November 5, 2013
Dear Ms. Murphy,
I am the current Director of the North Carolina Securities Division and a former president of the North American Securities Administrators Association.
I am writing this message to support the proposal to require the advance filing of Form D in connection with reliance on the new general solicitation provision of Regulation D, Rule 506(c).
My views are based on my experience as Director of the North Carolina Securities Division, which is fortunate to have the authority to regulate securities offerings carried out to obtain capital for use by legitimate, law-abiding business enterprises, as well as the authority to investigate and, with the cooperation of district attorneys and U.S. Attorneys, prosecute criminal securities fraud perpetrated by those who scoff at our system of laws. Additionally, as a former president of NASAA, I recognize the importance of both state and federal securities regulators maximizing the usefulness of the resources available to them in protecting the investing public and in supporting the legitimate business community.
Over the years we have seen a dramatic increase in the use of the Reg D Rule 506 strategy in funding business plans. As a result of the JOBS Act's authorization of general solicitation to market Rule 506 transactions, we expect to see a further increase in the frequency in which Rule 506 will be the chosen structure for capital formation.
While the number of 506 transactions continues to increase, our resources as state securities regulators do not increase proportionally. Our Securities Administrator, the Secretary of State, always encourages investors to "Check Before You Write One" when contemplating making an investment in securities. As a result, the Securities Division is the go-to agency in North Carolina for potential investors attempting to find out whether an investment opportunity is "legitimate" before investing their funds.
Without the advance filing of a Form D to signal an enterprise's intent to rely on the exemption provided by Rule 506(c), there is no way that the Securities Division will be able to respond to questions from the investing public as to whether the opportunity being offered to them is in compliance with the federal and state securities laws. To answer "The Securities Division doesn't know whether the offering is legitimate" does nothing to comfort the potential investor, and it does nothing to facilitate the business's efforts to raise capital quickly.
Additionally, without the requirement of an advance filing of Form D, the Division's investigators will be spending a significant amount of resources unnecessarily, trying to find out if the Internet solicitation that we will be picking up on our computer monitors is a legitimate, compliant Rule 506 transaction or instead is a scam being marketed by criminals hiding behind the anonymity of the Internet. We don't need to waste our resources chasing down general solicitations of investments only to discover that they are in fact legitimate securities offerings. Instead, we need to apply those resources to chasing the crooks that target would-be investors and act as a cancer on legitimate enterprises attempting to form capital.
For these reasons, I strongly advocate requiring the advance filing of a Form D by companies using general solicitations to market 506(c) transactions. This would be a very small price to pay for the degree of protection that would be created for both the investors and the companies involved.
I am sure that you will understand when I point out that the opinions expressed in this message are my own, and should not be interpreted as those of the Department of the Secretary of State.
David S. Massey
North Carolina Securities Division
David S. Massey