Testimony of Neicei E.

Bullaiu
Piesiuent anu Founuei
Funu Bemociacy, Inc.

anu
NBLA Bistinguisheu Lectuiei, Associate Piofessoi of Law, anu
Biiectoi, Business Law Institute
0niveisity of Nississippi School of Law



befoie the

Committee on Small Business


0niteu States Bouse of Repiesentatives

on

SEC's Ciowufunuing Pioposal:

Will it Woik foi Small Businesses.


}anuaiy 16, 2u14



2
Chaiiman Schweikeit, Ranking Nembei velazquez anu membeis of the Committee, thank
you foi the oppoitunity to appeai befoie you touay to uiscuss the SEC's iulemaking on
ciowufunuing. It is an honoi anu a piivilege to appeai befoie the Committee touay.*

I am the Founuei anu Piesiuent of Funu Bemociacy, a nonpiofit investoi auvocacy gioup,
anu a NBLA Bistinguisheu Lectuiei, Associate Piofessoi of Law anu Biiectoi of the
Business Law Institute at the 0niveisity of Nississippi School of Law. I am also a vice
Piesiuent of the financial planning fiim, Plancoip LLC; a membei of the PCA0B's Investoi
Auvisoiy uioup; anu an Accieuiteu Investment Fiuuciaiy. I was foimeily a membei of the
SEC's Investoi Auvisoiy Committee anu chaiieu its Investoi as Puichasei Subcommittee;
an Assistant Chief Counsel in the SEC's Bivision of Investment Nanagement; anu an
attoiney in the secuiities piactice of Wilmei, Cutlei & Pickeiing (now WilmeiBale).

This testimony is baseu on my geneial expeiience ovei a numbei of yeais as an investoi
auvocate, jouinalist, acauemic, iegulatoi, financial plannei, piivate piactitionei anu expeit
witness anu consultant. I have been engageu in secuiities iegulation issues fiom a vaiiety
of peispectives anu attempt to pioviue testimony that ieflects the inteiests of investois,
uiveise views of vaiious constituents, anu the piactical exigencies of ieal-woilu legal
piactice anu compliance.

I. Intiouuction

This is the seconu occasion on which I have testifieu on ciowufunuing. 0n the fiist occasion
in 2u12, a bill hau not gotten out of Committee. Two yeais latei, implementing iules have
been pioposeu. Some have complaineu about how much time this iulemaking has taken,
but it is extiaoiuinaiy how quickly the ciowufunuing concept has taken on conciete foim.
0n the whole, the Commission anu its staff shoulu be applauueu foi theii haiu woik on this
iulemaking.

*I woulu like to thank 0niveisity of Nississippi law stuuent }ustin Bouchaiu foi his assistance in
piepaiing this testimony.

S
The title of this heaiing poses the question: SEC's Ciowufunuing Pioposal: Will it Woik foi
Small Businesses. I am afiaiu that the answei is piobably "no." Bowevei, the question is
somewhat unfaii. Nuch of what is noimally left to agency iulemaking has been set in stone
by the Capital Raising 0nline While Beteiiing Fiauu anu 0nethical Non-Bisclosuie Act of
2u12 ("Ciowufunu Act" oi "Act"). The Act is as extiaoiuinaiy in its level of uetail as it is
extiaoiuinaiy in the speeu of its evolution. It specifically imposes numeious uisclosuie
iequiiements that peimit no leeway in theii application. The Commission has veiy little
wiggle ioom to make the Act woik bettei foi small businesses.

Bowevei, in many iespects the Commission has asseiteu authoiity to change the law
wheie no such authoiity exists. Theie aie many instances in which the Commission
pioposes something uiffeient fiom the veiy specific iequiiements of the Act. In some cases,
the Commission asseits the authoiity to uilute investoi piotections, in othei cases to
impose auuitional buiuens on small businesses, anu in each case its appioach woulu
contiavene specific uiiections fiom Congiess. Foi example, the Commission is consiueiing
iequiiing CE0-ceitifieu financials foi issueis with moie than $1uu,uuu in ciowufunuing
offeiings,
1
wheieas Congiess specifically uiiecteu that this iequiiement apply only to
issueis that have iaiseu $1uu,uuu oi less.
2
The Commission is consiueiing loweiing the
$2,uuu minimum foi investois with veiy low income anu net woith,
S
but it uoes not have
the authoiity to amenu the $2,uuu minimum chosen by Congiess.

To illustiate the same ovei-ieaching with iespect to specific investoi piotections
piesciibeu by Congiess, the Commission is consiueiing eliminating investment limits foi

1
Pioposing Release at 8S.

2
Secuiities Act 4A(b)(1)(B)(i)(II).

S
Pioposing Release at 29.

4
!"# at 28 - 29.

S
In the SEC's woius: "The integiation uoctiine seeks to pievent an issuei fiom impiopeily
avoiuing iegistiation by aitificially uiviuing a single offeiing into multiple offeiings such
that Secuiities Act exemptions woulu apply to multiple offeiings that woulu not be available

2
Secuiities Act 4A(b)(1)(B)(i)(II).

S
Pioposing Release at 29.

4
accieuiteu anu institutional investois.
4
This might be goou policy, but it is flatly
inconsistent with the Act's puipose of peimitting gieatei access to investment
oppoitunities foi small investois, not to mention the veiy specific uollai amounts set foith
in the Act.

Theie is no authoiity in the Act foi the Commission to supplant Congiess's juugment with
the SEC's own. The piovisions of the Act ieflect a ieasoneu compiomise among membeis of
Congiess. Nembeis voteu foi oi against the Act baseu on its specific teims, but they might
have voteu uiffeiently on the amenuments being consiueieu by the Commission. Thus, one
geneial concein iegaiuing the SEC's iulemaking is that often it uoes not iespect the limits
of its authoiity anu upsets the compiomise negotiateu by the legislative bianch.

Anothei concein is that the Commission ignoies the uaik siue of ciowu behavioi, choosing
insteau only to lauu its stiengths anu viitues. The Commission piaises the potential to tap
the "wisuom of the ciowu," but uoes not acknowleuge, much less uiscuss, the negative
behavioi that is often associateu with ciowus. As the Commission knows, ciowus aie often
uestiuctive, paiticulaily with iespect to maikets.

In fact, the most-citeu woik on uestiuctive ciowu uynamics in maikets is entitleu:
Extiaoiuinaiy Populai Belusions anu the !"#$%&& of Ciowus. The book uiscusses, among
othei things, the ciowu uynamics unueilying the Butch tulip mania, Nississippi Company
bubble, anu South Sea Company bubble. If its authoi, Chailes NacKay, weie alive touay, he
woulu most ceitainly be wiiting about the behavioi of the ciowu uuiing the iecent Inteinet
anu subpiime bubbles. When thinking of ciowu uynamics, Citigioup CE0 Chuck Piince's
wiuely quoteu comment maue in 2uu7 seems apiopos: "As long as the music is playing,
you've got to get up anu uance." Will investois actually uiscuss hot ciowufunuing offeiings
anu think about them befoie investing. 0i will they simply "get up anu uance".


4
!"# at 28 - 29.

S
This is not to say that the piomise of ciowufunuing is a false one. Rathei, it is to say that the
Commission shoulu appioach iulemaking with its eyes open to the potential uownsiue of
ciowu uynamics, especially in a maiket wheie the uata show that one-thiiu to one-half of
investments aie likely to become woithless. Insteau, the Commission seems to see
ciowufunuing thiough iose-coloieu glasses. It iaiely uiscusses how things might go wiong,
so one wonueis whethei its iulemaking auequately ieflects that possibility. Ciowufunuing
will not woik foi small businesses if a minoiity of ciowufunuing issueis aie alloweu to give
it a bau ieputation.

The iemainuei of this testimony uiscusses specific aspects of the SEC's pioposeu iules. 0ne
aspect that shoulu be of paiticulai concein to small businesses is the SEC's position that the
aggiegate, 12-month $1 million limit on offeiings applies only to ciowufunuing offeiings
(as uiscusseu in Pait III at page 14). The SEC's position not only contiavenes the plain
meaning of the Act, it also iisks allowing laige- anu meuium-size companies to entei the
ciowufunuing maiket anu squeeze out the staitups anu small businesses foi which it was
cieateu.

The SEC's inteipietation woulu peimit, foi example, a laige issuei to sell $1 billion in
secuiities, then sell $1 million in ciowufunuing secuiities, anu then sell anothei $1 billion
in secuiities, because the Commission woulu subject only the ciowufunuing secuiities to
the $1 million limit. Ciowufunuing will not woik foi small businesses if it becomes a
maiket foi all businesses, iegaiuless of size. Nembeis of Congiess who voteu foi the Act
uiu so on the assumption that it was intenueu to help small businesses anu not to cieate a
social meuia oppoitunity foi meuium- anu laige-size businesses. Congiess ensuieu that the
ciowufunuing maiket woulu be a maiket foi small businesses piecisely by limiting '('")
secuiities offeiings within any 12-month peiiou to $1 million. The Commission has
pioposeu to iepeal this iequiiement, which will allow businesses of unlimiteu size to fill
out the ciowufunuing space, notwithstanuing that they have no uifficulty iaising capital.
The ciowu will not be the investois, it will be the issueis, anu as always is the case, the
laige will ciowu out the small, just as the laige cuiiently ciowu out the small in the
secuiities offeiing space at laige. Congiess uiu not wiite the Act to allow laige businesses
6
to captuie a maiketplace that was uesigneu foi small businesses. The Commission may
heai fiom ciowufunuing inteimeuiaiies that amenuing the $1 million limit woulu impiove
ciowuing, but that it because they natuially piefei the laigest possible ciowufunuing
maiket, which woulu geneiate the laigest ievenue. The Committee shoulu listen closely to
small business's thoughts on theii becoming inciuental playeis in a maiket that Congiess
cieateu foi them.

0thei conceins go to the kinu of ieputation that ciowufunuing is likely to uevelop unuei
the SEC's iules. vaiious pioposals woulu allow ciowufunuing issueis to use stale financial
statements, inteimeuiaiies to accept investment fiom ineligible investois, anu issueis to
engage in public auveitising unuei the guise of a concuiient piivate offeiing. Each of these
pioposals will uegiaue the quality of the ciowufunuing maiketplace. They will also cieate
an unfaii auvantage foi less sciupulous issueis ovei small businesses that play by the iules.

The oveiiiuing issue foi ciowufunuing is likely to be how the naiiative of investois
fiequently losing theii entiie investment plays out. If investois aie peiceiveu as losing only
a small pait of theii poitfolios because of business failuies iathei than fiauu, oi if theii
ciowufunuing losses aie set off by gains in othei investments thiough uiveisification, the
ciowufunuing maiket coulu weathei laige losses anu thiive. Bowevei, if fiauusteis aie
easily able to scam investois unuei the covei of a ciowufunuing offeiing, oi stale financial
statements ioutinely tuin out to have hiuuen moie iecent, unuiscloseu financial ueclines,
oi theie aie investois who can't affoiu the losses they incui, iesulting in stoiies of peisonal
financial uistiess - then ciowufunuing maikets will nevei become a cieuible tool foi
iaising capital.

