Proposal to Define Qualified Purchaser by osp18113

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									             AMERICAN BAR ASSOCIATION - SECTION OF BUSINESS LAW
April 30, 2002
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Attention: Mr. Jonathan G. Katz, Secretary
Re: Proposal to Define "Qualified Purchaser" - File No. S7-23-01
Ladies and Gentlemen:
This letter responds to the request of the Securities and Exchange Commission in Release No.
33-8041 (2001) (the "Release") for comments on a proposal to define "qualified purchaser"
under the Securities Act of 1933 to implement a provision of the National Securities Markets
Improvement Act of 1996.
The comments have been prepared by members of the Subcommittee on Small Business Issuers
(the "Subcommittee") of the Committee on Federal Regulation of Securities and members of the
Small Business Committee (together, the "Committees") of the Section of Business Law of the
American Bar Association. A draft of this letter was circulated for comment among members of
the Subcommittee, the chairs and vice-chairs of the subcommittees and task forces of the
Committees, the officers of the Committees, the members of the Advisory Committee of the
Committee on Federal Regulation of Securities and the officers of the Section. A substantial
majority of those who have reviewed the letter in draft form have indicated their general
agreement with the views expressed. However, this letter does not represent the official position
of the ABA, the Section or the Committees, nor does it necessarily reflect the views of all of the
individuals who reviewed it.
I. The National Securities Markets Improvement Act of 1996 ("NSMIA") established categories
of covered securities that provide for preemption of state registration and review. These
categories include "any security offered or sold to a qualified purchaser" as defined by the
Commission. We agree there should be a class of investors that federal policy determines do not
need state registration or qualification. A federal definition is appropriate to avoid multiple and
conflicting definitions of such a class of investors.
II. We agree with the approach proposed by the Commission to define qualified purchaser in the
same manner as "accredited investor" under Regulation 501(a) of Regulation D. We believe that
the concept of a sophisticated investor as envisioned by Congress in authorizing the Commission
to define qualified purchaser is the same as "accredited investor." We also agree, however, that it
may be appropriate to revisit the definition of accredited investor to determine if the objective
financial tests are the correct tests and are at the appropriate level. We believe, though, that this
issue should be addressed in conjunction with a more comprehensive review of the exemptive
process. Depending on that definition, it may be appropriate to revisit the definition of "qualified
purchaser" to determine whether that definition of sophisticated purchaser for purposes of
preemption from state securities laws, particularly if the states are being preempted when the
offering is public, should continue to be the same as the definition used for purposes of the
federal private and limited offering exemptions to determine what disclosure is required or the
number of permitted purchasers.
III. The Release asks if accredited investors in a public 504 offering should be excluded from the
qualified purchaser definition so as to preserve the ability for offerings to be made under state
accredited investor exemptions. The alternative proposed is a uniform federal exemption that
replicates current state exemptions for public offerings to accredited investors. We believe that a
uniform federal exemption for a public offering solely to qualified purchasers in lieu of
504(b)(1)(iii) is the appropriate approach and that such exemption should not be predicated on
compliance with individual state exemptions. To achieve the uniformity contemplated by
Congress, the federal exemption for offerings solely to qualified purchasers should be self-
executing. The appropriate regulatory role for the states is retained under NSMIA through the
states' anti-fraud authority and broker-dealer and agent registration requirements, which would
be unaffected.
As a Section 3(b) exemption, the Commission would not have to limit the exemption to the
current one million dollar limit of Rule 504, but could consider increasing the permitted size of
the offering. Indeed, under Section 28, the Commission could adopt the exemption without a size
limit. The Committee on Federal Regulation of Securities has previously recommended that, as
part of a broader review of the securities offering process, the Commission exempt offerings to
qualified purchasers without any dollar limit.
A federal exemption for a public offering solely to qualified purchasers would have to address
permissible communications. We note that the Committee on Federal Regulation of Securities
has called for a review of the prohibition on general solicitation in the context of an overall
review of the securities offering process. Accordingly, we believe that, in general, there should
