Palms & Company Document

SPECIAL REQUIREMENTS FOR ARRANGING CAPITAL INVESTMENT IN RUSSIA IN 1999

by

Dr. Pyotr Johannevich van de Waal-Palms

"What American investment managers must tell their clients about the Russian companies in which they are going to make investments."

The Securities laws of the United States require a comprehensive degree of disclosure by those soliciting capital from Americans for investment in Russia. The Average "Prospectus" will contain more than 100 pages of such disclosures.

We have provided here a brief excerpt from a hypothetical prospectus, which enumerates some of the issues such a document might mention about risk factors and Special Considerations in Russia.

This information is useful to Russian companies seeking capital for the following reasons:

• 1. The Information demonstrates clearly an awareness on the part of Investment Managers of the political and economic and social situation in Russia and the specific individual special risks, traps and pitfalls these conditions present , when making investments in Russia. Russian companies can gain some level of comfort from this recognition. Clearly investors are practical and realistic and know what to expect. They have come to invest under existing conditions and will not be shocked by reality.
• 2. The information also demonstrates the Special Consideration that investors must consider in making investment. Although the risks are known, Investment Managers still have an obligation to mitigate the the risks and take comprehensive steps to eliminate or minimize the described risks. The work, by Russian companies, to satisfy these "due-diligence" requirements of investors entails considerable expense on their part ranging from 2% to 7% of the required capitalization.

The Term "Russia Company" means a legal entity (i) that is organized under the laws of, or with a principle office and domicile in Russia, (ii) for which the principal equity securities trading market is in Russia, or (iii) that derives at least 50% of its revenues or profits from goods produced or sold, investments made, or services performed in Russia or that has at least 50% of its assets situated in Russia. Only Russia no CIS countries.

DESCRIPTION OF RISKS

These are highly speculative securities. An investment in the Fund involves significant risks described in the prospectus.

Prior to this offering there has been no public market for the Fund's shares. During an initial period which is not expected to exceed three months from the date of this prospectus, The Fund's shares will not be listed on any securities exchange. The Underwriters do not intend to make a market (buy back) the Fund's shares.

The expenses of the underwriter will be paid from the money raised which includes $250,000 to be paid to the Underwriter in partial reimbursement of their expenses

The address of the Fund is .........

Investment will be made in equity securities, common stock, preferred stock, convertible preferred stock, bonds, notes, and debentures convertible into common or preferred stock; stock purchase warrants and rights; equity interests in trusts, partnerships and joint ventures and American or Global Depository Receipts. Funds not invested in companies will be invested in debt issued or guaranteed by Russian state entities.

Under American Securities law the Fund must describe the risks involved in the investment. The prospectus lists the following risks

• Risk of nationalization
• Greater social political and economic uncertainty
• Delays in settling portfolio transactions and risk of loss arising our of Russia's system of share registration
• Risks in connection with the maintenance of Fund portfolio securities and cash with foreign sub-custodians and securities depositories including the risk that appropriate sub-custody arrangements will not be available to the Fund.
• The risk that it may be impossible or more difficult than in other countries to obtain and/or enforce a judgment.
• Pervasiveness of corruption and crime in the Russian economic system
• Greater price volatility, substantially less liquidity and significantly smaller market capitalization of securities markets in which the Fund will invest.
• Currency exchange rate volatility and the lack of available currency hedging instruments
• The use of derivative instruments, which may include forward foreign currency exchange contracts , currency futures contracts and options thereon, put and call options on securities,indices and foreign currencies stock index futures contacts and options thereon.
• Higher rates of inflation (including the risk of social unrest associated with periods of hyper-inflation.
• Controls on foreign investments and local practices disfavoring foreign investors and limitations on repatriations of invested capital, profits, and dividends, and on the Fund's ability to exchange local currencies for U.S. dollars.
• The risk that the government of Russia or other executive or legislative bodies may decide not to continue to support the economic reform programs implemented since the dissolution of the Soviet Union and could follow radically different political and/or economic policies to the detriment of investors., including non-market oriented policies such as the support of certain industries at the expense of other sectors or investors or a return to the completely centrally planned economy that existed prior to the dissolution of the Soviet Union.
• The financial condition of Russian companies including, including large amounts of inter-company debt which may create a payments crisis on a national scale and the fact that Russian companies may be smaller, less seasoned and newly organized companies;
• The risk that taxes on dividends will be withheld at the source
• Dependency on exports and the corresponding importance of international trade.
• The difference in, or lack of, auditing and financial reporting standards, which may result in unavailability of material information about issuers, particularly in Russia
• The risk that the Russian Tax system will not be reformed to prevent inconsistent, retroactive or exorbitant taxation
• The fact that statistical information regarding the economy of Russia may be inaccurate or not comparable to statistical information regarding the U.S. or other economies
• Less extensive regulation of the securities markets
• The risks associated with the difficulties that may occur in pricing the Fund's portfolio securities
• Possible difficulty in identifying a purchaser of securities held by the Fund due to the underdeveloped nature of the securities markets

