118 CFA Institute Letter; MCS Letter; WDFI Letter.
119 Letter from Barbara Roper, Director of Investor Protection, Consumer Federation of America, March 24, 2014 (“CFA Letter”).
120 CFA Letter (not recommending this specifically, but noting this as one reason why the investment limit was not an adequate substitute for state review of Tier 2 offerings); William A. Jacobson, Clinical Professor of Law, Cornell Law School, and Director, Cornell Securities Law Clinic, March 24, 2014 (“Cornell Clinic Letter”).
121 KVCF Letter.
122 ABA BLS Letter; Andreessen/Cowen Letter; B. Riley Letter; CFIRA Letter 1; CFIRA Letter 2; Fallbrook Technologies Letter; Letter from Groundfloor Finance, Inc., Nov. 18, 2014 (“Groundfloor Letter”); Heritage Letter; ICBA Letter; IPA Letter; Letter from Ford C. Ladd, Esq., May 19, 2014 (“Ladd Letter 2”); Letter from John Rodenrys, Executive Director R&D, Leading Biosciences, Inc., March 24, 2014 (“Leading Biosciences Letter”); Milken Institute Letter; MoFo Letter; NASAA Letter 2; Letter from Michael L. Zuppone, Paul Hastings LLP, March 24, 2014 (“Paul Hastings Letter”); Letter from Jason Coombs, Co-Founder and CEO, Public Startup Company, Inc., April 2, 2014 (“Public Startup Co. Letter 7”); SVB Financial Letter.
123 Fallbrook Technologies Letter; Leading Biosciences Letter; ICBA Letter.
124 ABA BLS Letter; Andreessen/Cowen Letter; B. Riley Letter; MoFo Letter; Paul Hastings Letter; SVB Financial Letter.
commenters noted that the limit does not have a statutory basis and suggested that it may be contrary to Congressional intent,125 or contrary to the principles underlying federal securities law, which focus on fraud prevention and full disclosure.126 One commenter recommended eliminating the investment limitations only if the final rules do not
preempt state law registration requirements for Tier 2 offerings, arguing that the limitations may conflict with state investor suitability standards,127 while another commenter indicated that investment limitations would be unnecessary with appropriate state oversight, but supported limits for retail investors in startup companies and high-risk offerings.128 Another commenter recommended creating various categories of investor
sophistication with corresponding requirements and limitations for each.129
Many commenters, including those both for and against the investment limit, recommended providing exceptions to the limit for certain types of investors, such as accredited investors, or altering the application of the limit to such types of investors.130 These commenters believed that the investor protections afforded by the investment limit would not be necessary for all types of investors or in all types of Regulation A offerings. Some commenters recommended eliminating the investment limit for accredited
125 ABA BLS Letter; Andreessen/Cowen Letter; CFIRA Letter 1; Heritage Letter; MoFo Letter; WR Hambrecht + Co Letter.
126 ABA BLS Letter; B. Riley Letter; Heritage Letter; Milken Institute Letter.
127 Groundfloor Letter.
128 NASAA Letter 2.
129 Cornell Clinic Letter (recommending the tiered investment limits in our proposed rules for securities-based crowdfunding as an example).
130 ABA BLS Letter; Andreessen/Cowen Letter; Canaccord Letter; Cornell Clinic Letter; Fallbrook Technologies Letter; Heritage Letter; Ladd Letter 2; Leading Biosciences Letter; McCarter & English Letter; MCS Letter; Milken Institute Letter; MoFo Letter; Paul Hastings Letter; Richardson Patel Letter; SVB Financial Letter; WR Hambrecht + Co Letter.
