August 30, 2012
This comment is submitted in support of the elimination of the prohibition against general solicitation and advertising contained in Rule 506 of Regulation D under the U.S. Securities Act of 1933, and in Rule 144A under the U.S. Securities Act of 1933.
The question before the Securities Exchange Commission is how to implement the legal mandate of Title II and Title III of the JOBS Act, in order to facilitate capital raising by small and medium sized companies, while at the same time fulfilling its obligation to minimize and deter potential securities fraud.
In my view, the best way to achieve this is to align the disclosure and maximum investment requirements of Crowdfunding offerings under Title III of the Jobs Act (the Crowdfund Act) with those under amended Rule 506 under Title II of the JOBS Act, in order to create a standardized set of rules of disclosure and maximum investment thresholds that apply to all Crowdfunding offerings by small companies conducted on the internet.
When Congress enacted the new Crowdfunding exemption under Title III of the Jobs Act, they attempted to deter and minimize potential fraud through the requirement that such Crowdfunding offerings be conducted only through SEC registered Crowdfunding platforms. Moreover, they attempted to prevent and minimize the effect of any fraud by requiring a minimum amount of disclosure based on the size of the offering and by limiting the amount of capital that any one investor could invest in any one company per year. By not requiring any modifications to the anti-fraud rules of the Securities Act, Congress implicitly acknowledged their belief that current anti-fraud rules and regulations continued to be adequate to deter and punish any actual fraud.
Similarly, the SEC should attempt to deter and minimize potential fraud in connection with Crowdfunding Offerings under amended Rule 506 under Title II of the Jobs Act by only permitting the conduct of general solicitation and advertising in connection with Rule 506 in one of two scenarios: Scenario 1- small offerings where the simple delivery of an accredited investor certificate would be sufficient (without a verification requirement by the company) provided that (i) the amount of capital that any one investor can invest in any one company per year is limited, say to no more than $10,000 (or in some other manner similar to Title III of the Jobs Act), and (ii) there is a minimum amount of disclosure based on the size of the offering (in a manner similar to Title III of the Jobs Act), OR
Scenario 2 - larger offerings to Institutional Accredited investors, in which there is some form of due diligence or verification requirement on the part of the issuer to ensure that all investors are in fact Institutional Accredited Investors.
Such an approach would not have any effect on the conduct of regular private placements to accredited investors under Regulation D, without the requirement to verify their status, so long as no public solicitation or advertising took place.
Larger private offerings that are made to private equity investors under Regulation D or under Section 4(2) of the Securities Act would probably not require the full removal of the limitation from general solicitation and advertising, because those are normally conducted and will most likely continue to be conducted on a one on one basis, or through closed loop information networks, accessible only to Institutional Accredited Investors.
In the same vein, Rule 144A offerings and secondary trading of Rule 144A securities would probably not require the full removal of the limitation from general solicitation and advertising, because those are also normally conducted and will most likely continue to be conducted on a one on one basis, or through closed loop information networks (like PORTAL), accessible only to Qualified Institutional Buyers.
Perhaps the SEC could clarify in its rule making process, that primary and secondary offerings and/or trading of securities of private issuers made on closed loop circuits accessible only to either Institutional Accredited Investors and/or Qualified Institutional Buyers, would not be considered to be general solicitation or advertising in violation of Rule 506 of Regulation D and/or Rule 144A under the Securities Act, as the case may be.
In addition, in its rule making process, the SEC should also amend Regulation S in order to make the necessary conforming changes to the definition of "directed selling efforts" so that both Regulation D / Rule 144A and Regulation S could continue to work seamlessly for private cross-border offerings.
In this manner, I believe that the SEC would be able to comply with the requirements of the JOBS Act, make capital formation easier and more accessible to small companies, and continue to minimize and deter securities fraud in the United States.
Sincerely,
Gil Michel-Garcia
Partner
Blue HF