Stock corporations are a relatively new concept in Russia. Russia does not at present have a developed body of securities law or laws governing corporations or joint stock companies. Most of the company and securities laws and regulations of Russia are in their preliminary stages of development. Laws regarding fiduciary duties of officers and directors, and the protection of investors, including foreign investors, are in the early stages of development and existing laws do not cover all contingencies or are not generally enforced.

There is little historical data on Russian securities markets because they are relatively new and a substantial portion of securities transactions in Russia are privately negotiated outside of stock exchanges. The Fund's holdings of equity securities of Russia Companies are expected to represent a relatively significant portion of the total float of such securities available for public trading and, therefore, the size of the Fund's holdings in specific securities relative to the trading volume in those securities could adversely affect the prices at which the securities are bought or sold and could lengthen the time period during which buying and selling programs are effected. Anticipation of the offering in the Russian securities markets may increase the prices that would otherwise be paid by the Fund for certain securities and lengthen the time period required to fully invest the proceeds of the offering in Russian Securities.

Russia and other of the countries in which the Fund may invest may be subject to a greater degree of economic, political and social instability than is the case in the United States and Western European countries. Such instability may result from, among other things the following:

• Authoritarian Government or military involvement in political and economic decision-,making including changes in government through extra-constitutional means
• Popular unrest associated with demands for improved political, economic and social conditions
• internal insurgencies
• Hostile relations with neighboring countries
• Ethnic and racial disaffection

The Fund may Invest up to 35% of its total assets in direct equity investments that the Investment Manager expects will provide for eventual disposition either through listing or sale of the securities to the issuer or another investor. Direct investment will consist of

• The purchase from an enterprise of an equity interest in the enterprise in the form of shares of common stock or equity interests in trusts, partnerships, joint ventures or similar enterprises
• The purchase of such equity interest in an enterprise from an investor in the enterprise

Such investments may involve a high degree of business and financial risk. Due to the absence of a public trading market for the Fund's direct investments, they will be less liquid than listed securities. Although these investments may, in some cases, be resold in privately negotiated transactions, the prices realized from these sales could be less than those originally paid by the Fund or less than what may be considered a fair value of such securities and in some cases it may not be possible to identify a buyer. If such securities are required to be registered under the securities laws of one or more jurisdictions before being resold, the Fund may be required to bear the expenses of registration. In addition the Fund may be unable to dispose of its direct investments at then-current market prices and may have to dispose of such securities over extended periods of time. Because of the absence of any trading markets for these investments, the Fund may take longer to liquidate these positions than it would for listed securities.

In addition securities of Russia, and particularly those that are not publicly traded, are not subject to the disclosure and other investor protection requirements that are generally accepted as necessary in countries with developed securities laws.

