September 18, 2007
September 18, 2007
Nancy M. Morris
Secretary
Securities and Exchange Commission
100F Street, N.E.
Washington, DC 20549-0609
Re: File Number S7-12-07
Comments to Release 33-8814
Electronic Filing and
Simplification of Form D
As an addendum to our September 7th letter (a slightly revised copy of which appears below this letter) to the Commission, we are pleased to comment further on Release 33-8814, specifically the proposal to remove the beneficial ownership requirement of Form D.
The Release notes that information identifying beneficial owners is available in the private placement memorandum (or in other information) provided to investors in the issuer.
However, it is our understanding that the PPMs of pooled investment vehicles and company issuers do NOT identify beneficial owners, generally speaking.
Furthermore, most pooled investment vehicles and company issuers do NOT currently reveal beneficial-owner information in their annual and quarterly reports to their investors.
Going back over three decades to the very beginning of the institutionalization of the private-placement market, many private-market issuers did identify their investors in their quarterly and annual reports to investors, but NOT anymore.
The situation has changed dramatically in recent years as public-sector institutions have become the primary funders of private-market issuers.
Many private-market issuers now go to extraordinary lengths to avoid regular disclosure of their ever-changing investor rosters, even to their own investors.
The self-interest of the private-market issuers is the prime motivator here. What issuer wants the full extent of their public-sector funding to become known? What issuer wants to bear increased public scrutiny in exchange for the PRIVILEGE of managing MOSTLY public money? What issuer wants the SEC, Treasury and other regulators to be parsing their investor rosters for sources of capital from questionable origins and for possible violations of money-laundering statutes and regulations?
Yet, isn't this a key role of the Commission, Treasury and other private-placement market regulators to carefully monitor the flow of funds (both by investor type and investor location) into private-market issuers on both the macro and micro levels? Dont regulators need to have more intelligence in such an opaque area and thereby be in a better position to craft regulations and advise policy makers, especially when such large amounts of public money are at stake, in the form of massive public-sector financial commitments to leading private-market issuers?
Fundamentally, how can the Commission continue to fulfill its function as the key regulator of the private-placement market when it proposes to throw away such a basic intelligence-gathering tool as the ownership-disclosure requirements of Form D, effectively, the private-market counterpart to the beneficial ownership reporting provisions under Sections 13 and 16 of the Exchange Act covering public issuers and their significant investors?
By retaining the ownership-disclosure requirements of Form D, the Commission would continue to allow bottom-up (from the issuers perspective) disclosure of significant investors to flow into the public domain and thereby supplement top-down (from the investors perspective) disclosure from many investors, including public-sector institutions. This would effectively shine more light on the full extent of public-sector funding of private-market issuers, especially since a significant number of public investors (including government pension and sovereign wealth funds in the US and abroad) still do NOT disclose ownership information on their web sites, even though they are taxpayer-subsidized.
On another note, we applaud the Commissions effort to improve the data integrity of Form D in the proposed electronic filing system. We concur that it is extremely important to eliminate errors, omissions and obfuscations by issuers from the Form D.
In connection with the ownership-disclosure requirements of Form D, we suggest that the Commission no longer accept nominee names, post office box numbers and CARE OF addresses with respect to the identification of significant (10% or more) beneficial owners, thus making each private-market issuers control and semi-control investors more transparent to market regulators and the general public.
We also suggest that the data submitted in the macro-level geographic (both US and non-US) breakdown of each issuers sources of capital (in the appendix) serve as a logic check on the identification of significant beneficial owners on a micro level.
As the Commission knows, the identification of significant beneficial owners by issuers on Form D, currently, is spotty at best, as there are many omissions. This situation could be corrected by a logic check involving the numbers of investors (if it is a small single-digit number) that have contributed capital to the issuer, or by comparing to the geographic breakdown in the appendix.
One final point – in view of the massive opposition of state securities regulators, news media and other public interest groups to the Commissions proposed DELETION of the ownership-disclosure requirements of Form D, we can anticipate that private-market issuers will adopt a fall-back position that they should not have to disclose their significant PRIVATE investors, just their public investors.
