Comments of the Pennsylvania Securities Commission on S7-23-01

February 19, 2002

BY FEDERAL EXPRESS AND E-MAIL
Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549-0609

RE: SEC Release 33-8041; File No. S7-23-01

Dear Mr. Katz:

The Pennsylvania Securities Commission ("PSC") appreciates the opportunity to comment on Release 33-8041, "Proposed Rule: Defining the Term `Qualified Purchaser' under the Securities Act of 1933" (the "Release") issued by the United States Securities and Exchange Commission ("SEC") on December 19, 2001. PSC is an independent agency of the Commonwealth of Pennsylvania which administers the Pennsylvania Securities Act of 1972 (the "1972 Act").¹ Under the 1972 Act, PSC has a statutory mandate to protect Pennsylvania investors and foster legitimate capital formation in the Commonwealth.

To facilitate capital formation, PSC was the first securities regulator to provide regulatory guidance on use of Internet to raise capital.² To protect investors, PSC was the first regulator to provide SEC with detailed information evidencing, after enactment of the National Securities Market Improvement Act of 1996 ("NSMIA"),³ a trend of persons becoming involved in Rule 506 offerings⁴ who had incurred disciplinary history in connection with micro-cap fraud which history was not being disclosed to investors.⁵ It is in this context of achieving the right balance between capital formation and investor protection that PSC comments on this Release.

Executive Summary

1. SEC has not identified a regulatory problem that justifies state preemption. The effect of the Release is preemption of state law. It has no effect on those who must comply with federal securities laws. After careful consideration, PSC finds no empirical data or other evidence in the Release demonstrating that a regulatory problem exists at the state level which can be addressed only by SEC preempting state law by defining, under Section 18(b)(3) of the Securities Act of 1933 ("1933 Act"),⁶ the term "qualified purchaser" ("Qualified Purchaser"). It has been almost six years since enactment of NSMIA and, in that time, PSC is unaware of any position taken by a bar association, securities industry association, entrepreneurial organization or Congressional committee expressing the need for SEC to define Qualified Purchaser.

2. In an era of Enrons, dot.com bubbles, and volatile stock markets, the Accredited Investor definition is an antiquated standard. SEC never has revised the Accredited Investor definition to give effect to inflation. The annual salary ($200,000) and net worth ($1 million) components of the Accredited Investor definition have remained static for 20 years.⁷ The result has been that individuals who SEC thought in 1980 should not be deemed Accredited Investors have become Accredited Investors solely by operation of inflation. Adjusted for inflation, the current criteria should approximate an annual salary of $365,000 or a net worth of $1.8 million.

The net worth component of $1 million in the Accredited Investor definition has no qualifying criteria. This makes it vulnerable to stock market volatility and corporate implosions. The net worth component may be met by including houses, furnishings, automobiles, retirement accounts, art collections, illiquid securities, business valuations, etc. The recent dot.com bubble visibly demonstrates how paper millionaires (and hence, Accredited Investors) may suffer dramatically reduced circumstances in a very short period of time. Today, the possibility of going from stock market millionaire to stock market pauper within 12 months is not unrealistic.

The Enron debacle and collapse of shares of other well-known companies like Bethlehem Steel, K-Mart, Polaroid, and Rite-Aid have highlighted the fact that many 401(k) retirement plans are not diversified much beyond the shares of the employer. Yet, there is no prohibition on using retirement plans to qualify persons as Accredited Investors. How can this remain a valid standard when recent events have underscored the fact that employees almost unanimously have ignored one of the most fundamental principles of investing - that of portfolio diversification? SEC should admit that the individual Accredited Investor definition has failed to keep pace with 21^st century economic reality.

3. Preemption of state law will place investors at an increased risk of investment fraud. State and federal securities regulators long have recognized that securities registration provisions are the first line of investor protection. A prime example is the Greater Ministries case, which raised approximately $500 million from investors nationwide. PSC was the first securities regulator to obtain a preliminary injunction against such sales⁸ because PSC alleged a violation of its securities registration requirement.⁹ All PSC had to prove was the presence of a security and absence of an effective registration statement. In that case, having a valid state registration provision was a crucial enforcement tool used effectively to halt a major investment fraud.

In 1997, the North American Securities Administrators Association ("NASAA")¹⁰ adopted a Model Accredited Investor Exemption ("MAIE").¹¹ MAIE was designed to promote small business capital formation by allowing general solicitation (including Internet) in securities offerings where sales would be made only to Accredited Investors.¹² For uniformity, MAIE used the federal definition of Accredited Investor¹³ and modeled the notice filing on Rule 503.¹⁴ Based on PSC research, at least 34 states have adopted an exemption equal to, or more liberal than, MAIE and all but three require a notice filing.¹⁵

To guard against investor abuse, MAIE is not available to (1) issuers or affiliates of issuers that are subject to certain current enforcement proceedings or have incurred significant disciplinary history in the offer or sale of securities; (2) issuers which are blank check companies as defined in SEC Rule 419;¹⁶ or (3) issuers that employ cold calling tactics unless they know the person being called is an Accredited Investor.¹⁷ All offering information must be legended that sales only may be made to Accredited Investors.¹⁸

Do these protections make a difference? PSC's enforcement experience requires an emphatic "yes"! When NSMIA preempted application of state registration provisions to Rule 506 offerings, suddenly all phony investment programs offered by out-of-state boiler rooms were pitched as Rule 506 offerings. SEC prohibitions on general solicitation in Rule 506 offerings, however, nullified this argument and states took action based on their registration jurisdiction.

Adoption of the Release would be a boon to out-of-state promoters of investment scams as they would claim that all their investment programs are being offered solely to Accredited Investors. PSC would be helpless to protect our citizens from these frauds because the federal government will have preempted the registration provisions of state law upon which PSC relies to shut down these fraudulent schemes quickly. Perhaps the following excerpts from just a few of the many PSC enforcement cases containing cold callers' characterizations of an Accredited Investor will provide SEC with some sobering thoughts about the investor protections that will be lost and the harm that will be done to individual investors if it adopts the Release as proposed:

In pitching a $5,000 minimum investment and promising a 150% return, "an Accredited Investor is someone who has not maxed out his VISATM card."¹⁹
In pitching a $10,000 minimum investment in a check cashing venture promising a 100% return, "an Accredited Investor is someone who has an active brokerage account."²⁰
In pitching a $28,000 minimum oil and gas investment, Accredited Investor means that "you are not on Social Security and not investing your last dollar."²¹
In pitching a $50,000 minimum investment in promissory notes, "the Accredited Investor standard is to warn people that they won't get their investment back for one year."²²
In pitching a $10,000 minimum investment in wireless communications, to be qualified as Accredited Investor means that the investment "does not take food off your table."²³
In pitching a $10,000 minimum investment by a person subject to a SEC permanent injunction, "an Accredited Investor is someone who has a net worth of $300,000."²⁴
Using a private placement memorandum for an Internet-related offering which was labeled that sales were to be made only to Accredited Investors, "we just need to know that people didn't sell their home to invest."²⁵

4. Adopting the Accredited Investor definition for Qualified Purchaser adversely affects small business capital formation by increasing compliance costs and reducing by 50% the ways small business issuers can use general solicitation to attract investors. In light of widespread micro-cap fraud in which investors lost billions, SEC took action in 1999 to tighten the provisions governing use of general solicitation under Rule 504, which is a federal exemption often used by small business issuers to make public offerings of securities.²⁶

SEC, however, did allow use of general advertising and general solicitation in Rule 504 offerings if the securities were registered in a state requiring prospectus delivery or were offered and sold in reliance upon state Accredited Investor exemptions.²⁷ The legal effect of the Release would be nullification of existing state Accredited Investor exemptions. With their elimination, SEC would cut by 50% the ways in which a small business issuer making an offering under Rule 504 legally could use general solicitation to attract potential investors. In less than three years, SEC would be reversing its 1999 rulemaking on Rule 504.