The iemainuei of this testimony highlights some, but by no means all of the SEC's specific
pioposals. I expect to submit a complete comment lettei on the pioposals, which I hope the
Committee will consiuei in its oveisight of this iulemaking. The sections of the iemainuei

7
of this testimony aie paginateu as follows:
II. Integiation with 0thei 0ffeiings . . . . . . . . . . . 7
III. $1 Nillion Cap on Funus Raiseu . . . . . . . . . . . . 14
Iv. Limit on Investments by Investois . . . . . . . . . . 2S
v. Investoi Qualifications anu Knowleuge . . . . . . . 27
vI. Investois' Review of Investoi-Euucation
Nateiial . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
vII. Neaning of "Investoi" anu "Investoi anu theii
Spouse" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
vIII. Bisqualification of Ciowufunuing Issueis That
Aie in violation of the Act . . . . . . . . . . . . . . . . S1
IX. $Suu,uuu Tiiggei foi Auuiteu Financials. . . . . . . S2
X. 0veisubsciibeu 0ffeiings. . . . . . . . . . . . . . . . SS
XI. Stale Financial Statements . . . . . . . . . . . . . . . S4
XII. Extension of Time to File Taxes . . . . . . . . . . . . S7

!!" !$%&'()%*+$ ,*%- .%-&( .//&(*$'0

The pioblem of "integiation" aiises because concuiient offeiings unuei uiffeient
exemptions can allow an issuei to engage in peimitteu activities unuei one exemption that
aie not peimitteu unuei the othei.
S
Foi example, one exemption might peimit public
auveitising anu allow sales only to accieuiteu investois, while anothei piohibits public
auveitising but allows sales to any investoi. Without integiation iules, public auveitising in
the fiist offeiing coulu be useu, in effect, to engage in inuiiect, illegal auveitising of the
seconu. In othei woius, by publicly auveitising unuei the fiist exemption, the issuei woulu
be able to ieach potential nonaccieuiteu investois wheie the issuei was piohibiteu fiom
using public auveitising to ieach them. 0nfoitunately, the foiegoing pioblem is exactly
what the Commission woulu peimit with iespect to ciowufunuing offeiings.

Ciowufunuing offeiings aie subject to stiict limits on auveitising. The Act pioviues that
issueis may "not auveitise the teims of the offeiing, except foi notices which uiiect

S
In the SEC's woius: "The integiation uoctiine seeks to pievent an issuei fiom impiopeily
avoiuing iegistiation by aitificially uiviuing a single offeiing into multiple offeiings such
that Secuiities Act exemptions woulu apply to multiple offeiings that woulu not be available
foi the combineu offeiing." Pioposing Release at note 27.

8
investois to the funuing poital oi biokei."
6
Even within the context of communications on
the website foi an offeiing, that is, "communication channels pioviueu by the inteimeuiaiy
on the inteimeuiaiy's platfoim,"
7
issueis may not compensate any peison foi piomoting an
offeiing unless the ieceipt of the compensation is uiscloseu "upon each instance of such
piomotional communication."

The iestiictions aie necessaiy because, unlike piivate offeiings in which public auveitising
is peimitteu,
8
issueis may sell ciowufunueu secuiities to anyone. Congiess believeu that, if
a uespeiate investoi with no income anu $2,uuu in savings was to be peimitteu to invest
theii last penny in ciowufunueu secuiities, then issueis shoulu not be alloweu to luie them
by iunning aus in public meuia. Public auveitisements using exaggeiateu pitches -- "LAST
CBANCE," "SALE ENBS S00N," "EvERYTBINu N0ST u0" - may be allowable in the
maiketplace at laige, but Ameiica's centuiy-long uominance of the woilu's secuiities
maikets is substantially attiibutable to piohibitions against this kinu of misleauing sales
piactices.
9
Nothing is moie likely to expose the mauness of ciowus than peimitting public
auveitising to infiltiate the ciowufunuing space.


6
Secuiities Act 4A(b)(2). The phiase "$%&'( *+ $,% *++%&-./ means the amount of secuiities
offeieu, the natuie of the secuiities, the piice of the secuiities anu the closing uate of the
offeiing peiiou." Pioposeu Rule 2u4.

7
Pioposeu Rule 2u4(c).

8
Although the "piivate" offeiing exemption was intenueu to limit public communications,
the }0BS Act iequiieu that the Commission peimit public auveitising in "piivate" offeiings.

9
The kinu of public auveitising that has begun to emeige in the wake of iules peimitting
such auveitising in piivate offeiings illustiates what uniestiaineu ciowufunuing
auveitising might look like. Foi example, a sliue ueck foi a piivate offeiing by a funu that
invests in Bitcoins incluues a chait ("Bitcoin 0psiue") that shows the value of bitcoins iising
to equal the value of S peicent of the woilu's golu supply ($S4u billion). 0%% Investoi
Piesentation, Bitcoin Investment Tiust (}an. 2u14) available at
http:www.bitcointiust.co. 0%% 12(* uail Libeiman, Palm Beach Biscussion uioup Invests
in Single Bitcoin (}an. 12, 2u14) (aftei initially appioving investments in the Bitcoin
Investment Tiust in self-uiiecteu IRAs, Fiuelity ieveiseu its position). In the Act, Congiess
ueciueu to limit ciowufunuing issueis to making this type of claim only on ciowufunuing
platfoims anu theii uisclosuie uocuments.

9
Nonetheless, the Commission woulu allow issueis to make exaggeiateu claims in public
auveitisements uuiing a ciowufunuing offeiing. Issueis neeu only conuuct theii public
auveitising campaign unuei covei of a concuiient "piivate" offeiing. Ciowufunuing issueis
woulu be able to say anything, subject only to geneial antifiauu iules, about the issuei's
piospects in piecisely the public context that Congiess specifically piosciibeu foi
ciowufunuing. Integiation iules aie uesigneu to pievent piecisely this methou of
ciicumventing the iequiiements of offeiing exemptions. Integiation iules also pioviue
claiity to issueis anu inteimeuiaiies that have legitimate ieasons foi iaising funus unuei
uiffeient exemptions but aie conceineu that peimitteu activities unuei exemption might be
vieweu as violating anothei exemption unuei which they aie not peimitteu. Cleai iules
save money while pioviuing the founuation foi a ieputable, albeit iisky maiket.

Integiation pioblems aie auuiesseu in a vaiiety of ways unuei the secuiities laws. Foi
example, when issueis iaise funus thiough public anu piivate offeiings, anu the piivate
offeiing uoes not opt to engage in public auveitising,
1u
the public iegistiation statement
coulu be vieweu as a foim of public auveitising. Conveisely, piivate communications maue
puisuant to the piivate offeiing coulu be vieweu as offeis that violate investoi
communication iules goveining the public offeiing. The Commission has auopteu a safe
haiboi that geneially pioviues that a piivate offeiing that ceases at least Su uays befoie a
iegistiation statement is fileu in a public offeiing will not be consiueieu pait of (be
integiateu with) the public offeiing. A public offeiing that is withuiawn at least Su uays
befoie a piivate offeiing commences will not be consiueieu pait of the piivate offeiing.

The integiation safe haiboi is nonexclusive; concuiient offeiings will not necessaiily be
integiateu. Foi example, the Commission has taken the position that a non-auveitiseu
piivate offeiing coulu be unueitaken concuiiently with a public offeiing if the issuei coulu

1u
As noteu in footnote, the }0BS Act peimitteu public auveitising in piivate offeiings if
secuiities aie solu only to accieuiteu investois. Issueis can still conuuct piivate offeiings
anu opt not to engage in public auveitising subject to slightly uiffeient iules. 0%% Secuiities
Act 4(a)(2).

1u
uemonstiate that the investois in the piivate offeiing weie ieacheu by means othei than
the iegistiation statement.
11


It is woith noting heie that conceins iegaiuing a iegistiation statement seiving as a foim
of illegal public auveitising aie not neaily as gieat as when public auveitising occuis in
connection with a piivate offeiing. The content of iegistiation statements anu othei
peimissible public communications in public offeiings aie seveiely constiaineu, anu these
communications often woulu be impiacticable foi a billboaiu oi auveitisement in a
newspapei, magazine oi similai public meuia. The auveitising concein is also mitigateu by
the fact that only accieuiteu (piesumably moie sophisticateu) investois can invest in a
piivate offeiing, anu they aie less likely to be misleu by publicly available infoimation.
Inueeu, this is piecisely the aigument foi the }0BS Act's iecent elimination of the blanket
piohibition on public auveitising of piivate offeiings -- that sophisticateu investois can
fenu foi themselves.

In contiast, the pioblem of public auveitising in piivate offeiings being useu to
communicate with potential ciowufunuing investois is heighteneu. Anyone can invest in a
ciowufunuing offeiing, iegaiuless of theii income oi net woith. The potential foi investoi
losses is gieatei with stait-ups than foi any othei categoiy of businesses, anu low- oi no-
income anu low- oi no-net-woith investois aie those who aie least able to beai losses.
These factois aigue foi *+%"'%+ integiation iestiictions that ensuie that ciowufunuing
iules aie not ciicumventeu thiough the use of concuiient offeiings unuei othei
exemptions. In auuition, the ability of a business to iaise capital thiough a piivate offeiing
geneially is not the kinu business foi which ciowufunuing was intenueu; ciowufunuing
was intenueu to enable access to capital when not otheiwise piacticable, -#%#, to close the
"funuing gap."
12


11
0%% Revisions of Limiteu 0ffeiing Exemptions in Regulation B, Pait II.C (Aug. S, 2uu7).

12
Pioposing Release at 17 (ciowufunuing is intenueu to piomote "the goal of alleviating the
funuing gap faceu by staitups anu small businesses"). In fact, iecent uata publisheu by the
Commission itself shows that the claim that ciowufunuing is neeueu because small amounts
of capital cannot be efficiently iaiseu unuei piivate offeiing iules is patently false. 0%% -.+&1
11

Wheie the Commission shoulu be ,(&' conceineu about fiauuulent secuiities offeiings, it
has chosen the )%"&' piotective appioach. Bespite the gieatei fiauu iisk in concuiient
piivate anu ciowufunuing offeiings than in concuiient piivate anu public offeiings, anu the
gieatei investoi haim that fiauu in the ciowufunuing will impose, the Commission has
pioposeu to impose a )%&& iestiictive stanuaiu foi the foimei. In fact, it is not just a less
iestiictive stanuaiu; the Commission has pioposeu that no integiation iestiictions apply
whatsoevei. The only limitation that the Commission pioposes to apply is that any
"concuiient exempt offeiing foi which geneial solicitation is peimitteu coulu not incluue
an auveitisement of the teims of an offeiing maue in ieliance on Section 4(a)(6) that woulu
not be peimitteu unuei Section 4(a)(6) anu the pioposeu iules."
1S
This "iestiiction" woulu
pioviue no impeuiment to publicly auveitising a ciowufunuing offeiing unuei covei of a
piivate offeiing.

