(h) Development stage company. A company shall be considered to be in the development stage if it is devoting substantially all of its efforts to establishing a new business and either of the following conditions exists: (1) Planned principal operations have not commenced. (2) Planned principal operations have commenced, but there has been no significant revenue therefrom.

(1) Equity security. The term "equity security" means any stock or similar security; or any security convertible, with or without consideration, into such a security, or carrying any warrant or right to subscribe to or purchase such a security; or any such warrant or right.

(j) Fifty-percent-owned person. The term "50-percent-owned person," in relation to a specified person, means a person approximately 50 percent of whose outstanding voting shares is owned by the specified person either directly, or indirectly through one or more intermediaries.

(k) Fiscal year. The term "fiscal year" means the annual accounting period or, if no closing date has been adopted, the calendar year ending on December 31.

(1) Insurance holding company. The term "insurance holding company" means a person which is engaged, either directly or indirectly, primarily in the business of owning securities of one or more insurance companies for the purpose, and with the effect, of exercising control.

(m) Majority-owned subsidiary. The term "majority-owned subsidiary" means a subsidiary more than 50 percent of whose outstanding voting shares is owned by its parent and/or the parent's other majority-owned subsidiaries.

(n) Material. The term "material," when used to qualify a requirement for the furnishing of information as to any subject, limits the information required to those matters about which an average prudent investor ought reasonably to be informed.

(0) Parent. A "parent" of a specified person is an affiliate controlling such person directly, or indirectly through one or more intermediaries.

(p) Person. The term "person" means an individual, a corporation, a partnership, an association, a joint-stock company, a business trust, or an unincorporated organization.

(q) Principal holder of equity securities. The term "principal holder of equity securities," used in respect of a

registrant or other person named in a particular statement or report, means a holder of record or a known beneficial owner of more than 10 percent of any class of equity securities of the registrant or other person, respectively, as of the date of the related balance sheet filed.

(r) Promoter. The term "promoter" includes

(1) Any person who, acting alone or in conjunction with one or more other persons, directly or indirectly takes initiative in founding and organizing the business or enterprise of an issuer;

(2) Any person who, in connection with the founding and organizing of the business or enterprise of an issuer, directly or indirectly receives in consideration of services or property, or both services and property, 10 percent or more of any class of securities of the issuer or 10 percent or more of the proceeds from the sale of any class of securities. However, a person who receives such securities or proceeds either solely as underwriting commissions or solely in consideration of property shall not be deemed a promoter within the meaning of this paragraph if such person does not otherwise take part in founding and organizing the enterprise.

(s) Registrant. The term "registrant" means the issuer of the securities for which an application, a registration statement, or a report is filed.

(t) Share. The term "share" means a share of stock in a corporation or unit of interest in an unincorporated person.

(u) Significant subsidiary. The term "significant subsidiary" means (1) a subsidiary or (2) a subsidiary and its subsidiaries which meet any of the conditions described below based on (1) the most recent annual financial statements, including consolidated financial statements, of such subsidiary which would be required to be filed if such subsidiary were a registrant and (11) the most recent annual consolidated financial statements of the registrant being filed:

(a) The parent's and its other subsidiaries' investments in and advances to, or their proportionate share (based on their equity interests) of the total assets (after intercompany eliminations) of, the subsidiary exceed 10 percent of the total assets of the parent and its consolidated subsidiaries.

(b) The parent's and its other subsidiaries' proportionate share (based on

their equity interests) of the total sales and revenues (after intercompany eliminations) of the subsidiary exceeds 10 percent of the total sales and revenues of the parent and its consolidated subsidiaries.

(c) The parent's and its other subsidiaries' equity in the income before income taxes and extraordinary items of the subsidiary exceeds 10 percent of such income of the parent and its consolidated subsidiaries, provided that if such income of the parent and its consolidated subsidiaries is at least 10 percent lower than the average of such income for the last five fiscal years such average income may be substituted in the determination.

