January 18, 2013
Re: [Release No. 33-9354; File No. S7-07-12]
I would like the Commission to add the following requirements as conditions for anyone who conducts a Rule 506 public Offering to qualify for permission to engage in general solicitation and general advertising within the United States in reliance upon the JOBS Act:
1. All funds raised by way of general solicitation and general advertising must be paid by the investor to a Federal law enforcement agency, rather than directly to any party engaged in the capital formation effort of the Offering, and instead of transferring funds to any broker or other private party intermediary.
2. A cooling-off period of five business days must be allowed, during which time the investor can ask questions or express concerns to the law enforcement agency that is holding their capital funds, and during this time the investor can choose to cancel the purchase of the securities for any reason or for no reason. Until the cooling-off period has expired, the law enforcement agency could optionally withhold the personal information and private details identifying the investor so that the issuer cannot engage in high-pressure sales tactics targeting the prospective public investor during or after the cooling-off period if the investor decides to cancel the investment.
3. The Federal law enforcement agency must provide the investor with the SEC's standard investor education publications, at least in electronic form by reference, including at minimum a list of websites where the SEC publishes advisories, warnings, news of enforcement actions past and present, and instructions for filing tips or complaints to the Commission.
4. After the 5-day cooling-off period, the Federal law enforcement agency must transfer the capital funds, in accordance with the instructions of the issuer, unless the agency informs the issuer that a lawsuit or criminal indictment is now pending that seeks to block said transfer.
5. Neither the Commission nor the Federal law enforcement agency should impose any fees for the services provided to the investor or the issuer during the 5-day cooling-off period, and neither the investor nor the issuer should be entitled to any interest earned from the capital funds during the cooling-off period.
6. The costs associated with this capital formation service should be funded out of the SEC's annual budget and also from interest earned by the government on the capital funds held during the 5-day cooling-off period.
At the end of the day, any fraud committed by anyone in the early days of forming a new startup company or raising capital for expanding an existing venture is going to result in assets being seized by law enforcement when civil court judgments or criminal court convictions are adjudicated. Getting law enforcement involved from the start, as a simple intermediary buffer between investors and issuers, will, in my opinion, substantially decrease the prevalence of fraud and reduce costs overall for the government.
It is absurd political nonsense for the Commission to pretend that it is powerless to do anything proactive to preempt or to detect financial fraud in the capital formation process unless issuers are required to register securities and comply with the 1934 Exchange Act. The 1933 Securities Act is sufficient regulation provided that the SEC does not sabotage investors in private placement stock Offerings in order to prop up the listed marketplace for registered securities.
It makes no sense to wait until bad actors commit fraud before Federal law enforcement or regulatory enforcement legal actions intervene or have the opportunity to provide rudimentary oversight. Waiting until the disease is terminal, and then treating the terminal disease, is the most expensive and least-effective way to achieve health and wellness.
If an issuer is truthfully interested in engaging in lawful and healthy economic activity with the benefit of capital investment, then the issuer should be willing to allow any investor to cancel the investment within the cooling-off period and the issuer should not have any fear of contact with law enforcement agents. If the investor is allowed to withhold their identity from the issuer with the help of a Federal law enforcement intermediary then investors will be able to cancel potential direct investment decisions during the cooling-off period without fear of reprisal or harassment from the issuer.
As the Commission is aware, most high-net-worth individuals choose to rely on family attorneys or brokers to make direct capital investments on their behalf for this very reason: to protect their identity from persons unknown to them but with whom the investor would like to invest.
Many experienced investors are aware that keeping their identities confidential at all times while engaging in lawful investing activities is the only defense possible against the worst-case-scenarios that occur in the real world of business.
The Commission should, in adopting my proposed six requirements as affirmative conditions for issuers to become eligible to rely on the new Rules which will allow general solicitation and general advertising, devise a reasonable policy allowing an investor to prove Accredited status (if such proof is required by Rule) to the satisfaction of the Federal law enforcement agency intermediary WITHOUT revealing any personal or private information to the issuer. If ONLY Accredited investor funds are supposed to be channeled to issuers by virtue of a general solicitation, then the investors should also be willing to make contact with a Federal law enforcement agent as a preliminary step in the unregistered securities investing process.
Brokers are not, in my opinion, adequate intermediaries for this purpose because of their economic self-interest in facilitating transactions, which represents a fatal conflict of interest contrary to the public safety. Issuers should be allowed to work with brokers, of course, in any other way that the parties believe is beneficial to their business and capital formation objectives, but the first step in effecting any unregistered securities investment decision should involve Federal law enforcement if the Offering relies upon Federal legislation permitting general solicitation and general advertising of unregistered securities.
Sincerely,
Jason Coombs
https://twitter.com/jasoncoombs_com
Co-Founder and CEO
Public Startup Company, Inc.
http://JOBS-ACT.com
https://facebook.com/publicstartup/info