
promotional material. Promotions that are fraudulent will be easily identified by
investors and regulators as lacking this critical information.
Increased transparency will foster investor education by making it easier to
explain to investors how to identify fraudulent securities promotions. Transfer
agents and broker-dealers will identify securities beneficially owned by securities
promoters and their sponsors, thereby depriving spammers and “pump and
dump” con artists of illicit profits. The toxic promoters, and the account names
used to distribute securities, will be more easily identified by the legitimate
participants in securities markets. The spotlight of disclosure will cause
illegitimate promoters to scatter. Those who remain will be efficiently scooped up
by regulators; transparency of promotion will provide regulators with better tools
to locate and bring swindlers to justice.
1 “The causes of dangerous speculation in the securities markets . . . include
inadequate corporate reporting which keeps in ignorance of necessary factors for
intelligent judgment of values of securities a public continually solicited to buy
such securities by the sheer advertising value of listing.” H.R. Rep. No. 1383,
73d Cong., 2d Sess. 5, 11-12 (1934), quoted in Louis Loss and Joel Seligman,
Securities Regulations § 6-A (3d ed. 2004).
Pink Sheets LLC
304 Hudson Street, 2nd Floor, New York, NY 10013
212.896.4400 - 800 LIST OTC - Fax [phone] or 3828
Page 8
The Commission Has Authority to Adopt the Proposed Rule.
The Commission has authority to adopt the propose rule pursuant to Section
19(a) of the Securities Act, which provides, in part, as follows: “The Commission
shall have authority from time to time to make, amend, and rescind such rules
and regulations as may be necessary to carry out the provisions of this title, . . .”
The term “this title” includes Sections 5 and 17 of the Securities Act. The
Commission is therefore authorized to make rules necessary to carry out the
intent of Congress expressed in these Sections.
Section 5 of the Securities Act prohibits the sale of a security by any person,
unless a registration statement is in effect for such security. Section 4(1) of the
Securities Act provides a transactional exemption from the registration
requirements of Section 5 when the person selling the security is not an “issuer,
underwriter, or dealer.” Accordingly, securities sold by an “underwriter” must be
registered under Section 5.
Section 2(a)(11) of the Securities Act includes within the definition of an
“underwriter” any person who “offers or sells” for an issuer or an affiliate of an
issuer, directly or indirectly, in connection with a distribution of securities. Using
its authority under Section 19(a), the Commission has promulgated Rules 144
and 144A, which clarify the circumstances under which a person that has
purchased securities from an issuer is not engaged in a distribution of securities
and is therefore not an underwriter within the meaning of Section 2(a)(11). The
Commission clearly has the authority to determine that securities promoters that
encourage trading in an issuer’s securities are “underwriters” within the meaning
of Section 2(a)(11).
Section 17(a) of the Securities Act generally prohibits frauds in the offer or sale of
securities:
It shall be unlawful for any person in the offer or sale of any securities . . . ,
directly or indirectly—
(1) to employ any device, scheme, or artifice to defraud, or
(2) to obtain money or property by means of any untrue
statement of a material fact or any omission to state a material
fact necessary in order to make the statements made, in light
of the circumstances under which they were made, not misleading;
or
(3) to engage in any transaction, practice, or course of business
Pink Sheets LLC
304 Hudson Street, 2nd Floor, New York, NY 10013
212.896.4400 - 800 LIST OTC - Fax [phone] or 3828
Page 9
which operates or would operate as a fraud or deceit upon
the purchaser.
Securities promotion is intended to encourage trading in an issuer’s securities.
Spam securities promotions that occur in the absence of current adequate public
information regarding the issuer operate as a fraud or deceit on investors that are
influenced to make investment decisions on the basis of the promotion. Such
spam securities promotions are therefore prohibited by Section 17(a).
Section 17(b) requires promoters who are receiving consideration for the
promotion to disclose that fact in any publication or communication and to also
disclose the amount of the consideration.2 This section was clearly designed
with the particular intent to “meet the evils of the ‘tipster sheet’” and other
communications that “purport to give an unbiased opinion but which opinions in
reality are bought and paid for.”3 It is also clearly designed to apply to securities
traded in the aftermarket, as well as new issuances.4
The Commission clearly has the authority under Section 19(a) of the Securities
Act to make the activities of stock promoters fully transparent and effectuate the
Congressional intent expressed in Sections 5 and 17. Section 5 is intended to
make sure that investors receive current adequate public information regarding
securities they are being encouraged to buy. Section 17 is intended to prevent
fraudulent practices in securities distribution, and in particular, 17(b) specifically
targets fraudulent securities promotions.
It is specious to claim that securities promotion does not directly involve the offer
or sales of securities and therefore is not subject to the provisions of Sections 5
and 17, other than 17(b). It is true that Section 2(a)(3) of the Securities Act
defines a “sale” as “every contract or disposition of a security or interest in a
security, for value.” However, the federal courts have long held that activities
intended to encourage an active trading market should be considered “offers and
sales” for purposes of Section 5, even where no literal sales of securities by an
issuer takes place.
2 It has been held that there is no element of intent necessary to prove a violation
of Section 17(b). See In the Matter of Lehl, S.E.C. Admin. Proceeding No. 3-
9201 at 11 (2002); see also S.E.C. v. Liberty Capital Group, Inc., 75 F. Supp. 2d
1160, 1163 (W.D. Wash. 1999).
3 H.R. Rep. No. 85, 73d Cong., 1st Sess. (1933); see U.S. v. Amick, 439 F.2d
351, 365 (7th Cir. 1971); see also In the Matter of Lehl, S.E.C. Admin. Proceeding
No. 3-9201 at 11 (2002).