SEC admits that it would be creating a problem with Rule 504 offerings and proposes various "fixes." In this regard, SEC asks "whether the state accredited investor prong [in Rule 504(b)(1)] can or should be retained because states use definitions different than the Commission's definition of accredited investor."²⁸ Regrettably, the SEC's predicate for proposing a Rule 504 "fix" - the fact that states define Accredited Investor differently - is inaccurate. According to PSC research, all states that have chosen to adopt a definition of Accredited Investor have chosen the federal definition.²⁹

One "fix" suggested by SEC is to exclude from the Qualified Purchaser definition those Accredited Investors who purchase securities in Rule 504 offerings. PSC thinks this fix would serve only to inject unnecessary confusion and uncertainty into a process that currently is not broken. For entrepreneurs seeking legal opinions on securities law compliance, this proposal would increase their compliance costs as they will need to obtain sophisticated legal counsel to decipher when SEC will permit general solicitation. Generally, such advice resides not with local attorneys who usually advise small businesses but with larger regional or national law firms which charge substantially higher fees.

5. PSC supports adoption of a federal exemption premised on state law compliance.

The Release also asks for comment on adoption of a federal exemption under the 1933 Act that "substantially replicates the current state exemptions."³⁰ In 1996, SEC took a first step to coordinate federal exemptions with state exemptions by adopting Rule 1001,³¹ which provided an exemption under federal law for offerings made in reliance on California's "qualified purchaser" exemption (the forerunner of MAIE).³² In the adopting release, SEC explained that the rationale for Rule 1001 was "assisting small businesses' capital raising ability."³³

In 1999, SEC took further steps in coordinating federal and state exemptions by allowing an exception to the prohibition on use of general solicitation in Rule 504 offerings if the offering was being made pursuant to state Accredited Investor exemptions.³⁴ PSC thinks the logical nextstep is for SEC to adopt a federal exemption predicated upon compliance with state Accredited Investor exemptions. With enactment in NSMIA of general exemptive authority in Section 28 of the 1933 Act,³⁵ PSC thinks SEC has full statutory authority to adopt such an exemption.

PSC would support adoption of a federal exemption that would be premised upon compliance with state Accredited Investor exemptions. Such an exemption not only would provide needed uniformity but also would provide important investor protections currently not available at the federal level,³⁶ such as making the exemption unavailable for (1) issuers or affiliates of issuers that are subject to current enforcement proceedings or have incurred significant disciplinary history in the offer or sale of securities; (2) issuers which are blank check companies as defined in SEC Rule 419;³⁷ (3) issuers that employ cold calling tactics unless they know the person being called is an Accredited Investor; or (4) issuers which fail to disclose that sales can be made only to Accredited Investors.³⁸

6. Adopting the Accredited Investor definition for Qualified Purchaser is contrary to express Congressional intent in NSMIA. In various amendments to the 1933 Act, the Securities Exchange Act of 1934 ("1934 Act")³⁹ and the Investment Company Act of 1940 ("Investment Company Act"),⁴⁰ Congress clearly has demonstrated its ability to craft definitions specific to Accredited Investors,⁴¹ Qualified Purchasers⁴² and Qualified Investors.⁴³

If the intent of Congress in NSMIA was to equate Qualified Purchaser with Accredited Investor, Congress would not have used a term different than Accredited Investor. It also would have made the preemption in Section 18(b)(3) applicable to all transactions with Accredited Investors. In the same legislation, Congress did define "qualified purchaser" for purposes of the Investment Company Act. In the House Report on NSMIA, Congress gave specific guidance to SEC on defining Qualified Purchaser in Section 18(b)(3). Congress suggested that the definition "not be more restrictive" than the Investment Company Act definition.⁴⁴ Thus, Congress must have contemplated a Qualified Purchaser definition under the 1933 Act that was more than the Accredited Investor definition but not greater than the Investment Company Act definition.

7. Pursuant to explicit guidance given to SEC by Congress, any definition of Qualified Purchaser must be more than Accredited Investor but not greater than the Investment Company Act definition. Both NASAA and PSC are in accord in this position. In this regard, NASAA has suggested a Qualified Purchaser standard of $1 million in investments (to be defined in accordance with 17 CFR §270.2a51-1(b)) or $2 million net worth (to be defined in accordance with 17 CFR §230.501(a)(5)) (the "NASAA Proposal").⁴⁵ Based, however, on the lessons of Enron and the fact that, in the past, SEC standards, once fixed, are unlikely to change, PSC strongly recommends that the NASAA Proposal be augmented to include provisions that (1) adjust the net worth and investment standards annually to account for inflation and (2) exclude purported values of retirement plans in computing net worth.

I. SEC Fails to State a Case for Preemption of State Laws

A. Preemptive effect of the Release

Adoption of proposals in the Release will have the legal effect of preempting state laws requiring the registration or qualification of securities with respect to offers or sales of securities to Qualified Purchasers.⁴⁶ States would retain jurisdiction under state law to investigate and bring enforcement actions with respect to fraud or deceit or unlawful conduct by a broker-dealer in connection with offers or sales of securities to Qualified Purchasers.⁴⁷

Preemption of state law that will be invoked by adoption of the Release as proposed will apply regardless of issuer size, financial strength, type of security offered or method of offering. Preemption so sweeping should be premised on a compelling and legitimate interest. In PSC's opinion, SEC has marshalled no facts and presented no evidence to justify undertaking a regulatory action of the magnitude proposed in the Release.

B. Executive Order 12866

Under Executive Order 12866, "Regulatory Planning and Review," a federal agency is required, as a principle of regulation, to "identify the problem that it intends to address (including, where applicable, the failures of private markets or public institutions that warrant new agency action) as well as assess the significance of that problem."⁴⁸ By memorandum dated January 20, 2001, President Bush's Chief of Staff Andrew Card wrote to heads of all federal executive departments and agencies advising that those agencies should continue to comply with the requirements of Executive Order 12866.⁴⁹

PSC asserts that SEC has not complied with the requirements of Executive Order 12866 because it has failed specifically to identify in the Release the problem which the proposed rulemaking is intended to address and to provide an assessment of the significance of the problem. In fact, the Release contains no empirical data or other evidence that demonstrates the existence of a regulatory problem at the state level which can be addressed only by SEC preempting state law by defining Qualified Purchaser under Section 18(b)(3) of the1933 Act.