As argued in our September 7th letter (further below), we have no sympathy for significant PRIVATE investors (who complain about their names being disclosed on Form D) who are, in effect, subsidized by taxpayers worldwide through this massive inflow of public-sector funding (rising waters lift all ships) into private-market issuers.
If the Commission is truly worried about these and other privacy concerns, then we argue that it far better to retain the current ownership-disclosure requirements of Form D and withdraw the plan for the electronic filing system, thus permitting this crucial information to still flow into the public domain, albeit on a limited basis.
Otherwise, it seems to us and many observers that the Commissions plan to adopt electronic filing of Form D is simply a ruse to abandon the ownership-disclosure requirements of Form D (really the centerpiece of the Form) in a bid to make itself seem more transparent to the general, taxpaying public in the US and worldwide.
How else can one view this plan than as a Commission attempt to mollify private-market issuer critics (who are themselves trying to avoid public scrutiny of their largely public-sector financial backers) by cloaking the dismantlement of the beneficial-ownership reporting provisions of Form D in the phony garments of electronic filing, all in a feeble endeavor to seem more open to the global taxpaying citizenry, but actually being much less so, in the final analysis.
Thank you for the opportunity to amplify on our September 7th comment letter, a copy (slightly revised) of which appears below.
Very truly yours,
Chris Evans
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September 7, 2007 Comment Letter (Revised)
Nancy M. Morris
Secretary
Securities and Exchange Commission
100F Street, N.E.
Washington, DC 20549-0609
Re: File Number S7-12-07
Comments to Release 33-8814
Electronic Filing and
Simplification of Form D
Thank you for the opportunity to comment on the subject release. We are confident our views represent the vast majority of news organizations (including the major media, citizen journalists and Internet bloggers) committed to freedom of information and protection of First Amendment rights for all Americans.
While we applaud the Commissions proposal on electronic filing of Form D, we are deeply troubled by the proposal to DELETE the ownership-disclosure requirements of the Form.
Currently, there is valuable micro- and macro-level ownership information required of Form D filers by the Commission. On the granular front, the Commission requires the disclosure of significant (control and semi-control) investors of each private-markets issuer, those beneficial owners of 10 percent or more. On a higher level, the Commission requires a geographic breakdown (state-by-state, and foreign/non-US) of the sources of capital for each private-markets issuer in an appendix to Form D.
In this letter, we are pleased to provide our comments on both of these ownership-disclosure requirements of Form D.
Micro-Level Ownership Information of Private-Market Issuers
Over recent years, the tremendous growth in alternative assets (trillions of dollars raised by pooled investment vehicles and companies, many of them private) has prompted concern at the Commission that it lacks meaningful information about the private-placement market. The Commission staff has gone on record many times bemoaning the absence of accurate information about alternative (hedge, private equity, venture capital funds) investment vehicles and their sources of capital (investors).
So it comes as a great surprise to us that the Commission now proposes to eviscerate the Form D (under the guise of SIMPLIFICATION) by abolishing the ownership-disclosure requirements (really the heart of the Form) that are effectively the private-market counterpart to the beneficial ownership reporting provisions under Sections 13 and 16 of the Exchange Act covering public issuers and their significant investors.
Of course, as the Commission itself admitted in the proposed rule changes, some private-market issuers (and their lawyers) who file Form D have complained that they are private and not required to file ownership data with other regulatory agencies worldwide, so they should not be obligated to file this type of information on Form D with the Commission.
However, this claim by some fund-management operators and private-company issuers is simply NOT true.
Private-market issuers, including companies and pooled investment vehicles, have filed ownership information with state, federal and non-US regulatory agencies (beyond the Commission and state securities regulators) for many years.
Furthermore, investors in these private-market issuers file ownership reports (covering their alternative investment holdings) with various state, federal and non-US regulatory agencies
The reality is that large amounts of investor-ownership information on private-market issuers (both pooled vehicles and companies) reside in the public domain.
Investor/LP Information Widely Available on BOTTOM-UP Basis
Over the decades, investor/limited partner (LP) ownership information in private-market issuers (pooled investment vehicles and companies) has been widely available on a bottom-up (from the issuers perspective) basis. Thousands of private-market issuers file publicly-available documents with hundreds of government regulatory agencies worldwide in the ordinary course of business in which they identify all or some of their significant investors/limited partners.