With iespect to iestiictions on ciowufunuing auveitising, the Commission states that:

|ljimiting the auveitising of the teims of the offeiing to the infoimation
peimitteu in the notice is intenueu to uiiect investois to the inteimeuiaiy's
platfoim anu to make investment uecisions with access to the uisclosuies
necessaiy foi them to make infoimeu investment uecisions.
14


Peimitting public auveitising in concuiient offeiings uiiectly contiauicts this position.
Public auveitising of othei offeiings will encouiage investois to make ciowufunuing
investment uecisions baseu on infoimation that is $(' on the inteimeuiaiy's platfoim. This
public infoimation will be moie accessible than infoimation on the inteimeuiaiy's platfoim
anu may be moie likely to be ielieu on that infoimation on the inteimeuiaiy's platfoim.
Ciowufunuing issueis will have an inventive to engage in concuiient piivate offeiings
piecisely to enable them to ieach a wiuei auuience. This is exactly what Congiess intenueu

note 17. The }0BS Act's elimination of the ban on public auveitising in piivate offeiings will
make piivate offeiings even moie amenable to small issuances.

1S
Pioposing Release at 19.

14
!"# at 1u9.

12
to pievent by iestiicting auveitising to the inteimeuiaiy's platfoim. Anu this is piecisely
what the Commission woulu peimit by imposing no integiation iestiictions on such public
auveitising.

The Commission inteipiets the following piovision in the Act (the "Integiation Pioviso") to
pievent it fiom imposing integiation iestiictions:

Nothing in this section oi section 4(6) shall be constiueu as pieventing an
issuei fiom iaising capital thiough methous not uesciibeu unuei section
4(6).
1S


Rathei than suggesting that integiation conceins be entiiely ignoieu by the Commission,
the Integiation Pioviso actually assumes that some uegiee of integiation is likely, if not
inevitable. The Pioviso wains the Commission not to impose integiation tests that woulu
"pievent" offeiings unuei exemptions because Congiess was well awaie that the
Commission woulu finu that some integiation iestiictions woulu be necessaiy to ensuie
compliance with, foi example, the iestiiction of ciowufunuing auveitising to the
inteimeuiaiy's platfoim. Yet iathei than taking the Pioviso as a waining not to apply
integiation iestiictions too bioauly, the Commission has uistoiteu its meaning into a
commanu that no integiation iestiictions be applieu at all. Bespite the patently obvious
loophole that peimitting geneial solicitations in concuiient piivate offeiings -- anu even
somewhat less pioblematic communications in a concuiient public offeiings
16
-- woulu
cieate, the Commission has pioposeu to iepeal, in effect, the ciowufunuing iestiiction on
auveitising.


1S
Secuiities Act 4A(g).

16
As noteu above, concuiient public offeiing is aiguably of less concein because the content
of a public infoimation maue available in a concuiient public woulu be moie iegulateu that
public infoimation in a piivate offeiing. Bowevei, a concuiient public offeiing, in which any
investoi coulu invest an unlimiteu amount, might beg the question of why a ciowufunuing
offeiing that auus investoi investment limits was appiopiiate at all. Bowevei, this is
mitigateu by the fact that public companies aie not peimitteu to iely on the ciowufunuing
exemption anu ciowufunuing may not iaise moie than $1 million in any 12-month peiiou.
0%% -.+&1 Pait III.

1S
The Integiation Pioviso shoulu be ieau accoiuing to what it says: integiation iules shoulu
not -+%.%$' othei offeiings. Congiess coulu have but uiu not use the woiu "uelay."
Congiess coulu have but uiu not use the woiu "impeue." Congiess coulu have but uiu not
use the phiase "inteifeie with." Congiess was well awaie that existing integiation iules
"uelay," "impeue" anu "inteifeie with" secuiities offeiings, but it chose to wain the
Commission only against inteigiation iules' "pieventing" othei offeiings.

Congiess useu the teim "pievent" in the sense of keeping something fiom happening.
Existing integiation iules uo not pievent offeiings, noi woulu any ieasonable application of
these iules to ciowufunuing offeiings pievent othei offeiings. Requiiing that no public
auveitising of an offeiing by an issuei occui, foi example, within 6u uays befoie the
initiation of a ciowufunuing offeiing by that issuei coulu not be saiu to "pievent" the othei
offeiing. It woulu only iequiie that it teiminate befoie a subsequent ciowufunuing offeiing.
This iule woulu, howevei, "pievent" issueis fiom inuiiectly publicly auveitising theii
ciowufunuing offeiings. In view of the iegulatoiy iisks that ciowufunuing entails, such a
biight line iule woulu be piefeiable to a fact-baseu ueteimination. It woulu be
impiacticable to auopt the SEC's position on concuiient public anu piivate offeiings
because one coulu not uemonstiate that no ciowufunuing investoi was soliciteu thiough
public auveitising.

!%,/%+& (1 2($*+%&& &3(4)# 4+*% '3% 2(,,5&&5($ '( %$&4+% '3"' 6+(7#14$#5$* +4)%&
#( $(' %11%6'5.%)8 +%-%") '3% +%&'+56'5($& ($ 6+(7#14$#5$* "#.%+'5&5$* /8 -%+,5''5$*
-4/)56 "#.%+'5&5$* 5$ (11%+5$*& '3"' "+% 6($64++%$' 75'3 " 6+(7#14$#5$* (11%+5$*9
!(+%(.%+: 2($*+%&& &3(4)# 4+*% '3% 2(,,5&&5($ '( -+(35/5' '3% 5$5'5"'5($ (1 "
6+(7#14$#5$* (11%+5$* )%&& '3"' ;< #"8& "1'%+ " -4/)56 6(,,4$56"'5($ 5$ "$ (11%+5$* /8
'3% &",% 5&&4%+9


14
!!!" 12 3*44*+$ 5)6 +$ 78$90 :)*0&9

Congiess intenueu that ciowufunuing offeiings iemeuy peiceiveu uifficulties encounteieu
by issueis when iaising small amounts of capital.
17
The ciowufunuing exemption was not
intenueu to covei laige offeiings, much less issueis that ioutinely iaiseu substantial
amounts by othei means. Congiess accoiuingly limiteu the aggiegate amount of secuiities
iaiseu by a ciowufunuing issuei in any 12-month peiiou to $1 million. It also iequiieu that
the Commission aujust this limit at least once eveiy five yeais to ieflect inflation.
18
Thus, an
issuei that was able to iaise $1 million thiough a piivate offeiing, foi example, woulu not
be able to avail itself of the ciowufunuing exemption uuiing the 12 months following the
piivate offeiing, but it woulu be able to iaise up to $1 million eveiy yeai.


17
Recently publisheu uata unueimines this assumption. Fiom 2uu9 - 2u12, theie weie
4S,68S offeiings unuei Rule Su4, SuS anu Su6, anu moie than half - 22,126 - weie foi less
than $1 million. 0%% Ivanov anu Bauguess, Capital Raising in the 0.S.: An Analysis of
0niegisteieu 0ffeiings 0sing the Regulation B exemption, 2uu9 - 2u12 at 8 (}uly 2u1S)
available at http:www.sec.govuivisionsiiskfinwhitepapeisueia-uniegisteieu-
offeiings-ieg-u.puf. These uata uo not even incluue all alteinative offeiing exemptions,
much less auuitional offeiings that will be maue as a iesult of the iemoval of the ban on
public auveitising in piivate offeiings. Thus, offeiings of less than $1 million aie not just
feasible unuei othei offeiing exemption. They aie +(4'5$%.

The Commission cites this uata in the Pioposing Release, but it pioviues no analysis as to
what types of staitups anu small businesses aie having success with Reg B anu what types
aie not. Why aie some businesses able to finu accieuiteu investois anu otheis aie not. The
fact that the accieuiteu investoi stanuaiu is baseu on wealth, one might speculate that some
stait-ups anu small businesses aie excluueu fiom the kinus of netwoiks in which they
woulu have peisonal contact with accieuiteu investois oi with those who pioviue financial
seivices to these investois. 0ne might speculate fuithei that ciowufunuing's gieatest
potential may be its ability to iemove aibitiaiy socio-economic constiaints fiom capital
allocation uecisions.

Finally, the Commission acknowleuges that Reg B offeiings now may be publicly auveitiseu,
but it uoes not uiscuss what effect this might have on the ability of stait-ups anu small
businesses to iaise capital unuei that exemption. Again, it seems that thinking about the
effect of this change woulu be necessaiy foi the Commission to engage in infoimeu
iulemaking.

18
Secuiities Act 4A(g)(1).

1S
This $1 million cap is not limiteu to non-ciowufunuing offeiings. Congiess makes that
expiessly cleai in the Act. The ielevant piovision Act states as follows:

(6) tiansactions involving the offei oi sale of secuiities by an issuei
(incluuing all entities contiolleu by oi unuei common contiol with the
issuei), pioviueu that

(A) the aggiegate amount solu to all investois by the issuei, incluuing
any amount solu in ieliance on the exemption pioviueu unuei this
paiagiaph uuiing the 12- month peiiou pieceuing the uate of such
tiansaction, is not moie than $1,uuu,uuu; . . ..
19


Paiagiaph (6) applies to "the offei oi sale of secuiities by an issuei," anu subpaiagiaph (A)
limits "aggiegate amount solu to all investois by the issuei" to "not moie than $1,uuu,uuu."
By its teims, "the offei anu sale of secuiities" woulu mean all secuiities, incluuing
ciowufunuing secuiities, a point fuithei ieinfoiceu by the iefeience to "all" investois (not
just ciowufunuing investois).

Bowevei, theie is a potential ambiguity. The limit might be vieweu as ensuiing that issueis
that aie able to iaise $1 million by ('3%+ means shoulu not be able to avail themselves of
the ciowufunuing exemption. 0nuei this inteipietation, an issuei coulu, consecutively
within a 12-month peiiou, issue $Suu,uuu in ciowufunuing secuiities, $Suu,uuu in
piivately offeieu secuiities, anu $Suu,uuu secuiities. If the $1 million in ciowufunuing
secuiities weie not aggiegateu with the piivate offeiing, the seconu $Suu,uuu offeiing
woulu be peimitteu. Congiess intenueu that ciowufunuing secuiities be incluueu in
applying the $1 million cap. It intenu that the issuei be fiee to iaise auuitional capital
thiough nonciowufunuing means, but if it was able to iaise $1 million in a 12-month peiiou
it shoulu not be alloweu to exploit the ciowufunuing's loweieu investoi piotection at least
until 12 months has passeu.


