Patrick T. Morgan
chief counsel
Missouri Securities Division
A.
What I’m Going to Talk About
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B.
Dealing with Counsel: Understanding their pressures and
the types of issuer’s counsel that you will deal with
First steps in writing effective comment letters
Suggested rules in writing an effective comment
How to write an effective comment letter
What My Comments are Based On
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Understand their pressures:
◦ Urgency to get an offering to market
◦ Representing the firm well in relation to the issuer
◦ Personal stake in professional reputation, ambition within the
firm, etc.
◦ Dealing with 50+ jurisdictions
◦ Other clients, distractions
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Issuer’s counsel: A Taxonomy
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Depending on whether the offering is coming out of a big or smaller
firm, you may interact with any combination of these people. Thus, who
you are talking to has implications for your interactions and
communications with issuer’s counsel and issuer’s registration in your
state.
◦ the fresh-out-of-law school associate: often not helpful, but eager to find the
right person; frequently submits the offering and responds to comment letters
◦ the experienced, diligent partner: fully aware of all aspects of this offering and
ready as an advocate for the issuer
◦ the seen-it-all paralegal: most commonly found in big firms, doesn’t think much
of fancy-pants lawyers, often handles nearly all aspects of state registration matters
◦ the senior partner: may not be aware his/her name is on the U-1 but, if engaged,
will be very knowledgeable about how these offerings are conducted
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First Steps in Writing Effective Comment Letters
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Suggested Rules for Writing an Effective Comment
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How to Write an Effective Comment Letter
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Upon receiving the file, consider sending an initial letter
which:
◦ notes the receipt.
◦ provides them a time-frame,
◦ alerts counsel to anything missing from the file (payment,
corporate resolutions, opinion of counsel, etc.), or
◦ informs them of any delays.
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Read the disclosure document first to get a sense of what
is happening, at least the summary at the beginning.
◦ Don’t just immediately apply the policy.
 Rule
1. When writing comment letters,
remember that state securities regulators
are to balance investor protection with
helping businesses raise capital.
 Rule
2. If you are applying a NASAA
policy, then first understand the issue that
the policy addresses.
◦ These policies are general and cannot address
the varied offerings we see.
◦ Sometimes the policies will require nuanced
application.
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Rule 3. When making a comment, specifically
refer to the document and page number/section
that you are discussing.
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Examples:
◦ “On page 12 of the Issuer’s prospectus, . . .”
◦ “The third risk factor states that . . . .”
◦ “Section 3.5 of the Issuer’s operating agreement does not
comply with . . . .”
 Rule
4. Mind the cut-and-paste.
◦ “Boiler plate comments will get you boiler
plate responses.”
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Rule 5. Specifically explain in writing what you
want disclosed or changed but be flexible as to how
that ultimately appears.
◦ Don’t merely state “show compliance with x policy” without
specifically referring to that part of the prospectus or other
document that generated the comment.
◦ If you want a response to your question but not necessarily an
amendment, then clearly state that: “In a response to this letter,
please explain . . . .”
Let’s look at some examples . . .
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Rule 5, examples:
◦ Page 5, in the Escrow Procedures section, states: “One of our directors,
John Johnson, is vice president of First Bank and Trust Company.” First
Bank and Trust Company is the escrow agent for the offering. The Risks
Related to Conflicts of Interest section and the Escrow Procedures
section of the prospectus should disclose that director Mr. Johnson is
current a vice president of commercial lending at First Bank and Trust
Company in Springfield and that this bank is the Company’s escrow agent.
◦ Please add disclosure to the relevant locations in the prospectus that
the selling commissions associated with the DRIP may be significantly
higher that the selling commissions offered by similarly-structured REIT’s
and that the DRIP effectively lowers the total return of your investment
(similar language will be acceptable).
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Rule 6. In your letter, do not hesitate to ask
counsel for assistance, such as to:
a. explain something that confuses you;
b. explain how something complies with a particular
NASAA policy or state regulation; or
c. point out where something is that you are looking
for.
Again, an example . . .
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Rule 6, Example:
On page 49, the prospectus’s summary of the
indemnification provisions states that the Issuer will
indemnify certain persons for liabilities except for,
among other things, “acts constituting . . . gross
negligence.” We cannot find where the operating
agreement states that liabilities in connection with
“gross negligence” will not be indemnified. Please
direct our attention to this section or amend the
prospectus accordingly.
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Rule 7. Give counsel a chance to advocate why a certain
requirement should be waived. (See Rules 1, 6.b.)
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Example:
NASAA SoP § III.B.4. requires that, in the case of sales to fiduciary accounts, the
applicable minimum standards are met by the “beneficiary, the fiduciary account, or by
the donor or grantor.” Currently, it does not appear that the Issuer’s offering complies
with this requirement, nor can we find where in the subscription agreement that the
minimum standards apply to beneficiaries or fiduciaries. Therefore, please:
a. direct our attention to those places in the appropriate documents showing that
the Issuer complies with this requirement;
b. amend the necessary documents to comply with the NASAA policy’s
requirement; or
c. explain, in a response to this letter, why the Commissioner should waive
this requirement, being sure to address how investor protection is not
compromised by waiving the requirement.
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Rule 8. If you see a way to solve a particular
problem, then discuss it with the issuer’s
counsel.
◦ The superior state securities examiner will measure
his worth by assisting in, where necessary, creative
solutions to an offering’s deficiencies, not by how
many offerings are withdrawn or denied. (See Rule 1.)
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Rule 9. Only make comments that genuinely add
to the worth of the offering or to investor
protection.
◦ Registration examinations are not issue-spotting tests: Just
because a comment can be made does not mean it has to be
made.
◦ When making a comment, consider it in light of the offering’s
specific circumstances and your state’s policies. (See also,
Rule 4.)
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Structure your letter in a sensible way.
◦ Don’t make counsel jump back and forth in a document or
between documents.
◦ Consider dividing up your letter into sections, such as:
 sequentially walking your comments through the various parts of the
offering prospectus, or
 creating headings that specify the particular NASAA policy (e.g.,
“Escrow of Promotional Shares,” “Risk Factors”) and then listing
your comments applying that policy to the issuer’s offering.
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In your comment letter, consider asking for the SEC’s other states’
comment letters, minding which states are disclosure and which are merit.
◦ Look at the Form U-1: it will—or should—tell you where else the offering is being
made.
◦ Example:
Please provide the name and telephone number of the SEC examiner reviewing
this offering and forward a copy of all correspondence received from the SEC
along with the Issuer’s response.
Please submit to the Securities Division copies of all comment letters from the
following jurisdictions along with your responses: Kansas, Nebraska, and
Washington. If you have not received letters from these jurisdictions at this
time, then please submit these documents to the Division when you do receive
and respond to the above comment letters. (Please note, if your responses to
the Federal and state regulators contain their comments verbatim, then you need
only provide us your responses.)
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When writing your letter, remember that your letters may,
as a practical matter, have some precedential effect.
◦ Two concerns:
 Issuers in the same industry—e.g., REITs, biofuels, SPACs—will
often follow what the state regulators are requiring in their industry’s
offerings.
 Subsequent offerings are often based on your comments to the
previous, similar offering, and inconsistent comments on similarlysituated offerings increase issuers’ and attorneys’ costs.
Let’s wrap up . . . .
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Balancing capital formation with investor protection
should drive your comments.
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When making a comment, provide the counsel specific
references and specific directives as to what you want.
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Do not hesitate to engage counsel to get help in
understanding or solving problems.