C. Compliance with Section 2(b) of the 1933 Act

Under Section 2(b) of the 1933 Act, SEC is required to consider in its rulemaking whether the action will promote efficiency, competition and capital formation. Although a section of the Release is so titled, SEC provides no specific information on how defining Qualified Purchaser would promote efficiency and capital formation. Given the substantial negative impact the Release will have on small issuers relying on SEC Rule 504 by reducing by 50% the ways such issuer can use general solicitation and general advertising, PSC asserts that the proposed action will impede capital formation, not promote it. Therefore, SEC has not met its burden under Section 2(b) of the 1933 Act.

D. The Release likely will have no effect on current legal practice

Section 18(b)(4)(D) of the 1933 Act preempts application of registration or qualification provisions of state securities laws to offerings which are made in reliance on Rule 506, although states may receive a copy of SEC Form D (as in effect on September 1, 1996) and a filing fee.⁵⁰ Under Rule 506, an issuer may offer and sell securities in an exempted non-public offering to Accredited Investors and no more than 35 investors "who either alone or with his purchaser representative has such knowledge and experience in financial matters that he is capable of evaluating the merits and risks of the prospective investment."⁵¹ In the fiscal year ending June 30, 2001, PSC received approximately 2,115 Rule 506 notice filings.

Since NSMIA, state treatment of Rule 506 notice filings has become uniform and routine. Issuers know when to file and what to file. Use of Rule 506 is advantageous where an issuer intends to make an offering solely to Accredited Investors but later discovers that a purchaser was not an Accredited Investor. The purchaser, however, probably will qualify as a sophisticated investor within the meaning of Rule 506 and therefore, the exemption will remain available.

The Release does not affect compliance with federal securities laws. Issuers seeking to offer and sell securities to Qualified Purchasers still must comply with applicable federal laws. While compliance with federal securities law could range from a Section 5 registration statement to a number of exemptions, PSC thinks most issuers, particularly those offering securities solely to Accredited Investors, will continue to rely on Rule 506. Even with regard to Section 18(b)(3), NSMIA permits states to require a notice filing (and fee) of any document filed with SEC.⁵²

Based on the routinization of Rule 506 notice filings at the state level, particularly for non-public offerings made solely or primarily to Accredited Investors, and potential liability issues that might arise should a sale be made to a Qualified Purchaser who later turns out not to meet the Accredited Investor definition, PSC thinks competent counsel will not rely on proposed SEC Rule 146(c) with regard to state law and would continue to rely on Section 18(b)(4)(D) of the 1933 Act. Informal conversations with several members of PSC's Attorney Advisory Committee have confirmed this view.⁵³

E. Lack of interest by the organized bar

To PSC's knowledge, SEC issued the Release on its own initiative and not in response to any request from the securities section of any state or national bar association, securities industry association, Congressional Committee or entrepreneurial organization. It has been almost six years since enactment of NSMIA. It would seem logical that, if a regulatory problem existed at the state level of the magnitude which compels SEC to preempt state law, one of these organizations long ago would have brought the situation to SEC's attention. It is interesting to note that SEC itself did not raise the need for a Qualified Purchaser definition in the Uniformity Report which it submitted to Congress in 1997 pursuant to Section 102(b) of NSMIA.⁵⁴

F. Regulation for the sake of regulation

It appears that SEC has issued the Release simply because Congress has authorized it to promulgate a rule under Section 18(b)(3). The legislative branch often gives executive branch agencies enabling authority to adopt rules. This gives government needed flexibility to address novel issues and make common sense distinctions. It does not necessarily follow that rules must be issued in every instance that such authority is bestowed. PSC thinks the Congress that enacted NSMIA would not endorse a view that rulemaking, for its own sake, is salutary.

II. Use of the Accredited Investor Definition Has Serious Drawbacks

A. Eroding effect of inflation

SEC never has revised the Accredited Investor definition to give effect to inflation. The annual salary ($200,000) and net worth ($1 million) components of the Accredited Investor definition have remained static for 20 years. The result has been that individuals who SEC thought in 1980 should not be deemed Accredited Investors have become Accredited Investors solely by operation of inflation. Adjusted for inflation, the current criteria should approximate an annual salary of $365,000 or a net worth of $1.8 million.

Congress has recognized the eroding effect of inflation. In its 1999 proposal to increase the threshold for exemptions under Section 3(b) of the 1933 Act from $5 to $10 million, Congress included a provision designed automatically to increase the $10 million threshold annually by reference to the Consumer Price Index.⁵⁵

B. The Enron debacle demands exclusion of retirement plans from the net worth test

The recent collapse of Enron has brought home the fact that many 401(k) retirement plans are not diversified much beyond the shares of the employer. Yet, there is no provision in the Accredited Investor definition that prohibits use of purported values of retirement plans to qualify an individual as an Accredited Investor. Recent events have underscored the fact that employees almost unanimously have ignored one of the most fundamental principles of investing - that of portfolio diversification.

Enron teaches another valuable lesson. Those who were qualified as Accredited Investors based on the value of their Enron retirement plan became eligible, by virtue of being Accredited Investors, to purchase securities in offerings intended only for Accredited Investors. Usually, these are non-public offerings of speculative and highly illiquid securities.⁵⁶ Now that the value of their retirement plans has "tanked," some former Enron employees may have difficulty realizing immediate value from investments offered to them because they were deemed to be Accredited Investors. This illustrates the point that, once qualified as an Accredited Investor, an individual becomes eligible to participate in investments that, unlike securities listed on a stock exchange, often have no ready market and thus are difficult to liquidate.

C. Stock market volatility weakens the Accredited Investor definition

When SEC originally adopted the Accredited Investor definition, the Dow JonesTM Industrial Average had never seen 10,000. It was not until February 1999 that the National Association of Securities Dealers felt compelled to issue formal guidance to the brokerage community concerning stock market volatility.⁵⁷ As indicated previously, the net worth component of $1 million in the Accredited Investor definition has no qualifying criteria. This makes it vulnerable to stock market volatility and corporate implosions. Recent stock market volatility and the bursting of the dot.com bubble visibly has demonstrated how paper millionaires (and hence, Accredited Investors) may suffer dramatically reduced circumstances in a very short period of time. Today, the possibility of going from stock market millionaire to stock market pauper within 12 months is not unrealistic. SEC should admit that the Accredited Investor definition has failed to keep pace with 21^st century economic reality.

III. Preemption of State Laws Will Place Investors at Increased Risk of Investment Fraud

A. State registration provisions are effective in the fight against investment fraud

State and federal securities regulators have long recognized that securities registration provisions in both state and federal securities laws are the first line of investor protection. Like federal law, state securities registration is a strict liability standard. Proving a registration violation is the quickest and most cost-effective way to shut down or alert the public to a possible fraudulent investment scheme. Otherwise, regulators must devote substantial time and effort to prove a fraud, which prolongs the public's exposure to financial harm.