19
Secuiities Act 4(a)(6).

16
Congiess ueciueu to make it absolutely cleai that ciowufunuing secuiities weie to be
incluueu in the aggiegate $1 million cap
2u
anu accoiuingly auueu the claiification that is
italicizeu anu bolueu below:

(A) the aggiegate amount solu to all investois by the issuei, 5$6)4#5$*
"$8 ",(4$' &()# 5$ +%)5"$6% ($ '3% %=%,-'5($ -+(.5#%# 4$#%+ '35&
-"+"*+"-3 #4+5$* '3% >?@,($'3 -%+5(# -+%6%#5$* '3% #"'% (1 &463
'+"$&"6'5($: is not moie than $1,uuu,uuu . . .
21


In the event that it was not cleai that the "aggiegate amount solu" incluueu ciowufunuing
secuiities, Congiess stateu expiessly that these secuiities weie incluueu. Theie was no
neeu to explain that the "aggiegate amount solu" incluueu secuiities issueu in othei
offeiings. Inueeu, the fact that Congiess believeu it necessaiy to note that ciowufunuing
secuiities weie "incluueu" must mean that Congiess also believeu that othei secuiities
weie incluueu in the "aggiegate amount solu." It is an obvious iule of statutoiy
constiuction, easily unueistoou by any lay peison, that the teim "incluuing" means
"illustiative of," anu not, foi example, "limiteu to."
22


2u
0%% Willheim v. Murchison, 342 F.2d 33, 41 (2d Cir. 1965) (Definitions in securities and other
legislation often use the word include out of abundant caution, and this serves a clear purpose
when one or more of the things stated as included would not be so in the ordinary meaning of the
term defined . . ..).

21
Secuiities Act 4(a)(6)(A).

22
0%%3 %#/#3 Fed. Land Bank of St. Paul v. Bismarck Lumber Co., 314 U.S. 95, 99-100, 62 S. Ct. 1,
4, 86 L. Ed. 65 (1941) (We iecently hau occasion unuei othei ciicumstances to point out
that the teim 'incluuing' is not one of all-embiacing uefinition, but connotes simply an
illustiative application of the geneial piinciple. (citing Phelps Bouge Coip. v. National Laboi
Relations Boaiu, S1S 0.S. 177, 189, 61 S.Ct. 84S, 8Su, 8S L.Eu. 1271, 1SS A.L.R. 1217;
Belveiing v. Noigan's, Inc., 29S 0.S. 121, 12S, SS S.Ct. 6u, 61, 79 L.Eu. 2S2); Stansell v.
Revolutionaiy Aimeu Foices of Colombia, 7u4 F.Su 91u, 91S (11th Cii. 2u1S)("When a
statutoiy uefinition ueclaies what a teim "means" iathei than "incluues," any meaning not
stateu is excluueu. Colautti v. Fianklin, 4S9 0.S. S79, S92-9S & n. 1u, 99 S.Ct. 67S, 684 & n.
1u, S8 L.Eu.2u S96 (1979). This is because the teim "means" uenotes an exhaustive
uefinition, while "incluues" is meiely illustiative. 0niteu States v. Piobel, 214 F.Su 128S,
1288-89 (11th Cii.2uuu)."); Citizens for Responsible Gov't State Political Action Comm. v.
Davidson, 236 F.3d 1174, 1190-91 (10th Cir. 2000) (Colorado is among the overwhelming
majority of jurisdictions that read the word includes as a term of extension or enlargement
when used in a statutory definition. Colorado Common Cause v. Meyer, 758 P.2d 153, 16364
(Colo.1988) (en banc).); Dong v. Smithsonian Inst., 125 F.3d 877, 880 (D.C. Cir. 1997) ("We
recognize, of course, that the word includes normally does not introduce an exhaustive list but
17

merely sets out examples of some general principle. Federal Land Bank of St. Paul v. Bismarck
Lumber Co., 314 U.S. 95, 100, 62 S.Ct. 1, 4, 86 L.Ed. 65 (1941).); Feueial Election Com'n v.
Nassachusetts Citizens foi Life, Inc., 769 F.2u 1S, 17 (1
st
Cii. 198S) ("'A teim whose
statutoiy uefinition ueclaies what it 'incluues' is moie susceptible to extension of meaning
by constiuction than wheie the uefinition ueclaies what a teim 'means.' It has been saiu 'the
woiu "incluues" is usually a teim of enlaigement, anu not of limitation." . . . It, theiefoie,
conveys the conclusion that theie aie othei items incluuable, though not specifically
enumeiateu . . . (45*$-./ N. Singei, 2A Sutheilanu Statutes anu Statutoiy Constiuction 1SS
(4th eu. 1984) (45*$-./ Aigosy Ltu. v. Bennigan, 4u4 F.2u 14, 2u (Sth Cii.1968))); 0niteu
States v. Nass. Bay Tianspoitation Authoiity, 614 F.2u 27, 28 (1st Cii.198u) ("Incluues is
not a finite woiu of limitation."); Bautista v. Star Cruises, 286 F. Supp. 2d 1352, 1360 (S.D. Fla.
2003) aff'd, 396 F.3d 1289 (11th Cir. 2005) ("Plaintiffs' interpretation of the Convention Act
overlooks the significance of the word including in 202. A term whose statutory definition
declares what it includes' is more susceptible to extension of meaning by construction than
where the definition declares what the terms means. Singer, supra, 47:07. In fact, the word
includes' is usually a term of enlargement, and not of limitation ... It, therefore, conveys the
conclusion that there are other items includable, though not specifically enumerated by the
statutes. See Argosy Limited v. Hennigan, 404 F.2d 14, 20 (5th Cir.1968) (internal citations
omitted). Based on these principles of statutory construction, the term including instructs that
the transactions, contracts and agreements described in 2 of the FAA are covered by the
Convention Act, as well as other arbitration agreements that arise out of commercial legal
relationships.); Argosy Ltd. v. Hennigan, 404 F.2d 14, 20 (5th Cir. 1968) (In both of these
statutes, we think the word including is not to be restricted to the rate and amount of duties
chargeable, but read in relation to the phrase, all decisions entering into same. The word
includes' is usually a term of enlargement, and not of limitation. United States v. Gertz, 9 Cir.
1957, 249 F.2d 662, 666. It therefore conveys the conclusion that there are other items includable,
though not specifically enumerated by the statutes.); United States v. Gertz, 249 F.2d 662, 666
(9th Cir. 1957) (The word includes' is usually a term of enlargement, and not of limitation. As
stated in Federal Land Bank of St. Paul v. Bismarck Lumber Co., 314 U.S. 95, 100, 62 S.Ct. 1, 4,
86 L.Ed. 65, including is not one of all-embracing definition, but connotes simply an illustrative
application of the general principle.); Braun v. Wal-Mart Stores, Inc., 2011 PA Super 121, 24
A.3d 875, 963-64 (Pa. Super. Ct. 2011); (With respect to the term include, [t]he term
include is to be dealt with as a word of enlargement and not limitation. Pa. Human Relations
Comm'n v. AltoReste Park Cemetery Ass'n, 453 Pa. 124, 13031, 306 A.2d 881, 885 (1973)
(alterations omitted); accord Samantar v. Yousuf, U.S. , n. 10, 130 S.Ct. 2278,
2287 n. 10, 176 L.Ed.2d 1047, 1062 n. 10 (2010).); Vassiliu v. Daimler Chrysler Corp., 178 N.J.
286, 295, 839 A.2d 863, 868-69 (2004) (Rather, the word includes' is usually a term of
enlargement, and not of limitation.... It, therefore, conveys the conclusion that there are other
items includable, though not specifically enumerated [.] 2A Norman Singer, Sutherland
Statutory Construction 47:07 at 231 (6th ed. 2000) (internal quotation marks and footnote
omitted); accord Fraser v. Robin Dee Day **869 Camp, 44 N.J. 480, 485, 210 A.2d 208, 21011
(1965).); Brown v. Scott Paper Worldwide Co., 143 Wash. 2d 349, 359, 20 P.3d 921, 926 (2001)
(RCW 49.60.040(3) contains the word includes, which is a term of enlargement.); Ornelas v.
Randolph, 4 Cal. 4th 1095, 1101, 847 P.2d 560, 563 (1993) (The statutory definition of
recreational purpose begins with the word includes, ordinarily a term of enlargement rather
than limitation. (citing People v. Western Air Lines, Inc. (1954) 42 Cal.2d 621, 639, 268 P.2d
723; 2A Sutherland, Statutory Construction (4th ed. 1973) 47.07, pp. 8182.)); Matter of Estate
of Corwin, 1987-NMCA-100, 106 N.M. 316, 317, 742 P.2d 528, 529 (This appeal requires us to
apply principles of statutory construction. We find the correct approach in 2A N. Singer,
18

Bowevei, the Commission inteipiets the teim "incluuing" to mean "limiteu to." 0f couise, if
the only secuiities that Congiess intenueu the $1 million to apply to weie ciowufunuing
secuiities, then it woulu have saiu:

the aggiegate amount of secuiities &()# 5$ +%)5"$6% ($ '35& %=%,-'5($
uuiing the 12-month peiiou pieceuing the uate of such tiansaction, is
not moie than $1,uuu,uuu,

anu not what Congiess actually saiu:

the aggiegate amount solu to all investois by the issuei, 5$6)4#5$*
"$8 ",(4$' &()# 5$ +%)5"$6% ($ '3% %=%,-'5($ -+(.5#%# 4$#%+ '35&
-"+"*+"-3 #4+5$* '3% >?@ ,($'3 -%+5(# -+%6%#5$* '3% #"'% (1 &463
'+"$&"6'5($: is not moie than $1,uuu,uuu.
2S


Yet the Commission inteipiets "incluuing" to mean "only." I am not awaie of "$8 suppoit
foi this inteipietation of "incluuing" in this context. Couits have consistently inteipieteu
"incluue" anu "incluuing" to be a nonexclusive example of the set of things that it follows.
The sentence, "All cais must be iegisteieu, incluuing blue cais" cannot mean that only blue
cais must be iegisteieu. The sentence, "All felons must iepoit to theii paiole officei,
incluuing felons who have seiveu sentences of less than one yeai" cannot mean that
muiueieis aie not iequiieu to iepoit to theii paiole officeis.


Sutherland Statutory Construction Section 47.07 (Sands 4th ed. 1984): A term whose statutory
definition declares what it includes is more susceptible to extension of meaning by construction
than where the definition declares what a term means. It has been said the word includes' is
usually a term of enlargement, and not of limitation. * * * It, therefore, conveys the conclusion
that there are other items includable, though not specifically enumerated. * * * (Footnote
omitted.) This rule has found support in other jurisdictions. Federal Land Bank of St. Paul v.
Bismarck Lumber Co., 314 U.S. 95, 62 S.Ct. 1, 86 L.Ed. 65 (1941); Smyers v. Workers' Comp.
Appeals Bd., 157 Cal.App.3d 36, 203 Cal.Rptr. 521 (1984); Schwab v. Ariyoshi, 58 Hawaii 25,
564 P.2d 135 (1977); Janssen v. Janssen, 331 N.W.2d 752 (Minn.1983).).

