September 11, 2013
RE: FILE No. 265-27
Advisory Committee on Small and Emerging Markets
Private Placement Broker Exemption
Ladies and Gentlemen:
The American Bar Association Private Placement Broker Task Force (the "Task Force") would like to express its views on the need for a limited or conditional exemption from broker registration under Section 15 of the Securities Exchange Act of 1934, as amended, for private placement brokers assisting smaller operating businesses in raising capital from accredited investors. We acknowledge and appreciate your public support of an exemption for M&A and business brokers. We believe that the time is right for an exemption for intermediaries (sometimes called "finders") who make introductions between issuers and potential investors.
We understand that the Financial Industry Regulatory Authority ("FINRA") is considering the creation of a limited purpose broker dealer category of registration for intermediaries. Those intermediaries would be permitted to engage in certain broker activities including providing advice to issuers in capital raising activities. They would also be permitted to qualify, identify and solicit institutional investors (generally, banks, insurance companies, investment companies, investment advisers and persons having at least $50 million in assets). While this is a positive development, it would limit the ability of these intermediaries to solicit only institutional investors. The Task Force urges you to support FINRA's proposal for intermediary registration but to consider a broader criterion such as an accredited investor standard for the reasons outlined below.
The Task Force shares the goal of the Jumpstart Our Business Startups Act, or JOBS Act, which is to promote capital raising and job creation by small businesses. These businesses often lack access to traditional sources of capital and are poorly served by established private placement agents, who may find that the transaction size is too small for them to make their desired return after expenses. As a result, smaller businesses sometimes rely on intermediaries for whom the full panoply of broker-dealer registration may be overly burdensome. This has created an environment which limits the availability of financing for small businesses, makes them prey to unscrupulous intermediaries and encourages otherwise law abiding intermediaries to operate in violation of applicable rules.
At the present time, small issuers are dependent on intermediaries to locate suitable investors who are both willing and financially able to make such investments. Small businesses typically do not attract the interest of large institutional investors. Rather, investors in small business are often accredited investors, many of whom do not have the capacity or desire to invest in the large increments typically required by large institutional investors and have no legal intermediaries available to them. Finally, intermediaries are at risk when they provide suitable investors because the agreements under which they operate are void as a matter of law. All three of these groups - issuers, investors, and intermediaries - need the protection of a simplified registration process that eliminates some of the historical barriers to entry.
The purpose of the Task Force is to create a mechanism with specific focus on smaller businesses so that many of those intermediaries currently acting outside any regulatory regime would be able to register with FINRA and be regulated by FINRA and the individual states. The Task Force has met with high-ranking members of the Commission, FINRA, and NASAA to further this goal. Registering and regulating intermediaries achieves the combined goals of job creation and capital formation while providing regulatory oversight. However, any proposal that restricts the ability of registered intermediaries to solicit only institutional investors still leaves far too many transactions outside of the regulatory scheme.
As has been discussed with the various stakeholders (the Commission, FINRA, and NASAA), we are looking to a mutually agreeable structure of registration that could include basic licensing requirements, investor suitability criteria identical to those enumerated in Regulation D, Rule 501, and enhanced accredited investor suitability requirements of Rule 506(c) which will go into effect on September 23, 2013. The enhanced suitability requirements of Rule 506(c) could also be applied to all offerings in which a registered intermediary participates.
A proposal similar to this has been at the top of the list of proposals adopted at every SEC-Small Business Conference for the past twenty years. We respectfully request that the Advisory Committee on Small and Emerging Markets consider this approach and provide guidance to the Task Force as to how we can further assist the various stakeholders to reach these goals.
American Bar Association Private Placement Broker Task Force
Task Force Drafting Committee Members
Martin A. Hewitt, Chairman of the Task Force; Eden L. Rohrer, Vice Chairperson of the Task Force; Joan Adler; Faith Colish; Linda Lerner; Gerald Niesar; and Bonnie J. Roe
American Bar Association Private Placement Broker Task Force Martin A. Hewitt
112 Quaker Drive
East Brunswick, NJ 08816-3238
Eden L. Rohrer
Crowell & Moring LLP
590 Madison Avenue, Floor 19
New York, NY 10022-2524