From: Campbell, Rutheford B
March 30, 2016
Submitted electronically to firstname.lastname@example.org; File No. S7-22-15
U.S. Securities and Exchange Commission
Re: Proposed revision of Rule 147
Dear Sir or Madam:
I write to offer comments on the proposed revision of Rule 147, as announced in the Commission's Release 33-9973 (Oct. 30, 2015) .
A. Overview of My Comments
My first comment is: You should eliminate the conditions for the exemption imposed by proposed Section 147(a). The availability of the federal exemption from registration should not be predicated on meeting any particular state registration requirement or state exemption provision. An issuer should be able to coordinate a Rule 147 offering with any applicable state registration or exemption.
My second comment is: You should require issuers utilizing the proposed Rule 147 exemption to file with the Commission a simple notice of the use of Rule 147, similar to the Form Ds required in Regulation D offerings.
B. Predicating the Availability of Rule 147 on Meeting Particular State Registration or Exemption Requirements Will Significantly and Unnecessarily Limit the Availability of This Federal Exemption.
Issuers should be permitted to coordinate a Rule 147 offering with any applicable state registration requirement or exemption provision. The practical impact of limiting the Rule 147 exemption to offerings registered with the state or exempt under the state’s crowdfunding exemption is to limit significantly and unnecessarily the availability of Rule 147, especially in the case of offerings by small issuers.
I would recount, in that regard, my own experience in putting together my Rule 147 offerings.
My most heavily utilized state exemption from registration in my Rule 147 offerings was the state small offering exemption. I also at times utilized other state exemptions from registration (e.g., the exemption available for offerings by companies regulated by a state public service commission), but the state small offering exemption dominated my strategies to coordinate my Rule 147 offerings with state requirements.
It seems certain that issuers would in many (most?) instances continue to coordinate Rule 147 offerings with the state small offering exemption (or other state exemptions), even with the advent of state crowdfunding exemptions.
The whole crowdfunding craze has yet to sort itself out, but my view is that we may well overestimate the extent to which state crowdfunding rules (assuming states follow the federal provisions) will be attractive to small issuers. Securities have to be sold in many (most?) instances the old fashion way in which a human being (agent for the issuer) interacts with the other side of the transaction (investor). While a neutral internet postings may work in some instances, we should not take away from issuers the ability to market their Rule 147 securities by more traditional selling strategies. We should allow the full range of state exemptions to be available for Rule 147 offerings.
It also appears that so limiting the availability of Rule 147 is contrary to a policy underlying Section 3(a)(11) of the Securities Act of 1933 (1933 Act).
One basis for the intrastate exemption in Section 3(a)(11) is that such an offering within a single state is best left for the state to regulate. It is a matter, principally, of local concern, and states should be allowed to regulate these offering according to the best interests of the state and its citizens.
The practical effect of proposed Rule 147(a) is to take away from states the right to control the terms of these intrastate offerings. Issuers can only make these offerings if the offering complies with state registration provisions or the state crowdfunding exemption. Satisfying other state exemptions – the small offering exemption, for example – will not legitimize the offering. We in essence are taking away from the states the right to control the terms of the local offering, and this is inconsistent with a policy underlying Section 3(a)(11).
It is no answer to these problems to say that issuers still can rely on the common law of Section 3(a)(11). The common law is so thin and confused that it is essentially useless. Question, for example, about integration, the residency definition for investors and the impact of interstate resales and reoffers of the Section 3(a)(11) securities generate a level of unpredictability and thus risk for the issuer that is unacceptable. I can imagine that sophisticated counsel would only in rarest of occasions advise a client to rely on the common law of Section 3(a)(11) as a basis for an offering.
My view, therefore, is that it would be a major blunder to limit the availability of Rule 147 to offerings that are registered with the state or compliant with the state’s crowdfunding provision. Rule 147 is a very important exemption for small issuers, and we need to let the states work out the terms of these offerings within their borders.
Issuers utilizing Rule 147 should be required to file a simple notice with the Commission disclosing the Issuer’s offering in reliance on the exemption. A failure to file the notice, however, should not destroy the availability of the Rule 147 exemption. Rather, the Rule should follow the pattern in Regulation D, which provides other appropriate incentives for the issuer and its attorney to file the notice of use.
What we have discovered in the last few years is a strong need for information regarding the extent to which federal exemptions from registrations are working. We discovered (late in the game) that Regulation D was not working in the manner that the Commission anticipated and that, indeed, Regulation A offerings were essentially non-existent. These data have been very important in helping us move to a more efficient regulatory regime for small business capital formation.
Because there are no notice filing requirements for Rule 147 offerings, it has remained a black hole. My view — based on my experience as a practicing lawyer and as a law professor — is that Rule 147 is a highly useful exemption that promotes efficient capital formation and is of significant importance to small businesses. But, we do not have hard data that support or refute my view.
Lawyers and small businesses may oppose the notice requirement, but this modest obligation would in the long run promote efficient regulation and is well worth the costs.
Rutheford B Campbell, Jr.
University of Kentucky