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«Submitted electronically to rule-comments Elizabeth M. Murphy, Secretary Securities and Exchange Commission 100 F Street NE Washington D.C. ...»

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750 First Street N.E., Suite 1140

Washington, D.C. 20002


Fax: 202/783-3571



April 10, 2013

Submitted electronically to rule-comments@sec.gov

Elizabeth M. Murphy, Secretary

Securities and Exchange Commission

100 F Street NE

Washington D.C. 20549-1090

Subject: Comments on SEC Regulatory Initiatives under the Jumpstart Our Business Startups Act: Title IV – Small Company Capital Formation

Dear Ms. Murphy:

The North American Securities Administrators Association, Inc. (“NASAA”)1 submits the following advance comments concerning the adoption of an exemption under Section 3(b)(2) of the Securities Act of 1933 (“Act”), as authorized by Title IV of the Jumpstart Our Business Startups Act (“JOBS Act”).2 NASAA members have a strong interest in facilitating capital formation in Section 3(b)(2) offerings. Moreover, because these are public offerings that will not be subject to federal registration, the role of NASAA member jurisdictions in the regulation of these offerings is essential to investor protection. Ultimately, oversight by state regulators will contribute to the success of a public marketplace for these offerings. Therefore, in adopting rules applicable to Section 3(b)(2) offerings, we urge the Commission to be mindful of the important role of the states in regulating this new market.

The members of NASAA’s Small Business/Limited Offerings Project Group met in January to design a protocol for the coordinated multi-state review of Section 3(b)(2) offerings. The project group also met with members of the ABA Business Law Section’s working group on Section 3(b)(2) offerings to discuss the need for a coordinated review program and the guidelines that would be appropriate for 3(b)(2) offerings. NASAA members are committed to designing and implementing an efficient review program that facilitates capital formation in these offerings while providing an appropriate level of investor protection.

1 The oldest international organization devoted to investor protection, the North American Securities Administrators, Inc. was organized in 1919. Its membership consists of the securities administrators in the 50 states, the District of Columbia, Canada, Mexico, Puerto Rico and the U.S. Virgin Islands. NASAA is the voice of securities agencies responsible for grass-roots investor protection and efficient capital formation.

Pub. L. No. 112-106, 126 Stat. 306 (2012), available at http://www.gpo.gov/fdsys/pkg/PLAWpubl106/pdf/PLAW-112publ106.pdf.

President: A. Heath Abshure (Arkansas) Secretary: Chris Naylor (Indiana) Directors: Douglas R. Brown (Manitoba) President-Elect: Steven D. Irwin (Pennsylvania) Treasurer: Fred Joseph (Colorado) Melanie Senter Lubin (Maryland) Past-President: Jack E. Herstein (Nebraska) Ombudsman: Matthew Neubert (Arizona) John Morgan (Texas) Executive Director: Russel Iuculano Patricia D. Struck (Wisconsin) We suggest that the federal and state requirements for these offerings should be harmonized to the fullest possible extent. Toward that end, the comments set forth below are intended to assist the Commission in designing and implementing a Section 3(b)(2) exemption that is compatible with the state review program. We also request the cooperation of the Commission staff to work with NASAA to implement a “one-stop” electronic filing system for state review of Section (3)(b)(2) offerings.

1. NASAA strenuously objects to suggestions to define “qualified purchaser” in Section 3(b)(2) or any other offerings based on whether or not the sale was effected through a registered broker-dealer or based on investor qualifications that are commensurate or inferior to current “accredited investor” thresholds.

Section 401 of the JOBS Act provides that a security sold to a “qualified purchaser” in a 3(b)(2) offering will be treated as a covered security under Section 18 of the Securities Act of 1933.

Because states are preempted from requiring registration of covered securities, the definition of a qualified purchaser is a matter of great importance to state regulators and the investors we strive to protect.

NASAA is deeply disturbed by the advance comments of the ABA Federal Regulation of Securities Committee3 and others4 suggesting that the Commission define “qualified purchaser” in a manner that is commensurate with or even less stringent than5 the criteria for an “accredited investor,” or to define it in such a manner that would render any sale of securities through a registered broker-dealer a covered security. In the debate and eventual passage of the JOBS Act, calls to broadly preempt state securities registration requirements with respect to securities offered under Section 3(b)(2) were rejected. Instead, recognizing the important role of states in the regulation of these offerings, Congress limited the preemption to two narrowly-tailored conditions.