A prime example is the Greater Ministries case, which raised approximately $500 million from investors nationwide. PSC was the first securities regulator to obtain a preliminary injunction against such sales⁵⁸ because PSC alleged a violation of its securities registration requirement.⁵⁹ All PSC had to prove was the presence of a security and the absence of an effective registration statement. In that case, having a valid state securities registration provision was a crucial enforcement tool used effectively to halt a major investment fraud. Without that tool, much more time would have been spent building a case and millions more investor dollars would have been lost to fraud.

In the Executive Summary, PSC provided excerpts from a small fraction of its enforcement cases concerning the characterization of Accredited Investor by out-of-state promoters cold calling potential investors in Pennsylvania to offer them an investment opportunity that often was "too good to be true." Some of those calling Pennsylvania residents already had been the subject of SEC injunctive action for violation of the federal securities laws.

PSC Orders issued in these cases are matters of public record and are accessible on our Internet Home Page.⁶⁰ PSC enforcement staff routinely receive calls from potential investors who saw a PSC order on the Internet (either directly or by inserting a name in a search engine) and decided not to invest in the named entity. While it is impossible to quantify the amount of dollars such enforcement actions have "saved" from being sucked into fraudulent investments, we suspect the amount is significant. Moreover, we hear directly from our citizens that this investor protection program is effective.

B. State exemptions protect investors while promoting small business capital formation

In 1997, NASAA adopted the Model Accredited Investor Exemption ("MAIE") to assist small business access to capital by allowing use of general solicitation (including Internet) in securities offerings where sales would be made only to Accredited Investors. For uniformity, MAIE used the federal definition of Accredited Investor and modeled the notice filing provision after Rule 503.⁶¹ According to PSC research, at least 34 states have adopted an exemption equal to, or more liberal than, MAIE and all but three require a notice filing.

To guard against investor abuse, MAIE is not available to (1) issuers or affiliates of issuers that are subject to current enforcement proceedings or have incurred significant disciplinary history in the offer or sale of securities; (2) issuers which are blank check companies as defined in SEC Rule 419; or (3) issuers that employ cold calling tactics unless they know the person being called is an Accredited Investor. All offering information must be legended that sales only may be made to Accredited Investors. Most of these investor protections are not available under federal law and will be lost under the current SEC proposal.⁶²

C. The Release would facilitate proliferation of fraudulent investment programs

Proposed Rule 146(c) would eliminate all state Accredited Investor exemptions. All the investor protections under the MAIE would be lost with no additional federal protections taking their place. History has demonstrated that boiler room operators and other scam artists are quick to take advantage of regulatory arbitrage. When NSMIA preempted application of state registration provisions to Rule 506 offerings, suddenly all phony investment programs offered by out-of-state promoters were pitched as Rule 506 offerings. Federal prohibitions on general solicitation in Rule 506 offerings, however, nullified this argument and states asserted registration jurisdiction to shut them down.

Adoption of the Release would be a boon to out-of-state promoters of investment scams as they would claim that all their investment programs are being offered solely to Accredited Investors. PSC would be helpless to protect our citizens from these frauds because the federal government will have preempted the registration provisions of state law which PSC relies upon to shut down these fraudulent schemes quickly. These are the same programs involving prime bank schemes, promissory notes, pay telephones, automated teller machines and viatical settlement contracts in which investors recently have lost hundreds of millions of dollars.

D. The Release will place additional burdens on SEC's Division of Enforcement

PSC is curious as to whether the SEC Division of Enforcement has taken a position on proposed Rule 146(c) or whether the Division of Corporation Finance has sought the views of SEC's enforcement staff. This Release will act to deter state enforcement personnel from taking on cases where an issuer purports to be offering securities only to Accredited Investors. This means that either SEC's Division of Enforcement will have to shoulder the extra workload or this segment of the market may be devoid of regulatory scrutiny. If the latter be the case, SEC should place investors on appropriate notice.

IV. The Release Adversely Affects Small Business Capital Formation

A. Ability of small business issuers to use general solicitation will be drastically reduced

Although SEC states in the Release that "it is not our intention to change the existing ability of issuers to reach investors under Rule 504,"⁶³ adoption of the Release would have such an effect. The Release recognizes that it would nullify existing state Accredited Investor exemptions. With their elimination, SEC would cut by 50% the ways in which a small business issuer making an offering under Rule 504 legally could engage in general solicitation to attract potential investors. Under the Release, the sole method by which a small business issuer making an offering under Rule 504 could use general solicitation to attract investors is by registering those securities in a state which has a prospectus delivery requirement.

B. SEC admits that its Release causes problems with Rule 504 that now do not exist

1. Predicate to SEC proposals to "fix"Rule 504 problem is fundamentally flawed

In the beginning of its discussion of possible "fixes" for the Rule 504 problem created by nullifying state Accredited Investor exemptions, SEC asks "whether the state accredited investor prong [in Rule 504(b)(1)] can or should be retained because states use definitions different than the Commission's definition of accredited investor."⁶⁴ Regrettably, this is an inaccurate statement of law.⁶⁵ SEC should not rely on incomplete research as a basis for any regulatory action, much less one that has the effect of preempting state law

a. NASAA policies use federal definition of Accredited Investor

In the interests of uniformity and minimizing compliance costs, state regulatory policies adopted by NASAA historically have used the federal definition of Accredited Investor. In the early 1980s, NASAA developed a uniform exemption at the state level to complement recently adopted SEC Regulation D, ie, the Uniform Limited Offering Exemption ("ULOE").⁶⁶ ULOE, by premising its applicability upon compliance with Rule 505 or 506, automatically incorporated the federal concept and definition of Accredited Investor.⁶⁷ When NASAA adopted MAIE in 1997, it used the federal Accredited Investor definition and specifically referenced Rule 501(a).⁶⁸

b. States uniformly use the federal definition of Accredited Investor

PSC's legal research reveals that when states have chosen to define Accredited Investor for state law purposes, they uniformly have chosen the federal definition. PSC research indicates that all states (except New York which does not have a securities registration requirement) have adopted the federal definition of Accredited Investor set forth in Rule 501(a).⁶⁹ Perhaps more importantly for this Release, the 34 states that have adopted a state Accredited Investor exemption have defined Accredited Investor using the federal definition.⁷⁰

2. Excluding Accredited Investors purchasing under Rule 504 is confusing

One "fix" suggested by SEC is to exclude from the Qualified Purchaser definition those Accredited Investors who purchase securities in Rule 504 offerings. PSC thinks this "fix" would serve only to inject unnecessary confusion and uncertainty into a process that currently is not broken. Unfortunately, the focus of any publicity concerning adoption of the Release as proposed would be the elimination of state Accredited Investor exemptions. Even if SEC were to adopt an exclusion for Accredited Investors purchasing under Rule 504, this exclusion likely will get lost in the general message of state preemption. This will have the potential of causing massive inadvertent federal securities law violations by uninformed entrepreneurs.

