Changing regulations brings out the passion in people as more than 130 individuals, firms and associations responded to the Securities and Exchange Commission’s request for comments on its Concept Release on Harmonization of Securities Offering Exemptions. The deadline for comments was Sept. 24, and though several addressed everything from private fund offerings to crowdfunding, many of the writers had comments on the SEC’s question on whether to relax the “accredited investor” rule of Regulation D.

The rule affects many other aspects discussed in the concept release, in which the SEC proposes several exemptions that would help capital fundraising. “We believe our capital markets would benefit from a comprehensive review of the design and scope of our framework for offerings that are exempt from registration,” states the SEC. “More specifically, we also believe that issuers and investors could benefit from a framework that is more consistent and addresses gaps and complexities.”

One discussion the SEC brings up in its expansive release is “If we were to permit an investor advised by a registered financial professional to be considered an accredited investor, should we consider any other investor protections in these circumstances? For example, should we require educational or other qualifications for a financial professional advising such an investor and, if so, what type of qualifications? What additional disclosure, if any, should the financial professional be required to provide to the investor in connection with an investment available only to accredited investors? Should the financial professional be required to assess the appropriateness of the investment in an exempt offering on a transaction-by-transaction basis, or would it be appropriate to make the assessment looking at the investor’s investment portfolio as a whole?”

Blowback

There wasn’t a consensus on where the majority stood on the definition. Many thought the SEC should make changes to the rule or drop any restrictions, while many took offense at the idea that the SEC seemed to be more intent in expanding the private markets than protecting customers. Wrote George R. Humm, CFA: “I have over 50 years experience in the securities industry and correct me I’m wrong but I thought the purpose of the SEC was to enforce the securities laws in order to protect investors and not economic development.”

Some were clearly against changes to the rule, including Better Markets, a nonprofit group founded in the wake of the 2008 financial crisis to improve markets for all investors, which noted the rule is one of the SEC’s “most important retail investor protections and should not be diluted.” It also stated the rule has been a “clear demarcation” in protecting those who need protection “and has allowed market participants, including broker-dealers, underwriters and companies to more effectively target their solicitation and offerings. The SEC should not tamper with this time-tested and time-proven construct.”

The group also stated that retail investors were not “clamoring for exempt offerings, that there is in fact a glut of funding available for high-growth and promising companies, and that those companies who are passed by various sophisticated investors and banks should not gain access to solicit unsophisticated investors.”

Another viewpoint is from the Public Investors Arbitration Bar Association, which believes there is a need for revising the current definition due to inflation.

“… These standards have not been substantially modified from a time when a newspaper cost 20 cents and a can of Coke from a vending machine cost 35 cents,” the PIABA wrote. Today, it noted, 8.9% of households qualify based on the individual household income of $200,000, verses 0.5% of households in 1983 when the rule was defined. Likewise, 9.4% qualify based on net worth of $1 million and 13% of U.S households qualify as accredited investors. “In short, thanks exclusively to inflation and passage of time, more than 7 times as many investors qualify as ‘accredited investors’ today compared to the time the regulation was first put in place. Conspicuously absent from that increase is any sort of meaningful improvement in financial literacy for retail investors.”

California Attorney General Xavier Becerra suggested that the rule be revised to include “a sophistication criterion.” Exemptions to the rule should first make sure investors “have sufficient sophistication and power to demand (and receive) material information from issuers. Second, investors should have sufficient wealth or income to tolerate illiquidity and withstand losses from their investments. This second criteria could also be satisfied through caps on the amount of investment for individuals who do not meet a certain wealth or income threshold.” Further, he says, if the SEC doesn’t modify the rule or add the second criterion, it should modify rules 506(b) and 506(c) to “require issuers to provide mandatory disclosure to accredited investors as well.”

A Different View

Andrew Vollmer of the Mercatus Center, a free-market oriented think tank at George Mason University, believes that “tinkering with the definition of accredited investors is the wrong approach.” He states that the new SEC-proposed version “offers a way out of the difficulty with the definition of accredited investors and the perceived unfairness of offering investments to the wealthy but denying them to ordinary retail investors. Private offerings may be opened to all who take delivery of a solid disclosure document. Information is what matters.”

One group recommended using an accreditation process via the Financial Industry Regulatory Authority based on the group’s Securities Industry Essentials Exam. “We believe such a program would facilitate the democratization of access to private markets,” tech firm Carta Inc. states in its letter. “We believe that this alternative program should be available to all qualifying persons in the US and should not be subject to educational or financial constraints that have the effect of exacerbating the damaging effects of income inequality across gender, race, ethnicity, and geography that impacts our nation today.”

BlackRock Vice Chair Barbara Novick and Managing Director Joanne Medero note in their letter that the firm “welcomes” the SEC’s willingness to consider changes to the accredited investor definition, adding that the SEC also should allow “’knowledgeable employees” of private fund managers to qualify as AIs for investments in their employers’ private fund, arguing that “knowledgeable employees have the investment experience and sufficient access to information necessary to make informed decisions.”

Brian Davis, an individual, concurred, stating that the accredited investor criteria “be waived for anyone who actively works with the startup ecosystem and signs an acknowledgement of risks.” He adds that “a sophisticated investor should be based upon their knowledge, not size of back account.”

Real estate developer Cody Snyder stated that “local access to capital early in a venture’s life is critical, but so is access to venture-stage investment opportunities for average middle class Americans. Removing the wealth/asset test from the definition of Accredited Investor is probably the single most effective means to improve BOTH middle class wealth mobility AND the Kauffman Index of startup generation.”

Just as adamant was Andrew Deville, who stated that accredited investor “laws need to be abolished. There is a wealth of information these days with the internet, so gaining proper information is much easier. These laws hold people back.”

The comment letters currently are under review by the SEC.

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