The Federal and State Securities Subcommittees of the American Bar Association (ABA) submitted comments to the SEC on October 12, 2007 regarding the SEC’s proposal to amend its private offering rules, including Regulation D and Rule 144A. The significant comments included the following:
1. That the prohibition on advertising and general solicitation be eliminated for the Regulation D, Rule 506 exemption or in the alternative that the prohibition be removed for Rule 506 offerings made to accredited investors.
2. That the “bad boy” disqualification provisions currently a part of the Regulation D, Rule 505 exemption not be expanded to apply to Rule 506. The ABA contended that attaching the Rule 505 disqualification provisions to Rules 504, 506 and 507 would overburden legitimate issuers’ capital raising efforts and have the effect of steering them away from using any of Regulation D exemptions, forcing them instead to claim the safe harbor of Section 4(2) of the Securities Act of 1933. By having to rely on Section 4(2), the exemption for “transactions not involving a public offering,” issuers subject themselves to the non-uniformity of each state’s private placement exemptions.
3. That in the proposed new Rule 507 exemption, radio and television broadcasts be allowed to advertise the offering, with the antifraud power used to combat abusers on a case-by-case basis. The proposal would only allow print communication to advertise the offering.
4. That Rule 507 fall under the safe harbor of Section 4(2) of the Securities Act of 1933 rather than under the general exemptive authority of Section 28 as proposed. The ABA stated that authorizing Rule 507 under Section 28 would require the large accredited investors of Rule 507 to be defined as “qualified purchasers” for the offered securities to be “federal covered securities,” thereby making safe harbor rules 152 and 155 unavailable unless they are amended, and excluding pooled investment funds from being used in connection with Rule 507.
5. That the federal across-the-board restrictions on resales in Rule 504 offerings not be adopted. The ABA declared that the $1 million offering amount in Rule 504 is small enough not to warrant federal concern, and that the regulation of this exemption should be left exclusively to the states. The proposed amendment to Rule 504 would make securities issued under subsection (b)(1)(iii) subject to resale restrictions [(b)(1)(iii) is the solely accredited investor prong of the Rule 504 that permits general solicitation].
6. The ABA supports the proposed reduction of the Regulation D integration period from six months to 90 days. The ABA, however, does not want a subsequent public offering to be integrated with the initial private offering.
7. That the prohibition against general solicitation be eliminated from private investment vehicles because these offering are made only to qualified purchasers who are sophisticated enough to know if the investment is appropriate for them.
8. The ABA supports the proposal to exclude advertising under Rule 507 from being an improper activity under Rule 144A. However, the ABA believes the better approach would be to eliminate the restriction on offers to persons who are not qualified institutional buyers since Rule 144A is premised on sales solely to QIBs. Furthermore, the ABA recommends revising the QIB definition and expanding the class of investors entitled to purchase under Rule 144A.
The ABA sees the SEC private offering proposals as but a first step toward reform that will require ongoing evaluation and refinement in light of changing technology and globalization.