September 19, 2013
This comment is made partially in response to the letter from Rep. McHenry, Garrett, and Green on July 22, 2013 to the Honorable Mary Jo White, Chairman of the Securities and Exchange Commission, regarding the implementation of Title II of the JOBS Act (P.L. 112-106) by the SEC, particularly discussing the expansion of regulation for 506 offerings, including the ability to advertise.
Our law firm represents Conestoga International, LLC, one of the many small companies that stand to benefit from the ability to solicit and advertise to potential investors.
While we support and agree wholeheartedly with the letter's analysis to Ms. White, we would like you to address another very important limitation of the new rules. As you are well aware, one of the primary goals of the JOBS Act was to lift the long-standing ban on general solicitation and advertising for private securities offerings under Rule 506, so long as the securities are sold only to accredited investors under Rule 506 or qualified institutional buyers under Rule 144A. The JOBS Act directed the SEC to require issuers engage in reasonable steps to verify that the purchasers of the securities are accredited investors. The final rule included a list of four specific and detailed non-exclusive, non-mandatory methods for verifying accredited investor status of purchasers who are natural persons. In summary, they include the following:
1. Meeting the Income Requirement: IRS Forms: Reviewing any Internal Revenue Service form—including Forms W-2, 1099, K-1, and 1040—that reports the purchasers income for the two most recent years and obtaining a written representation from the purchaser that he or she has a reasonable expectation of reaching the income level necessary to qualify as an accredited investor during the current year
2. Meeting the Net Worth Requirement: Financial Institution and Other Third Party Statements: Reviewing certain documents—including, for assets, bank, brokerage and other statements of securities holdings, certificates of deposit, tax assessment and appraisal reports, and, for liabilities, a report from a nationwide credit reporting agency. The report must be dated within the prior three months that show the purchasers assets and liabilities, and the issuer must obtain a written representation from the purchaser that all liabilities necessary to make a determination of net worth have been disclosed
3. Third Party Confirmation: Obtaining a written confirmation from certain third parties, including registered broker-dealers, SEC-registered investment advisers and licensed attorneys and certified public accountants in good standing, that such person or entity has taken reasonable steps within the prior three months to verify that the purchaser is an accredited investor and has determined that such purchaser is an accredited investor and
4. Accredited Investors who are Prior Purchasers: Regarding any person who purchased securities in an issuers Rule 506 offering as an accredited investor prior to the effective date of the final rules and who continues to hold such securities, obtaining a certification by such person at the time of sale that he or she remains qualified as an accredited investor.
Our primary concern is that this rule will serve to limit the interest of potential investors to such a great degree, that no amount of advertising will compensate for the intrusive nature of these requests. Our worry is that the vast majority of potential investors will be unwilling to share such private and protected financial data now required to confirm their accredited investor status. For comparison, to ensure it sells only to accredited investors, Conestoga International requires its potential investors to review a form that defines the requirements to be an accredited investor and then requires a signature of all investors indicating that they are accredited investors. Using this much less intrusive method has been perfectly adequate, and does not require extensive prying into private financial records by a third party. We see no reason why such similar method would not be within the scope contemplated by the JOBS Act. We feel the SEC is overreaching on this matter, and any efforts you can take to recalibrate this portion of the law would be greatly appreciated.
Thank you for allowing us to bring this matter to your attention. Your efforts in this regard honor the purpose and goals of the JOBS Act to ensure the final law is not overly restrictive and allows small businesses across the country to benefit from the new law, rather than face a new set of increasingly arduous regulatory barriers and costs.
Hector De Leon and Lauren Schoenbaum,
De Leon Washburn, PC