In this letter, we will not PUBLICLY identify these regulatory agencies because some private-market issuers (and their highly-paid lawyers) will proceed to lobby said agencies to prevent the future disclosure of such information, just as they are engaged now in a heavy lobbying campaign to persuade the Commission to dismantle the ownership-disclosure requirements of Form D.
As an example, through the early 1980s, the Secretary of State of the State of Delaware required pooled investment vehicles to identify their investors/limited partners (LPs) in public filings. Some private-market issuers were unhappy with this disclosure obligation and they lobbied successfully for Delaware to remove this requirement.
So we are sure you can understand why we are reluctant to PUBLICLY identify other regulatory agencies worldwide that require disclosure since the moneyed interests (and their legal contingent) will attempt to also shut down these sources.
Of course, we would be happy to identify these other regulatory agencies in private discussions with the Commission staff if you have any interest.
Investor/LP Information Widely Available on TOP-DOWN Basis
For decades now, investor/limited partner (LP) ownership information in private-market issuers (pooled investment vehicles and companies) has also been widely circulated and available on a top-down (from the investor/LPs perspective) basis.
Virtually all investors/LPs file at least annual reports of their private equity fund holdings as part of larger schedules of investments with hundreds of government regulatory agencies all over the world.
In the US alone, investors/limited partners (by category) file publicly-available investment reports (lists of their alternative investment holdings, including funds, directs and co-invests) with many government regulatory agencies, including but NOT limited to the following classes of investors:
Insurance Companies
Labor Unions (Balance Sheet Assets)
Labor Union Employee Benefit Plans
Endowments
Church and religious employee benefit plans
Operating Private Foundations
Corporate Investors (Balance Sheet Assets)
Corporate Employee Benefit Plans
Non-Profit Employee Benefit Plans
Individuals Families
FOF Managers that solicit ERISA capital
Commercial Banks and Trust Companies
Again, we would be happy to identify the specific regulatory agencies that the above investors report to in private discussions with the Commission staff, if you have any interest.
We are sure you can understand our concerns about some private-market issuers (and their enterprising legal staffs) mobilizing to close the investor-ownership disclosure window in other regulatory jurisdictions.
Investor/LP Information Widely Available Via Press Releases and General/Trade News
Many private-market issuers have voluntarily provided this investor/LP information as a marketing tool (and also because many know that much of this information is already in the public domain, obscure though it may be) either through direct press releases or via interviews with the general/trade press. Here are a few examples below:
NGEN Partners Fund II
Wellington Partners III Technology Fund, Munich
Going back 30 years, there are thousands of private equity funds that have provided this investor/LP information to the mass media. These news items on the investors/LPs of thousands of private equity funds are available to the general public through Lexis-Nexis, Factiva and Dialog news archives that are available for FREE in large public and academic libraries.
Investor/LP Info Widely Available in Commercial Newsletters, Directories and Databases
Investor/limited partner (LP) ownership information in private-market issuers has long been widely available in commercial newsletters, directories and databases that are accessible to the public via major public and academic libraries.
There are hundreds of thousands of venture capital, private equity and hedge fund managers plus their portfolio companies (most of them PRIVATE) and investors/limited partners identified in the following commercial databases:
Dow Jones/VentureOne/Private Equity Analyst – VentureSource, LPSource
Thomson Financial/Venture Economics – VentureXpert database
McGraw-Hill/Standard Poors – Capital IQ database
Private Equity Intelligence – Investor Intelligence (Private Equity Venture Capital)
Private Equity Intelligence – Investor Intelligence (Real Estate)
Private Equity Intelligence – Investor Intelligence (Hedge Funds)
PEI – PECONNECT.COM database
Incisive Media – Private Equity LPs database
Incisive Media – Hedge Fund LPs database
Again, there is detailed information in the above commercial databases on pooled investment vehicles and their portfolio companies (most of which are PRIVATE investee companies). There is not only detailed financial information on hundreds of thousands of PRIVATE companies that have raised capital in the private-placement market over the decades, but also information on thousands of PRIVATE investors/LPs in pooled investment vehicles and their investees.