2S
0%% Coastal Barge Corp. v. Coastal Zone Indus. Control Bd., 492 A.2d 1242, 1246-47 (Del. 1985) (We
are mindful of the fact that the General Assembly used the words bulk product transfer facility means
rather than bulk product transfer facility includes and that a term whose statutory definition declares
what it includes is more susceptible to extension of meaning by construction than where the definition
declares what a term means. (citing 2A. Sutherland, Statutes and Statutory Construction 47.07 (4th
ed. 1984)).

19
Congiess knows how to limit a piovision to ciowufunuing offeiings. In fact, Congiess
pioveu as much in this veiy same Act anu to a similai offeiing limitation. Section 4A(a)(8)
iequiies ciowufunuing inteimeuiaiies to comply with SEC iules uesigneu:

to ensuie that no investoi in a 12-month peiiou has puichaseu
&%64+5'5%& (11%+%# -4+&4"$' '( &%6'5($ AB;C that, in the aggiegate,
fiom all issueis, exceeu the investment limits set foith in section
4(6)(B) . . ..

This piovision piohibits the sale of ciowufunuing secuiities - anu only ciowufunuing
secuiities -- to an investoi if the sale woulu iesult in the investoi's total puichases in the
pieceuing 12 months exceeuing the investoi investment limits (S% of net income, %$6#).
Thus, an investoi whose income anu net woith aie less that $4u,uuu puichaseu his
investment limit of $2,uuu, a uiffeient issuei coulu not sell the investoi anothei uollai in
ciowufunuing secuiities until 12 months hau passeu.

This limit is impoitant heie because it shows that Congiess knew how to uiaft a 12-month
uollai limit that applies only to aggiegate sales of ciowufunuing secuiities. It use the
woius: "has puichaseu secuiities offeieu puisuant to section 4(6) that, in the aggiegate, . .
.." It uiu not say: has puichaseu secuiities, 5$6)4#5$* '3(&% offeieu puisuant to section 4(6)
that, in the aggiegate, . . .." Congiess useu uiffeient teims to impose sepaiate 12-month
uollai limits on sales of only ciowufunuing secuiities foi a ieason. It specifically iuentifieu
ciowufunuing secuiities anu only ciowufunuing secuiities wheie the limit applieu only to
ciowufunuing secuiities. In contiast, it useu "incluuing" in the $1 million issuei cap to
claiify that ciowufunuing secuiities weie "incluueu" in the aggiegate amount but not the
only secuiities to which the piovision applieu. The only iational ieauing of the $1 million
issuei cap is that it applies to all secuiities solu by the issuei.

The Commission's inteipietation of the $1 million cap piovision also violates the spiiit anu
intent of the Act. The Commission's inteipietation woulu allow, foi example, an issuei to
iaise $1 /5))5($ in a piivate oi public offeiing anu follow up with a $1 million ciowufunuing
offeiing. Conveisely, a business coulu iaise $1 million anu immeuiately follow that with a
$1 /5))5($ piivate of public offeiing. Eveiy laige issuei will consiuei whethei it woulu be an
2u
effective social stiategy to conuuct a ciowufunuing offeiing in oiuei to "ieach out" to theii
small shaieholueis while the issuei is a conuucting a concuiient piivate offeiing fiom
which small investois woulu be excluueu.

It coulu not have been fuithei fiom Congiess's intent to help staitups anu small businesses
by cieating an exemption foi billion-uollai businesses. The Commission contenus that:

iequiiing aggiegation of amounts iaiseu in any exempt tiansaction - woulu
be inconsistent with the goal of alleviating the funuing gap faceu by staitups
anu small businesses because it woulu place a cap on the amount of capital
staitups anu small business coulu iaise.
24


Bow, exactly, is theie a "funuing gap" foi a business that iaises millions oi even billions in a
meie 12 months thiough non-ciowufunuing offeiings. Such a business uefinitionally uoes
$(' have a "funuing gap." Noi is it a staitup oi the kinu of small business foi which
Congiess cieateu the ciowufunuing exemption. The SEC's statement also exaggeiates the
facts because the cap woulu apply only uuiing the 12-month peiiou; issueis woulu be fiee
to engage in offeiings outsiue of the 12-month winuow. Ny plain ieauing of the statute
uiscusseu above is not, as the Commission contenus, "inconsistent" with the statute
because no ieasonable peison woulu aigue that the ciowufunuing exemption was cieateu
to enable laige businesses to iaise capital.

Noieovei, the Commission also stateu that the:

offeiing exemption in Section 4(a)(6) was uesigneu to help alleviate
the funuing gap anu the accompanying iegulatoiy conceins faceu by
staitups anu small businesses, many of which ,"8 $(' /% 1",5)5"+
75'3 '3% 1%#%+") &%64+5'5%& )"7&.
2S



24
Pioposing Release at 17.

2S
!"# at 269.

21
The staitup oi small business that is "not familiai with the feueial secuiities laws" is not
the business that woulu be able to iaise substantial capital thiough a piivate offeiing anu
othei methous.

The Commission stateu fuithei:

As uiscusseu above, the ciowufunuing piovisions of the }0BS Act,
which we woulu implement thiough this pioposeu iegulation, weie
uesigneu to help alleviate the funuing gap anu accompanying
iegulatoiy conceins faceu by small businesses by making +%)"'5.%)8
)(7 #())"+ (11%+5$*& of secuiities less costly anu by pioviuing
ciowufunuing platfoims a means by which to facilitate the offei anu
sale of secuiities without iegisteiing as biokeis, with a fiamewoik foi
iegulatoiy oveisight to piotect investois.

anu:

We unueistanu that Title III was uesigneu to help alleviate the funuing
gap anu accompanying iegulatoiy conceins faceu by staitups anu
small businesses in connection with iaising capital in +%)"'5.%)8 )(7
#())"+ ",(4$'&.
26


anu:

|Tjhe ciowufunuing exemptionj is intenueu to alleviate the funuing
gap anu accompanying iegulatoiy conceins faceu by staitups anu
small businesses in connection with iaising capital in +%)"'5.%)8 )(7
#())"+ ",(4$'&.

It is uncleai why the Commission believes that inteipieting a statute to allow businesses to
iaise ,(+% than $1 million in a 12-month peiiou ieflects its view that ciowufunuing was
"uesigneu" oi "intenueu" foi small businesses "making ielatively low uollai offeiings of
secuiities" oi offeiings in "ielatively low uollai amounts."

It is not ieasonable to ieau the Act as intenueu to help businesses that iaise tens, hunuieus
oi even thousanus of millions of uollais by allowing them to iaise an extia $1 million
thiough ciowufunuing. In contiast, it is entiiely logical to ieau the statute to mean that

26
!"# at 11.

22
Congiess ueciueu that $1 million was moie than a "low uollai amount." 0nuei the SEC's
inteipietation, billions of uollais woulu qualify as a "low uollai amount."

The effect of allowing meuium-size anu laige businesses to engage in ciowufunuing will be
to squeeze out the small businesses foi which it was intenueu. Ciowufunuing
inteimeuiaiies, which have actively lobbieu Congiess on ciowufunuing woulu piefei the
laigest maiket possible. Bowevei, the effect of allowing any non-public company to engage
in ciowufunuing will be to peipetuate the competitive uisauvantage of the smallest
businesses that ciowufunuing was uesigneu to iemeuy. The Commission's inteipietation of
the piovision benefits meuium-size anu laige businesses, anu ciowufunuing
inteimeuiaiies, at the expense of staitups anu small businesses.

The Commission attempts to suppoit its inteipietation by iefeiencing the Integiation
Pioviso, which, as uiscusseu above, is cleaily intenueu to auuiess the pioblem of using one
offeiing to ciicumvent the iules of anothei, concuiient offeiing. Fiist, the $1 million limit is
not ambiguous; it allows foi only one ieasonable ieauing. Seconu, the Integiation Pioviso
iefeis to "pieventing" offeiings, wheieas the $1 million cap woulu only limit the amount
iaiseu anu even then foi no longei than 12 months. It woulu "pievent" nothing. The
Commission states:

An issuei that alieauy solu $1 million in ieliance on the exemption
pioviueu unuei Section 4(a)(6), foi example, woulu be pieventeu
fiom iaising capital thiough othei exempt methous anu, conveisely,
an issuei that solu $1 million thiough othei exempt methous woulu
be pieventeu fiom iaising capital unuei Section 4(a)(6).

This is incoiiect, howevei, because an issuei woulu nevei be subject to the limit foi longei
than 12 months. An offeiing woulu nevei be pieventeu; it coulu only be uelayeu.

The $1 million cap piovision states that the "aggiegate" amount of "secuiities" "solu to all
investois" shall not exceeu the $1 million limit in any 12-month peiiou. These teims aie
unambiguous. The SEC's inteipietation makes a mockeiy of Congiess's plain English use of
the phiase in the piovision: "incluuing any amount solu in ieliance on the exemption
2S
pioviueu unuei this paiagiaph." The only iational inteipietation is that the teim
"incluuing" means that the categoiy of offeiings to which the $1 million cap applies
"incluues" ciowufunuing offeiings. It is iiiational to inteipiet the teim "incluuing"
ciowufunuing offeiings to mean "only" ciowufunuing offeiings, just as it woulu be
iiiational to twist the meaning of a statute to enable billion-uollai businesses that conuuct
billion-uollai offeiings the ability to iely on the ciowufunuing exemption. Finally, the
Commission's inteipietation flatly contiauicts its iepeateu chaiacteiization of the entities
foi which ciowufunuing was intenueu as "small businesses" iaising "small uollai amounts"
in oiuei to iemeuy existing "funuing gaps."

2($*+%&& &3(4)# 6(,,4$56"'% '( '3% 2(,,5&&5($ '3"' '3% D6' 7"& 5$'%$#%# '( -+(.5#%
" )5,5'%# 6+(7#14$#5$* %=%,-'5($ 1(+ )(7 #())"+@",(4$' (11%+5$*& /8 &'"+'4-& "$#
/4&5$%&&%& '3"' ,5*3' ('3%+75&% %=-%+5%$6% " *%$45$% 14$#5$* *"-9 2($*+%&& &3(4)#
%=-)"5$ '( '3% 2(,,5&&5($ '3"' '3% E> ,5))5($ F"**+%*"'%G )5,5' ($ '3% F(11%+ "$# &")%
(1 &%64+5'5%&G B$(' ($)8 6+(7#14$#5$* &%64+5'5%&C '( F"))G 5$.%&'(+& B$(' H4&'
6+(7#14$#5$* 5$.%&'(+&C +%1)%6'& '3% 4$#%+&'"$#5$* (1 2($*+%&& '3"' " /4&5$%&& '3"' 5&
"/)% '( +"5&% ,(+% '3"$ E> ,5))5($ 75'35$ " ,%+% >? ,($'3& 5& $(' '3% I5$# (1 14$#5$*@
*"- /4&5$%&& (+ )(7@#())"+ ",(4$' (11%+5$* 6($'%,-)"'%# /8 '3% D6'9

!;" <*=*% +$ !$>&0%=&$%0 ?@ !$>&0%+(0

viitually eveiy membei of Congiess who has spoken about the Act has affiimeu the
impoitance of investoi piotection, anu the Act's most impoitant investoi piotection
piovision is its limit on the amount that investois may invest. This piovision is ciitical
because typically one-thiiu to half of small businesses fail within the fiist few yeais of theii
founuing.
27
Ciowufunuing businesses may have a highei concentiation of businesses that
weie iejecteu by angel investois, which suggests that theii failuie iate may be even highei,

27
The uata vaiies gieatly as to small business failuie iates, but most show about a 4u to Su
peicent failuie iate aftei thiee yeais. 0%%3 %#/#, Scott Shane, Small Business Failuie Rates by
Inuustiy: The Real Numbeis, www.smallbiztienus.com (Sep. 24, 2u12). The Commission
cites vaiious stuuies that show similaily high failuie iates. 0%% Pioposing Release at SSS
("Theie is bioau eviuence that many of these potential issueis aie likely to fail aftei
ieceiving funuing.").

