The definition of an Accredited Investor determines who may participate in Regulation D (Reg D) private placement offerings. This is an enormous market at over $1 trillion in annual investments and the most popular path for an early-stage firm to raise needed growth capital. The regulatory process to pursue a Reg D offering is fairly simple – you file a single sheet document outlining required information as outlined by the Securities and Exchange Commission. If you are pursuing a Reg D 506c, an iteration created by the JOBS Act of 2012, you may “generally solicit” the securities offering. In other words, you may promote the offering online and pursue a securities crowdfunding round. But there is another requirement for Reg D 506c – issuers must reasonably prove that all investors are deemed to be accredited.
In brief, an accredited investor is an individual who earns over $200,000 a year ($300,000 if married) or has a net worth of over $1 million (not counting a primary residence). These wealth metrics do not take into consideration sophistication or experience. Reg D investors lean towards angel investors, institutional money or venture capital firms – so a fairly affluent crowd.
Currently, the SEC is reviewing the definition of an Accredited Investor and many observers are concerned that the Commission will raise the hurdles for investors to participate in these private securities offerings. While it is not immediately clear what a change may do to the private placement market, clearly raising the wealth metrics will mean fewer individuals able to participate in these securities offerings. A change may also harm early-stage firms in need of capital – a vital sector of the economy – one that policymakers must support.
Recently, CI connect with Steven Weinstein, CEO of Seismic Capital, an early-stage growth investor. Weinstein has been involved in the capital markets including private financing for the past 30 years. We asked Weinstein for his opinion on Reg and the impact that any changes may have on this key sector of finance. Our discussion is below.
How important is the Reg D (both b/c) to the US economy? How does Reg D compare to the IPO market?
Steven Weinstein: Technology has made it possible for issuers to raise capital for themselves, and Reg D, along with Reg A+ and Reg CF, came about logically to put some order around the process. With the three Regs – D, A+, and CF – the SEC exercises various levels of scrutiny on the offerings, and it decides whether they meet government requirements. These offerings all are private, and, as a result, trading in the securities may be limited. An IPO introduces a company to the public markets.
There has been a good amount of reporting that due to rising costs and reporting demands, combined with significant private money, most promising younger firms stay private for as long as possible. Thoughts on this?
Steven Weinstein: IPOs typically are expensive, and launching a successful IPO often can require key executives of a company to spend time away from core missions, such as building the company or growing market share. Companies that are backed privately don’t have those distractions. There comes a time when it makes sense to take a company public or to sell it. This might be for any number of reasons, such as the investors have reached the end of their investment horizon, or the company has reached a critical market share, or the founders want to “take some money off the table”. Rushing to an IPO generally benefits no one.
Who benefits from the Accredited Investor definition?
Steven Weinstein: For many years, the SEC and other government entities have sought to protect unsophisticated investors. Accredited investors were considered to have enough market knowledge that they could make informed decisions for themselves. The flip side of that argument was that many of the most lucrative prospective investments were kept away from non-accredited investors.
We recommend that everyone research the investment opportunities they are considering. The tools to do this are plentiful. The abundance of information that is available today makes it possible for non-accredited investors to make very sophisticated and informed decisions. We recommend that all investors do their homework before moving forward on any investment decision.
The SEC may want to raise the threshold, how will this impact private funding markets?
Steven Weinstein: We’d like to see the proposal get fleshed out more before we comment on specifics. Given where we are today, and the information available, it’s hard to know what problem is being solved.
What is your opinion on creating a sophistication qualification? What about accessible venture funds?
Steven Weinstein: As noted, the information is there, and it’s generally available. Everyone – sophisticated, accredited, non-accredited – needs to become informed before investing. That goes for experienced and for first-time investors.
At Seismic, we created the first venture investment vehicle to offer our shares to the general public — sophisticated, accredited, non-accredited investors all are welcome. We believe that everyone should have access to venture investing, as it has produced the highest returns of any asset class, consistently. We didn’t see why that should be limited to college endowments, pension funds, institutional investors, and rich people. We set our minimum investment at $1,000 so that folks at many income levels could participate.
Should the federal government be engaged with determining who can, and who cannot invest in private securities offerings?
Steven Weinstein: Good question. I don’t think that they are now, though there are obstacles in place that make it difficult for non-accredited investors to participate in some offerings. Because of those obstacles, many issuers just don’t bother trying to bring on non-accredited investors. There definitely is an outsized burden placed on companies that want to offer their shares to non-accredited investors.
Why would the SEC want to raise the accredited investor threshold?
Steven Weinstein: We don’t know what’s driving the discussion. Protecting consumers is obviously a noteworthy goal, but we don’t know that raising the threshold changes the requirement that everyone has to be an informed buyer when they make an investment decision.