In addition, the suggestions of the ABA and others would make it easier for fraudsters to utilize this exemption due to the lack of rigorous federal or state review. The fraud that would result would undermine the market for these types of offerings and hamper the ability of legitimate issuers to raise capital under the exemption. The fact that the securities will be freely tradable, unlike those issued in Rule 506 and other exempt offerings, exacerbates the potential for fraud and abuse and increases the importance of state regulation.

Letter from Catherine T. Dixon, Chair, Federal Regulation of Securities Committee, Business Law Section, American Bar Association, to SEC (Sept. 7, 2012), at http://www.sec.gov/comments/jobs-title-iv/jobstitleiv-13.pdf (hereinafter ABA Comment Letter).

See, e.g., Letter from William R. Hambrecht, Chairman and CEO, WR Hambrecht+Co., to SEC (Jan. 4, 2013), at http://www.sec.gov/comments/jobs-title-iv/jobstitleiv-21.pdf.

Letter from Rutheford B. Campbell, Jr., William L. Matthews Professor of Law, University of Kentucky, to Elizabeth M. Murphy, Secretary, SEC (Nov. 13, 2012), at http://www.sec.gov/comments/jobs-title-iv/jobstitleivpdf (suggesting that the Commission define “qualified purchaser” as any investor who purchases securities in a Section 3(b)(2) offering).

As pointed out by NASAA in the past,6 when Congress enacted the National Securities Markets Improvement Act of 1996 (“NSMIA”) and defined “covered security” to include sales to “qualified purchasers,” it clearly intended for the definition of qualified purchaser to require greater investor qualifications than those of “accredited investors.” The legislative history indicates that qualified purchaser was to be defined to include “sophisticated investors, capable of protecting themselves in a manner that renders regulation by State authorities unnecessary.”7 In both legislation and Commission rule-making, it has been recognized that while accredited investors may not need all the protections afforded by the registration process, offerings to those types of investors remain subject to specific limitations designed to provide some minimal level of investor protection. For example, notice filings containing specified information about the offering are required to be filed with the Commission in sales to accredited investors under Rule

506. In addition, Congress mandated the adoption of disqualification provisions under Rule 506 to protect accredited investors from offerings by “bad actors” in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

The suggestion that investors who purchase securities through registered broker-dealers should not be afforded the protections of either federal or state registration defies registration requirements under the Securities Act of 1933, the Investment Company Act of 1940, and all state securities laws. One need only look as far as the enforcement orders of the Commission, FINRA, and the states to discover the unfortunate reality that registration as a broker-dealer fails to provide the same investor protection that is provided by the securities registration process.

Never has the registration of a broker-dealer alone been recognized as an adequate substitute for the investor protections provided by the registration process, and recent history affirms the fallacy of such recognition.8 While NASAA does not object to the adoption of rules to define a qualified purchaser, the definition must be based on qualifications that are sufficiently greater than the definition of an accredited investor whereby the benefits of further limitation on sales to these types of investors are far outweighed by the associated burdens. In this regard, if the Commission pursues defining qualified purchaser under the Securities Act of 1933, NASAA again suggests the adoption of the same thresholds as those contained in the definition of “qualified purchaser” under the Investment Company Act of 1940 (’40 Act).9 To be deemed a qualified purchaser under the ’40 Letter from Patricia D. Struck, NASAA President and Wisconsin Securities Administrator, to Nancy M. Morris, Federal Advisory Committee Management Officer, SEC (Mar. 28, 2006), at http://www.sec.gov/rules/other/265rastaples1692.pdf. See also, Letter from Joseph P. Borg, NASAA President and Director of the Alabama Securities Commission, to Jonathan G. Katz, Secretary, SEC (Mar. 4, 2002), at http://www.sec.gov/ rules/proposed/s72301/borg1.htm (hereinafter NASAA Qualified Purchaser Letter).

