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SEC Talks Crowdfunding, Grapples With Accredited Investor Rules

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The Securities and Exchange Commission is reviewing the more than 40 comments it has received on a study on modifying the accredited investor definition and has received more than 100 offering statements filed since the agency’s capital-raising Regulation A+ rule was amended a year ago, SEC Chairwoman Mary Jo White said Tuesday.

Speaking at a meeting of the agency’s Advisory Committee on Small and Emerging Companies, White said that since the final Reg A+ rules went into effect last year, the agency “has qualified nearly 50” of the 100 offering statements in what she dubbed “a very interesting and dynamic space.”

The SEC released Reg A+, which makes it easier for small companies to raise capital, under the Jumpstart Our Business Startups (JOBS) Act on March 25, 2015.

As to other agency rules to facilitate small-business capital formation, White noted that as of Monday, more than 60 offerings have taken place with a total of $4.4 million in funds being committed by investors under the Regulation Crowdfunding rule, which took effect on May 16.

Since that date, 12 funding portals have registered with the Commission and become members of the Financial Industry Regulatory Authority, White said, adding that SEC staffers continue to “closely monitor the Regulation Crowdfunding and Regulation A+ markets and are available to answer questions.”

The U.S. Court of Appeals for the D.C. Circuit in mid-June shot down attempts by Massachusetts and Montana securities regulators to nullify Reg A+.

William Galvin and Monica Lindeen, the chief securities regulators for Massachusetts and Montana, respectively, argued that because the SEC “declined to adopt a qualified-purchaser definition limited to investors with sufficient wealth, revenue or financial sophistication to protect their interests without state protection. But the judge denied their request to vacate the rule.

Keith Higgins, director of the SEC’s Division of Corporation Finance, noted during the meeting that SEC staff is “working on fine-tuning” its review of Reg A+ filings.

Accredited Investors

Meanwhile, the SEC has been taking comments on the SEC staff study released in December on ways to revise the accredited investor definition.

The Dodd-Frank Act requires the SEC to review the accredited investor definition every four years. Both the SEC’s Investor Advisory Committee and the Advisory Committee on Small and Emerging Companies have recommended changes to the accredited investor definition.

The small company advisory committee has recommended that while the agency should not change the current financial thresholds in the definition except to adjust on a going–forward basis to reflect inflation, the SEC should consider expanding the definition to take into account measures of “nonfinancial sophistication,” regardless of income or net worth, in order to expand the pool of accredited investors.

The committee discussed on Tuesday “nonfinancial” qualifying options, which could include allowing those with a “minimum amount of investments” to qualify; those with certain professional credentials; investors with experience investing in “exempt offerings”; knowledgeable employees of private funds; and devising an “accredited investor” test.

But committee members grappled with how nonfinancial criteria could meet their proposed standard of being able to be “ascertained with certainty.”

Stephen Graham, co-chair of the committee and of Fenwick & West’s Life Sciences Practice as well as managing partner of the firm’s Seattle office, said he wasn’t sure how to set the parameters for a “minimum amount of investments.”

Committee member Annemarie Tierney, vice president and head of strategy and new markets at Nasdaq Private Market, agreed, stating: “Is it the number of investments or the amount? I’m all for adding [the option] it but I don’t have enough data to assess a number.”

Laura Yamanka, president and co-founder of teamCFO Inc., a financial and accounting firm offering onsite customized CFO/controller and accounting services to small to medium-sized businesses and nonprofits, noted her support for “broadening the pool of potential investors,” to give “people the opportunity to play.”

But Paul Elio, founder of startup automaker Elio Motors, warned in his skyped remarks that “it’s a fine line to walk” in how far the investor playing field should be opened. Noting that he “respects the little guy,” Elio stated the importance of ensuring they can understand the risks “eyes wide open” of investing in startup ventures. He noted the importance of investors, for instance, paying off high card credit debt and having a savings cushion before taking such a leap.

— Check out So You Can Invest in Crowdfunding. Now What? on ThinkAdvisor.


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