«Submitted electronically to rule-comments Elizabeth M. Murphy, Secretary Securities and Exchange Commission 100 F Street NE Washington D.C. ...»
In drafting its rules, we further encourage the Commission to accept the question and answer disclosure format of the latest Small Company Offering Registration (SCOR) form, which was promulgated by NASAA in 1989 and has been updated since that time. NASAA is committed to further updating the SCOR form in cooperation with the Commission staff to ensure a mutually acceptable question and answer disclosure document that is designed for Section 3(b)(2) offerings and facilitates robust and adequate disclosures.
3. NASAA strongly urges the Commission to proscribe offerings under Section 3(b)(2) by blank check companies and SPACs.
Offerings by blank check companies and special purpose acquisition companies (SPACs)15 are generally prohibited as fraudulent offerings under state securities laws.16 NASAA members have found that “sales of blank check blind pool securities contain inadequate disclosure of facts about the issuer and the offer, tend to work a fraud upon the purchasers thereof and cannot be justified for any useful economic purpose.”17 For these reasons, we urge the Commission to proscribe these types of offerings under Section 3(b)(2), which if permitted at all, would be more appropriately conducted in an offering subject to federal registration.
4. NASAA strongly urges the Commission to proscribe the use of financial projections in Section 3(b)(2) offerings in the absence of their review and expression of an unqualified opinion thereon by a licensed certified public accountant.
State law may not permit the use of financial projections in registered offerings due to the inherent potential for fraud and abuse and the possible lack of any reasonable bases for the projections. The higher offering amount permitted under Section 3(b)(2) as compared to Regulation A elevates these concerns, and the freely tradable nature of the securities contributes to the need for such a prohibition in the interest of investor protection. Thus, NASAA strongly urges the commission to proscribe the use of financial projections in Section 3(b)(2) offerings.
As an alternative, NASAA urges the Commission to allow the use of financial projections only if See Blank Check Company, SEC, at http://www.sec.gov/answers/blankcheck.htm.
Resolution of the North American Securities Administrators Association, Inc., Declaring Blank Check Blind Pool Offerings to be Fraudulent Practices (Apr. 29, 1989), available at http://www.nasaa.org/wpcontent/uploads/2011/07/NASAA-Resolution-Regarding-Blank-Check-and-Blind-Pool-Offerings.pdf.
they are reviewed or compiled and contain the the expression of an unqualified opinion thereon by a licensed certified public accountant.
5. NASAA strongly urges the Commission to appropriately condition the ability of issuers to solicit indications of interest prior to the filing of an offering statement.
Section 401 of the JOBS Act will allow issuers to solicit indications of interest in an offering prior to the filing of any offering statement with the Commission. This raises concerns that issuers may pre-condition the market with potentially false or misleading statements, effectively negating the likelihood of investors reviewing final offering materials that may contain substantially different terms or revised disclosures. For this reason, we urge the Commission to place appropriate conditions on the ability to solicit indications of interest prior to the filing of an offering statement in Section 3(b)(2) offerings. In this regard, we believe it is appropriate to restrict the ability to solicit indications of interest prior to the filing of an offering statement to those solicitations conducted by registered broker-dealers or to solicitations in firmly underwritten offerings. The involvement of a registered broker-dealer or an underwriter will provide a minimal degree of assurance that the risk of pre-conditioning the market with potentially false or misleading statements is mitigated.
We further recommend that the Commission adopt specific disclosure requirements in any solicitations of interest to ensure that prospective investors are appropriately advised of the tentative nature of the offering and are urged to read the final offering statement. At a minimum, these advisements should include those prescribed by Rule 254(b)(2).18
6. NASAA urges the adoption of a uniform disqualification provision for offerings under Regulation D, Section 4(a)(5), Regulation A, and Section 3(b)(2).
As urged by NASAA in the past, we continue to advocate for the adoption of a uniform disqualification provision for “bad actors” that would apply to all offerings under Regulation D, Section 4(a)(5), Regulation A, and the new exemption under Section 3(b)(2).19 The creation of a different disqualification provision for Section 3(b)(2) offerings, in addition to those that already exist, would only serve to create confusion and increase compliance costs.
7. Should the Commission permit the use of Section 3(b)(2) by Real Estate Investment Trusts (REITs) and Business Development Companies (BDCs), NASAA urges the Commission to consider tailored disclosure requirements.
Real Estate Investment Trusts (REITs) and Business Development Companies (BDCs) currently register their securities using Form S-11 and Form N-2, respectively. The unique nature of REITs and BDCs with respect to, among other things, the nature and timing of their capital formation and investment strategies, fee structures, and liquidity, necessitate disclosure fitting for 17 CFR § 230.254(b)(2).
