SEC Small Business Capital Formation Advisory Committee Releases Agenda for Next Meeting, Definition of an Accredited Investor is Main Topic

The SEC Small Business Capital Formation Advisory Committee will hold a meeting later this week (February 10) where it will address an important topic when it comes to access to capital for early-stage firms.

Following an update from the Advocate for Small Business Capital Formation, the Committee will discuss the definition of an Accredited Investor – a topic that has long been on SEC Chairman Gary Gensler’s list of things to do.

Currently, an Accredited Investor is an individual who earns over $200,000 a year or has a net worth of over $1 million (not counting a primary residence). If married, the income hurdle increases to $300,000.

If you are Accredited, you may participate in Reg D private securities offerings – the most popular exemption used by early-stage firms raising growth capital. Today, the Reg D market is enormous – more than a trillion dollars annually, as venture capitalists, wealthy individuals, and other institutions invest in promising young firms. Most hot private companies try to stay private as long as possible, due to the high cost, heightened regulatory scrutiny, and amount of time needed to be a publicly traded firm. This also means much of any capital gain (or potential loss) is captured before a firm completes a public offering.

Last fall, Chairman Gensler updated his regulatory agenda but left his top item alone: exempt securities offerings. The review of exempt securities is expected to include “public comment on ways to further update the Commission’s rules related to exempt offerings to more effectively promote investor protection, including updating the financial thresholds in the accredited investor definition, amendments to Rule 701, and amendments related to the integration framework for registered and exempt offerings.”

The fear among industry followers is the Commission will seek to increase the income and wealth hurdles thus making it more difficult for individuals to participate in Reg D offerings. Many observers believe the best path forward would be to leave the wealth hurdles alone but incorporate a sophistication qualification so individuals who may not be wealthy, but are very knowledgeable on financial offerings, may gain access to this important and robust market. This makes quite a bit of sense as many young securities attorneys, professors of finance, etc. would not qualify to participate in a private securities offering when they clearly have the knowledge to understand a private offering. Some insiders have posited that the definition should be eliminated altogether as it effectively disenfranchises most of the investing population.

The Committee meeting should be of interest to platforms engaged in online capital formation as Reg D 506c is frequently utilized to raise capital in securities crowdfunding offerings.

The Commission may, or may not, utilize the opinion of the Committee to update the definition of an Accredited Investor.

The meeting is scheduled to take place on February  10, 2022, beginning at 10 AM ET. The gathering will be live-streamed on the SEC website and available to the public.

 

 

 


Date:          Thursday, February 10, 2022

Time:          10:00 a.m. – 2:30 p.m. (ET)

10:00   Call to Order; Introductory Remarks by Commissioners

10:15   Updates from the SEC’s Office of the Advocate for Small Business Capital Formation

The SEC’s Office of the Advocate for Small Business Capital Formation will provide an overview of the Office’s FY2021 Annual Report, which includes an in-depth profile on the state of capital raising activity from startup to small cap, along with the Office’s policy recommendations.

The Office will also provide an update on recently-released educational resources on the SEC’s new Capital Raising hub, which aim to make the capital raising rules more accessible and to empower entrepreneurs and investors to make more informed decisions.

10:45   Accredited Investor Definition

The Commission’s recently released rulemaking agenda for this year includes seeking public comment on updates to the financial thresholds in the accredited investor definition as a part of potential changes to the exempt offering rules. For background, in 2019 the Committee evaluated potential amendments to the accredited investor definition and offered recommendations to the Commission.

The Committee will first receive an overview on the current accredited investor framework from the SEC’s Office of the Advocate for Small Business Capital Formation, including recent amendments that became effective in 2020, and how the definition interrelates with other capital raising rules.

Following the overview, the Committee will hear from speakers on how the accredited investor definition impacts capital raising opportunities for both entrepreneurs and their investors.

Speakers:

Following discussion with the speakers, the Committee will discuss the accredited investor definition in the context of capital raising.

There will be a lunch break from 12:00-1:00.

1:00     Accredited Investor Definition (continued)

Committee members will continue to engage in discussions about the accredited investor definition, including deliberation on potential recommendations.

2:30     Wrap-up and Adjournment



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