24
a view with which the Commission agiees.
28
Thus, a substantial peicentage of investments
maue in small businesses will be woithless within a few yeais. Investois in these fiims will
lose theii entiie investment.

Small business failuies aie not typically the iesult of fiauu. They aie 75(-.%(( failuies that
iesult fiom incompetence anuoi inexpeiience. This means that, no mattei what
uisclosuies aie pioviueu, sophistication tests aie applieu, oi inteimeuiaiy iules aie
auopteu, about half of ciowufunuing investments in ciowufunueu staitups may be a total
loss. This woulu not necessaiily ieflect negatively on ciowufunuing, although one hopes
that ciowufunuing woulu iesult in impioveu suivival iates. The only way to piotect
investois fiom excessive losses is to limit the amount that they aie peimitteu to invest.

The Act imposes two foims of investment limits on ciowufunuing investois as follows:

The aggiegate uollai amount of investments in any 12-month peiiou in secuiities of
a single ciowufunuing issuei (incluuing ciowufunuing secuiities); anu

The aggiegate uollai amount of investments in all ciowufunuing secuiities in any
12-month peiiou.


In each case the uollai limit is the same: between $2,uuu anu $1uu,uuu, uepenuing on the
investois' wealth anu net woith. Thus, the limits piotection investois against the two
piimaiy iisks: (1) issuei iisk (the iisk that a single ciowufunuing issuei will fail), anu (2)
ciowufunuing iisk (the iisk of investing in ciowufunuing offeiings by multiple issueis). In
auuition, the limits aie geneially baseu on a peicentage of net woithincome, which moie
closely aligns the uollai amount at iisk on one hanu, with the ability of the investoi to beai
the loss on the othei. This is a significant impiovement ovei the application of investment
limits in othei scenaiios. In contiast, the SEC's Reg B allows an investoi with $1 million in

28
0%% -"# at SSS ("Because we expect that issueis that woulu engage in offeiings maue in
ieliance on Section 4(a)(6) woulu potentially be in an eailiei stage of business uevelopment
than the businesses incluueu in the above stuuies, we believe that issueis that engage in
secuiities-baseu ciowufunuing may have highei failuie iates than those in the stuuies citeu
above.").
2S
new woith to bet all of it on a single offeiing, while an investoi with only $999,999 can
invest nothing. While the paiticulai uollai limits that Congiess chose aie questionable
(they allow someone with no income anu $2,uuu in assets to invest theii last penny in a
ciowufunuing offeiing), anu ovei a numbei of 12-month peiious any ciowufunuing
invesois coulu expeiience uevastating losses, Congiess shoulu be applauueu foi uesigning
a stiuctuie that pioviues gieatei piotection against financially uevastating losses.

The Commission iecognizes the investoi piotection puipose of the limits on ciowufunuing
investments by investois. It stateu in the Pioposing Release:

Congiess pioviueu impoitant investoi piotections foi ciowufunuing
tiansactions unuei Section 4(a)(6), incluuing inuiviuual investment
limits.
29


Bowevei, wheie theie is any ambiguity in the opeiation of these investoi piotection limits,
the Commission seems to have opteu to inteipiet them to peimit 21&/%& investments by 2%((
8%12$,9 investois. 0nuei the status quo, issueis may sell secuiities to investois who aie
below ceitain net woith anu income floois only puisuant to a public offeiing anu unuei a
limiteu numbei of exemptions. Wheie the law uepaits fiom the status quo with iespect to
the piotection of investois, as is the case with ciowufunuing, it is incumbent that any
ieuuction in investoi piotection occui only wheie the law is cleai. Wheie theie is uoubt,
the iegulatoi shoulu eii on the siue of the status quo unless Congiess has expiesseu its
cleai intent. Bowevei, the Commission seems to view eveiy piovision of the Act as
intenueu to inciease access to capital foi small businesses without any iegaiu foi investoi
piotection goals (notwithstanuing that weak investoi piotection is likely to unuei the
ciowufunuing maiket anu huit small businesses).

This appioach is ieflecteu in the SEC's position on the investment limits in Section
4(a)(6)B), in which theie is a flat contiauiction in the application of the investment limits.
Subpaiagiaph (B)(i)'s limit applies "if %5'3%+ the annual income oi the net woith of the

29
!"# at 12.

26
investoi is less than $1uu,uuu." Subpaiagiaph (B)(ii)'s limit applies "if %5'3%+ the annual
income oi the net woith of the investoi is equal to oi moie than $1uu,uuu." The piovisions
aie cleai as long as an investoi's income anu net woith aie both below oi both equal to oi
above $1uu,uuu. Bowevei, if one is below $1uu,uuu anu the othei is equal to oi above
$1uu,uuu, both stanuaius apply. Such a patent uiafting eiioi is, iionically, a ieflection of
the uaik siue of ciowu psychology. Bozens of expeits, peihaps hunuieus, faileu to uetect
this eiioi uuiing the uiafting phase because we believeu that the Empeioi ceitainly coulu
not be walking the stieets with no clothes on. Nonetheless, the contiauiction exists, anu the
Commission cannot auopt iules without iesolving it.

Noimally, one woulu iesolve such a contiauiction in way that fuitheis the goal of the
paiticulai piovision. The Commission states expiessly that this is an investoi piotection
piovision, yet it has inteipieteu it to pioviue less investoi piotection iathei than moie. The
Commission's justification foi its position is that "this claiification woulu give effect to the
piovision anu woulu be consistent with Congiessional intent in pioviuing investment
limitations."
Su
Bowevei, taking the opposite position woulu 12(* be consistent with this
intent. viitually 1.9 inteipietation woulu impose investment limitations, which ienueis
the SEC's explanation is meaningless. The question is what the limit shoulu be when an
investoi has less than $1uu,uuu in income but at least a $1uu,uuu net woith, oi vice veisa.

Noie piecisely, the piimaiy investoi piotection concein is foi the investoi with a small
income oi no income who has manageu to save $1uu,uuu. This peison may be a ietiiee
living exclusively oi piimaiily on Social Secuiity who is paiticulaily vulneiable to
investment scams anu has no means of iecoveiing fiom losses.
S1
Thus, the Commission's
inteipietation woulu allow such a ietiiee with an annual income of $2S,uuu anu $1uu,uuu
in assets to invest $1u,uuu in a ciowufunuing offeiing, wheieas an investoi-piotection

Su
!"# at 24.

S1
In contiast, a peison who eains moie than $1uu,uuu in thiee consecutive yeais is likely to
be in much bettei position to absoib a 1uu peicent loss. Theie is no basis, howevei, in
inteipieting Subpaiagiaph (B) uiffeiently foi income anu net woith.

27
oiienteu inteipietation woulu limit hei investment to $S,uuu. Aumitteuly, Congiess cleaily
ueciueu that it is appiopiiate foi a ietiiee living on Social Secuiity with only $1uu,uuu
saveu to make a $S,uuu investment, which ceitainly makes the SEC's position seem benign
in compaiison. But that is not the iulemaking issue. What is uifficult to unueistanu is why
the Commission woulu choose to exaceibate an alieauy bau situation by inteipieting a
contiauiction in an investoi piotection piovision in a way that fuithei +%#46%& investoi
piotection.
S2
This is uifficult to unueistanu, in pait, because the Commission pioviues no
uiscussion of the potential haim to investois fiom its position. The moie that vulneiable
ciowufunuing investois expeiience financial uistiess as a iesult of ciowufunuing, the less
likely it is that the ciowufunuing maiket will succeeu. The SEC's position is not uoing small
businesses any favois.

2($*+%&& &3(4)# ",%$# '3% D6' '( 6)"+518 '3"' 51 %5'3%+ "$ 5$.%&'(+J& $%' 7(+'3 (+
5$6(,% 5& /%)(7 E><<:<<<: '3%$ '3% E?:<<< K L -%+6%$' 5$.%&',%$' )5,5' "--)5%&: (+
6(,,4$56"'% '( '3% 2(,,5&&5($ '3"': -%$#5$* 6)"+5156"'5($ /8 2($*+%&&: '3%
6($'+"#56'5($ 5$ '3% D6' &3(4)# /% 5$'%+-+%'%# 6($&5&'%$' 75'3 5'& 5$.%&'(+ -+('%6'5($
-4+-(&%9

;" !$>&0%+( A8)4*/*B)%*+$0 )$9 C$+,4&9'&

The Commission has pioposeu that inteimeuiaiies be peimitteu to iely on the
iepiesentations of investois iegaiuing theii eligibility to invest. The Commission must be
minuful of imposing unnecessaiy buiuens on ciowufunuing, but in this iespect it is
impeiative that stiongei pioceuuies be iequiieu when confiiming investois' eligibility.
0ne pioblem is that investois will ioutinely consiuei the value of theii home in calculating
theii net woith, anu may even neglect to ieuuce that amount by any outstanuing moitgage.
Inteimeuiaiies shoulu be iequiieu to obtain specific confiimation iegaiuing the investois'

S2
In a belateu lettei to Congiess, foimei SEC Chaiiman Shapiio expiessions hei conceins
iegaiuing the inauequacy of investoi piotections unuei ciowufunuing. If this uiu not
incluue minimizing the investment amounts maue by the most vulneiable Ameiicans, it is
haiu to imagine to what she was iefeiiing. It appeais that the SEC's position seems to have
taken shaip tuin since 2u12.

28
calculation, such as an account statement that shows the value of an investoi's secuiities
account oi one oi moie pay stubs that show theii income. These uocuments can be sent
electionically without an unieasonable buiuen on the investoi. At minimum, investois
shoulu be askeu specifically about whethei they have incluueu the value of theii home in
theii calculation.

