Last week, the SEC Small Business Capital Formation Advisory Committee (SBCFAC) held a meeting to discuss the definition of an accredited investor. As CI has frequently covered in the past, this definition determines who may, or who may not, participate in Reg D securities offerings. Reg D is a vital and robust private securities exemption and the most popular method for early-stage firms to raise growth capital. Investors in Reg D offerings are typically VCs, family offices, and wealthy individuals.
As it stands today, the definition of an accredited investor is a blunt wealth metric. If you earn enough or are rich enough, you can participate in Reg D offerings. This approach, while simple to apply, makes little sense as it does not take into consideration an individual’s knowledge, or experience – a far better measure of an individual’s ability to gauge risk.
At the beginning of the meeting, Commissioner Hester Peirce shared some common sense on the current definition. The Commissioner stated:
“If we’re going to increase participation in our capital markets by a broader group of investors and founders, we need to move off measuring the ability to participate in private markets by wealth and income. Starting a business if you’re an Ivy Leaguer living in New York City with a wealthy network might not run into any difficulties from the current thresholds, or whatever they might be raised to in connection with the rulemaking on the Chair’s agenda. It’s a whole different story for a founder with a good idea and a community that believes in her, but who doesn’t have generational wealth or high income. That story too often ends with the founder giving up her dream.”
Pierce added that it should be an individual’s choice, and not the federal government’s decision, as to how you spend your money. While this statement should be obvious to all, the current administration of the SEC appears to be on a path to raise the wealth metric – thus making it even more difficult for individuals to decide if they want to participate in Reg D offerings.
The current definition of an accredited investor disenfranchises most of the population simply due to the belief the government can better determine which firms you back and which ones you must avoid. It also creates more barriers to entry from underserved markets like ethnic minorities or fly-over country – where people earn less than the folks in SF or NYC (and hence, must not be quite as sophisticated). So will the SEC provide a path for more individuals to participate in this important market? Or will it make it more exclusive? Let’s hope leadership listens to Commissioner Peirce and makes the obvious decision.