(v) Subsidiary. A "subsidiary" of a specified person is an affiliate controlled by such person directly, or indirectly through one or more intermediaries.

(w) Totally held subsidiary. The term "totally held subsidiary" means a subsidiary (1) substantially all of whose outstanding equity securities are owned by its parent and/or the parent's other totally held subsidiaries, and (2) which is not indebted to any person other than its parent and/or the parent's other totally held subsidiaries, in an amount which is material in relation to the particular subsidiary, excepting indebtedness incurred in the ordinary course of business which is not overdue and which matures within 1 year from the date of its creation, whether evidenced by securities or not. Indebtedness of a subsidiary which is secured by its parent by guarantee, pledge, assignment, or otherwise is to be excluded for purposes of subparagraph (2) of this paragraph.

(x) Voting shares. The term "voting shares" means the sum of all rights, other than as affected by events of default, to vote for election of directors and/or the sum of all interests in an unincorporated person.

(y) Wholly owned subsidiary. The term "wholly owned subsidiary" means a subsidiary substantially all of whose outstanding voting shares are owned by its parent and/or the parent's other wholly owned subsidiaries.

[37 FR 14593, July 21, 1972, as amended at 38 FR 6066, Mar. 6, 1973; 39 FR 17931, May 22, 1974; 40 FR 55835, Dec. 2, 1975]

QUALIFICATIONS AND REPORTS OF
ACCOUNTANTS

SOURCE: $210.2-01 to 210.2-05 appear at 37 F.R. 14594, July 21, 1972, unless otherwise noted.

§ 210.2-01 Qualifications of account

ants.

(a) The Commission will not recognize any person as a certified public accountant who is not duly registered and in good standing as such under the laws of the place of his residence or principal office. The Commission will not recognize any person as a public accountant who is not in good standing and entitled to practice as such under the laws of the place of his residence or principal office.

(b) The Commission will not recognize any certified public accountant or public accountant as independent who is not in fact independent. For example, an accountant will be considered not independent with respect to any person or any of its parents, its subsidiaries, or other affiliates (1) in which, during the period of his professional engagement to examine the financial statements being reported on or at the date of his report, he or his firm or a member thereof had, or was committed to acquire, any direct financial interest or any material indirect financial interest; (2) with which, during the period of his professional engagement to examine the financial statements being reported on, at the date of his report or during the period covered by the financial statements, he or his firm or a member thereof was connected as a promoter, underwriter, voting trustee, director, officer, or employee, except that a firm will not be deemed not independent in regard to a particular person if a former officer or employee of such person is employed by the firm and such individual has completely dissociated himself from the person and its affiliates and does not participate in auditing financial statements of the person or its affiliates covering any period of his employment by the person. For the purposes of this § 210.2-01 the term "member" means all partners in the firm and all professional employees participating in the audit or located in an office of the firm participating in a significant portion of the audit.

(c) In determining whether an accountant may in fact be not independent with respect to a particular person, the Commission will give appropriate consideration to all relevant circumstances, including evidence bearing on all relationships between the accountant and that person or any affiliate thereof, and will not confine itself to the relationships existing in connection with the filing of reports with the Commission.

§ 210.2-02 Accountants' reports.

(a) Technical requirements. The accountant's report (1) shall be dated; (2) shall be signed manually; (3) shall indicate the city and State where issued; and (4) shall identify without detailed enumeration the financial statements covered by the report.

(b) Representations as to the audit. The accountant's report (1) shall state whether the audit was made in accordance with generally accepted auditing standards; and (2) shall designate any auditing procedures deemed necessary by the accountant under the circumstances of the particular case, which have been omitted, and the reasons for their omission. Nothing in this rule shall be construed to imply authority for the omission of any procedure which independent accountants would ordinarily employ in the course of an audit made for the purpose of expressing the opinions required by paragraph (c) of this section.

