February 25, 2002
Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
Re: Comments on Proposed Rule Defining the Term "Qualified Purchaser"
File No: S7-23-01
Dear Mr. Katz:
The Financial Services Group of Dechert is pleased to have the opportunity to comment on the Securities and Exchange Commission's ("the Commission") proposed rule defining the term "qualified purchaser" under the Securities Act of 1933, as amended (the "Securities Act"), as set forth in Release No. 33-8041, File No. S7-23-01, dated December 20, 2001 (the "Proposed Rule").
Dechert is an international law firm with a wide-ranging financial services practice serving clients in the United States and worldwide. The Financial Services Group of Dechert provides advice and assistance to a wide variety of domestic and non-U.S. investment companies and private funds, as well as investment advisers, fund administrators, broker-dealers, insurance companies, commercial banks, and thrift institutions. An extensive part of our services for these clients involves assistance in compliance with federal and state securities laws in the organization, distribution, and operation of investment funds, including those registered with the Commission and those not subject to registration. The comments that follow reflect our own views and not necessarily those of any client of the firm.
We applaud the Commission's effort to simplify and streamline the state and federal registration process for companies seeking to raise capital, and thus rationalize the relationship between federal and state law. We agree that the definition of "qualified purchaser" should include "investors that, by virtue of their financial sophistication and ability to fend for themselves, do not require the protections of registration under the state securities laws."1
We believe, however, that defining "qualified purchaser" under Section 18 of the Securities Act to mean only an "accredited investor" as defined in Rule 501(a) of Regulation D will exclude unintentionally certain clearly qualified persons and entities. For example, in some circumstances, "qualified institutional buyers" ("QIBs") as defined under Rule 144A of the Securities Act and "qualified purchasers" as defined in the Investment Company Act of 1940, as amended (the "1940 Act"), do not qualify as accredited investors. Consequently, we encourage the Commission to include QIBs and 1940 Act qualified purchasers as additional categories of Securities Act qualified purchasers. We also urge the Commission to consider including non-U.S. purchasers as defined in Regulation S as Securities Act qualified purchasers.
Qualified Institutional Buyers
Although in the vast majority of situations QIBs fall within the definition of accredited investor, situations may arise in which a QIB is not also an accredited investor. For example, a registered investment adviser that invests on a discretionary basis more than $100 million in securities for the account of its QIB clients qualifies as a QIB itself but fails to qualify as an accredited investor if the adviser owns less than $5 million in assets in the adviser's own name.2 This example exposes a situation in which an offer and sale of securities to this adviser, a sophisticated investor fully capable of protecting its interests in a manner that renders state regulation unnecessary, would fall outside the scope of the Proposed Rule. Expanding the proposed definition of Securities Act "qualified purchasers" to include QIBs would further rationalize the federal/state regulatory system.
Section 3(c)(7) of the 1940 Act excludes from the definition of "investment company" issuers whose securities are privately placed and owned exclusively by persons who were 1940 Act qualified purchasers at the time of the acquisition of the securities. Generally, individuals that own not less than $5 million in investments and entities that own not less than $25 million in investments meet the definition of a 1940 Act qualified purchaser.3
A trust may also qualify as a 1940 Act qualified purchaser provided that "the trustee or other person authorized to make decisions with respect to the trust, and each settler or other person who contributed assets to the trust" are 1940 Act qualified purchasers, regardless of the level of investments held by the trust.4 Rule 501(a)(7) of Regulation D defines an "accredited investor" to include "any trust with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person." Thus, a trust with less than $5 million in total assets may qualify as a 1940 Act qualified purchaser but may not be a Securities Act qualified purchaser under the Proposed Rule. Defining a Securities Act qualified purchaser to include a 1940 Act qualified purchaser would cover this type of trust and also further rationalize the federal/state regulatory system.
Non-U.S. Persons under Regulation S
Regulation S establishes a safe harbor for certain offers and sales of securities from registration with the Commission under the Securities Act provided that the following two conditions are met: (1) the offer or sale is made in an "offshore transaction" and (2) there are "no directed selling efforts" in the United States in connection with the distribution, sale or resale of the securities.5 Within the past several years, the Commission staff has indicated it would not recommend enforcement action if a private offer and sale to a non-U.S. investor who is temporarily in the United States in reliance on Securities Act Section 4(2) takes place and the issuer considers the investor a non-U.S. investor for purposes of sections 3(c)(1) or 3(c)(7) of the 1940 Act.6 Although this type of transaction is exempt under federal law but not necessarily under Regulation D, the state where the meeting occurred retains the authority to require registration.
A state's interest in requiring registration with respect to these transactions should be minimal given that the prospective investor under Regulation S is not resident in any state by definition. Consequently, the Commission should consider including non-U.S. Persons, as defined in Regulation S, Security Act qualified purchasers for purposes of Section 18 of the Securities Act. This expansion of the Proposed Rule would remove an unnecessary regulatory hurdle for offshore funds and also further rationalize the federal/state regulatory system. In addition, the traditional safeguards of broker-dealer registration and the various federal and state securities anti-fraud provisions would continue to operate to protect non-U.S. investors in these transactions.
* * *
We appreciate this opportunity to comment on the Commission's proposed rule. If you have any questions, please contact David A. Vaughan at 202.261.3355.
|1||Proposed rule: Defining the Term "Qualified Purchaser" under the Securities Act of 1933, Release No. 33-8041 (Dec. 20, 2001).|
|2||17 C.F.R. § 230.144A(a)(1)(i)(I) (2001) (defining QIBs to include any registered investment adviser); Id. § 501(a)(3) (defining accredited investors to include certain entities with total assets in excess of $5 million).|
|3||15 U.S.C. § 80a-2(a)(51)(A) (2000).|
|4||Id. § 80a-2(a)(51)(A)(iii).|
|5||17 C.F.R. § 903(a) (2001).|
|6||Wilmer, Cutler & Pickering and Davis Polk & Wardell, SEC No-Action Letter, 1998 SEC No-Act. LEXIS 896 (Oct. 5, 1998).|