Wilson, Sonsini, Goodrich & Rosati
650 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304-1050
TELEPHONE 650-493-9300 FACSIMILE 650-493-6811
Ann Yvonne Walker
June 29, 1999
Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W., Stop 6-9
Washington, D.C. 20549
Re: "Aircraft Carrier" Release No. 33-7606A; File No. S7-30-98
Dear Mr. Katz:
The following comments to Release No. 33-7606A (the "Release") are being submitted on behalf of the National Venture Capital Association ("NVCA").
The NVCA consists of venture capital firms located throughout the United States. The perspective of the members of the NVCA, as reflected in this comment letter, derives from several relationships that they have with issuers of securities. Typically, the initial contact is when the venture capital firm makes a private investment in securities of an issuer prior to its initial public offering. Thereafter, venture capital firms are often selling shareholders either in the initial public offering or in a later public offering made by the company pursuant to which they are exercising their "piggy-back" registration rights. In addition, our members are often selling shareholders under shelf resale registration statements filed by the issuers solely for selling shareholders. They also frequently continue to be a major shareholder of the issuer following the initial public offering, and may also retain a representative on the Board of Directors.
In overly simplistic terms, one is tempted to say, "What's good for the company is good for the venture capital firm." In order for the venture capital firms to reap rewards on their investment, the company must be successful. It is therefore in the venture capitalist's best interest to assist the company in executing its business plan in an efficient manner and in accessing the securities markets in a cost-effective way when necessary.
This comment letter does not attempt to address all items in the Release that are of concern to the NVCA. Rather, it identifies a few selected items that are of particular concern to venture capitalists. In addition, please note that the comments of the NVCA on Section XI of the Release, relating to proposed reform of the rules under the Securities Exchange Act of 1934 (the "Exchange Act"), have previously been addressed in the comment letter dated March 16, 1999 from Dana T. Ackerly II, on behalf of the NVCA and the Association of Publicly Traded Companies. We do not repeat those comments in this letter.
While the NVCA appreciates the tremendous amount of time and effort that the Securities and Exchange Commission (the "SEC") and its staff have put into this project in an attempt to improve the current system of registration under the Securities Act of 1933, taken as a whole the NVCA much prefers the current system to the proposed one. Too many problems are introduced in the Release with respect to the registration process. The NVCA believes that, despite the flaws in the current registration process, it works relatively well and has supported tremendous growth in the capital markets in the United States over the last decade. The SEC should be extremely reluctant to introduce reforms that, as described in numerous comment letters, may threaten the efficiency and vitality of these capital markets.
The Release also contains proposals regarding integration safe harbors under Rule 152 and voting lock-ups under Rule 159 that would provide some significant and much needed relief in these areas. These proposals appear to the easily separable from the registration process proposals in the Release. We urge the SEC to adopt the integration proposals and the proposals relating to voting lock-ups as soon as possible without waiting for a determination as to the status of the remainder of the Release.
The Registration Process
A. Limitation on Short-Form Resale Registration.
The proposed significant limitation on companies eligible to use short-form registration (Form B under the Release, which is analogous to Form S-3 under current rules) is of grave concern to the NVCA. Venture capital firms, which invest privately in companies at a time when their investments are very much at risk, need easy avenues of liquidity after the company goes public. This is especially true during the first year after the initial public offering, when Rule 144(k) will often not yet be available due to lack of the necessary two-year holding period, and for venturecapital firms with large stock positions and/or Board representatives that cause them to be considered an "affiliate" of the issuer, making Rule 144(k) unavailable regardless of their holding period. However, it is not in the interest of the venture capitalist to force upon the issuer the expense and liability of either a long-form shelf registration or an underwritten offering pursuant to the exercise of a demand registration right.
Permitting the resale of restricted securities pursuant to short-form registration statements regardless of the size or seasoning of the issuer provides a needed avenue of liquidity for private investors but does not in our view pose a threat to public investors. Most investors who purchase stock in the public market do not purchase such stock pursuant to a registered public offering; rather, they simply purchase in the secondary market. Such investors really gain nothing from receiving a lengthy prospectus that they are unlikely to read. They simply want to purchase the stock at the current market price based on the information that is publicly available about the issuer. They don't really care whether it is stock that was already trading freely in the secondary market or whether it is stock that is technically restricted and is being sold to them under a shelf registration statement. On the other hand, if a company is doing a primary offering, which typically means the company is selling a large number of previously unissued shares into the public market, it makes perfect sense to require a more lengthy registration statement and prospectus.
We urge the SEC not to adopt the proposed limitation on the use of short-form registration for resale.