A seconu pioblem is that investois will have an incentive to inflate theii net woith oi
income both to establish theii eligibility anu to inciease the amount they aie peimitteu to
invest. Foi example, an investoi with a $9u,uuu net woith may iepiesent that the investoi
has a $1 million net woith in oiuei to be alloweu to invest at the 1u% level anu invest all of
it, iathei than $S,uuu alloweu unuei the Act. The total ieliance on self-ceitification ignoies
the fact that these aie not just limits on issueis; the limits also effectively constiain
investois ability to invest in ceitain offeiings. Self-ceitification uoes not take investoi
eligibility because it imposes absolutely no contiols on investois' ability to ciicumvent the
limits, anu it imposes no obligation on the pait of issueis oi inteimeuiaiies that they aie
not being ciicumventeu. This appioach cieates a mutual incentive to iequiie as little
infoimation as possible so as to pioviue the gieatest fieeuom to both siues.

In view of the likelihoou that investois will lose theii entiie ciowufunuing investment, the
Commission shoulu implement pioceuuies to ensuie that investois can affoiu to lose theii
entiie investment.

;!" !$>&0%+(0D :&>*&, +/ !$>&0%+(EF98B)%*+$ 3)%&(*)4

The Act iequiies that inteimeuiaiies "ensuie that each investoi ieviews investoi-euucation
mateiials," which the Commission appeais to have suggesteu may be satisfieu by having
the investoi check a box that they have ievieweu the mateiial. Bowevei, the investoi-
euucation piovision imposes a uiiect iequiiement that investois "ieview" infoimation,
wheieas Congiess iequiie only that investois "positively affiim" theii unueistanuing of the
iisk of a total loss anu theii ability to beai such a loss. Allowing an investoi to check a box
stating that the investoi has ievieweu investoi-euucation mateiials applies a "positively
affiims" that Congiess chose not to apply in this case.
29

Anyone who uses a computei ioutinely checks boxes stating that they have ieau licensing
teims anu othei uisclosuies when they know that they have not. They will uo the same
with iespect to investoi-euucation mateiials. The check-the-box appioach is especially ouu
because an inteimeuiaiy coulu easily ueteimine whethei the ielevant uocument hau been
openeu oi the investoi has actually sciolleu past the fiist few lines. This woulu
uemonstiate that the investoi hau $(' ievieweu the infoimation, but the inteimeuiaiy
woulu be alloweu to ignoie this infoimation. The Commission shoulu not accept this
appioach as satisfying the "ieview" iequiiement.

It is impiacticable, of couise, to iequiie inteimeuiaiies watch ovei investois to confiim
that they have ieau investoi-euucation mateiials. Bowevei, it woulu be piacticable to
iequiie investois to take a quiz that uemonstiateu that they hau ievieweu it, a methou that
the Commission has suggesteu coulu be satisfactoiy. This quiz coulu be combineu with the
quiz that inteimeuiaiies aie otheiwise iequiieu to auministei to confiim each investoi's
unueistanuing of liquiuity iisk anu the iisk of investing in small businesses. Alteinatively,
the Commission coulu iequiie that the investoi scioll thiough a seiies of web pages that
show only one oi two shoit sentences in a laige font setting foith the most impoitant
investoi-euucation facts, with a button confiiming that they have ieau them anu a link to
moie infoimation ielateu to that web page.

;!!" 3&)$*$' +/ G!$>&0%+(H )$9 G!$>&0%+( )$9 %-&*( I6+80&H

The investment limit unuei the Act applies to the "aggiegate amount solu to "$8
5$.%&'(+."
SS
The same piovision iefeis in subpaiagiaph (B)(i) to "the annual income oi the
net woith of the investoi." Subpaiagiaph (B)(ii) also iefeis to "the annual income oi the net
woith of '3% 5$.%&'(+." In each case, the teim "investoi" is singulai. None of the foiegoing
piovisions iefeis to "investois." None of the foiegoing piovisions states oi even implies
that the teim "investoi" shoulu be inteipieteu to mean anu "investoi" "$# '3%5+ &-(4&%.


SS
Secuiities Act 4(a)(6)(B).

Su
Nonetheless, the Commission chose to inteipiet the singulai "investoi" to incluue the
"investoi's" spouse.
S4
The SEC's only justification foi inteipieting a singulai noun to
iepiesent a couple is that it:

believe|sj that this appioach is consistent with the iules foi
ueteimining accieuiteu investoi status because the accieuiteu
investoi uefinition contemplates both inuiviuual anu joint income anu
net woith with a spouse as methous of calculating annual income anu
net woith.
SS


This explanation might make sense but foi the fact that it is $(' the accieuiteu investoi
stanuaiu that is being applieu. It is the investment limit foi investments in ciowufunuing
offeiings, wheie Congiess chose to use the singulai teim "investoi."

Noi is the SEC's position consistent with its own accieuiteu investoi uefinition. The
accieuiteu investoi uefinition iequiies at least $2uu,uuu in income foi an inuiviuual
investoi, but the joint income iequiiement is highei, at $Suu,uuu. Even assuming that it has
the authoiity to ieplace Congiess's ciowufunuing stanuaiu foi a single investoi with a
stanuaiu foi singles anu couples, which it uoes not have, the Commission has violateu its
own position that the minimum foi a couple shoulu be L< -%+6%$' 35*3%+9

Rathei than iecognizing that Congiess cleaily chose $(' to auopt this aspect of the
appioach to joint net woith anu income that appeais in the uefinition of accieuiteu
investoi, the Commission seems to have ueciueu that Congiess &3(4)# 3".% auopteu this
appioach.


S4
0n a ielateu mattei, the Commission asks whethei the S peicent limit shoulu apply to the highei
oi lowei of the investoi's income oi net woith. The Commission is coiiect that is not expiessly
stateu in subpaiagiaphs (B)(i) anu (ii). It woulu be ieasonable, if not necessaiy, to inteipiet the
placement of the phiase "the gieatei of" immeuiately pieceuing the $2,uuu anu S peicent limits to
mean that the phiase also applies to "the annual income oi the net woith."

SS
Pioposing Release at 2S

S1
This is also uespite the fact that Congiess knew veiy well how to apply the accieuiteu
investoi uefinition when it believeu that the stanuaiu was appiopiiate. Congiess uiu
piecisely that when the stanuaiu that it pioviueu that ciowufunuing net woith anu income
shoulu be "calculateu in accoiuance with" the calculation of net woith anu income foi an
accieuiteu investoi. Thus, Congiess specifically chose the accieuiteu investoi calculation
methouology (%#/#, the exclusion the value of a home in calculating net woith) but not
accieuiteu investoi tieatment of a couple's income of net woith, yet the Commission seems
to believe that this was a meie Congiessional oveisight that it is the SEC's pieiogative to
fix.

2($*+%&& &3(4)# +%5'%+"'% '( '3% 2(,,5&&5($ '3"' '3% &5$*4)"+ '%+, F5$.%&'(+G ,%"$& "
&5$*)% 5$.%&'(+ "$# 4+*% '3% 2(,,5&&5($ $(' '( %=6%%# 5'& "4'3(+5'8 /8 ",%$#5$* '3%
D6' '( 6+%"'% " 6+(7#14$#5$* &'"$#"+# 1(+ '3% $%' 7(+'3 (+ 5$6(,% (1 6(4-)%& 4$'5) "$#
4$)%&& 2($*+%&& 3"& #5+%6'%# 5' #( &(9

;!!!" J*0K8)4*/*B)%*+$ +/ 5(+,9/8$9*$' !008&(0 L-)% M(& *$
;*+4)%*+$ +/ %-& MB%

Congiess gianteu the Commission expiess authoiity to piohibit ceitain issueis fiom
ielying on the ciowufunuing exemption. The Commission pioposes to excluue issueis that
have not pioviueu to investois the annual iepoits that aie iequiieu unuei the Act following
a piioi ciowufunuing offeiing. In my view, issueis that have uemonstiateu an inability to
comply with the ($)8 obligation that continues aftei a ciowufunuing shoulu not be alloweu
to engageu in anothei ciowufunuing offeiing until they have come into compliance. The
ueliveiy of the annual iepoit is entiiely within the contiol of the issuei. Its inability to
make this uisclosuie shows that it shoulu be ielieu upon to make appiopiiate uisclosuies
in the couise of new offeiing.

Bowevei, the Commission has pioposeu to uisqualify issueis only if they have not fileu anu
ueliveieu theii '7( most iecent iepoits. 0nuei this stanuaiu, an issuei coulu go 2S months
anu Su uays without having fileu a iepoit; inueeu, it might $%.%+ have fileu a iepoit. Theie
is no ieason that an issuei that is cuiiently uelinquent on the filing oi ueliveiy of one
S2
iepoit, much less two shoulu be alloweu to avail itself of the ciowufunuing exemption.
Peimitting such issueis to paiticipate in the same maiket as small businesses that uo
comply with the law will only uegiaue investoi confiuence in the ciowufunuing maiket anu
cieate an unlevel playing fielu by imposing costs of some issueis that aie not imposeu on
otheis.

2($*+%&& &3(4)# %$#(+&% '3% MN2J& %=6)4&5($ (1 6%+'"5$ 5&&4%+& '3"' "+% #%)5$O4%$' ($
'3%5+ "$$4") +%-(+'5$* (/)5*"'5($ 4$#%+ '3% D6' "$# %$6(4+"*% '3% 2(,,5&&5($ '(
-+(35/5' "$ 5&&4%+ 1+(, +%)85$* ($ '3% 6+(7#14$#5$* %=%,-'5($ 4$'5) '3% 5&&4%+ 5&
64++%$' ($ 5'& "$$4") +%-(+'5$* (/)5*"'5($9

!N" 1OPPQPPP L(*''&( /+( M89*%&9 7*$)$B*)40

The Act iequiies that a ciowufunuing issuei pioviue auuiteu financial statement if the
amount of the offeiing exceeus $Suu,uuu. Bowevei, it also authoiizes the Commission to
establish some othei amount. This means that the Commission coulu iaise oi 2*8%& this
amount, yet the Commission uesciibes this authoiity as peimitting only an inciease in the
amount.
S6
The Commission shoulu acknowleuge that this authoiity also allows foi a
ieuuction in this amount anu that it will, in fact, ieuuce the amount if subsequent events
waiiant such a ieuuction.

Such an inciease oi ieuuction may be appiopiiate in the futuie, but the Commission uoes
not cuiiently have any analytical oi empiiical basis to uo so. Bebt ciowufunuing, such as
offeieu by Piospei.com anu LenuingClub.com, has been opeiational foi yeais, may offei
insight into the ielevance of financial statement stanuaius in the ciowufunuing context.
uift-baseu ciowufunuing sites have enough of an opeiating histoiy they also might sheu
light on this question. Bowevei, the only cuiient basis foi the auuiteu financial tiiggei is
the specific uollai amount of $Suu,uuu pioviueu by Congiess. In view of the cuiient lack of

S6
Pioposing Release at note S1 (":+. Secuiities Act Section 4A(b)(1)(B)(iii) (giving the
Commission uiscietion to inciease the aggiegate taiget offeiing amount that iequiies
auuiteu financial statements).").