4 See S. Rep. No. 47, 73d Cong., 1st Sess. (1933); see also H.R. Rep. No. 85,
73d Cong., 1st Sess. (1933), both cited with approval in S.E.C. v. Wall Street
Publishing Institute, Inc., 851 F.2d 365, 369 (D.C. Cir. 1988).
Pink Sheets LLC
304 Hudson Street, 2nd Floor, New York, NY 10013
212.896.4400 - 800 LIST OTC - Fax [phone] or 3828
Page 10
In SEC v Harwyn, 326 F. Supp 942 (SDNY 1971), the federal court determined
that a spin-off distribution by a public parent company of the unregistered shares
of a subsidiary would, under certain circumstances, be considered an unlawful
distribution of securities in violation of Section 5. In that case, the defendants
created a shell subsidiary of the parent that was merged into an operating
company in a transaction where the parent received a portion of the resulting
company’s shares. The parent then distributed these shares to its shareholders
as a dividend. The district court rejected arguments that because the shares
were distributed as a dividend, without the receipt of any consideration, no sale
of securities had occurred because the disposition was made “without value.”
Instead, the court maintained that the transaction violated the spirit of the
Securities Act, which was intended to ensure that current adequate information
was made available to public investors. The court pointed out that the
transaction was intended to encourage the formation of a trading market in the
former subsidiary’s shares, which provided numerous benefits to the issuer and
its insiders, even though they were personally precluded from selling stock in the
resulting aftermarket. The encouragement of an active trading market in the
issuer’s securities was sufficient to require that current adequate information
should be made available to the investing public.
Similarly, spam securities promotion in the absence of current adequate public
information violates the letter and spirit of the Securities Act. Such promotions
encourage trading activity without providing investors with the information
needed to make good investment decisions. We urge the Commission to adopt
the Proposed Rule to expose the activities of spam securities promotions to the
light of transparent disclosure and deprive swindlers of access to easy targets
and illicit profits.
The Nature of Issuer Disclosure
For purposes of determining the type of information regarding the issuer that
should be provided to the market when securities promotion is ongoing, the
proposed rule has relied entirely on the information requirements contained in
Rule 144, which describes the circumstances under which persons that purchase
securities from an issuer may resell such securities without being considered an
underwriter under Section 4(1) of the Securities Act. Reporting issuers are
required to be current in complying with their reporting obligations. Non-reporting
issuers are required to make certain information enumerated in Section 15c2-11
under the Exchange Act publicly available.
Pink Sheets LLC
304 Hudson Street, 2nd Floor, New York, NY 10013
212.896.4400 - 800 LIST OTC - Fax [phone] or 3828
Page 11
Investors also need transparency with respect to the promotion. Investors must
be able to identify the securities promoter and persons who finance the
promotion. The nature and amount of consideration paid to the promoter must
be exposed to public scrutiny. Issuers should know who is promoting their
securities so that appropriate restrictions can be placed on their transferability.
Broker-dealers need to know that certain securities they are holding for
customers are held by spammers and their financiers and therefore may not be
sold without registration or an appropriate exemption from registration. Transfer
agents must be able to identify such securities as restricted so that their free
transfer may be blocked.
It is also necessary to clarify the means by which information about the issuer is
made publicly available. Any legitimate securities promotion will clearly identify
where current adequate information about the issuer may be viewed by
investors. In the case of reporting companies, information can easily be
accessed through the SEC’s EDGAR system. For non-reporting companies,
Pink Sheets has created the Pink Sheets News Service, an Internet repository
where issuers can post disclosure and financial information at an extremely low
cost. This information is displayed for free to all investors, regulators and any
other interested person on the Pink Sheets Internet site. We believe that any
venue publishing quotes for non-reporting issuers should make such a repository
available so that there is an appropriate medium for making adequate current
information freely available to investors.
Conclusion
The OTC equity markets form the great salt marsh of this nation’s economy. This
is the market the fuels the dreams of America’s budding entrepreneurs. Every
one of the nation’s greatest companies was once a smaller public company.
This great breeding ground for the nation’s economy is now under attack from
predators, securities promoters filling investors’ email inboxes with spam.
Spammers seek to pollute the OTC equity markets for unlawful gain, leaving
behind a wasteland where nothing can prosper. The Commission’s immediate
action is required to deprive spammers of the profits from illegal activities. The
glaring spotlight of full transparency will drive the crooked securities promoters
away from the OTC equity markets and facilitate recovery from the pollution
caused by the unlawful and deceptive practices of spammers and those who
finance their activities.
We believe that the Proposed Rule will enable investors to easily identify spam
securities promotions as fraudulent, depriving swindlers of easy targets. The
Pink Sheets LLC
304 Hudson Street, 2nd Floor, New York, NY 10013
212.896.4400 - 800 LIST OTC - Fax [phone] or 3828
Page 12
Proposed Rule will provide investors with access to information that will greatly
increase their ability to make sound investment decisions. Issuers and brokerdealers
will be obligated to take appropriate action to deprive spammers and
their financiers from profits in pump and dump schemes. In summary, the
Proposed Rule will rid the OTC markets of the spam polluting the market for
smaller public companies so that this great breeding ground for the nation’s
economy will perform its role – the facilitation of small business capital formation
and the efficient allocation of resources within the OTC markets.
We urge the Commission to adopt the Proposed Rule, together with any
modifications that are necessary or desirable to serve the interests of the
investing public and Congressional intent.
Please call me if you have any questions or need any additional information.
Respectfully submitted,
R. Cromwell Coulson
Chief Executive Officer
cc: Chairman Christopher Cox
Commissioner Cynthia A. Glassman
Commissioner Paul S. Atkins
Commissioner Roel C. Campos
Commissioner Annette L. Nazareth

http://sec.gov/rules/petitions/petn4-519.pdf