B. Bias Toward Registration.
The general tone in the Release seems to be that registration of a securities offering is always better than reliance on an exemption from registration. This pervasive theme manifests itself in many different ways, including the proposed elimination of Exxon Capital A-B exchange offers and the proposed limitation on the use of short-form resale registration statements. Both of these appear to be an attempt to force the registration of the private placement by cutting off previously available avenues of liquidity for resales. We strongly disagree with the premise that registration is always preferable to use of a valid exemption.
From the venture capitalist's perspective, the concept of registering a typical venture capital private placement by a private company is simply unworkable. The timing of such a registration would be much too slow as compared to a private unregistered transaction. It would also be prohibitively expensive for the issuer and would prematurely force the issuer to become subject to the costly reporting requirements of the Exchange Act. None of these results are desirable from the NVCA's perspective.
In addition, registration would force Section 11 liability on the issuer for the venture capital financing -- something that most (if not all) issuers would be unwilling to accept, andsomething that the venture capitalists do not need. As venture capitalists, we are professionals at what we do. It is our business to know how to get the information that we need about an issuer, evaluate it and make an informed investment decision. We are sophisticated investors who clearly do not need or want the protection of the registration process. A venture capitalist wants the issuer to be able to conduct its initial public offering at the appropriate time and not to force that event to occur too soon in the life cycle of the issuer.
For the foregoing reasons, we do not think that the SEC should approach a reform of the registration process with a bias toward registration in the way that it appears to have approached the proposals set forth in the Release.
Integration Safe Harbors Under Rule 152
The NVCA applauds the SEC for the integration safe harbor proposals contained in Section X of the Release. These proposals are definitely a step in the right direction and should be adopted as soon as possible. While there may be minor tweaks that are desirable (as have been pointed out and will be pointed out in comment letters by others), the general notion of providing integration safe harbors in these situations is something that we strongly support.
B. Public to Private.
The conversion of a public offering to a private offering -- otherwise known as a failed public offering -- is currently a major problem for companies that find themselves in that situation. As the SEC knows, the application of the principles of integration and the SEC's interpretation of the integration doctrine currently make it nearly impossible for the company to quickly complete a private offering once they have attempted to do a public offering, even though no securities were sold in the public offering. It is extremely important to facilitate this process, as the SEC has recognized.
If an initial public offering fails, we as venture capitalists need to be able to protect our investment by putting more money into the company on a private basis or by arranging for more money from other private investors. The company needs to be able to do this very quickly and without the fear of Section 11 liability or a Section 5 violation. While we question the need for the proposed 30-day period prior to engaging in a private offering without Section 11 liability, we appreciate the SEC's attempt to make some accommodation for issuers that find themselves in this uncomfortable position.
C. Private to Public.
The SEC's proposals in the Release are also helpful in the scenario where a company starts to do a private offering and then determines that there is sufficient investor interest to switch to a public offering. The availability of a safe harbor for this transition should provide issuers with some comfort that they can safely commence a private offering with venture capitalists without foreclosing the possibility of turning it into a public offering if the demand is sufficiently strong. The ability to do this may have the desirable effect of avoiding the failed public offering scenario, as it in essence allows companies to "test the waters" before deciding to expend the money and take on the liability involved in conducting a public offering.
Voting Lock-Up Agreements Under Rule 159
Acquisitions provide an important exit strategy for venture capitalists who have invested in companies that may not be candidates for going public but that make excellent acquisition targets for another larger public company that wishes to acquire them for its stock. In order to entice a prospective acquiring company to enter into an acquisition agreement with a private company target, it is frequently necessary to obtain assurances that the insiders and major shareholders will in fact vote in favor of the proposed merger.
Rule 159, as proposed to be amended, goes a long way toward facilitating these voting lock-up agreements by clarifying the situations in which they may be entered into without fear of running afoul of the "gun jumping" prohibitions of the Securities Act of 1933. However, we believe that the rule should also provide a safe harbor from violation of the proxy solicitation rules under Section 14 of the Exchange Act.
We encourage the SEC to adopt the proposed amendments to Rule 159, with our suggested expansion to cover Section 14 of the Exchange Act, as soon as possible. This is particularly important in light of the extremely active merger and acquisition environment in which we currently find ourselves.
In conclusion, the NVCA encourages the SEC not to change the system of registration as proposed in the Release. If the SEC feels that it must change the registration system along the linesproposed, it is critical that broad access to short-form resale registration be preserved. Finally, we encourage the SEC to adopt the integration safe harbors and the voting agreement provisions as soon as possible in order to provide needed relief to issuers.
Very truly yours,
/s/ Ann Yvonne Walker
Ann Yvonne Walker
On behalf of the National Venture Capital Association
cc: Mark Heesen