Rescission of Venture Capital Policy and Adoption of New Requirement

TO: All NASD Members and Other Interested Persons

On May 31, 1983, the Securities and Exchange Commission ("SEC") approved an amendment to the Association's rules rescinding the Policy of the Board of Governors — Venture Capital and Other Investments by Broker/Dealers Prior to Public Offerings ("Venture Capital Policy"). Simultaneously, the SEC approved an amendment to the Interpretation of the Board of Governors — Review of Corporate Financing under Article III, Section 1 of the Rules of Fair Practice ("Corporate Financing Interpretation") requiring that certain investments by members in private companies be restricted in connection with an initial public offering.

The Association's decision to rescind the Venture Capital Policy recognizes the significantly changed conditions of the securities industry which have evolved since its adoption in the late 1960's. The Policy was originally intended to be temporary pending further study of the practice of venture capital investments prior to initial public offerings. With the adoption of other Association rules on self-underwriting and certain SEC rules on sales of securities held by affiliates, the Association concluded that the Venture Capital Policy was no longer necessary to assure investor protection.

In the course of SEC review of the Association's proposal to rescind the Venture Capital Policy, it was determined that a restriction should be added to the Corporate Financing Interpretation relating to situations in which members and certain control persons propose to sell their holdings in companies at the time the member participates in an initial public offering of the company. It was concluded that this situation can present certain conflicts of interest with respect to the establishment of a public offering price and the assurance of full disclosure. Accordingly, it was agreed that members and specifically enumerated control persons of members be restricted from selling their holdings during an initial public offering of a company and for a 12 month period following the effective date, if the member participates in the distribution of the offering.

Language to implement this restriction has been added to the Corporate Financing Interpretation and became effective upon approval by the SEC on May 31, 1983. The restriction is applicable to all offerings filed with the Association after May 31, 1983.

A copy of the text of the new provision as approved by the SEC is attached. Questions regarding this notice may be directed to Dennis C. Hensley at (202) 728-8258.

Sincerely,

Gordon S. Macklin
President

VENTURE CAPITAL RESTRICTIONS

No member or officer, director, general partner or controlling shareholder of a member which participates in the initial public offering of an issuer's securities and which beneficially owns any securities of said issuer at the time of filing of the offering shall sell those securities during the offering or sell, transfer, assign or hypothecate those securities for one year following the effective date of the offering.