June 25, 2019
Dear Chairman Clayton Associates:
I am excited to share my initial personal thoughts regarding the harmonization of securities offering exemptions, which have developed tremendously over the last decade through the groundbreaking Jumpstart Our Business Startups Act of 2012 and the various addenda shortly thereafter.
Early-stage investment is the key to unlocking innovation in business. Americas diverse landscape of perspective, experience, thought, and action provide a unique yet crucial combination of collective qualities that challenge the status quo and thrust our economy forward – step by step through new businesses in combination with new business leaders.
Despite initial high upfront costs and other difficulties small business investors face, history has shown that they are often able to persevere, making a tremendous profit on their initial stake. They are able to enjoy the fruits of their investment while others without access are forced to sit on the sidelines.
This continues to condense the highest returns and largest amounts of wealth within the smallest collection of investors. It also hinders the free flow of capital, as these larger firms hold all of the leverage and are notorious for bleeding startups and negating innovation. Efficient private capital markets are driven by fair capital markets, and the current, flawed structure is working against the very ideals the American economy looking to promote.
Thanks to the JOBS Act, much of that is poised to change.
With the additions to Rule 506 of Regulation D, Regulation A, Rule 504 of Regulation D, the intrastate offering exemptions, and Regulation Crowdfunding, entrepreneurs are able to accept investment from a much larger and diverse group of investors by reducing capital requirements from each individual and allowing additional access for a wider base of investors.
However, when put into practice, some aspects of these laws havent fully worked as intended. Below are a few points for your consideration:
- There are serious concerns over the viability of a successful public market transition following the issuance of an exempted security. A limited number of shareholders prevents open exchange and unnecessarily increases the minimum investment amount required by a company. This increases the barriers for entry twofold - higher upfront costs and reduced liquidity options for holders - increasing risk as well as opportunity cost.
- Accreditation requirements do not properly provide opportunity for all qualified investors, instead only identifying those with enough capital to lose. Higher education, financial securities licenses, and other professional licenses such as doctors and practicing lawyers should qualify as accredited investors.
- Lockup period conflicts present contradictions that provide international investors with arbitrage opportunities over their United States counterparts. Regulation S requires a 6-month lockup period for international investors, while Regulation D requires a 12-month lockup for domestic investors. International investors are currently able to liquidate six months before domestic investors, disincentivizing collaborative funding efforts between US and international investors. Mandating long lockup periods is also an unusual requirement that is not practiced in other leading economic hubs around the world.
- Potential gaps in the framework have led to obscurity over the compliance of digital asset fundraising. Inquiries regarding but not limited to Regulation A+, broker-dealer applications, domestic secondary exchange, international secondary exchange, taxation, internal governance, disclosures, and retail participation surrounding certain industries has led to observable trepidation from even the highest-quality issuers.
This letter addresses some of my personal concerns regarding the current exemption framework. I will be a leader in drafting a constructive structure to communicate effective solutions to many of these concerns but feel the suggestions and perspectives in that upcoming proposal should represent an independent, collective work from leaders across the entire finance technologies sector, free from ulterior intentions. I would be more than happy to share additional personal perspectives on some of these solutions if requested.
Thank you for setting a great example through open-mindedness, collaboration, and genuine care for the American ideals that have built the strongest economy in history. The signed document is attached to this submission.
Best regards,
Kyle Sonlin
CEO, Security Token Market