Month: July 2012

Iran, Tuvalu, and Oil

Anyone who works with sanctions monitoring most likely hates ships. Their names are so common that the ships’ names routinely cause false positives. (My software has a button to exclude ships’ names, but I often forget to activate that feature.) Now the Iranian oil sanctions program is highlighting some issues with ships.

The tiny Pacific island nation of Tuvalu is prepared to re-flag a fleet of National Iranian Tanker Co. vessels to operate under Tuvalu’s ship registry.  From a personal perspective, it will likely mean more ship names in the databases. Fortunately, my company doesn’t deal with ships so it will only affect me when I forget to select the right option.

On a global scale, it may be an effective way to hide ownership and get cash to Iran. There is still the problem of moving the cash through the global financial system.

Rep. Howard Berman, the ranking member of the House Foreign Relations Committee wrote a letter to Willy Telavi, prime minister of Tuvalu, to cancel the registry.

It is my understanding that the Government of Tuvalu has permitted the National Iranian Tanker Company (NITC) to reflag as many as 22 vessels under the Tuvalu ship registry, allowing them to remain under NITC ownership and continuing to transport Iran’s crude oil exports. This has the effect of assisting the Iranian regime in evading U.S. and EU sanctions and generating additional revenues for its nuclear weapons program and its support for international terrorism.

It would be profoundly disappointing to me if your government has acted in contravention of the broad international coalition that is working together to use peaceful means, including economic sanctions, to change the threatening behavior of the Iranian regime.

Prior to selling its soul to Iran, Tuvalu was mostly known for its strong position on global warning. The county is small and flat. At just 26 square kilometers Tuvalu is the fourth smallest country in the world, larger only than the Vatican City at 0.44 square kilometers, Monaco at 1.98square kilometers and its neighbor Nauru at 21 square kilometers. At its highest, Tuvalu is only 4.8 meters above sea level. A dramatic rise in sea level could make the country inhabitable.

Why would such an environmentally fragile country help a rogue nation? Tuvalu has been looking for a place to re-settle its inhabitants once sea levels rise. It seems unlikely that they would choose Iran for resettlement. I would assume it comes down to cash. I suspect Iran offered a big pile of cash, with some of it going directly to select Tuvalu officials.

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Image of Iranian and Tuvalu flags courtesy of crossed flag pins.com

The Rebirth of Regulation A Offerings

The Jumpstart Our Business Startups Act requires the Securities and Exchange Commission to amend Regulation A, raising the threshold for use of that exemption from $5 million to $50 million. From the numbers I’ve seen, Regulation A was rarely used as a source of raising capital. It seemed strange that it was included in the JOBS Act. But there were many strange things in the JOBS Act.

Section 402 of the JOBS ACT required the GAO to study the impact of state securities laws on Regulation A offerings. The GAO released its study: Factors That May Affect Trends in Regulation A Offerings.

The report confirmed the lack of use of Regulation A in capital raising. The number of Regulation A offerings filed with the SEC decreased from 116 in 1997 to 19 in 2011. Similarly, the number of qualified offerings dropped from 57 in 1998 to 1 in 2011.

The big difference is that Regulation A offerings are still subject to state securities laws. In contrast, Rule 506 offerings under Regulation D are not subject to the state securities law.

To contrast, there were 15,500 initial Regulation D offerings for up to $5 million in 2010 and 2011, compared to the 8 qualified Regulation A offerings during the same period.

One aspect of a Regulation A offering compared to a Regulation D offering is that it is subject to review, comment, and qualification by the SEC. According to the GAO report 20% of Regulation A filings were abandoned during the SEC comment process.

Another aspect of Regulation A is that the securities’ sales are not limited to accredited investors. So there is a larger pool of potential investors.

On the state side of the process, all states conduct a similar disclosure review as the SEC. Apparently some states will also engage in a merit review to determine if potential investors are getting a good deal. According to the report, businesses are generally advised by legal counsel to avoid Regulation A offerings in states that have a merit review.

So where does this leave Regulation A offerings in the new world of capital formation after the JOBS Act? I would guess in the same place. The big advantage of Reg A offerings over Reg D offering is that they can be sold to non-accredited investors. That comes with a lot of cost and lost time to go through the review process. I would guess that the new crowdfunding offering would be a more attractive alternative to reaching non-accredited investors. Of course, the regulations on crowdfunding do not yet exist and the mandatory equity crowdfunding portals do not yet exist.

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Independence Day and Compliance

What better way to celebrate the independence of the United States than by taking the day off from work, grilling meat, and watching stuff blow up. I’m doing the same thing on the blog and taking a vacation.


“The Second Day of July 1776, will be the most memorable Epocha, in the History of America. I am apt to believe that it will be celebrated, by succeeding Generations, as the great anniversary Festival. It ought to be commemorated, as the Day of Deliverance by solemn Acts of Devotion to God Almighty. It ought to be solemnized with Pomp and Parade, with Shews, Games, Sports, Guns, Bells, Bonfires and Illuminations from one End of this Continent to the other from this Time forward forever more. ”

– John Adams on July 3, 1776 to his wife (via A Tradition of Celebration by the Adams Family Researched by James R. Heintze)

 
Fireworks display by Agiorgio
CC BY SA

Wait a Bit Longer for Removing the Ban on General Solicitation and Advertising

On June 28 Securities and Exchange Commission Chairman Mary L. Schapiro testified that the SEC will not make the deadline for lifting the ban on general solicitation and advertising and the reasonable process for verification of accredited investors. Title II of the JOBS ACT gave the SEC 90 days to craft the regulation.

“As I stated to Congress prior to the passage of the Act, time limits imposed by the JOBS Act are not achievable. Here, the 90 day deadline does not provide a realistic timeframe for the drafting of the new rule, the preparation of an accompanying economic analysis, the proper review by the Commission, and an opportunity for public input.”

Since there has not even been a proposed rule available for comment, there was no doubt the SEC was going to miss the deadline.

The regulation will likely be a key change for private fund managers.

I don’t expect private funds to engage in bulk email or late night television commercials. I would expect more advertising in trade publications and more engagement with the media.

For me the bigger concern is what the SEC is going say about the “reasonable steps to verify that purchaser of the securities are accredited investors…” that the SEC has been empowered in include in this new regulation. The SEC has been empowered to implement requirements for years. It has just chosen not do any thing. The JOBS Act has given the SEC a little nudge to act.

Perhaps the SEC will not act.

The current method of self-certification for accredited investors seems to work for now. Imposing some requirement to gather financial information would dramatically increase the amount of sensitive personal information being transmitted and stored. That will mean firms will need to beef up their data security and deal with this new source of personal information. Inevitably, there will be a breach and investors identity’s will be stolen.

The current process of self-certification of investors seems to work well. Of course, I could see how the failure to review a potential investor could lead to fraud. It would seem to hurt the investor, committing to an investment he or she could not afford. perhaps it would be a red flag to regulators that the adviser is not conducting the diligence to conclude that an investor is accredited, and is therefore preying on unsophisticated investors.

However, for private funds the minimum investment amount is usually equal to or in excess of the standard for being an accredited investor. If the fund requires a minimum investment of $1 million, then the investor presumably has the $1 million net worth required by the accredited investor standard. Hopefully, the rule will contemplate that situation and not overly burden private funds.