Letter from David S. Massey, NASAA President and Deputy Securities Commissioner, North Carolina Department of the Secretary of State, to Elizabeth M. Murphy, Secretary, SEC (July 25, 2011), at http://www.sec.gov/comments/s7-21-11/s72111-35.pdf.
these specific entities. Should the Commission permit the use of Section 3(b)(2) by Real Estate Investment Trusts (REITs) and Business Development Companies (BDCs), NASAA would appreciate the opportunity to work with the Commission to develop appropriate disclosure requirements for REITs and BDCs.
8. NASAA urges the Commission to restrict the ability of selling security holders to rely on Section 3(b)(2) in the absence of the approval of the offering by a majority of an issuer’s independent directors upon a finding that the offering is in the best interests of both the selling security holders and the issuer.
In its present form, Regulation A limits the amount of securities that may be offered by selling security holders and prohibits resales by affiliates “if the issuer has not had net income from continuing operations in at least one of its last two fiscal years.”20 This limitation protects the investing public from selling security holders who may have superior information about the issuer from dumping their investments in the public markets.
NASAA members are disturbed by recent offerings whose sole purpose is to provide liquidity to venture capital and private equity investment firms, which have better negotiating power and access to information than the average investor in a public offering. We are concerned these offerings may be abusive of not only investors that purchase securities in the resale, but also of the issuers themselves. For example, in a recent application by Applied Medical Corporation, the company is seeking registration of outstanding securities held by a venture capital firm pursuant to demand registration rights. The prospectus discloses in no uncertain terms that the issuer’s board of directors and executive officers believe the offering, which will not provide any proceeds to the issuer, is not in the best interests of the company.21 We do not believe these offerings are what Congress contemplated when passing the JOBS Act because these offerings do not provide capital to the issuers or otherwise contribute to job creation. Accordingly, the Commission should not allow the market for Section 3(b)(2) offerings to be muddied with offerings by selling security holders such as venture capital and private equity firms who had superior negotiating power at the time of their investment, have greater access to information, and seek to offload their investments on public investors. For these reasons, we urge the Commission to restrict the ability of selling security holders to use the exemption.
In the alternative, we urge the Commission to require the approval of a majority of an issuer’s independent directors as a condition of Section 3(b)(2) for offerings involving selling security holders. While such a provision would not protect public investors from venture capital and private equity firms with superior negotiating positions and access to information, it would at least serve to mitigate the risk of offerings that are not in an issuer’s best interests and do nothing to increase an issuer’s access to capital or facilitate job creation. These offerings would instead 17 CFR § 230.251(b).
The prospectus further discloses that the underwriter selected by the venture capital firm may not be acting in the best interests of the company, its existing stockholders, or its potential investors. Shockingly, the prospectus goes on to suggest that information posted on the underwriter’s website may contradict the disclosure set forth in the prospectus, which we understand may mean that misleading statements and omissions are being made in connection with this offering.
be subject to SEC registration and would therefore be more likely to be listed on an exchange, providing greater protection to public investors than that provided in an offering exempt from federal registration. We note that such a provision would need to provide that demand registration rights cannot form the basis for the approval of the offering by independent directors.
9. NASAA urges the Commission to adopt meaningful reporting requirements for Section 3(b)(2) issuers to protect the investing public and facilitate secondary trading.
As we have suggested previously,22 we continue to urge the Commission to adopt meaningful reporting requirements for offerings conducted under Section 3(b)(2) offerings to facilitate secondary trading. In this age of internet communications, social media, and online trading, meaningful reporting requirements are essential to provide a level of investor protection for securities that are not federally registered.23 The reporting requirements ultimately adopted must be fulsome enough to mitigate potential fraud in this area in light of the fact that the securities offered under Section 3(b)(2) are not subject to federal registration and will not necessarily be subject to exchange listing requirements, but will be freely tradable nonetheless.
NASAA appreciates the opportunity to provide these comments to the Commission. We look forward to working with the Commission staff to ensure maximum coordination of a the exemption under Section 3(b)(2) with state law requirements and to facilitate a “one-stop” filing system. Should you have any questions regarding the comments in this letter, please contact the undersigned; Rick Fleming, Deputy General Counsel for NASAA, at firstname.lastname@example.org or (202) 737or Bill Beatty, Securities Administrator for the State of Washington and Chair of NASAA’s Corporation Finance Section at email@example.com or (360) 902-8760.
Letter from Jack Herstein, NASAA President and Assistant Director, Nebraska Department of Banking & Finance, to Elizabeth M. Murphy, Secretary, SEC (July 3, 2012), at http://www.sec.gov/comments/jobs-titleii/jobstitleii-40.pdf.
See, e.g., Eleazar David Melendez, Twitter Stock Market Hoax Draws Attention of Regulators, TheHuffingtonPost.com, Inc., Feb. 1, 2013, at http://www.huffingtonpost.com/2013/02/01/twitter-stock-market- hoax_n_2601753.html.