(c) Opinion to be expressed. The accountant's report shall state clearly: (1) The opinion of the accountant in respect of the financial statements covered by the report and the accounting principles and practices reflected therein; and (2) the opinion of the accountant as to the consistency of the application of the accounting principles, or as to any changes in such principles which have a material effect on the financial statements.

(d) Exceptions. Any matters to which the accountant takes exception shall be clearly identified, the exception thereto specifically and clearly stated, and, to the extent practicable, the effect of each such exception on the related financial statements given. (See Release No. AS-4.)

(e) Association with unaudited note covering interim financial data. If the financial statements covered by the accountant's report designate as "unaudited" the note required by § 210.3-16 (t), it shall be presumed that appropriate professional standards and procedures with respect to the data in the note have been followed by the independent accountant who is associated with the unaudited footnote by virtue of reporting on the financial statements in which it is included.

[37 FR 14594, July 21, 1972, as amended at 40 FR 46111, Oct. 6, 1975; 41 FR 35479, Aug. 23, 1976]

90-062-77-18

§ 210.2-03 Examination of

financial statements by foreign government auditors.

Notwithstanding any requirements as to examination by independent accountants, the financial statements of any foreign governmental agency may be examined by the regular and customary auditing staff of the respective government if public financial statements of such governmental agency are customarily examined by such auditing staff.

financial statements of persons other than the registrant.

§ 210.2-04 Examination of

If a registrant is required to file financial statements of any other person, such statements need not be examined if examination of such statements would not be required if such person were itself a registrant.

If, with respect to the examination of the financial statements of any person, the principal accountant relies on an audit made by another accountant of certain of the accounts of such person or its subsidiaries, the report of such other accountant shall be filed (and the provisions of §§ 210.2-01 and 210.2-02 shall be applicable thereto): However, The report of such other accountant need not be filed (a) if no reference is made directly or indirectly to such other accountant's audit in the principal accountant's report, or (b) if, having referred to such other accountant's audit, the principal accountant states in his report that he assumes responsibility for such other accountant's audit in the same manner as if it had been made by him.

RULES OF GENERAL APPLICATION SOURCE: $ 210.3-01 to 210.3-16 appear at 37 F.R. 14595, July 21, 1972, unless otherwise noted.

§ 210.3-01 Form, order, and terminology.

(a) Financial statements may be filed in such form and order, and may use such generally accepted terminology, as will best indicate their significance and character in the light of the provisions applicable thereto.

(b) All money amounts required to be shown in financial statements may be expressed in whole dollars, in thousands of dollars or in hundred thousands of dollars, as appropriate: Provided, That, when stated in other than whole dollars, an indication to that effect is inserted immediately beneath the caption of the statement or schedule, or at the top of the money columns, or at an appropriate point in narrative material. The individual amounts shown need not be adjusted to the nearest dollar, or thousand or hundred thousands if in a note it is stated that the failure of the items to add to the totals shown is due to the dropping of amounts less than $1, $1,000, or $100,000, as appropriate.

(c) Negative amounts (red figures) shall be shown in brackets or parentheses and so described in the related caption, columnar heading or a note to the statement or schedule, as appropriate. § 210.3-02 Items not material.

If the amount which would otherwise be required to be shown with respect to any item is not material, it need not be separately set forth (but see Release No. AS-41).

§ 210.3-03 Inapplicable captions and omission of unrequired or inapplicable financial statements.

(a) No caption need be shown in any financial statement as to which the items and conditions are not present.

(b) Financial statements not required or inapplicable because the required matter is not present need not be filed.

(c) Financial statements omitted and the reasons for their omission shall be indicated in the list of financial statements required by the applicable form. § 210.3-04 Omission of substantially identical notes.

If a note covering substantially the same subject matter is required with respect to two or more financial statements relating to the same or affiliated persons, for which separate sets of notes are presented, the required information may be shown in a note to only one of such statements: Provided, That a clear and specific reference thereto is made in each of the other statements with respect to which the note is required. § 210.3-05 Omission of names of certain subsidiaries.

