Dear Sir or Madam:
I write to offer comments on Release No. 33-8041 and more specifically on the proposed definition of "qualified purchaser."
My view is that your proposal, which defines "qualified purchaser" to be the same as an "accredited investor", is too narrow. Instead, the appropriate definition should include as a "qualified purchaser" one who purchases securities sold in transactions exempt under Rule 504, Rule 505, Rule 147 or Regulation A.
This broader definition furthers the articulated goals of NSMIA1 and is more in line with the legislative history of the particular statutory provision.2
1. The Statutory Language of NSMIA Itself Does Not Mandate a Narrow Definition of "Qualified Purchaser".
The language of NSMIA itself establishes the breadth of the Commission's definitional power over the term, "qualified purchasers," and the statute on its face grants the Commission very broad power in that regard.
Specifically, NSMIA states only that "qualified purchaser" shall be defined "consistent with the public interest and the protection of investors." 15 U.S.C.A. § 77r(b)(3). As concerns the definition of "public interest", NSMIA also states that when the Commission is to consider whether a regulation is "in the public interest, the Commission shall also consider, in addition to the protection of investors, whether the action will promote efficiency, competition and capital formation." 15 U.S.C.A. § 77b(b).
Thus the language of NISMA itself demonstrates that there is no legislative mandate for a narrow definition of "qualified purchaser". Instead, NISMA allows the Commission broad discretion in its definition of "qualified purchaser", so long as the Commission strikes the proper balance between "efficiency, competition and capital formation", on the one hand, and investor protection, on the other.
2. The Legislative Reports Accompanying the Adoption of NSMIA Do Not Support a Narrow Definition of "Qualified Purchaser".
In the Commission's release accompanying the propose definition of "qualified purchaser", it cites House and Senate Committee Reports as legislative history supporting its narrow definition.3 For at least two reasons, however this authority is inadequate to support the Commission's narrow definition.
First, to the extent the Committee Reports suggest a legislative mandate for a narrow definition of "qualified purchaser", the Reports are contrary to the language of the statute. As described above, NSMIA on its face in no way limits the definitional scope of "qualified purchasers" to persons who are accredited but, instead, clearly delegates a more expansive authority to the Commission respecting that definition.
Second, considered in its entirety, the language from the Committee Reports is so disjointed and confusing as to be essentially worthless concerning the matter of the appropriate definition of "qualified purchaser." While certainly one is able to find language in the Committee Reports supporting a narrow definition of the term, other parts of the Reports dealing with the matter seem to take other approaches to the definition. The Reports, therefore, are inconclusive when considered as a whole.4
Such ambiguities in the Committee Reports, of course, make it even more important to be guided by the clear language of the statute.
3. Defining "qualified purchaser" to Include All Purchasers of Securities in Transactions Exempt Under Rule 504, Rule 505, Rule 147 and Regulation A Strikes the Appropriate, Statutorily Mandated Balance Between "Protection of Investors" and "Capital Formation"
If there is no legislative mandate for a narrow definition of "qualified purchaser", then the obligation of the Commission is to define the term within the broad statutory limits and in a manner that consistent with the purposes of NSMIA and the 1933 Act as it now stands.
Expanding the definition of "qualified purchaser" to include purchasers of securities in transactions exempt under Rule 504, Rule 505, Rule 147 and Regulation A is consistent with the legislative mandate from NSMIA that the Commission's definition of "qualified purchaser" balance investor protection and capital formation. Specifically, each of those rules or regulation encapsulates that very balance. Each reflects the considered view of the Commission, developed over an extended time period and with the benefit of significant administrative experience, as to the appropriate balance between investor protection and capital formation in each of the situations covered by the particular rule or regulation. Thus, the regime of Regulation A, for example, was enacted only after the Commission concluded that the proper balance was struck.
If the Commission by regulation were to define "qualified purchasers" in such an expansive manner as to include all purchasers under Rule 504, Rule 505, Rule 147, and Regulation A, the resulting benefits would be important and appropriately focused. Generally, the definition would generate significant relief from the economic waste and unwarranted drag on capital formation caused by the registration and qualification provisions of state blue sky laws. More specifically, however, small issuers would be the most visible beneficiaries of such a definition and would finally be in a position to take full advantage of the Commission's apparent reckoning, which is encapsulated in its rules, regarding the proper balance between investor protection and capital formation.
Thank you for your consideration of my views.*
Rutheford B Campbell, Jr.
Alumni Professor of Law
College of Law
University of Kentucky.
*In constructing this response, I have relied on ideas, research and language from prior published works of mine. Those works include: The Impact of NSMIA on Small Issuers, 53 Bus. Law. 575 (1998) and The Insidious Remnants of State Rules Respecting Capital Formation, 78 Wash. U. L. Q. 407 (2000). The articles provide more expansive support for my views expressed in this letter and provide some empirical data regarding the importance of small businesses and their capital formation activities. I take the liberty in this letter of using ideas and language from these works without footnotes or quotation marks.
|1||National Securities Markets Improvement Act of 1996, Pub.L. No. 104-290, 110 Stat. 3416 (1996) [hereinafter NSMIA or the Act].|
|2||Much of this letter is based on a prior law review article of mine. Rutheford B Campbell, Jr., Blue Sky Laws and the Recent Congressional Preemption Failure , 22 J. Corp. L. 175 (1997). I take the liberty of using language and thoughts from my article without further footnoting or indicating specific language from the article through the use quotation marks.|
|3||Notes 18 and 36.|
|4||For example, at one point the Report states regarding the Commission's definition of "qualified purchasers" that the securities involved should "be fundamentally national in character and generally (though not always) subject to regulation at the Federal level." H.R. Rep. No. 104-622, § 102 (1996). The meaning of "national in character" is impossible to determine. Further, the test that securities should be "subject to regulation at the Federal level" is similarly meaningless, since the sales of all securities (assuming that the transactions meet the jurisdictional means) are subject to Section 5 of the 1933 Act and thus subject to federal regulation.
Also, in the same paragraph in which the Committee states that "in all cases" the definition of "qualified purchasers" should be rooted in the sophisticated investor concept, the Committee states that the Commission may define the term (qualified purchasers) "differently with respect to different categories of securities, consistent with the public interest (including consideration of efficiency, competition and capital formation) and the protection of investors." Obviously, the right to define "qualified purchasers" "differently with respect to different categories of securities" (which, interestingly, is language that also appears in the Act itself,NSMIA, supra note 1, § 102, 15 U.S.C. 77r(b)(3) (1996) (amending S 18(b)(3) of the Securities Act of 1933)) means that no definition, including sophistication, is exclusive. Read as a whole, this entire passage is inconsistent with the notion of any predetermined limit on the Commission's definitional power, but is instead consistent with the flexibility that is also apparent on the face of the statute.