SS
any basis foi seconu-guessing this stanuaiu, the Commission shoulu neithei iaise noi
lowei the $Suu,uuu tiiggei. Bowevei, it shoulu piomptly establish infoimation collection
anu analysis pioceuuies in oiuei to ensuie that it has the capacity to evaluate changes in
the $Suu,uuu tiiggei in the futuie.


N" .>&(08?0B(*?&9 .//&(*$'0

The Commission has pioposeu that issueis be iequiieu to uisclose how they will allocate
shaies in oveisubsciibeu offeiings, but otheiwise giants them the uiscietion to ueciue how
the allocation will be uone. 0ne issue is that this is not what the pioposeu iule says, which
is that issueis must uisclose whethei it:

will accept investments in excess of the taiget offeiing amount anu, if
so, the maximum amount that the issuei will accept anu whethei
oveisubsciiptions will be allocateu on a pio-iata, fiist come-fiist
seiveu, oi othei basis.
S7


Reau liteially, this piovision woulu peimit an issuei to uisclosuie that it will allocate
oveisubsciiptions on a basis othei than pio iata oi fiist-come, fiist-seiveu anu pioviue no
othei guiuance.

This is a iathei minoi point ielative to the moie impoitant question of whethei to piohibit
allocations baseu on a fiist-come, fiist-seiveu basis. The Williams Act anu iules theieunuei
specifically piohibit tenuei offeis foi public companies fiom being maue on a fiist-come,
fiist-seiveu basis. Rule 14u-8 iequiies that tenuei offeis be maue on a pio iata basis
because fiist-come, fiist-seiveu offeis have the potential to cieate a stampeue effect.
S8
This
woulu be an appiopiiate stanuaiu to apply to ciowufunuing oveisubsciiption allocations.

S7
Pioposeu Rule 2u1(h).

S8
0%% San Francisco Real Estate Investors v. Real Estate Invest. Trust of Am., 692 F.2d 814, 817
(1st Cir. 1982) ("When Congress enacted the Williams Act in 1968, it recognized that an offeror
who hoped to gain control of a target firm might well rely on a stampede effect. The offeror
would encourage shareholders to decide in its favor by offering a high price for only a portion of
the outstanding shares and making that price available.). There are other anti-stampede
provisions under the Williams Act, including minimum offer period and withdrawal rights.
S4

The stampeue effect is, of couise, a ieflection of a less appealing foim of ciowu uynamics.
As Senatoi Neikley has stateu, the Act's piovisions "aie uesigneu to allow investois the
chance to caiefully consiuei offeiings, peimitting the 'wisuom of the ciowu' to uevelop,
iathei than peihaps just the 'excitement of the ciowu.'" The Senatoi was iefeiiing heie to
withuiawal iights, which aie also impoitant in mitigating the stampeue effect (the
Commission has pioposeu a withuiawal iight up to 48 houis befoie the ueauline foi an
offeiing
S9
). Bowevei, issueis will have an incentive to use a fiist-come, fiist-seiveu
appioach to allocating oveisubsciibeu offeiing to piessuie investois to act quickly without
thinking. This coulu be mitigateu by iequiiing pio iata allocations.

2($*+%&& &3(4)# %$6(4+"*% '3% 2(,,5&&5($ '( +%O45+% '3"' (.%+&4/&6+5/%# (11%+5$*&
/% "))(6"'%# ($ " -+( +"'" /"&5&: "& 5& +%O45+%# 4$#%+ '3% P5))5",& D6': 5$ (+#%+ '(
-+%.%$' '3% &'",-%#% %11%6' '3"' "))(6"'5($ ($ " 15+&'@6(,%: 15+&'@&%+.%# /"&5& ,"8
6+%"'%9

N!" I%)4& 7*$)$B*)4 I%)%&=&$%0

The Act iequiies that ciowufunuing issueis pioviue financial statements to investois. This
infoimation will be ciitical in helping the ciowu evaluate issueis, but it will not be helpful if
the infoimation is stale. Stale infoimation is of paiticulai concein heie because many
issueis will have a veiy shoit opeiating histoiy. Foi example, if an issuei with a calenuai
fiscal yeai begins opeiations in Becembei anu makes an offeiing the following }une, then
the financial statement fiom its most iecent fiscal yeai woulu covei only one month, -#%#,
one-seventh of the lifespan of the business.

The Act uoes not inuicate how cuiient the financial statements must be. The Commission
has pioposeu that financial statements neeu only be as iecent as the enu of the issuei's


S9
Pioposeu Rule Su4(a). The Act iequiies that issueis pioviue a "ieasonable oppoitunity"
to cancel theii oiueis piioi to sale, Secuiities Act 4A(b)(1)(u), anu 48 houis piioi to the
ueauline meets this iequiiement.

SS
most iecent fiscal yeai. Buiing the fiist 12u uays of an issuei's fiscal yeai, the financial
statements neeu only be as iecent as the enu of ;&%6%"-./ fiscal yeai. In the lattei scenaiio,
the issuei with a calenuai fiscal yeai that began opeiations in Becembei in Yeai 1 coulu
submit financials coveiing only that month foi a ciowufunuing offeiing beginning as late as
Apiil of Yeai S. The financials woulu be 16-months stale anu covei only one month in the
issuei's 17-month lifespan.

The SEC's pioposal will substantially uilute the value of ciowufunuing financials. The
iequiiements peimit extiemely stale infoimation ielative to the life of a fiim to be the basis
foi an investment uecision by nonaccieuiteu investois. It is uncleai how the wisuom of the
ciowu will be able to evaluate a fiim baseu on financial infoimation that may be effectively
iiielevant to an issuei's cuiient financial conuition.

The Commission coiiectly notes that an issuei must uisclose any mateiial changes that
have occuiieu since the uate of the financials. Foi example, issueis must uisclose mateiial
changes in iepoiteu ievenue anu net income. Bowevei, iequiiing such uisclosuie without
also iequiiing that the infoimation be pioviueu in the foimat of a financial statement
unueimines the puipose of using financial statements in the fiist place. A financial
statement is, in effect, a stanuaiuizeu way of oiganizing infoimation that facilitates
inteipietation anu compaiison. A geneializeu uisclosuie about changes in ievenues anu net
income uoes not satisfy this stanuaiu. It piomotes the uissemination of financial
infoimation in obtuse, inconsistent foimats. Enfoicement of the iequiiement to coiiect of
mateiial changes woulu be fai moie uifficult than enfoicement of a cleai financial
statement stanuaiu.

If changes in financial infoimation weie unlikely, this might not be a significant pioblem,
but eaily stage businesses aie veiy likely to expeiience changes in theii financial
infoimation ovei shoit peiious. These changes will be ciitical infoimation because they
will be both cuiient anu ieflect the possible uiiection of the business. This SEC's appioach
is also pioblematic because it leaves substantial uiscietion to issueis to upuate financial
S6
infoimation when the changes aie positive, while not uisclosing infoimation when it is
negative.

The Commission shoulu iequiie that ciowufunuing issueis pioviue tiuly 64++%$'
financials. These neeu not necessaiily meet the same uegiee of foimality. Foi laige
offeiings, the Commission coulu iequiie that issuei pioviue theii auuiteu financial
statements foi the two most iecently enueu fiscal yeais plus non-auuiteu (%#/#, CE0-
ceitifieu) financial statements
4u
thiough the enu of the month that enus no moie two
months befoie the month in which the offeiing begins (%#/#, an offeiing any uay in Naich
woulu iequiie financials enuing in }anuaiy). It shoulu not be buiuen foi an issuei what is
otheiwise pioviuing auuiteu financial statements.

Foi smallei offeiings that have less buiuensome financial statement iequiiements unuei
the Act, a mouifieu stanuaiu foi pioviuing cuiient infoimation might be appiopiiate.
Bowevei, peimitting issueis to sell shaies off of financial statements that may be 16-
months stale, especially wheie that 16-month peiiou may iepiesent almost the entiie
lifespan of the business, will not facilitate the uevelopment of an efficient maiket. Issueis
will exploit the oppoitunity to make offeiings baseu on stale infoimation anu theieby
uilute investoi confiuence in ciowufunuing.

2($*+%&& &3(4)# 5$1(+, '3% 2(,,5&&5($ '3"' +%O45+5$* ($)8 15$"$65") 5$1(+,"'5($ "& (1
'3% %$# (1 '3% ,(&' +%6%$' 15&6") 8%"+: 73563 ,"8 /% >;@,($'3& &'")% "' '3% '5,% (1 '3%
(11%+5$*: 75)) -+(.5#% 5$.%&'(+& 75'3 5$"#%O4"'% 5$1(+,"'5($ '( %.")4"'% 5$.%&',%$'&
"$# 4$#%+,5$% 6($15#%$6% 5$ '3% 6+(7#14$#5$* ,"+I%'-)"6%9 2($*+%&& &3(4)#
%$6(4+"*% '3% 2(,,5&&5($ '( +%O45+% '3"' 5&&4%+& -+(.5#% '3% ,(&' 64++%$' 15$"$65")
5$1(+,"'5($ -+"6'56"/)%: %.%$ 51 '3% ,(&' 64++%$' 5$1(+,"'5($ 6(,-)5%& 75'3 " )(7%+
&'"$#"+#9

4u
The Act's financial statement iequiiement coulu be ieau to iequiie cuiient financial statements
oi only the most iecent financial statements. In light of this lack of claiity, the Commission shoulu
be vieweu as having the authoiity to impose a ieuuceu iequiiement foi cuiient financials oi to
iequiie that cuiient financials be pioviueu that meet the Act's stanuaiu.
S7

N!!" FR%&$0*+$ +/ L*=& %+ 7*4& L)R&0

The Act iequiies that issueis iaising $1uu,uuu oi less in a 12-month peiiou file a copy of
theii most iecently "fileu" tax ietuin. The Commission inteipiets this iequiiement liteially,
which means that issueis that have obtaineu an extension to file theii ietuins woulu not be
subject to this iequiiement. The Commission asks whethei issueis shoulu be alloweu
ciicumvent this iequiiement simply by obtaining an extension of time to file.

In my view, it is ieasonable to inteipiet the uate a tax ietuin is "fileu" as a uate not latei
than the ueauline foi the filing. The Commission shoulu auopt this inteipietation in oiuei
to pievent issueis fiom impiopeily evauing the tax ietuin filing iequiiement. Alteinatively,
the Commission coulu impose this inteipietation when the issuei has nevei fileu a tax
ietuin in oiuei to ensuie that at least one tax ietuin is available.

0n a ielateu issue, the Commission asks whethei issueis shoulu be peimitteu to ieuact
peisonal iuentifying infoimation. The puipose of filing tax ietuins is to pioviue investois
with useable infoimation on which to base an investment uecision. To the extent consistent
with this puipose, the Commission shoulu peimit the ieuaction of peisonal infoimation.