55 Old Field Point Road Greenwich, CT | Securities (Finance) | Securities Act Of 1933

55 Old Field Point Road Greenwich, CT 06830 P 203.422.5000 F 203.422.2481 www.nyppex.


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-byPub. L. 104-290, 110 Stat. 3416 (Oct. 11, 1996). H.R. REP. NO. 104-864 (1996) (Conf. Rep.), available at http://thomas.loc.gov/cgibin/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.



Congressman Jim Himes, Greenwich, CT


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

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