August 31, 2012
This second comment letter is submitted in connection with SEC Release No. 33-0354, to request the enactment of one or more safe-harbor provisions for what constitutes "taking reasonable steps to verify that purchasers of the securities are accredited investors" under the proposed amended Rule 506(c) of Regulation D under the Securities Act of 1933.
The current draft of the proposed amended Rule 506(c) contained in SEC Release No. 33-0354, in my view, does not further the intent of Congress of facilitating the capital raising process for small and medium sized companies in the United States.
By not setting out one or several clear safe-harbors for what constitutes "taking reasonable steps to verify that purchasers of the securities are accredited investors" the SEC has created regulatory uncertainty which will no doubt make it more expensive and more difficult for small and medium sized companies to be able to raise funds using Crowdfunding techniques on the internet (which is exactly what Congress was trying to facilitate through the JOBS Act).
I believe that the SEC's approach of considering the nature of the purchaser and the type of accredited investor, as well as the amount and type of information made available to investors, and the investment amount, are appropriate factors to consider when determining the reasonableness of the steps taken to verify that a purchaser is an accredited investor. However, small companies still need to be able to have clear safe-harbors that will allow them to undertake small offerings to investors using Crowdfunding techniques on the internet.
Therefore, I would propose that the SEC consider enacting the following safe-harbors for what constitutes "taking reasonable steps to verify that purchasers of the securities are accredited investors" under proposed Rule 506(c) of Regulation D under the Securities Act of 1933.
PROPOSED Rule 506(c) CROWDFUNDING PLATFORM SAFE-HARBOR:
I would propose a safe-harbor of what constitutes "taking reasonable steps to verify that purchasers of the securities are accredited investors" for Rule 506(c) compliant offerings of securities: (i) made through U.S. registered broker dealers and/or SEC registered crowdfunding platforms (who certify to the issuer that their investors have been reasonably pre-verified to be "accredited investors"), and (ii) where the minimum investment amount is at least $10,000.
PROPOSED DE MINIMIS Rule 506(c) CROWDFUNDING SAFE-HARBOR:
I would also propose a safe-harbor of what constitutes "taking reasonable steps to verify that purchasers of the securities are accredited investors" for Rule 506(c) compliant offerings of securities: (i) made through U.S. registered broker dealers and/or SEC registered crowdfunding platforms, (ii) to investors who have certified that they are accredited investors (without the need for any further additional verification), (iii) in which the amount of capital that any one investor can invest in any one company per year is limited, say to no more than $5,000 (or in some other manner similar to Title III of the Jobs Act), (iv) in which the amount of capital that any one company can raise in any one year is limited to no more than $1 million (in a manner similar to Title III of the Jobs Act), and (v) there is a minimum amount of disclosure based on the size of the offering (in a manner similar to Title III of the Jobs Act).
PROPOSED Rule 506(c) INSTITUTIONAL CROWDFUNDING SAFE-HARBOR:
I would also propose a safe-harbor of what constitutes "taking reasonable steps to verify that purchasers of the securities are accredited investors" for Rule 506(c) compliant offerings of securities: (i) made to investors who have certified that they are institutional "accredited investors" (i.e., with minimum assets of $5 million) (without the need for any further additional verification), and (iii) where the minimum investment amount is $50,000.
Only by providing regulatory certainty, and clear non-exclusive safe-harbors, will the SEC be able to comply with the requirements of the JOBS Act and make capital formation easier and more accessible to small and medium sized companies in the United States.
Sincerely,
Gil Michel-Garcia
The views expressed herein are my personal views and do not denote the views of any other member of my firm.