For those entrepreneurs seeking legal opinions on securities law compliance, this proposal would increase their compliance costs as they will need to obtain sophisticated legal advice to decipher when SEC will permit general solicitation. Generally, such counsel resides not with local attorneys who usually advise small businesses but with larger regional or national law firms which charge substantially higher fees.

3. SEC should adopt a federal exemption which is predicated upon compliance with state Accredited Investor exemptions

The Release also asks for comment on adoption of a federal exemption under the 1933 Act that "substantially replicates the current state exemptions."⁷¹ In 1996, SEC took a first step to coordinate federal exemptions with state exemptions by adopting SEC Rule 1001 which provided an exemption under federal law for offerings made in reliance on California's "qualified purchaser" exemption (which was the forerunner of the MAIE).⁷² SEC explained that the rationale for Rule 1001 was "assisting small businesses' capital raising ability."⁷³

In 1999, SEC further coordinated federal and state exemptions by allowing an exception to the prohibition on use of general solicitation in Rule 504 offerings if the offering was being made pursuant to state Accredited Investor exemptions.⁷⁴ The logical next step is for SEC to adopt a federal exemption predicated on compliance with state Accredited Investor exemptions.

A federal exemption predicated upon compliance with state Accredited Investor exemptions not only would provide needed uniformity but also would provide important investorprotections currently not available at the federal level such as making the exemption unavailable for (1) issuers or affiliates of issuers that are subject to certain current enforcement proceedings or have incurred significant disciplinary history in the offer or sale of securities;⁷⁵ (2) issuers which are blank check companies as defined in SEC Rule 419;⁷⁶ (3) issuers that employ cold calling tactics unless they know the person being called is an Accredited Investor; or (4) issuers which fail to disclose that sales can be made only to Accredited Investors. With enactment in NSMIA of general exemptive authority in Section 28 of the 1933 Act,⁷⁷ PSC thinks SEC has full statutory authority to adopt such an exemption and urges it to do so.

V. The Release is Contrary to Express Congressional Intent

In making sweeping changes in NSMIA to the 1933 Act, 1934 Act, Investment Company Act and the Investment Advisers Act of 1940, Congress demonstrated the ability to craft definitions specific to its purpose. If the intent of Congress in NSMIA was to equate Qualified Purchaser with Accredited Investor, it would not have used a different term in Section 18(b)(3). It also would have made the preemption in Section 18(b)(3) applicable to all transactions with Accredited Investors as defined in Section 2(15) of the 1933 Act and SEC rules. It did not.

In the House Report on NSMIA, Congress gave guidance to SEC on defining Qualified Purchaser in Section 18(b)(3) of the 1933 Act. Congress suggested that the definition "not be more restrictive" than the Investment Company Act definition.⁷⁸ Therefore, Congress must have contemplated a Qualified Purchaser definition under the 1933 Act that was more than the Accredited Investor definition but not greater than the Investment Company Act definition.

VI. PSC Recommendations

A. SEC has failed to observe Executive Order 12866 or state a case for any action

PSC believes that SEC has failed to provide any data or information upon which to base an action that preempts state law. No bar association, securities industry association, small business organization or Congressional committee has requested SEC to act or expressed a need for SEC to define Qualified Purchaser. SEC itself did not raise the need for a Qualified Purchaser definition in the Uniformity Report it submitted to Congress in 1997.⁷⁹ SEC also has failed to observe the requirements of Executive Order 12866 which mandates that, when federal agencies engage in rulemaking, they identify the problem which the proposed rule is to address and provide an assessment of the significance of the problem. The Release does the opposite. It describes a problem that will be caused by the Release.⁸⁰

B. The starting point for defining Qualified Purchaser is NSMIA

The starting point for any consideration of a definition of Qualified Purchaser under Section 18(b)(3) of the 1933 Act is NSMIA, the law which created that section. In NSMIA, Congress provided three important guideposts. The first was that Congress could have writtenSection 18(b)(3) to exempt all transactions with Accredited Investors. It did not. It decided to use a different term, which indicates that it had a different standard in mind. Second, this standard was expressed by Congress in the definition of Qualified Purchaser it created in Section 2(a)(51) of the Investment Company Act.⁸¹ Third, the language in the House Report provides explicit direction to SEC in the context of rulemaking under Section 18(b)(3) that Qualified Purchaser should be defined to be more than Accredited Investor but not greater than the definition in Section 2(a)(51) of the Investment Company Act.

PSC thinks it inescapable that SEC's starting point for defining Qualified Purchaser should be NSMIA and PSC would prefer to see SEC define Qualified Purchaser under Section 18(b)(3) the same as it is defined in Section 2(a)(51) of the Investment Company Act. This also would promote uniformity of definitions under the federal securities law. If the Release was adopted as proposed, Qualified Purchaser would have different meanings under different provisions of the federal securities laws.

C. Alternatively, PSC could support NASAA Proposal with two important additions

PSC is cognizant that, in its direction to SEC for rulemaking under Section 18(b)(3), Congress gave SEC a range of standards from something more than Accredited Investor but not greater than the Investment Company Act definition of qualified purchaser. In this regard, NASAA has suggested a Qualified Purchaser standard of $1 million in investments (to be defined in accordance with 17 CFR §270.2a51-1(b)) or $2 million net worth (to be defined in accordance with 17 CFR §230.501(a)(5)). PSC could support the NASAA Proposal with addition of two provisos that PSC strongly believes are dictated by lessons of history and those of current events.

1. Addition of an inflation adjustment factor for net worth and investment tests

It is an economic axiom that, over time, inflation erodes the value of monetary standards. This has been demonstrated most graphically in the case of the current Accredited Investor definition. Adjusted for inflation, the current criteria should approximate an annual salary of $365,000 or a net worth of $1.8 million. Congress, in its 1999 proposal to increase the threshold for exemptions under Section 3(b) of the 1933 Act from $5 to $10 million, recognized the eroding effect of inflation and included a provision designed automatically to increase the $10 million threshold annually by reference to the Consumer Price Index.⁸²

Therefore, PSC recommends adding a provision to the NASAA Proposal which would increase the $1 million in investments or $2 million net worth standard "annually based on the annual percentage change, if any, in the Consumer Price index for all urban consumers, as published by the Department of Labor." This is the exact language that Congress proposed to use in the Securities Markets Enhancement Act of 2000.

2. Excluding value of retirement plans from the $2 million net worth test

The Enron debacle highlighted the fact that many 401(k) retirement plans are not diversified much beyond the shares of the employer, ignoring the fundamental investing principle of portfolio diversification. Stock market volatility also has contributed to wide swings in value of stocks in retirement plans. The dot.com bubble graphically illustrated how quickly and easily an individual can go from being a paper multi-millionaire to stock market pauper. Therefore, PSC argues that good public policy and investor protection requires adding a provision to the NASAA Proposal that would exclude the purported values of retirement plans from the computation of the $2 million net worth test.

PSC very much appreciates the opportunity to comment on the Release. If SEC staff have any questions or require additional information, please contact Chief Counsel Philip Rutledge at (717) 783-5130.