Notwithstanding the requirements as to particular statements, subsidiaries, the

names of which are permitted to be omitted from the list of affiliates re quired by the applicable form, need not be named in any financial statement.c Reasonable grouping of such subsidiaries may be made, with an explanatory group caption which shall state the number of subsidiaries included in the group. § 210.3-06 Additional information.

The information required with respect to any statement shall be furnished as a minimum requirement to which shall be added such further material information as is necessary to make the required. statements, in the light of the circumstances under which they are made, not misleading. This rule shall be applicable to all statements required to be filed, in- ' cluding copies of statements required to be filed in the first instance with other governmental agencies.

§ 210.3-07 Changes in accounting principles and practices and retroactive adjustments of accounts.

(a) Any change in an accounting principle or practice, or in the method of applying any accounting principle or practice, made during any period for which financial statements are being filed which materially affects comparability of such financial statements with those of prior periods, and the effect thereof upon the net income of the period in which such change is made and, if practicable, of the prior periods for which financial statements are being filed, shall be disclosed in an appropriate manner.

(b) Any material retroactive adjustment made in income statements during any period for which financial statements are being filed, and the effect thereof upon net income of prior periods shall be disclosed in a note to the appropriate financial statement: Provided, however, That such disclosures need not be made (1) if they have been made in filings with the Commission in prior years a or (2) the financial statements which are being retroactively adjusted have not previously been filed with the Commission or otherwise made public.

§ 210.3-08 Summary of accounting principles and practices.

Information required in notes as to accounting principles and practices reflected in the financial statements may be presented in the form of a single statement. In such case, specific references shall be made in the appropriate financial

་

Assets and other resources classed with cash and its equivalent as current assets shall be reasonably expected to be realized in cash or sold or consumed within one year. However, if the normal operating cycle of the company is longer than 1 year, generally recognized trade practices may be followed with respect to the inclusion of items such as installment receivables or inventories long in process: Provided, An appropriate explanation of the circumstances is made and, if practicable, an estimate is given of the amount not realizable within 1 year. The captions specified under this § 210.3-11 and § 210.3-12 are not required for persons which do not normally distinguish current assets and liabilities from noncurrent.

Obligations which are payable within 1 year or whose liquidation is reasonably expected to require the use of existing current assets (see § 210.3-11) or the creation of other current liabilities shall be classed as current liabilities. However, if the normal operating cycle of the company is longer than 1 year, generally recognized trade practices may be followed with respect to the exclusion of items such as customers' deposits and deferred income, provided an appropriate explanation of the circumstances is made. (See also Release No. AS-102.)

Reacquired shares not retired shall be shown separately as a deduction from capital shares, or from the total of capital shares and other stockholders' equity, or from other stockholders' equity, at either par or stated value, or cost, as circumstances require. § 210.3-15

Discount on capital shares.

Discount on capital shares, or any unamortized balance thereof, shall be shown separately as a deduction from capital shares or from other stockholders' equity as circumstances require. [38 F.R. 6066, Mar. 6, 1973]

§ 210.3-16 General notes to financial statements. (See Release No. AS-4.)

If present in regard to the person for which the financial statements are filled, the following shall be set forth on the face of the appropriate statement or in notes appropriately captioned and referred to in such statement. The information shall be provided for each statement required to be filed, except that the information required by paragraphs (c), (e), (f), (g) (3), (h), (i), (k), and (p) of this section shall be provided as of the most recent audited balance sheet and any subsequent unaudited balance sheet being filed and for item (q) as specified therein. When specific statements are presented separately the pertinent notes shall be attached unless cross-referencing is appropriate.

(a) Principles of consolidation or combination. With regard to consolidated or combined financial statements, refer to §§ 210.4-01 to 210.4-09 for requirements for supplemental information in notes to the financial statements.

(b) Principles of translation of items in foreign currencies. When items in foreign currencies are included in the financial statements being presented, there shall be stated (1) a brief description of the principles followed in translating the foreign currencies into U.S. currency and (2) the amount and disposition of the unrealized gain or loss.