September 14, 2012
September 14, 2012
The Honorable Mary Schapiro, Chairman
U.S. Securities and Exchange Commission
100 F St., N.E.
Washington, DC 20549
Dear Chairman Schapiro,
While I understand the legitimate reasons for delaying the rules dictated by the JOBS Act, with regard to lifting the ban on general solicitation and general advertising as defined in Regulation D Rule 506, I am concerned that the SEC (herein The Commission or SEC) has become so inundated with these mammoth undertakings that the outcome of the final rules will further complicate, and/or prohibit, the capital acquisition process for privately held small businesses, e.g., much of the Dodd-Frank Act has yet to be implemented.
Moreover, I fear that the law professors and other persons hired for the specific task of creating and implementing these new rules, although esteemed and honored in their professions, are not experientially equipped to address the needs of typical Main Street - Privately Held - Small Businesses (herein Private Issuers). These newly hired persons are very qualified to provide analysis for Wall Street level companies, e.g., IBM, Microsoft, Google, etc., but they have little experience in starting a Pizza Shop or a Gas Station in a small town. I sincerely hope my data is wrong on this, but my research has told me otherwise.
It appears that many of the pundits of the JOBS Act failed to plan for the "brick wall" that was quickly installed as a hurdle by NASAA and the private sector organizations that allegedly operate as a constant supporter of NASAA's main influencers, e.g., Fund Democracy, Inc., AFL-CIO, International Brotherhood of Teamsters, and others.
While many of the opposing organizations listed above have their constituents interests at heart, their concern for securities fraud seems overzealous, and rightfully so, however, it appears to me that as complex as this particular issue seems to be, the solution may indeed be an adjustment with the entire definition of what is considered a Private or Public Issuer.
In the recent past (1992 or thereabout) an easing of the ban on solicitation culminated into a significant uptick in fraudulent activity, which played out during the mid to late 1990s. This activity however, was, for the most part, concentrated in the Penny Stock Markets, or Pink Sheets. The Pink Sheets is a public market for semi-public securities. The issuers who trade their stocks on the Pink Sheets call themselves public companies, yet these issuers are not subject to the same stringent disclosure requirements as issuers who trade in larger public markets that require full disclosure of material information, such as the NASDAQ, NYSE or OTC Bulletin Board (OTCBB).
I agree with NASAA and its supporters, lifting The Ban will indeed create an uptick in fraudulent activity, but I do not agree that this fraudulent activity will be carried out, in large part, by Private Issuers. As our recent history has shown (1992), this uptick in fraud will most likely be trackable in the Penny Stock Markets. Just for clarity, Private Issuers are not necessarily Penny Stock Market Issuers (herein Penny Stock Issuers).
NASAA and its supporters seem to be painting all Private Issuers with the same broad brush that they use to paint Penny Stock Issuers. In carrying out this broad brush approach, Private Issuers are being portrayed as Scoundrel Penny Stock Market Fraudsters, who are out to commit fraud against investors rather than present a true American Business that has a Real American Dream behind it.
With that being said, many of the Penny Stock Issuers are indeed good businesses with great potential, however, they are indeed in a different sector all together, and it is extremely apparent, that NASAA, its supporters, and perhaps even the SEC, views the Pink Sheets Stock Markets as a thorn in its proverbial side.
For the sake of preserving the integrity of Americas Main Street Businesses, I propose that The Commission enact rules that create a clear line or clear distinction between what is defined as a Private Issuer and a Public Issuer.
Defining a clear difference, and eliminating the grey area in the Pink Sheets, will separate Main Street from Wall Street.
For example: If a Main Street Issuer (or Private Issuer) decides to become a Wall Street Issuer (or Pink Sheets Issuer) then they should be required to adhere to The Commissions Rules for Publicly Traded Companies, e.g., full disclosure of material information, audits, Sarbanes-Oxley, etc.
The current rules allow Penny Stock Issuers to sell their stock shares as sudo-public companies, to the general public, without requiring them to disclose material information and audits. The current rules also allow Public Issuers to act as Private Issuers selling shares to private investors, these are known as PIPEs in the industry, or Private Investment in a Public Entity.
Herein lies the problem
NASAA and its supporters are categorizing both Private Issuers and Pink Sheets Issuers together, selling the idea that the two Issuers are 1 in the same. In my opinion, the two Issuers could not be more different.
1. Small local or regional businesses who dont trade on Wall Street
2. Required to sell only to accredited investors (or up to 35 non-accredited, potential fraud)
3. Cant advertise or solicit the sale (see JOBS Act)
4. Must deliver ALL material information, including audits, to investors if they sell to even 1 non-accredited investor
5. Investors are restricted from transferring (selling or trading) the shares for 12 months
6. Investors win or lose
Pink Sheets Issuers
1. Publicly traded companies
2. Can sell securities to the general public
3. Can hire Investor Relations Firms to perpetuate the sales of their public securities (potential fraud)
4. Can act as a Private Issuer while traded publicly
5. In private offerings, cant advertise or solicit the sale (see JOBS Act)
6. In private offerings, must deliver ALL material information to investors if they sell to even 1 non-accredited investor
7. In private offerings, can sell up to 35 non-accredited investors (most of these companies sell to non-accredited investors anyway, without disclosing the required material information, intermingling public and private status, potential fraud)
8. In private offerings, Investors are restricted from trading the private shares for 12 months, however, these companies know many tricks to get these shares registered before the 12 month holding period ends (again, therein lies the potential for fraud)
9. In private offerings, Investors can trade the shares after 12 months, but the shares must be registered by the Issuer, and the Issuer must provide the Investor with a new Stock Certificate that has the Restrictive Legend removed (many Issuers play games with these stock shares, delaying the delivery, or actually losing the stock shares in the mail therein lies the potential for fraud).
Obviously, Pink Sheets Issuers have more resources to commit fraud than Private Issuers. If the current rules are left in place, I would at least urge The Commission to consider adjusting the rules for Pink Sheets Issuers making them fully reporting public companies. This would indeed strengthen the integrity of the Pink Sheets Stock Markets. Investors would have the added benefit of knowing that the companies listed in those markets are held to the highest standards. Moreover, it would separate Main Street Issuers from the public portrayal that they are somehow in the same category with the Pink Sheets Issuers.
Finally, this would truly allow American Citizens to start financially supporting local small businesses, without being forced to shy away from them, due to disparaging comments by powerful law professors, who have never started a small business or struggled to pay bills or agonized over the need to raise private capital, due to banks that are reluctant to lend money to small businesses.
I realize these esteemed individuals are trying to act in the best interests of Investors. I applaud their efforts. But, please take into consideration that most small business owners will never make it to Wall Street, nor do they have that goal in mind. Most of them just want to build a small private business to support their families or buy a nice house or have enough money to retire.
NASAA and others are suggesting that you create rules that would indeed pre-judge a large group of American Citizens "guilty" before any crimes have been committed.
I will end with a quote:
"It is better 100 guilty Persons should escape than that one innocent Person should suffer, is a Maxim that has been long and generally approved."
- Benjamin Franklin
Thank you for your time and consideration.
Stallion Assets, Inc.