H.R. Rep. No. 622, 104th Cong. 2d Sess. at 31 (1996).

See, e.g., Press Release, SEC, SEC Charges J.P. Morgan and Credit Suisse With Misleading Investors in RMBS Offerings (Nov. 16, 2012), at http://www.sec.gov/news/press/2012/2012-233.htm; Press Release, FINRA, FINRA Sanctions Eight Firms and 10 Individuals for Selling Interests in Troubled Private Placements, Including Medical Capital, Provident Royalties and DBSI, Without Conducting a Reasonable Investigation (Nov. 29, 2011), at http://www.finra.org/newsroom/newsreleases/2011/p125193; Press Release, NASAA, State Securities Regulators Announce $1.3 Billion Settlement with Wells Fargo Investors in Auction Rate Securities Investigations (Nov. 18, 2009), at http://www.nasaa.org/2171/state-securities-regulators-announce-1-3-billion-settlement-with-wells-fargoinvestors-in-auction-rate-securities-investigations/.

See NASAA Qualified Purchaser Letter, supra note 6.

Act, a natural person must generally own not less than $5,000,000 in investments and an entity must generally own and invest on a discretionary basis not less than $25,000,000 in investments.10 Investors who meet these thresholds have been recognized by Congress as not generally needing the protections afforded by registration of investment companies under the ’40 Act. These established thresholds are sufficiently high that “there is a reasonable probability that the investors included in the definition would be financially sophisticated and capable of assuming risk” as contemplated by Congress in enacting NSMIA.11 In the alternative, we would again propose that the term be defined consistent with the thresholds established in the Investment Advisers Act of 1940 for “qualified clients.” While inferior to the qualified purchaser standard under the ’40 Act, the qualified client definition attempts to define those clients of an investment adviser more likely to be financially sophisticated and capable of evaluating and assuming the risks of performance based fee arrangements. The qualified client definition is subject to adjustments for inflation and generally requires that a natural person have either (i) $1,000,000 under the management of the investment adviser, or (ii) net worth of more than $2,000,000 exclusive of the investor’s primary residence.12 As we suggested in our 2002 comment letter on the definition of qualified purchaser, we urge that both of these thresholds be satisfied for qualified purchasers. While either of these thresholds may be sufficient to allow clients to enter into performance based fee arrangement with investment advisers, they are not as effective in the case of the definition of qualified purchaser in light of the absence of the fiduciary relationship that exists between an investment adviser and its clients.13

2. An exemption adopted under Section 3(b)(2) must require fulsome disclosure and the format for disclosure should follow the format of the Form 1-A.

In adopting an exemption under Section 3(b)(2), it is imperative that the Commission mandate the use of an offering statement and its contents to provide fulsome disclosure to prospective

investors. Congress clearly intended such a mandate when it required 3(b)(2) issuers to:

prepare and electronically file with the Commission and distribute to prospective investors an offering statement, and any related documents, in such form and with such content as prescribed by the Commission, including audited financial statements, a description of the issuer’s business operations, its financial condition, its corporate governance principles, its use of investor funds, and other appropriate matters.14 Not only did Congress express its intent for the Commission to mandate specific disclosure requirements, but the need for mandated disclosure to protect investors is magnified by several factors, including: (1) the fact that issuers will be able to sell to investors regardless of their qualifications; (2) the ability to engage in general solicitation; (3) the higher permitted offering 15 USC 80a-2(a)(51).


17 CFR § 275.205-3.

NASAA Qualified Purchaser Letter, supra note 6.

Section 401 of the JOBS Act.

amount as compared to Reg. A offerings; and (4) the ability to solicit indications of interest prior to ever filing the offering statement with the Commission. For these reasons, we urge the Commission to mandate the use and filing of a fulsome disclosure document.

NASAA members have long accepted the disclosure mandated in Form 1-A for Regulation A offerings, and we believe Form 1-A provides an appropriate level of disclosure for offerings exempt under Section 3(b)(2). NASAA was also responsible for the drafting of the question and answer style disclosure format of Model B of Form 1-A, and we believe the Model B disclosure format facilitates capital formation by small business issuers whose officers and directors may be the primary drafters of the disclosure document.

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