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55 Old Field Point Road

Greenwich, CT 06830
P 203.422.5000
F 203.422.2481
www.nyppex.com

Laurence G. Allen
Managing Member

D 203.422.5101
M 203.912.9265
E lallen@nyppex.com
December 28, 2009

The Honorable Christopher J. Dodd


448 Russell Building
United States Senate
Washington, DC 20510

Re: “Restoring American Financial Stability Act of 2009” – Private Placements

Dear Senator Dodd:

I am writing on behalf of NYPPEX, LLC to respectfully request that you revise the
discussion draft of the bill entitled the “Restoring American Financial Stability Act of 2009” (the
“Draft Bill”) to remove Section 928, which otherwise would eliminate the federal preemption of
state regulation of securities offerings made pursuant to Regulation D of the Securities Act of
1933 (the “1933 Act”) (“Private Placements”).

If the states are permitted to regulate Regulation D offerings of securities, it would have a
deleterious affect on the capital formation process for small businesses, eliminate a useful capital
raising tool for issuers of all sizes, and harm employees of start-up companies who often are
compensated with unregistered securities that may only be practically sold pursuant to
Regulation D.

Overview of NYPPEX

NYPPEX is a global securities firm that is registered with the U.S. Securities and
Exchange Commission and in all 50 states as a broker-dealer. Among other things, NYPPEX
provides access to private market liquidity for unregistered equity and debt related securities in
private companies and receivables and interests in a variety of private funds.

NYPPEX is recognized by the U.S. Internal Revenue Service through a private letter
ruling in 2004, as a Qualified Matching Service for private partnerships under IRS §1.7704. The
NYPPEX IPL Private Trading System™ matches buy and sell orders, anonymously and at low
transaction cost. In 2009, private transactions advised by NYPPEX were valued at over $3
billion.

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Background on the National Securities Markets Improvement Act of 1996

As you know, when Congress adopted the National Securities Markets Improvement Act
of 1996 (“NSMIA”)1 it eliminated the duplicative system of federal and state regulation of
securities offerings that had existed since the enactment of the 1933 Act by providing for federal
preemption of state registration and review of transactions involving, inter alia, securities offered
pursuant to Regulation D.

In the Joint Explanatory Statement of the Committee on Conference concerning NSMIA,


the House and Senate managers (the “Managers”), including yourself, noted that:

“The development and growth of the nation's capital markets has prompted the
Congress to examine the need for legislation modernizing and rationalizing our
scheme of securities regulation to promote investment, decrease the cost of
capital, and encourage competition. The Managers have sought to achieve these
goals while also advancing the historic commitment of the securities laws to
promoting the protection of investors. In particular, the system of dual Federal
and state securities regulation has resulted in a degree of duplicative and
unnecessary regulation. Securities offerings and the brokers and dealers engaged
in securities transactions are all currently subject to a dual system of regulation
that, in many instances, is redundant, costly, and ineffective.
...
“The Managers have sought to eliminate duplicative and unnecessary regulatory
burdens while preserving important investor protections by reallocating
responsibility over the regulation of the nation's securities markets in a more
logical fashion between the Federal government and the states.”2

Discussion of Draft Section 928

If the Draft Bill is enacted with Section 928 intact, Congress will make the capital raising
process even more difficult for companies of all sizes who are in need of funds following the
recent financial crisis. Specifically, if states are no longer preempted from regulating the
Regulation D private placements, a company that seeks to raise capital pursuant to Regulation D
will need to obtain pre-review by and pre-approval from each individual state in which potential
investors reside who may be interested in investing in the company’s securities. Unlike today’s
notice filing process for Regulation D offerings, this could mean a substantive review state-by-
1
Pub. L. 104-290, 110 Stat. 3416 (Oct. 11, 1996).
2
H.R. REP. NO. 104-864 (1996) (Conf. Rep.), available at http://thomas.loc.gov/cgi-
bin/cpquery/?&sid=cp104xbGcm&refer=&r_n=hr864.104&db_id=104&item=&sel=TOC_120433&.

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state review of the merits of an offering, with significant additional expense to issuers, including
through greater legal fees and filing costs.

This 50-state vetting requirement would apply notwithstanding the sophistication of the
potential investors. This concept of sophisticated investors having the knowledge and resources
to protect themselves has long been a part of the U.S. securities regulatory regime, including
when Congress added Section 4(6) and its “accredited investor” concept to the 1933 Act as part
of the Small Business Investment Incentive Act of 1980.3

States Currently Have Authority to Regulate Regulation D Offerings

Notwithstanding Congress’s preemption of state authority to require the registration of


offerings of “covered securities,” it preserved their rights to investigate and bring enforcement
actions in connection with fraud or deceit in connection with securities and securities
transactions. Through the states’ investigative and enforcement powers, which we have seen
exercised vigorously in recent years across the country, state authorities are able to prosecute and
deter wrongful conduct in their respective jurisdictions. In addition, the states as well as the
Financial Industry Regulatory Authority and the Securities and Exchange Commission have
authority to regulate the broker-dealers who offer and sell securities to offered pursuant to
Regulation D.

*****

I appreciate the opportunity to comment to you on the Draft Bill. I would be glad to
discuss my concerns with you and to discuss the market for privately placed securities generally.

Sincerely,

Cc: Congressman Jim Himes, Greenwich, CT

3
Pub. L. 96-477 94 STAT. 2275 (Oct. 21, 1980).

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