Also, please note that the National Venture Capital Association (NVCA), the trade group for hundreds of major private equity firms (including Menlo Ventures, Carlyle, Summit Partners and HarbourVest, among hundreds of others) has an ongoing strategic partnership with Thomson Financial/Venture Economics in which member firms are encouraged by the associations leadership to complete elaborate quarterly surveys, including the identification of their funds investee companies and limited partners which ultimately feeds the Thomson Financial/Venture Economics directories and databases.
http://www.nvca.org/nvca_partner.html
For your information, NVCA had a similar strategic partnership with publisher VentureOne (the company that was eventually acquired by Dow Jones) in the early to mid-1990s, in which NVCA members at the time were encouraged by the NVCA leadership to provide comparable information that ultimately fueled the VentureOne directories and databases.
Now we ask a fundamental question: If the private-market investor/LP information is so confidential as some GPs allege, then why is the NVCA leadership (who comprises the top GPs in the worlds largest private-issuers market) encouraging its member firms to complete quarterly surveys, including the identification of their individual funds portfolio companies and investors/limited partners that ultimately becomes public through directories and databases of their strategic research partner, a for-profit publishing firm?
Of course, annual subscriptions to these databases typically cost tens of thousands of dollars, effectively making them available, for the most part, to industry insiders: private-market issuers and their service providers (lawyers, accountants, agents).
Why should industry insiders have almost exclusive access to this information (through these costly, PRIVATE commercial databases), when it is publicly available via Form D filings that the Commission now proposes to eviscerate through abolition of the ownership-disclosure requirements (really the core of the Form) that are effectively the private-market counterpart to the beneficial ownership reporting provisions under Sections 13 and 16 of the Exchange Act covering public issuers and their significant investors?
Why should the Commission now favor a few industry insiders (and their highly-paid legal armies) who complain about ownership-disclosure requirements of Form D, despite the fact that much investor/LP information has for years resided in the public domain?
Why should the Commission now disadvantage the taxpaying public in the US and even worldwide (by DELETING the current ownership-disclosure requirements) who effectively subsidizes private-market issuers via public-sector domination of their investor rosters?
Socialization of Private Equity (and Alternatives More Broadly): Public Money Drives Private-Placement Market
As much as private-market issuers are loath to admit, we state emphatically that the private-placement market is, to a large extent, US – you, me and other members of the tax-paying citizenry in this country and around the world.
Top-tier buyout funds get upwards of two-thirds of their capital from public LPs: KKR, Lone Star, Madison Dearborn, Blackstone, Texas Pacific are but a few examples. The best venture funds get upwards of 50% or more of their capital from publics: Examples include Menlo Ventures, Warburg Pincus, and many others. Funds of funds are at least half fueled by public LPs: the largest FOF managers, HarbourVest, Grove Street, Adams Street, Hamilton Lane, ATP (100% public), Abbott, Pantheon, Parish Capital, CSFB (CFG) and Pathway in the aggregate are about half (and probably more) public money.
It is a truism that brand-name private issuers, the cream of the private-markets crop, are directly and/or indirectly (via FOF limiteds) dependent on the largesse of public LPs and, ultimately, the taxpayers subsidy.
On average, private equity funds worldwide obtain slightly over 50% of their capital from public LPs, dwarfing other types of investors such as banks, insurance companies, private pensions, individuals/families, endowments, foundations, and corporate strategics whose contributions are typically less than 10% EACH of the overall funding pie. Please note that this figure is based on a drill-down analysis of fund-of-fund managers who themselves secure half of their capital, on average, from public limited partners.
Of course, public investors have come late to hedge funds (compared to private equity and venture capital), but their presence is now being felt on the investor rosters of major absolute-return fund managers. We project that, in another decade, public-sector LPs will be the most important class of hedge-fund investor from a sources-of-capital perspective.
Private-market issuers have deliberately understated public participation in their LP rosters by misclassifying public institutions as private (for example, university endowments such as the University of California, University of Michigan, etc. are public, NOT private) and not performing drill-down analysis on their fund-of-fund LPs who get 50% of their money on average from public agencies.
This is a key reason why certain general partners are so against releasing their LP rosters, since the weakness of their position will become widely known. And they will need to bear increased public scrutiny in exchange for the PRIVILEGE of managing MOSTLY public money.
