May 11, 2012
In regards to Sec. 4A(a)(6): not later than 21 days prior to the first day on which securities are sold to any investor (or such other period as the Commission may establish), make available to the Commission and to potential investors any information provided by the issuer pursuant to subsection (b)
This provision can be construed in more than one way. The first construction could be that under this provision, the issuer must pass background and securities checks and be listed by the broker or funding portal and the Commission notified, and then at least 21 days must pass before any securities are sold to any investor before any investor is allowed to invest. The rationale for this might be to allow sufficient time for investors to interact with the issuers prior to purchasing any securities and for the Commission to have notice of the offering. On the other hand, this could be construed to mean that once the target offering has been reached, 21 days must pass before closing the transactions and disbursing funds to the issuer. The rationale here would be to allow a cooling off period so that investors have the opportunity to change their minds, or collective minds. Each of these raises questions.
The first of these seems the most likely construction because it says prior to the first day on which securities are sold. That implies that securities will be sold for more than one day, over time, and that this is the first day the particular securities are for sale. Prior to this day, they have been available for consideration for 21 days, but not for sale.
Which one this is depends on the definition of sold. Provision Sec. 4A(a)(7) indicates that offering proceeds are only available to the issuer when the aggregate capital raised has reached the target offering amount. Up until that point (or some other point that the Commission determines is appropriate) any investor can cancel their commitments to invest. Ostensibly then, that point, the point of closing the sale and distributing proceeds to the issuer, is when the securities are actually sold and not when the investor transmits money in an offer to invest. If that is the correct interpretation of the term sold as used in this provision, then essentially it means that the second construction is correct and investors can begin transmitting funds in offers to invest immediately, but 21 days must pass before the offering can be consummated even if the target amount is reached in 7 days. While this does not seem the most likely construction, it would provide the Commission the ability to check its records on each investor to determine whether any have exceeded the limits (see Sec. 4A(a)(8) below).
In regards to Sec. 4A(a)(7): ensure that all offering proceeds are only provided to the issuer when the aggregate capital raised from all investors is equal to or greater than a target offering amount, and allow all investors to cancel their commitments to invest, as the Commission shall, by rule, determine appropriate
One can envision an investor cancelling his commitment to invest on the day before the sale of securities is closed and the offering proceeds are to be distributed to the issuer. That begs several questions. The first question is what then? Is the offering re-opened until those shares are sold again? What about extensions of time if this happens on the last day of the offering? The second question is when does the sale consummate? When the last of the shares are purchased? Or is there some time period after the last of the shares are purchased during which investors can cancel but after that point there is no backing out? Clearly, the parties involved will have work to do in closing the sale, distributing the proceeds and providing whatever documentation is required for investors to document their investment. There must be a drop-dead time on any of these offerings after which the investment cannot be cancelled.
In regards to Sec. 4A(a)(8): make such efforts as the Commission determines appropriate, by rule, to ensure that no investor in a 12-month period has purchased securities offered pursuant to section 4(6) that, in the aggregate, from all issuers, exceed the investment limits set forth in section 4(6)(B)
It seems obvious that no broker or funding portal will know what any investor has purchased from any issuer through another broker or portal. The only effort that might be made is to obtain an affirmative statement, under penalty by the Commission, that no other securities have been purchased during the preceding 12-month period from any other issuer or through any other broker or funding portal, or in the alternative, state the amount of such securities purchased, from which issuer, which broker or funding portal, and on what date. For all the brokers and funding portals to know this information, the Commission would have to collect this data and maintain it, on a real-time basis, for electronic access and search by brokers and funding portals.
In addition, the net worth of an investor can change dramatically due to circumstances. If an investors net worth changes, does the commission expect the investor to change this information with every funding portal at the moment such a change occurs or is this a question that should be presented to investor at the moment the investor is committing funds?