June 14, 2014
Response to Request for Comment 251 252 (subsequent securities):
Proposed Rule 12(g)(6) raises questions concerning convertible securities. For example, an early stage investor might receive a convertible note or similar instrument. That note may result in the subsequent issue of preferred stock in connection with significant equity financing. That preferred stock may itself convert to common stock in conjunction with an acquisition or IPO. These are positive outcomes for early investors and startups. Subsequent securities might also be issued as an anti-dilution measure during subsequent financing, as a beneficial conversion prior to liquidation, or under other terms provided by the security.
Proposed Rule 12(g)(6) is unclear whether these securities issued subsequent to a convertible security would themselves be exempted under 12(g) from the record holder count. The SEC should clarify that any securities issued subsequent to the initial security that are issued under a term of the initial security would themselves be treated as the initial security for the purposes of the exemption to the record holder count under 12(g). Otherwise, issuers may be prevented from offering securities that provide important investor protections and the potential for investors to profit.
Similarly, securities (and subsequent securities) should remain exempt after any transfer of ownership, which is already only possible after the 1-year holding period. Other commenters have pointed out that issuers would seek to limit liquidity to remain compliant with 12(g). Issuers would have to sell the securities at a lower price, and investors would be unable to resell them to capture profits or limit losses, even if a secondary market would otherwise exist. It is important that the SEC adopt the current proposed rule, which would permanently exempt these securities.
Response to Request for Comment 6 7 (investor limits):
The SEC should interpret the statute in a manner that results in the HIGHEST possible limits for each investor. Presumably Section 4(a)(6)(B) is intended to protect investors from a riskier class of assets. Other commenters have noted that the statute itself is misguided: we do not typically limit the amount of money someone may invest in their own business, invest into real estate, gamble at a casino, or use to purchase stock options, futures, or other risky investment vehicles that can and often do result in a total loss of investment. The statute would have been better to impose limits only on a per investment basis, as opposed to an aggregate basis, or to not impose any limit at all. Regardless, the SEC must issue rules that interpret Section 4(a)(6)(B), which has set hard limits adjustable only for inflation.
The investment limitations may actually HARM investors. Other investors providing early stage financing (angel networks, venture capital, etc.) typically protect themselves from the non-systematic risk by building a diversified portfolio of investments. These investors rely on a few extremely successful investments to offset the total losses generated by most investments. A higher limit to investment capital PROTECTS investors by allowing them to properly diversify by building a portfolio of investments, rather than investing in only one or two offerings. Therefore, the SEC should interpret Section 4(a)(6)(B) in whichever manner consistent with the statute provides for the highest limit.