Not so surprisingly, private pension fund participation in private equity has faded over the years due to the dramatic decline in corporate defined benefit plans and the concomitant increase in corporate defined contribution plans (401k plans) which do NOT invest in private equity.
The numbers are incontrovertible. In the US, public pension plans control nearly $3 trillion in assets and globally, public pensions control about $4.5 trillion.
Another class of public, taxpayer-supported investors are the sovereign wealth funds that control about $2.6 trillion in assets.
The numbers simply dwarf the assets of other classes of institutional investors such as endowments, foundations, corporate defined-benefit pensions, etc.
These sovereign wealth funds have been much in the news lately as US Treasury Secretary Paulson has been visiting their oversight boards, urging them to become more transparent about their investment methods, holdings and activities in the US and Europe.
Since these huge sovereign wealth funds are merely pools of recycled money primarily from the developed world, US and European political leaders are urging the World Bank and IMF to develop possible codes of conduct for them as they must be held to a higher disclosure standard.
In summary, public-sector investors are funding GIANTS astride the alternative-assets market. Their heft enables them to be the CORNERSTONE investors in many alternative-asset funds and private companies. Not just well known names as CalPERS and CalSTERS in the US, but also CPP Investment Board, OMERS, OTPPB and the Caisse de Depot in Canada the Irish National Pension Reserve, French National Reserve Fund, Swedish National Pension Funds (AP), ATP Denmark in Europe KIO, ADIA and SAMA in the Middle East GIC, Temasek, Malaysia Provident Fund and Japans Government Pension Investment Fund in Asia.
Other Market Players, Including Private LPs, Dependent on Public LPs Too
Like GPs, private investors/LPs have gained enormously from this flood of public money over the years into the private equity market. The dramatic increase in secondary and tertiary buyouts (where one private equity firm sells a portfolio company to another private equity firm) is clearly a result of the vast infusion of public money into the market over the past decade or so. This secondary/tertiary buyout activity has directly benefited the investment pools of veteran private LPs who are the passive investors in portfolio companies that could not find a corporate strategic buyer or achieve an IPO exit. Private LPs (including, but not limited to HNWs) too have grown hopelessly dependent on the tremendous liquidity that public LPs have injected into the market, thereby affording their GPs a staggering choice of exit opportunities for underlying portfolio companies that ultimately inure to the benefit of their LPs.
Beyond GPs and private LPs, it goes without saying that other market participants such as consultants/advisers, placement agents, law firms, auditors and others have profited directly and indirectly from the avalanche of fees paid as a result of public agency participation in the alternative-asset market. There is no turning back the clock here, and these players just need to accept the reality that increased public disclosure of investor/LP information is the price they must all pay for the GOLDEN GRAVY TRAIN on which they are all passengers, courtesy of public LPs and the taxpayers.
Macro-Level Ownership Information of Private-Market Issuers
We are also disturbed by the Commissions proposed elimination of the geographic breakdown (state-by-state, and foreign/non-US) of the sources of capital for each private-markets issuer in the appendix to Form D.
This section of Form D provides wonderful macro-level ownership information of private-market issuers that would be invaluable to the Commission and market regulators worldwide in analyzing flow of funds and sources of capital in a decidedly opaque area.
Again, the Commissions staff has repeatedly mentioned the lack of good information on this rapidly-growing alternatives market, so macro-level sources of capital data seems to us an invaluable resource for regulators and lawmakers to make public policy.
Since flows of funds into alternatives is now truly global, we even suggest that the Commission refine the geographic breakdown to incorporate both a state-by-state (for the US) and country-by-country (for non-US) breakdown of capital sourced by each private-markets issuer.
There are actually two parts to any serious sources-of-capital analysis:
1) Sources of Capital by Geographic Location of Investor
2) Sources of Capital by Type of Investor
Hence, we also suggest that the Commission collect information from each private-market issuers on their sources of capital by type of investor.
Essentially, we are suggesting that each private-markets issuer classify their investors by type, possibly according to the categories below so that the Commission could properly track capital flows into the burgeoning alternative markets.
