October 9, 2007
Thank you for the opportunity to comment on the proposed changes to Reg D. I thank the Commission for their interest in expanding the opportunities for capital formation in this country. It is rather unfortunate that the Commission cannot address the true culprit in our inability to maintain pace with other nations in the capital formation race: Sarbanes-Oxley.
It is clear that the Commission has expended considerable effort to reasonably address the issues associated with private placements in an attempt to allow issuers the largest access to investors without placing investors unreasonably at risk. I believe however, that the Commission may have expanded the potential universe of private placement investors a little wider than would be prudent. The Commission has proposed an investment threshold for the definition of "accredited investor" in Rule 501. At first glance, this would appear to be a good idea. However, if we are going to utilize the size a person's investment portfolio as the determinant of that person's sophistication and ability to make independent investment decisions, the requirement should exclude real estate investment, and should be based upon the person's equity in the portfolio. Under the proposed definition, a person owning a few units of rental real estate that are mortgaged to the gills would qualify as an "accredited investor", even if that person possessed few or no other investments. I do not believe that Congress intended to deny protection to this type of investor under the Act. Any investment threshold utilized to meet the definition of "accredited investor" should include an equity requirement. Additionally, the value of real estate investments should be discounted when determining a person's investments for this purpose.
The Commission has requested comment as to the appropriate length of the description of an issuer's activities contained in a Rule 507 advertisement. I believe that a 25 word limitation is unreasonably confining. If we are to allow advertising, an issuer should be granted ample opportunity to accurately describe its activities, albeit solely for the purpose of creating investor interest. It could be that, unbeknownst to me, the Commission has surveyed market participants, and it has been determined that this limitation is not unreasonable. In the absence of such research, I would recommend a 100 word limitation on the description of an issuer's activities for purposes of Rule 507 advertising.
The Commission has also requested comment related to the definition of "qualified institutional buyer" contained in Rule 144A, and whether or not the definition should be expanded to include entities proposed to fall within the definition of "accredited investor" in Rule 501. I strongly urge the Commission to exclude governmental entities from the definition of any term that would allow a governmental entity to purchase a private placement. It is unnecessary to repeat the litany of governmental entity investment disasters here. I believe that enough evidence exists to warrant the exclusion of government entities from the definition of "accredited investor" and certainly from the definition of "qualified institutional buyer".
Thank you again for providing the opportunity to comment on the proposals. Time does not permit me to note each of the proposals I endorse. By and large, the proposals are sensible and indicative of responsiveness to the needs of the market, while not neglectful of investor protection.