investors.131 One such commenter recommended eliminating the investment limit generally and, if not, at least for institutional investors and offerings of securities listed on securities exchanges.132 Several commenters recommended eliminating the investment limit for non-natural persons or institutional investors.133 Other commenters recommended eliminating the investment limits for other types of investors or offerings.134 Two commenters noted that it would be difficult to apply the investment limits to non-natural persons (such as small businesses and IRAs) if the rules use an income or net worth test.135 One of these commenters recommended that, if the test applies to such investors, it should be based on assets or revenue.136
Many commenters explicitly supported allowing issuers to rely on an investor’s representation of compliance with the 10% investment limit.137 Most of these
131 ABA BLS Letter; Andreessen/Cowen Letter; Canaccord Letter; Fallbrook Technologies Letter;; Heritage Letter; Ladd Letter 2; Leading Biosciences Letter; McCarter & English Letter; MCS Letter; MoFo Letter; Paul Hastings Letter; Richardson Patel Letter; SVB Financial Letter; cf. Cornell Clinic Letter (recommending an unspecified higher limit for accredited investors); Milken Institute Letter; WR Hambrecht + Co Letter (supporting eliminating the investment limit generally).
132 Milken Institute Letter.
133 ABA BLS Letter; Canaccord Letter; Milken Institute Letter; MoFo Letter; WR Hambrecht + Co Letter. Several of these commenters believed that, as proposed, the investment limitations would not apply to non-natural persons and asked the Commission to confirm or clarify this point.
134 Cornell Clinic Letter (creating a separate, higher limit for institutional investors and other types of non-retail investors included in the “accredited investor” definition); Heritage Letter (eliminating the investment limit for “any current or former investor, employee or officer of the issuer”); Ladd Letter 2 (eliminating the investment limit for any non-accredited affiliates, founders, employees, agents, independent contractors and owners); Milken Institute Letter (eliminating the investment limit for investors that purchase Tier 2 securities on an exchange); Paul Hastings Letter (eliminating the investment limit for offerings conducted by registered broker-dealers); Richardson Patel Letter (eliminating the investment limit for any non-individual investor with at least $100,000 in assets or $100,000 in revenue in the previous fiscal year).
135 McCarter & English Letter; Richardson Patel Letter.
136 Richardson Patel Letter.
137 Fallbrook Technologies Letter; Heritage Letter; IPA Letter; KVCF Letter; Leading Biosciences Letter; REISA Letter.
commenters stated that any more rigorous verification process would cause the compliance costs to be too high. One commenter recommended eliminating any obligation for the issuer to monitor the 10% investment limit and allowing the issuer to rely on a representation by the investor that he or she will notify the issuer upon exceeding the 10% limit.138 Another commenter recommended permitting an issuer to rely on representations from its underwriters or broker-dealers as to the 10% investment limit, rather than having to seek this directly from investors.139 This commenter believed that the issuers in most Tier 2 offerings would have little direct contact with the investors and that the intermediaries would be better positioned to assess compliance (possibly already having information about the investor’s finances).
Several commenters disagreed with allowing investors to represent compliance with the investment limitation and recommended a standard that would require an issuer to do more to ensure compliance.140 Two commenters recommended adopting a standard requiring issuers to take reasonable steps to verify that the purchasers are in compliance with the 10% investment limit.141 Two commenters recommended requiring an issuer to have a “reasonable belief” or “reasonable basis” that it can rely on an investor’s
representation of compliance with the 10% investment limit.142 One such commenter also suggested allowing accredited investors to exceed the 10% investment limit, but
138 REISA Letter.
139 KVCF Letter.
140 Letter from Paul Sigelman, President & CEO, Accredited Assurance, March 24, 2014 (“Accredited Assurance Letter”); CFA Letter; CFA Institute Letter; Cornell Clinic Letter; MCS Letter; WDFI Letter.
141 Accredited Assurance Letter; WDFI Letter.
142 CFA Institute Letter; MCS Letter.
requiring that the issuer take reasonable steps to verify accredited investor status.143 One commenter recommended requiring a “duty of inquiry” so that the issuer would have to follow-up on any “red flags.”144 Additionally, this commenter recommended that the Commission create an independent and secure means of verifying investor income or to require a mandatory questionnaire for individual investors to complete before buying a security issued under Regulation A.