Very truly yours,

JOHN A. MAHER
Commissioner ROBERT M. LAM
Chairman A. RICHARD GERBER
Commissioner

cc: Joseph Borg, NASAA President
Marc Beauchamp, NASAA Executive Director
Alan Beller, Director, SEC Division of Corporation Finance
Richard Wulff, Director, SEC Office of Small Business Policy
Marva Simpson, Counsel, SEC Office of Small Business Policy

Footnotes

¹ 70 P.S. §1-101 et seq. The 1972 Act is modeled on the Uniform Securities Act (1956) adopted by the National Conference of Commissioners on Uniform State Laws.
² Offers Effected Through Internet That Do Not Result in Sales In Pennsylvania, PSC Order (August 31, 1995), subsequently codified at 64 Pa. Code §230.190. The regulatory approach originally enunciated by PSC was adopted by North American Securities Administrators Association on January 7, 1996 in its Resolution Regarding Securities Offered on Internet, NASAA Reports (CCH) ¶7040, and by SEC in "Statement of the Commission Regarding use of Internet Websites to Offer Securities, Solicit Securities Transactions, or Advertise Investment Services Offshore," Securities Act Release No. 33-7516 (March 23, 1998).
³ Pub.L. No.104-290, 110 Stat. 3417.
⁴ Effective October 11, 1996, NSMIA amended Section 18 of the Securities Act of 1933, 15 U.S.C. §77r(b)(4)(D), to prohibit application of state registration provisions to offerings made in reliance on Rule 506, 17 CFR §230.506. Before being preempted by NSMIA, state law prohibited use of state-level exemptions by persons with significant disciplinary history.
⁵ Letter from Robert M. Lam, PSC Chairman, to Arthur Levitt, SEC Chairman, dated March 3, 1998; Letter from John A. Maher, PSC Commissioner, to Brian Lane, Director, SEC Division of Corporation Finance, dated May 18, 1998.
⁶ 15 U.S.C. §77r(b)(3).
⁷ See 17 CFR §230.501(a).
⁸ Commonwealth of Pennsylvania v. Greater Ministries International, Inc., Gerald Payne, Betty L. Payne, Don Hall, Brenda Hall and Patrick Henry Albert, No. 877 M.D. 1998 (Pa. Commw. Ct. 1998).
⁹ 70 P.S. §1-201.
¹⁰ NASAA is the oldest international organization dedicated to investor protection. Its membership includes all state securities regulators in the United States; the securities regulators of the District of Columbia, Puerto Rico, Guam, and the Virgin Islands; Canadian Provincial securities regulators; and the securities regulatory authority of the Republic of Mexico. PSC is a NASAA member jurisdiction.
¹¹ NASAA Reports (CCH) ¶361.
¹² Due to existing federal prohibitions in Rule 505 and 506, 17 CFR §§230.505 and 230.506, on use of general solicitation, issuers relying on MAIE must be engaged in a securities offering in reliance on Rule 504, 17 CFR §230.504, SEC Regulation A, 17 CFR §§230.251-230.262, or Section 3(a)(11) of the 1933 Act, 15 U.S.C. §77c(a)(11).
¹³ 17 CFR §230.501(a).
¹⁴ 17 CFR §230.503.
¹⁵ States that have adopted an Accredited Investor exemption equal to, or more liberal than, MAIE include: Alaska, Arizona, Arkansas, Colorado, Connecticut, Delaware, Hawaii, Indiana, Kansas, Kentucky, Nebraska, Maine, Maryland, Minnesota, Nevada, New Jersey, New Mexico, North Dakota, Ohio, Oklahoma, Pennsylvania, Puerto Rico, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, Wyoming. All require a notice filing except Minnesota, Nebraska and Texas.
¹⁶ 17 CFR §230.419(a)(2). Blank check companies, however, are prohibited from relying on Rule 504, 17 CFR §230.504(a)(3).
¹⁷ NASAA Reports (CCH) ¶361.
¹⁸ Id.
¹⁹ In the Matter of Expedition Partners, LP, Tri-Star Capital Management Corp., Inc., Starquest Capital Management, Bradley Ferguson and Tom Sawyer, No. 9710-07 (December 23, 1997). The promoter was located in La Jolla, CA.
²⁰ In the Matter of Republic Cash Advance of Orlando LLC, Republic Cash Advance, Inc., Curtis J. Billups, Collete Matranga and Michael Smith, No. 9808-02 (August 11, 1999). The promoter was located in Phoenix, AZ.
²¹ In the Matter of Duke Enterprises and Steve J. Denton, No. 9907-01 (July 13, 1999). The promoter was located in Austin, TX.
²² In the Matter of Veracicom, Inc., John Tabor, Waterworld Entertainment, Inc., and Michael A. Aitken, No. 0105-03 (May 10, 2001). The promoter was located in Tacoma, WA.
²³ In the Matter of AirTrac Chicago, Inc., Fred Cavin, Clarence Friend and Dave Pinkerton, No. 9905-07 (May 12, 1999). The promoter was located in Huntington Beach, CA.
