February 25, 2002
Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission
450 Fifth Street NW
Washington DC 20549-0609
Re: Release No. 33-8041; File No. S7-23-01; Definition of Qualified Purchaser
Dear Mr. Katz:
The Utah Division of Securities ("Division") would like to thank the Securities and Exchange Commission ("Commission") for the opportunity to comment on proposed Rule 146(c), which would define a "qualified purchaser" to mean any "accredited investor" as that term is defined in Rule 501 of Regulation D.
The Division has reviewed the North American Securities Administrators Association ("NASAA") comment letter, which is yet to be filed with the Commission, and the comment letter submitted by the Pennsylvania Securities Commission. The Division supports both the NASAA and Pennsylvania comments and proposals.
The Division's Concerns
In addition to expressing our support for the positions expressed in the NASAA and Pennsylvania comment letters, the Division would like to express some of its own concerns. The Division is very concerned with the overly simplistic nature of the Commission's proposal as applied to a very complex issue. It appears to the Division that in developing its proposal, the Commission has not thoroughly examined the ramifications. The Division is concerned with the Commission's use of wealth tests to gauge investor sophistication. The Division believes that while not perfect, a test based on the amount of investments held by an investor is a much better indicator of financial sophistication than a person's income or net worth. However, to be effective, such a test should exclude investments from certain retirement funds. Furthermore, the Division is very concerned that the Commission's proposal would erode the Division's ability protect Utah investors.
The Division believes that the "natural person" tests found in Rule 501(5) and (6) are much too low to be used to gauge financial sophistication. The Division asserts that this test, which has not been adjusted for inflation in 20 years, would include a very large portion of the investing public that is in great need of the protections provided by Utah law.
The Division is also concerned about a situation where an issuer sells securities to qualified purchasers under circumstances in which the securities are exempt from federal registration pursuant to section 3(a)(11) of the Securities Act of 1933. Under such a transaction, these shares would not carry any restriction on the manner of resale, except under Rule 147 to residents of the same state for a period of 9 months. The Division fears that this would become the new weak link of the securities laws. An issuer could do a public offering in a single state to a group of nominees that qualify as accredited investors, wait 9 months, and then resell to anybody without the securities every having been registered. We could very well see some of the same problems we experienced after Regulation S was first created. If the Commission intends to define qualified purchaser, the rule proposal should exclude any transactions in which the issuer is relying on section 3(a)(11). This should be done not only to avoid the potential problems described above, but I question whether federal preemption of a transaction that occurs entirely within one state could pass constitutional muster.
Since the passage of the National Securities Markets Improvement Act (NSMIA) in 1996, the Division has noted a dramatic increase in problems associated with offerings that are exempt under Rule 506. Most of these problems have been uncovered after review of the notice filings (several have been uncovered when promoters of these offerings have actually cold-called members of the Division's staff ). This has resulted in an increased number of enforcement actions involving Rule 506 offerings. The Division fears that if the Commission's proposal were passed, compliance problems would then shift to offerings involving qualified purchasers. However, there is uncertainty whether the states would be able to detect these problems because of the uncertainty whether states would be able to require submission of notice filings. Also, unless the Commission is comitted to providing resources to police this area, it could result in no protection from either the states or the Commission.
The Division strongly opposes proposed Rule 146(c). The Commission has attempted to select the easy route in defining qualified purchaser by substituting the definition of "accredited investor." If this is what Congress had intended, they clearly could have done so themselves. Rather, Congress entrusted the Commission with the duty of using its expertise to study and analyze the issue with the intent of producing a more enlightened standard. The Commission has failed to put any real effort into determining the effect of its proposal. The Division sincerely hopes that the Commission has only used its release as a way of starting a discussion and as a method to perform the analysis and not with the real intent of creating such a low threshold of unregulated activity.
S. Anthony Taggart