Subject: File No. 265-23
From: Karl Kirwan
Affiliation:
Karl Kirwan
49 Beach Way
Baiting Hollow, NY 11933
Telephone: 631 369-7850
June 08, 2005
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
Attention: Jonathan G. Katz, Secretary
Via e-mail: rule-comments@sec.gov
Re: Securities and Exchange Commission Release Nos. 33-8575; 34-51730; File No. 265-23, SUBJECT: Advisory Committee on Smaller Public Companies.
Ladies and Gentlemen:
I am a registered representative with the National Association of Securities Dealers and I am active in fundraising for small public companies. I am writing with comment to Section 7 Capital Formation and subsection’s 7.4 Analyze investment banker roles and 7.6.2 Possible roles of capital formation specialists, including brokers and “finders.” of the Committee Agenda.
My concerns lie with persons who are active in fundraising that have a fraudulent past and ‘unregistered’ entities and persons who receive commissions from the selling of securities through fundraising activities. The reason this is a concern for me is that people who have a past history of financial malfeasance and people and entities who have no ‘background’ checks for the like (read Patriot Act), are today participating in the capital formulation process. Their participation, in some cases, continues fraud in the industry and needs to be stopped.
I unfortunately suppose it will come as no surprise that I know of one individual who, named last year in an SEC action for a ‘pump and dump’ scheme, is active in the selling of securities and whom is currently expecting commissions from a sale of securities. I unfortunately also know of an unregistered entity, that one local New York daily newspaper considers a ‘promoter’, who is being sued for taking fees on a securities transaction that the counter party does not believe are legally theirs (and the issuer is being sued also). This does not seamless Capital Formation make.
If I’m reading this right, the Commission has the authority Under the Sarbanes-Oxley Act of 2002 to remedy the problems as outlined above. The authority comes, in part, from TITLE VI--COMMISSION RESOURCES AND AUTHORITY, sub Sec. 603. Federal court authority to impose penny stock bars that “(6) Authority of a court to prohibit persons from participating in an offering of penny stock. In part, “The Commission may, by rule or regulation, define such term to include other activities, and may, by rule, regulation, or order, exempt any person or class of persons, in whole or in part, conditionally or unconditionally, from inclusion in such term.".
So the SEC can chose or bar a person or class of persons to participate or not to participate in fundraising for penny stocks, good. Now, how best to implement this? The next section, Sec. 604. Qualifications of associated persons of brokers and dealers, spells it out. This section more or less states that if a person regulated by a broker dealer or an investment advisor has been convicted of or is under investigation for financial malfeasance, that person can not participate in the fundraising process. Pretty Simple.
The reason people and entities are circumventing this rule today, is because they do not have to be registered with a broker dealer or with an investment advisor. They don’t have to be registered with anyone. Making everyone register as or with a broker dealer or an investment advisor closes this loophole once and for all and does not require additional legislation from Congress, the regulatory bodies, or the states.
Incorporating this rule should not be burdensome to the Capital Formation process. Regarding issuers, the burden will be light. Private Placement Memorandums always note fees being paid to commissions. A line and or checkbox would need to be added to confirm that the persons are registered with or are a broker dealer or investment advisor. And for contracts between investors and companies, there is always a line stating whether or not commission fees are being paid on the raise. Again, another line or checkbox would be added to confirm that the persons are registered with or are a broker dealer or investment advisor. The due diligence required by the company would be similar to the due diligence required when they hire legal or accounting advice, not burdensome in the least.
Regarding fundraisers, legitimate persons and entities who want to participate in the selling of securities simply will get registered, again not a burdensome event. Fraudulent people and entities will no longer be able to participate. This is clearly beneficial to the Capital Formation process, as well as in line with the Commissions responsibilities toward investors.
And lastly, implementing this rule will not cause a loss of capital available to public companies, in my opinion, as the fundraising landscape is extremely competitive in today’s marketplace. Those of you who come from public companies know of what I speak.
I appreciate you attention to this matter.
Sincerely,
Karl Kirwan
49 Beach Way
Baiting Hollow, NY 11933
Telephone: 631 369-7850
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