Because of the recent formation of securities markets as well as the understated state of banking and telecommunications systems, settlement, clearing, and registration of securities transactions are subject to significant risk. Ownership of shares is defined according to entries in the company's share register and normally evidenced by extracts from the register by formal share certificates. However, there is no central registration system for shareholders and those services are not carried out by the companies themselves or by registrars located throughout Russia. These registrars are not necessarily subject to effective state supervision and it is possible for the Fund to lose its registration through fraud, negligence or even mere oversight. While the Fund will endeavor to ensure that its interest continue to appropriately recorded either itself or through custodian or other agent inspecting the share register and by obtaining extracts of share registers through regular confirmations, these extracts have no legal enforceability and it is possible that subsequent illegal amendment or other fraudulent act may deprive the Fund of its ownership rights or improperly dilute its interests. In addition, while applicable Russian regulations impose liability on registrars for losses resulting from their errors, it may be difficult for the Fund to enforce any rights it may have against the registrar or issuer of the securities in the event of loss of share registration. Furthermore, although a Russian public enterprise with more than 1,000 shareholders is required by law to contract out the maintenance of its shareholder register to an independent entity that meets certain criteria, in practice this regulation has not always been strictly enforced. Because of this lack of independence, management of a company may be able to exert considerable influence over who can purchase and sell the company's shares by illegally instructing the registrar to refuse to record transactions in the share register. This practice may prevent the Fund from investing in the securities of certain Russian companies deemed suitable by the Investment Manager. Further, this also could cause a delay in the sale of Russian company securities by the Fund if a potential purchaser is deemed unsuitable, which may expose the Fund to potential loss on the investment.

The Fund is also permitted to engage in foreign currency hedging transactions and to enter into options and futures transactions with respect to securities and indices, some of which are commonly known as derivatives, and which may involve a risk of loss in the event of adverse movements in the value of underlying instruments. However, these strategies cannot at the present time be used to a significant extent by the Fund in the markets in which the Fund will principally invest.

The Fund may invest up to 20% of its total assets in unrated debt securities as well as debt securities that are rated in any category by recognized statistical organizations when consistent with the Fund's investment objectives and policies. Lower-rated debt securities (which are commonly referred to as "junk bonds") generally involve greater volatility of price and risk of loss of principal and income than higher rated securities. Unrated debt securities in which the Fund may invest generally involve risks equivalent to those of lower-rated debt securities. A debt security rated "D" by Standard & Poor's Corporation means that the issuer is in payment default.

The operating expense ration of the Fund can be expected to be higher than that of investment companies investing in more established securities markets since the expenses of the Fund, including management and custodian fees, will generally be higher than the expense of such other funds.

The Fund is classified as a "non-diversified" investment company under the Securities & Exchange 1940 Act, which means that the Fund is not limited by the 1940 Act in the proportion of its assets that may be invested in the securities of a single issuer. As a non-diversified investment company the Fund may investor a greater proportion of its assets in the securities of a smaller number of issuers and, as a result, will be subject to a greater risk of loss with respect to its portfolio securities. However, the Fund intends to comply with the diversification requirements imposed by the U.S. Internal Revenue Code of 1986 as amended, for qualification as a regulated investment company. In addition the Board of Directors has adopted a non-fundamental policy under which the Fund will not invest more than 10% of its assets in the securities of any one issuer (the Fund will treat Russian state issuers and their corporate instrumentalities as separate issuers)

Shares of closed end investment companies frequently trade at a discount from net asset value. This characteristic is a risk separate and distinct from the risk that the Fund's net asset value will decrease as a result of its investment activities and may be greater for investors expecting to sell their Shares in a relatively short period following completion of the offering.

INVESTORS SHOULD CAREFULLY CONSIDER THEIR ABILITY TO ASSUME THE FOREGOING RISKS BEFORE MAKING AN INVESTMENT IN THE FUND. AN INVESTMENT IN SHARES OF THE FUND SHOULD BE CONSIDERED HIGHLY SPECULATIVE. THE FUND IS INTENDED FOR LONG-TERM INVESTORS AND SHOULD NOT BE CONSIDERED A VEHICLE FOR TRADING PURPOSES. AN INVESTMENT IN THE SHARES OF THE FUND SHOULD NOT BE CONSIDERED A COMPLETE INVESTMENT PROGRAM AND WOULD NOT BE AN APPROPRIATE INVESTMENT FOR ALL INVESTORS

Comments: Russian General Directors will benefit from the advice of an experienced American Investment Banker in preparing investment capital proposals and dealing with questions about disclosures. we invite your inquiries

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