²⁴ In the Matter of Fortune on Wheels Unit Investment Trust, Cherry Avenue, Inc., Harvey P. Tabb and Robert Wrynn, No. 0005-22 (May 22, 2000). The promoter was located in Las Vegas, NV.
²⁵ In the Matter of Miracle Mail, Inc., Joseph E. Mackey and Morgan Fields Associates Corporation, No. 2001-07-028 (July 24, 2001). The promoter was located in Farmingdale, NY.
²⁶ "Revision of Rule 504 of Regulation D, the "Seed Capital" Exemption," Securities Act Release No. 33-7644 (February 25, 1999).
²⁷ 17 CFR §230.504(b)((1).
²⁸ Release at 8.
²⁹ PSC research indicates all states (except New York which does not have a securities registration requirement) have defined the term "accredited investor" and all of them have adopted the federal definition at 17 CFR §230.501(a).
³⁰ Release at 9.
³¹ 17 CFR §230.1001.
³² "Exemption for Certain California Limited Issues," Securities Act Release No. 33-7285 (May 1, 1996).
³³ Id. at 1.
³⁴ Supra, note 26.
³⁵ 15 U.S.C. §77z-3.
³⁶ Currently, there are no disqualification provisions applicable to offerings made in reliance on Rule 504, 17 CFR §230.504, or Rule 506, 17 CFR §230.506. The disqualifications applicable to offerings made in reliance on Rule 505 pertain generally to violations of federal law, 17 CFR §230.505(b)(2)(iii).
³⁷ 17 CFR §230.419(a)(2). Blank check companies are prohibited from relying on Rule 504, 17 CFR §230.504(a)(3).
³⁸ NASAA Reports (CCH) ¶361.
³⁹ 15 U.S.C. §78a et seq.
⁴⁰ 15 U.S.C. §80a-1 et seq.
⁴¹ 15 U.S.C. §77b(15).
⁴² 15 U.S.C. §80a-2(a)(51).
⁴³ 15 U.S.C.§78c(54).
⁴⁴ H.R. Rep. No. 104-622 at 31-32 (1996).
⁴⁵ Communication on the definition of Qualified Purchaser from the NASAA Corporation Finance Section to SEC Division of Corporation Finance (December 17, 2001).
⁴⁶ 15 U.S.C. §77r(b)(3).
⁴⁷ 15 U.S.C. §77r(c)(1).
⁴⁸ Exec. Order No. 12,866, 58 Fed. Reg. 51,735 (September 30, 1993).
⁴⁹ Text available at www.whitehouse.gov/news/releases/20010123-4.html.
⁵⁰ 15 U.S.C. §§77r(b)(4)(D) and 77r(c)(2)(B).
⁵¹ 17 CFR §230.506(b)(2).
⁵² 15 U.S.C. §77r(c)(2)(A).
⁵³ PSC's Attorney Advisory Committee was created in 1986 to advise PSC on regulatory issues. Its 10 members represent securities practitioners resident across the Commonwealth of Pennsylvania who are members of national and regional law firms as well as legal academic institutions.
⁵⁴ U.S. Securities and Exchange Commission, Report on the Uniformity of State Regulatory Requirements for Offerings of Securities that are not "Covered Securities" Pursuant to Section 102(b) of the National Securities Markets Improvement Act of 1996 (October 1997).
⁵⁵ Securities Markets Enhancement Act of 2000, S. 2107, 106^th Cong. §311 (1999).
⁵⁶ Generally, securities purchased in reliance on SEC Regulation D are considered restricted securities and cannot be resold absent a registration under the 1933 Act or an applicable exemption,17 CFR §230.502(d).
⁵⁷ NASD Notice to Members 99-11 (February 1999).
⁵⁸ Commonwealth of Pennsylvania v. Greater Ministries International, Inc., Gerald Payne, Betty L. Payne, Don Hall, Brenda Hall and Patrick Henry Albert, No. 877 M.D. 1998 (Pa. Commw. Ct. 1998).
⁵⁹ See 70 P.S. §1-201.
⁶⁰ www.psc.state.pa.us.
⁶¹ NASAA Reports (CCH) ¶361.
⁶² Disqualification provisions apply only to securities offered and sold in reliance upon SEC Rule 505, 17 CFR §230.505((b)(2)(iii). Those disqualifications, set forth at 17 CFR §230.262, generally do not include violations of state law. Only Rule 504 prohibits blank check companies from relying on the exemption established by that rule, 17 CFR §230.504(a)(3).
⁶³ Release at 9.
⁶⁴ Release at 8.
⁶⁵ Supra note 29.
⁶⁶ NASAA Reports (CCH) ¶6201.
⁶⁷ Id and note 3a.
⁶⁸ NASAA Reports (CCH) ¶361.
⁶⁹ Supra, note 29.
⁷⁰ Supra, note 15.
⁷¹ Release at 9.
⁷² "Exemption for Certain California Limited Issues," Securities Act Release No. 33-7285 (May 1, 1996).
⁷³ Id. at 1.
⁷⁴ Supra, note 26.
⁷⁵ Disqualification provisions currently apply only to offerings made in reliance on Rule 505, 17 CFR §230.505(b)(2)(iii), and they generally do not include violations of state law.
⁷⁶ 17 CFR §230.419(a)(2). Blank check companies are not permitted to rely on Rule 504, 17 CFR §230.504(a)(3).
⁷⁷ 15 U.S.C. §77z-3.
⁷⁸ Supra, note 44.
⁷⁹ Supra, note 54.
⁸⁰ A significant section of the Release is devoted to asking for comments on how to address a problem with Rule 504 offerings that will be created by adoption of the Release. Release at 9-10.
⁸¹ 15 U.S.C. §80a-2(a)(51).
⁸² Securities Markets Enhancement Act of 2000, S. 2107, 106^th Cong. §311 (1999).