I) Public Sector
(a) Employee Benefit (Retirement/Health Welfare Systems)
1. National Pension Plan
2. State/Provincial/Regional Pension Plan
3. County Pension Plan
4. Municipal Pension Plan
5. Special District Pension Plan
6. Public School/University Pension Plan
(b) Non-Employee Benefit (Permanent Investment Funds)
1. Sovereign Wealth Fund
2. Public School/University Endowment Fund
II) Private Sector
(a) Employee Benefit (Retirement/Health Welfare Systems)
1. Private Pension Plan
(b) Non-Employee Benefit (Balance-Sheet Assets)
1. Commercial Bank
2. Savings/Thrift Institution
3. Investment Bank
4. Insurance Company
5. Fund-of-Fund Manager
6. Corporate Strategic Investor
7. Broker/Mutual Fund/Other Investment
(c) Individuals Families
1. Man
2. Woman
3. Joint Account
4. Family
5. Trust Estate
6. Family Office/Multi-Family Office
III) Non-Profit, Independent Sector
(a) Employee Benefit (Retirement/Health Welfare Systems)
1. Non-Profit Pension Plan
(b) Non-Employee Benefit (Permanent Investment Funds)
1. Educational Endowment
2. Healthcare Endowment
3. Museum Endowment
4. Library Endowment
5. Miscellaneous Non-Profit Endowment
6. Private Foundation
7. Operating Foundation
With this macro-level ownership information, the Commission would finally be able to answer probing questions such as:
1) What is the exact extent of public-sector LP involvement in alternative funds?
2) How influential are sovereign wealth funds in the LP rosters of alternative funds?
3) What is the exact extent of capital flowing into alternative investment funds from possible money-laundering (Columbia, Russia, Middle East, Caymans) locations?
4) Is the level of non-US LP investment into US alternative funds growing, as generally expected? By how much? And from what countries?
5) To what degree do HNW retail investors participate in the alternative-investment market as LPs?
6) To what extent do HNWs invest directly in emerging, private, venture-backed companies that serve as the growth engine of our economy?
These are just some of the many questions that could be answered if the Commission re-considers its proposal to eliminate the ownership-disclosure requirements of Form D.
Certainly, the present and future debates on the taxation of alternative investment GPs would be better informed if the Commission were to retain the Form D ownership-disclosure requirements on both the macro and micro levels.
Conclusion
In this comment letter, we have argued for the Commission to retain (and even slightly enlarge, on a macro level) the ownership-disclosure requirements of Form D.
Furthermore, we have attempted to refute the claims of certain private-market issuers that they are not required to file ownership data with other regulatory agencies worldwide,
We have shown how widely available is investor/LP ownership information in private-market issuers around the world. It is fair to say that industry insiders (such as IR staffers, competing GPs, etc.), industry regulators, and industry observers such as academics the trade press know the identities of thousands of investors worldwide and their ownership positions in thousands of private-market issuers (both pooled investment vehicles and private companies) globally.
How can a private-market issuers significant investors be a privacy concern when its contents are widely circulated and known to individuals outside the issuer via regulatory filings by GPs/LPs and commercial newsletters/directories/databases (that the industry trade group, NVCA, promotes, ironically) that are clearly in the public domain?
How can the release of investor/LP ownership information in private-market issuers cause competitive harm to issuers when this information has long been widely available to industry players (including other competing GPs), media/academic observers and even members of the general public?
Most importantly, we have also demonstrated in this comment letter that PUBLIC money drives the private equity market ( alternatives more broadly), and that the public has a right to know more about private-market issuers and their significant investors, as taxpayers are heavily subsidizing these issuers, generally speaking.
The public certainly has a right to such information, if it can be proved that vast troves of such information have already been in the public domain (from hundreds of regulators worldwide) for more than 30 years.
We daresay there is a compelling public interest for the continuation (and slight enlargement, on a macro level) of the ownership-disclosure requirements of Form D, as it will finally shine an INDEPENDENT light on the full extent of public funding of private-market issuers. As stated earlier, this is a key reason why certain private-market issuers (and their attorneys) are so against releasing anything about their investor rosters, since the weakness of their position will become known. And they will need to bear increased public scrutiny in exchange for the PRIVILEGE of managing MOSTLY public money.
Thank you for giving us the time to be heard here. In closing, we are proud to share the same objectives of other public-interest groups that promote transparency in government affairs, corporate/investor ethics responsibility, and the taxpayer right to know.
Very truly yours,
Chris Evans