be few limitations on permissible communications to qualified purchasers. However, recognizing
the interests of the states in these offerings, we would not object to certain requirements for
advertising in connection with these offerings. The parameters for tombstone ads under Rule 134
and for testing-the-waters under Regulation A should provide the framework for establishing
requirements for permissible advertising. We would not, however, go as far as the state Model
Accredited Investor Exemption ("MAIE"). For example, the MAIE requirement to describe the
business in 25 words or less is both too prescriptive and too restrictive. On the other hand, we
agree that it is appropriate for an advertisement to indicate that the offering is being made solely
to qualified purchasers (i.e., accredited investors).
In view of the nature of the permitted investors, the current feature of Rule 504 that does not
mandate any particular format or content for disclosure should be retained as a feature of a new
federal exemption.
We support limitations permitting resales only to other qualified purchasers for a one year period
under the new proposed exemption to address concerns that qualified purchasers could be used
as a conduit for an unregistered public offering.
Since there would be no review of offering documents by the Commission, we believe requiring
notice in the form determined by the Commission to the states of the existence of the offering is
appropriate. The NSMIA provision for the filing of Form D with the states has proven to be an
efficient means to give the states notice of an offering. The notice specified under the MAIE is
an acceptable form of notice. We note that the imposition of separate state fees can be especially
burdensome, particularly for small offerings, when several states are involved.
We do not object to the imposition of the current "bad boy" provisions as contained in the MAIE.
We note, however, that bad boy provisions are generally imposed currently under federal law
when there is no requirement that investors be sophisticated and that these provisions may not be
necessary when only qualified purchasers, who do not need the same level of protection, are
permitted to participate in the offering. In the event "bad boy" provisions are not imposed when
dealing solely with qualified purchasers, we believe disclosure should be required of any such
"bad boy" information.
IV. Registered offerings in the states under Rule 504 should continue to be available to issuers
that are attempting to offer to both nonaccredited and accredited investors. Accredited investors
should not be prevented from investing solely because the issuer is subject to state review as a
result of including nonaccredited investors. Since both an offering that is registered in a state and
an offering to qualified purchasers under the proposed new federal exemption are permitted to be
public without the limitations designed to ensure a private offering, there is no reason the two
should not be able to proceed simultaneously.
V. We do not believe that the qualified purchaser definition should differ for different types of
securities, for example, by limiting the exemption to "fundamentally national" securities. The
ability of small issuers to obtain access to capital, as envisioned by Congress, would be restricted
under such a limitation.
VI. With respect to public offerings under Section 3(a)(11) that are reserved to the states as
provided in Section 18(b)(4)(C), we believe the states have a legitimate claim to regulate these
offerings and therefore agree that the definition of qualified purchaser should not extend to
purchasers in offerings relying on the federal intrastate exemption. On the other hand, although
the states have retained the right to review Regulation A offerings, we do not believe the
definition of qualified purchaser should exclude purchasers in a Regulation A offering because,
unlike the intrastate exemption, offerings under that exemption are subject to filing and review at
the federal level.
We hope that the Commission will find these comments helpful. Members of the Subcommittee
on Small Business Issuers and the Small Business Committee who were involved in the drafting
of this letter are available at the Commission's convenience to discuss these comments.
Respectfully submitted,
_________________________________
Stanley Keller
Chair, Committee on Federal
Regulation of Securities
___________________________________
Jean E. Harris
Co-Chair, Subcommittee on Small Business
Issuers
Gregory C. Yadley
Co-Chair, Subcommittee on Small Business
Issuers
___________________________________
Jean L. Batman
Chair, Small Business Committee
Drafting Committee:
Jean E. Harris, Chair
Gregory C. Yadley
Stanley Keller
Hugh H. Makens
cc: Hon. Harvey L. Pitt
Chairman of the Securities and
Exchange Commission
Hon. Isaac C. Hunt, Jr.
Commissioner

Hon. Cynthia A. Glassman
Allen Beller, Esq.
Director of Division of Corporation Finance
Richard K. Wulff
Office of Small Business
Division of Corporation Finance

								
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