¹	70 P.S. §1-101 et seq. The 1972 Act is modeled on the Uniform Securities Act (1956) adopted by the National Conference of Commissioners on Uniform State Laws.
²	Offers Effected Through Internet That Do Not Result in Sales In Pennsylvania, PSC Order (August 31, 1995), subsequently codified at 64 Pa. Code §230.190. The regulatory approach originally enunciated by PSC was adopted by North American Securities Administrators Association on January 7, 1996 in its Resolution Regarding Securities Offered on Internet, NASAA Reports (CCH) ¶7040, and by SEC in "Statement of the Commission Regarding use of Internet Websites to Offer Securities, Solicit Securities Transactions, or Advertise Investment Services Offshore," Securities Act Release No. 33-7516 (March 23, 1998).
³	Pub.L. No.104-290, 110 Stat. 3417.
⁴	Effective October 11, 1996, NSMIA amended Section 18 of the Securities Act of 1933, 15 U.S.C. §77r(b)(4)(D), to prohibit application of state registration provisions to offerings made in reliance on Rule 506, 17 CFR §230.506. Before being preempted by NSMIA, state law prohibited use of state-level exemptions by persons with significant disciplinary history.
⁵	Letter from Robert M. Lam, PSC Chairman, to Arthur Levitt, SEC Chairman, dated March 3, 1998; Letter from John A. Maher, PSC Commissioner, to Brian Lane, Director, SEC Division of Corporation Finance, dated May 18, 1998.
⁶	15 U.S.C. §77r(b)(3).
⁷	See 17 CFR §230.501(a).
⁸	Commonwealth of Pennsylvania v. Greater Ministries International, Inc., Gerald Payne, Betty L. Payne, Don Hall, Brenda Hall and Patrick Henry Albert, No. 877 M.D. 1998 (Pa. Commw. Ct. 1998).
⁹	70 P.S. §1-201.
¹⁰	NASAA is the oldest international organization dedicated to investor protection. Its membership includes all state securities regulators in the United States; the securities regulators of the District of Columbia, Puerto Rico, Guam, and the Virgin Islands; Canadian Provincial securities regulators; and the securities regulatory authority of the Republic of Mexico. PSC is a NASAA member jurisdiction.
¹¹	NASAA Reports (CCH) ¶361.
¹²	Due to existing federal prohibitions in Rule 505 and 506, 17 CFR §§230.505 and 230.506, on use of general solicitation, issuers relying on MAIE must be engaged in a securities offering in reliance on Rule 504, 17 CFR §230.504, SEC Regulation A, 17 CFR §§230.251-230.262, or Section 3(a)(11) of the 1933 Act, 15 U.S.C. §77c(a)(11).
¹³	17 CFR §230.501(a).
¹⁴	17 CFR §230.503.
¹⁵	States that have adopted an Accredited Investor exemption equal to, or more liberal than, MAIE include: Alaska, Arizona, Arkansas, Colorado, Connecticut, Delaware, Hawaii, Indiana, Kansas, Kentucky, Nebraska, Maine, Maryland, Minnesota, Nevada, New Jersey, New Mexico, North Dakota, Ohio, Oklahoma, Pennsylvania, Puerto Rico, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, Wyoming. All require a notice filing except Minnesota, Nebraska and Texas.
¹⁶	17 CFR §230.419(a)(2). Blank check companies, however, are prohibited from relying on Rule 504, 17 CFR §230.504(a)(3).
¹⁷	NASAA Reports (CCH) ¶361.
¹⁸	Id.
¹⁹	In the Matter of Expedition Partners, LP, Tri-Star Capital Management Corp., Inc., Starquest Capital Management, Bradley Ferguson and Tom Sawyer, No. 9710-07 (December 23, 1997). The promoter was located in La Jolla, CA.
²⁰	In the Matter of Republic Cash Advance of Orlando LLC, Republic Cash Advance, Inc., Curtis J. Billups, Collete Matranga and Michael Smith, No. 9808-02 (August 11, 1999). The promoter was located in Phoenix, AZ.
²¹	In the Matter of Duke Enterprises and Steve J. Denton, No. 9907-01 (July 13, 1999). The promoter was located in Austin, TX.
²²	In the Matter of Veracicom, Inc., John Tabor, Waterworld Entertainment, Inc., and Michael A. Aitken, No. 0105-03 (May 10, 2001). The promoter was located in Tacoma, WA.
²³	In the Matter of AirTrac Chicago, Inc., Fred Cavin, Clarence Friend and Dave Pinkerton, No. 9905-07 (May 12, 1999). The promoter was located in Huntington Beach, CA.
²⁴	In the Matter of Fortune on Wheels Unit Investment Trust, Cherry Avenue, Inc., Harvey P. Tabb and Robert Wrynn, No. 0005-22 (May 22, 2000). The promoter was located in Las Vegas, NV.
²⁵	In the Matter of Miracle Mail, Inc., Joseph E. Mackey and Morgan Fields Associates Corporation, No. 2001-07-028 (July 24, 2001). The promoter was located in Farmingdale, NY.
²⁶	"Revision of Rule 504 of Regulation D, the "Seed Capital" Exemption," Securities Act Release No. 33-7644 (February 25, 1999).
²⁷	17 CFR §230.504(b)((1).
²⁸	Release at 8.
²⁹	PSC research indicates all states (except New York which does not have a securities registration requirement) have defined the term "accredited investor" and all of them have adopted the federal definition at 17 CFR §230.501(a).
³⁰	Release at 9.
³¹	17 CFR §230.1001.
³²	"Exemption for Certain California Limited Issues," Securities Act Release No. 33-7285 (May 1, 1996).
³³	Id. at 1.
³⁴	Supra, note 26.
³⁵	15 U.S.C. §77z-3.
³⁶	Currently, there are no disqualification provisions applicable to offerings made in reliance on Rule 504, 17 CFR §230.504, or Rule 506, 17 CFR §230.506. The disqualifications applicable to offerings made in reliance on Rule 505 pertain generally to violations of federal law, 17 CFR §230.505(b)(2)(iii).
³⁷	17 CFR §230.419(a)(2). Blank check companies are prohibited from relying on Rule 504, 17 CFR §230.504(a)(3).
³⁸	NASAA Reports (CCH) ¶361.
³⁹	15 U.S.C. §78a et seq.
⁴⁰	15 U.S.C. §80a-1 et seq.
⁴¹	15 U.S.C. §77b(15).
⁴²	15 U.S.C. §80a-2(a)(51).
⁴³	15 U.S.C.§78c(54).
⁴⁴	H.R. Rep. No. 104-622 at 31-32 (1996).
⁴⁵	Communication on the definition of Qualified Purchaser from the NASAA Corporation Finance Section to SEC Division of Corporation Finance (December 17, 2001).
⁴⁶	15 U.S.C. §77r(b)(3).
⁴⁷	15 U.S.C. §77r(c)(1).
⁴⁸	Exec. Order No. 12,866, 58 Fed. Reg. 51,735 (September 30, 1993).
⁴⁹	Text available at www.whitehouse.gov/news/releases/20010123-4.html.
⁵⁰	15 U.S.C. §§77r(b)(4)(D) and 77r(c)(2)(B).
⁵¹	17 CFR §230.506(b)(2).
⁵²	15 U.S.C. §77r(c)(2)(A).
⁵³	PSC's Attorney Advisory Committee was created in 1986 to advise PSC on regulatory issues. Its 10 members represent securities practitioners resident across the Commonwealth of Pennsylvania who are members of national and regional law firms as well as legal academic institutions.
⁵⁴	U.S. Securities and Exchange Commission, Report on the Uniformity of State Regulatory Requirements for Offerings of Securities that are not "Covered Securities" Pursuant to Section 102(b) of the National Securities Markets Improvement Act of 1996 (October 1997).
⁵⁵	Securities Markets Enhancement Act of 2000, S. 2107, 106^th Cong. §311 (1999).
⁵⁶	Generally, securities purchased in reliance on SEC Regulation D are considered restricted securities and cannot be resold absent a registration under the 1933 Act or an applicable exemption,17 CFR §230.502(d).
⁵⁷	NASD Notice to Members 99-11 (February 1999).
⁵⁸	Commonwealth of Pennsylvania v. Greater Ministries International, Inc., Gerald Payne, Betty L. Payne, Don Hall, Brenda Hall and Patrick Henry Albert, No. 877 M.D. 1998 (Pa. Commw. Ct. 1998).
⁵⁹	See 70 P.S. §1-201.
⁶⁰	www.psc.state.pa.us.
⁶¹	NASAA Reports (CCH) ¶361.
⁶²	Disqualification provisions apply only to securities offered and sold in reliance upon SEC Rule 505, 17 CFR §230.505((b)(2)(iii). Those disqualifications, set forth at 17 CFR §230.262, generally do not include violations of state law. Only Rule 504 prohibits blank check companies from relying on the exemption established by that rule, 17 CFR §230.504(a)(3).
⁶³	Release at 9.
⁶⁴	Release at 8.
⁶⁵	Supra note 29.
⁶⁶	NASAA Reports (CCH) ¶6201.
⁶⁷	Id and note 3a.
⁶⁸	NASAA Reports (CCH) ¶361.
⁶⁹	Supra, note 29.
⁷⁰	Supra, note 15.
⁷¹	Release at 9.
⁷²	"Exemption for Certain California Limited Issues," Securities Act Release No. 33-7285 (May 1, 1996).
⁷³	Id. at 1.
⁷⁴	Supra, note 26.
⁷⁵	Disqualification provisions currently apply only to offerings made in reliance on Rule 505, 17 CFR §230.505(b)(2)(iii), and they generally do not include violations of state law.
⁷⁶	17 CFR §230.419(a)(2). Blank check companies are not permitted to rely on Rule 504, 17 CFR §230.504(a)(3).
⁷⁷	15 U.S.C. §77z-3.
⁷⁸	Supra, note 44.
⁷⁹	Supra, note 54.
⁸⁰	A significant section of the Release is devoted to asking for comments on how to address a problem with Rule 504 offerings that will be created by adoption of the Release. Release at 9-10.
⁸¹	15 U.S.C. §80a-2(a)(51).
⁸²	Securities Markets Enhancement Act of 2000, S. 2107, 106^th Cong. §311 (1999).