February 22, 2002
Mr. Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, NW
Washington, D.C. 20549-0609
Re: Comment Letter on Release No. 33-8041;
Commission File No.: S7-23-01
Ladies and Gentlemen:
We have the following comments for your consideration in connection with Defining the Term "Qualified Purchaser" under the Securities Act of 1933, Release No. 33-8041 (the "Proposing Release"). Our practice almost exclusively includes small business issuers, so we believe we see many of the issues that confront small business issuers when they seek to raise capital. In particular, our client base does not include companies that have found access to venture capital funds, but instead consists principally of companies that seek to raise funds from individual investors. In our representations, we have noticed that individual investors do not have the same interest in obtaining control over issuers that venture capital investors do, and accordingly prompt access to a liquid market for resales of stock is a primary investor concern. Our comments on your proposed definition flow from this fundamental point.
We believe that the Proposing Release is a step in the right direction toward providing meaningful preemption. We believe the Commission should go further, however, and include purchasers in certain specific types of transactions in the definition of "qualified purchaser": (1) purchasers in an offering registered under the Securities Act of 1933 (the "Act") where the manner of sale complies with that contemplated by Rule 144(f); and (2) purchasers in an offering registered under the Act where the offering would otherwise comply with Rule 506 under Regulation D.
The Proposing Release sets out two policy aims that we believe should inform the breadth of the definition of qualified purchaser. First, we believe that preemption is appropriate where investors "do not require the protections of registration under the state securities laws."1 Although the Proposing Release focuses on investor sophistication in developing this policy aim, we believe that due regard should be accorded an issuer's registration under the Act. The second policy aim reinforces our belief that registration under the Act is an important consideration, namely that preemption should "eliminat[e] redundancy and work a meaningful preemption in the area of disparate securities registration systems".2 As a fundamental premise, we believe that the requirement to register with both the Commission and one or more states should be imposed only in those circumstances where a state has an interest in protecting large numbers of unsophisticated investors.
The Proposing Release refers to the legislative history from time to time. We believe that the actual text of Section 18 should also inform legislative intent, as it applies to the Commission defining qualified purchaser. If Congress had intended "qualified purchaser" preemption to apply only to accredited investors, we believe it would have said so in Section 18(b)(3). By leaving the development of the definition of qualified purchaser to the Commission, we believe Congress intended an examination of specific transaction formats in which preemption of state regulation might be appropriate. In particular, we believe the Commission should take note of Congress's approval of ordinary resale transactions3 and Rule 506 private placements.4 We believe that Congress's express preemption of these types of transactions in the text of Section 18 speaks volumes about legislative intent. We suggest, therefore, that preemption should be available for registered transactions that bear a striking resemblance to these legislatively approved transactions.
We have two specific transaction formats to discuss. First, a reporting issuer registers a selling shareholder offering on a continuous and delayed basis under Rule 415. Second, an issuer registers a fixed price primary offering (which could include some selling shareholder shares). We believe that each of these transaction types bears a striking resemblance to transactions that Congress has already approved for preemption.
Rule 415 Selling Shareholder Offering
In this transaction format, an issuer with its common stock registered under Section 12(g) of the Securities Exchange Act of 1934 (the "Exchange Act") files and clears through the Commission a registration statement to register a continuous and delayed offering under Rule 415 by certain selling shareholders. Frequently the registration is undertaken as a result of an undertaking demanded by investors in a prior private placement. The issuer's common stock is not traded on an exchange recognized by Section 18(b) or Rule 146(b).
Under current law this transaction runs into a multiplicity of conflicting blue sky issues. No sales can take place unless an exemption is available under applicable blue sky laws. When the proposed sale is to be made through the market, the issuer must determine where the sale will be made and whether an exemption is available before permitting the sale. When issuers have significant volume in their stocks, it is impossible to determine where the "sale" actually occurs. As a practical matter, when we have inquired of state authorities how to deal with this issue, they have advised us that they deem the sale to have occurred in the jurisdiction where the selling shareholder places his or her sell order. We also generally recommend to issuers that they have a market maker in a jurisdiction that has the "Manual" exemption for shareholder sales. Issuers cannot control this, however, because market makers in other jurisdictions have the right under the NASD's rules to make a market in the issuer's stock if the market maker chooses. Issuers have no control over the market maker that ultimately clears the sale.
We believe that this transaction is effectively the same as the transaction already exempted by Congress in Section 18(b)(4)(A, B).5 In addition, there is an effective registration statement providing investor protection. As a result, to work a meaningful preemption where disparate registration systems are present, we recommend that purchasers in this type of transaction be designated as qualified purchasers. We do not believe preemption should be as broad as all Section 4(1) transactions,6 however, because state blue sky laws should apply to large bloc sales of stock negotiated outside the market.7 Accordingly, we suggest importing the manner of sale concept from Rule 144(f) to limit the scope of the transactions that would receive preemption.
Registered Fixed Price Offering
In this transaction format, an issuer files and clears through the Commission a registration statement to register an offering of its common stock (perhaps including some selling shareholder shares) at a fixed price. With a limitation on the number of unaccredited sophisticated investors, we believe that this transaction format is strikingly similar to a Rule 506 private placement. Congress has already preempted state regulation of Rule 506 private placements.8 We believe that any transaction Congress has chosen to preempt on a private basis should certainly be acceptable for preemption on a registered basis. Accordingly, we recommend that purchasers in an offering that, if accomplished privately, would otherwise satisfy Section 18(b)(4)(D) be considered qualified purchasers.
Overall Effect of Proposals
Issuers have an interest in raising capital. Investors who do not seek control through their investments place a premium on liquidity. As things currently stand, most small business issuers may secure preemption of state regulation in their initial capital raising by complying with Rule 506. Once issuers are public, their investors (after relevant holding periods) can secure preemption of state regulation under Section 18(b)(4)(A, B). Given the availability of preemption at these two points in the life-cycle of capital-raising transactions, we believe it serves no purpose to impose on small business issuers an onerous intermediate step where registration is required not just with the Commission but any number of state authorities as well.
We suggest revising the proposed text of Rule 146(c) to read as follows:
(c) Qualified Purchaser. A "qualified purchaser" as used in Section 18(b)(3) of the Act means (1) any accredited investor as defined in § 230.501(a), or (2) any purchaser of a security with respect to the following transactions in which the security is sold pursuant to an effective registration statement under the Act: (A) in a transaction that meets the manner of sale requirements set forth in Rule 144(f), and the issuer of such security files reports with the Commission pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934; or (B) in an offering that, if conducted privately, would have been exempt from registration under the Act pursuant to Commission rules or regulations issued under section 4(2).
We hope you find our comments helpful, and we would be happy to discuss our ideas further if you would find that helpful.
Very truly yours,
OGDEN MURPHY WALLACE, P.L.L.C.
/s/ Shea Wilson
|1||Proposing Release, § I(C).|
|3||§ 18(b)(4)(A, B).|
|5||The § 4(1) exemption is not available for the Rule 415 transaction because the Rule 415 transaction is registered and thus not exempt from § 5.|
|6||§ 18(b)(4)(A) does not limit preemption to market transactions.|
|7||In conjunction with your proposed definition of qualified purchasers as accredited investors, any bloc sale to an accredited investor would receive preemption; therefore our proposal would afford state protections to those who need it most, unaccredited investors buying blocs of registered securities that cannot easily be liquidated in the market.|