AMERICAN BAR ASSOCIATION - SECTION OF BUSINESS LAW
April 30, 2002
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Attention: Mr. Jonathan G. Katz, Secretary
Re: Proposal to Define "Qualified Purchaser" - File No. S7-23-01
Ladies and Gentlemen:
This letter responds to the request of the Securities and Exchange Commission in Release No. 33-8041 (2001) (the "Release") for comments on a proposal to define "qualified purchaser" under the Securities Act of 1933 to implement a provision of the National Securities Markets Improvement Act of 1996.
The comments have been prepared by members of the Subcommittee on Small Business Issuers (the "Subcommittee") of the Committee on Federal Regulation of Securities and members of the Small Business Committee (together, the "Committees") of the Section of Business Law of the American Bar Association. A draft of this letter was circulated for comment among members of the Subcommittee, the chairs and vice-chairs of the subcommittees and task forces of the Committees, the officers of the Committees, the members of the Advisory Committee of the Committee on Federal Regulation of Securities and the officers of the Section. A substantial majority of those who have reviewed the letter in draft form have indicated their general agreement with the views expressed. However, this letter does not represent the official position of the ABA, the Section or the Committees, nor does it necessarily reflect the views of all of the individuals who reviewed it.
I. The National Securities Markets Improvement Act of 1996 ("NSMIA") established categories of covered securities that provide for preemption of state registration and review. These categories include "any security offered or sold to a qualified purchaser" as defined by the Commission. We agree there should be a class of investors that federal policy determines do not need state registration or qualification. A federal definition is appropriate to avoid multiple and conflicting definitions of such a class of investors.
II. We agree with the approach proposed by the Commission to define qualified purchaser in the same manner as "accredited investor" under Regulation 501(a) of Regulation D. We believe that the concept of a sophisticated investor as envisioned by Congress in authorizing the Commission to define qualified purchaser is the same as "accredited investor." We also agree, however, that it may be appropriate to revisit the definition of accredited investor to determine if the objective financial tests are the correct tests and are at the appropriate level. We believe, though, that this issue should be addressed in conjunction with a more comprehensive review of the exemptive process. Depending on that definition, it may be appropriate to revisit the definition of "qualified purchaser" to determine whether that definition of sophisticated purchaser for purposes of preemption from state securities laws, particularly if the states are being preempted when the offering is public, should continue to be the same as the definition used for purposes of the federal private and limited offering exemptions to determine what disclosure is required or the number of permitted purchasers.
III. The Release asks if accredited investors in a public 504 offering should be excluded from the qualified purchaser definition so as to preserve the ability for offerings to be made under state accredited investor exemptions. The alternative proposed is a uniform federal exemption that replicates current state exemptions for public offerings to accredited investors. We believe that a uniform federal exemption for a public offering solely to qualified purchasers in lieu of 504(b)(1)(iii) is the appropriate approach and that such exemption should not be predicated on compliance with individual state exemptions. To achieve the uniformity contemplated by Congress, the federal exemption for offerings solely to qualified purchasers should be self-executing. The appropriate regulatory role for the states is retained under NSMIA through the states' anti-fraud authority and broker-dealer and agent registration requirements, which would be unaffected.
As a Section 3(b) exemption, the Commission would not have to limit the exemption to the current one million dollar limit of Rule 504, but could consider increasing the permitted size of the offering. Indeed, under Section 28, the Commission could adopt the exemption without a size limit. The Committee on Federal Regulation of Securities has previously recommended that, as part of a broader review of the securities offering process, the Commission exempt offerings to qualified purchasers without any dollar limit.
A federal exemption for a public offering solely to qualified purchasers would have to address permissible communications. We note that the Committee on Federal Regulation of Securities has called for a review of the prohibition on general solicitation in the context of an overall review of the securities offering process. Accordingly, we believe that, in general, there should be few limitations on permissible communications to qualified purchasers. However, recognizing the interests of the states in these offerings, we would not object to certain requirements for advertising in connection with these offerings. The parameters for tombstone ads under Rule 134 and for testing-the-waters under Regulation A should provide the framework for establishing requirements for permissible advertising. We would not, however, go as far as the state Model Accredited Investor Exemption ("MAIE"). For example, the MAIE requirement to describe the business in 25 words or less is both too prescriptive and too restrictive. On the other hand, we agree that it is appropriate for an advertisement to indicate that the offering is being made solely to qualified purchasers (i.e., accredited investors).
In view of the nature of the permitted investors, the current feature of Rule 504 that does not mandate any particular format or content for disclosure should be retained as a feature of a new federal exemption.
We support limitations permitting resales only to other qualified purchasers for a one year period under the new proposed exemption to address concerns that qualified purchasers could be used as a conduit for an unregistered public offering.
Since there would be no review of offering documents by the Commission, we believe requiring notice in the form determined by the Commission to the states of the existence of the offering is appropriate. The NSMIA provision for the filing of Form D with the states has proven to be an efficient means to give the states notice of an offering. The notice specified under the MAIE is an acceptable form of notice. We note that the imposition of separate state fees can be especially burdensome, particularly for small offerings, when several states are involved.
We do not object to the imposition of the current "bad boy" provisions as contained in the MAIE. We note, however, that bad boy provisions are generally imposed currently under federal law when there is no requirement that investors be sophisticated and that these provisions may not be necessary when only qualified purchasers, who do not need the same level of protection, are permitted to participate in the offering. In the event "bad boy" provisions are not imposed when dealing solely with qualified purchasers, we believe disclosure should be required of any such "bad boy" information.
IV. Registered offerings in the states under Rule 504 should continue to be available to issuers that are attempting to offer to both nonaccredited and accredited investors. Accredited investors should not be prevented from investing solely because the issuer is subject to state review as a result of including nonaccredited investors. Since both an offering that is registered in a state and an offering to qualified purchasers under the proposed new federal exemption are permitted to be public without the limitations designed to ensure a private offering, there is no reason the two should not be able to proceed simultaneously.
V. We do not believe that the qualified purchaser definition should differ for different types of securities, for example, by limiting the exemption to "fundamentally national" securities. The ability of small issuers to obtain access to capital, as envisioned by Congress, would be restricted under such a limitation.
VI. With respect to public offerings under Section 3(a)(11) that are reserved to the states as provided in Section 18(b)(4)(C), we believe the states have a legitimate claim to regulate these offerings and therefore agree that the definition of qualified purchaser should not extend to purchasers in offerings relying on the federal intrastate exemption. On the other hand, although the states have retained the right to review Regulation A offerings, we do not believe the definition of qualified purchaser should exclude purchasers in a Regulation A offering because, unlike the intrastate exemption, offerings under that exemption are subject to filing and review at the federal level.
We hope that the Commission will find these comments helpful. Members of the Subcommittee on Small Business Issuers and the Small Business Committee who were involved in the drafting of this letter are available at the Commission's convenience to discuss these comments.
Chair, Committee on Federal
Regulation of Securities
Jean E. Harris
Co-Chair, Subcommittee on Small Business
Gregory C. Yadley
Co-Chair, Subcommittee on Small Business
Jean L. Batman
Chair, Small Business Committee
Jean E. Harris, Chair
Gregory C. Yadley
Hugh H. Makens
cc: Hon. Harvey L. Pitt
Chairman of the Securities and
Hon. Isaac C. Hunt, Jr.
Hon. Cynthia A. Glassman
Richard K. Wulff
Director of Division of Corporation Finance
Office of Small Business
Division of Corporation Finance
Richard K. Wulff