SEC Commissioner Hester Peirce has posted here comments delivered at the beginning of the SEC’s 42nd Annual Small Business Forum taking place this week. A few years back, the Forum was an in-person event, but COVID and convenience have shifted the event to a virtual gathering.
Commissioner Peirce, a staunch supporter of both small businesses and small investors, has once again shared her opinions that support entrepreneurship and the need to improve opportunities for retail investors.
In the past, Commissioner Peirce has decried the shortcomings of the definition of an accredited investor. Currently, the definition disenfranchises the vast majority of the population due to the wealth metric that, in general, requires an income of over $200,000 a year ($300K if married) or a net worth of $1 million (minus a primary residence). Commissioner Peirce reiterates her support for rational rules:
“Wealth and income measures largely determine the eligible pool of accredited investors. I emphatically object to telling Americans that a whole sector of the economy is off-limits, but measures short of discarding the accredited investor paradigm probably have broader appeal. For example, allowing investors who had passed a sufficiently rigorous test, taken high-quality investing courses, or had relevant professional degrees would expand the accredited investor pool. Other potential options include allowing anyone to invest some percentage of her investment portfolio in private companies—a technique already used in the crowdfunding rules—and allowing people assisted by a sophisticated financial intermediary to invest. What would happen to capital availability in their communities if the SEC raised the income and net-worth thresholds for inflation, or otherwise narrowed the accredited investor definition? What do panelists think of expanding the accredited investor pool by adding new measures of sophistication or pursuing one of the other ideas I just mentioned?”
As just about everyone understands, a sizeable bank account is not a good measure of financial acumen. Many sophisticated investors have the capacity to understand the risk of backing private firms but may not have the salary to qualify. Expanding the definition makes a lot of sense except to big government, nanny state types who would rather you spend your money on lottery tickets or trips to Vegas.
Peirce also comments on the potential of a micro-exemption for offerings of, say, under $500,000 that are not required to file with the SEC or states. And what about Finders? Individuals who match people with money to entrepreneurs in need of growth capital. This has been an issue for years, but the SEC has incomprehensibly struggled to approve a rule that would allow Finders to operate legally instead of the current gray zone that exists today.
The Commissioner also points a finger at policymakers that misconstrue fraud and failure. Many, if not most, startups fail. As an investor, you understand the risk you are shouldering in backing a private venture, with the expectation that some investments may work out, but many will not. That is how capitalism and markets work. If you prefer the alternative, there is always Venezuela, where nobody succeeds except top government officials.
At the same time, risk-taking entrepreneurs learn from failed ventures and frequently try again, driving innovation and boosting the economy.
“Early-stage entrepreneurs often abandon a stable job to take on the risks of starting a new business that will meet a need that others in their community have. With a disruptor’s mindset, they are ready to take on the many challenges of getting their companies off the ground. Sometimes they fail, and often they pick themselves up, dust themselves off, and start a new business. Such resilient, optimistic, problem-solving people are essential to society.”
Prudent regulation is also essential to fostering robust capital markets, but too much regulation can kill or maim these markets to the detriment of all. The Commission needs to have a greater awareness of this paradigm.
At past Forums, participants have provided sage insight and advice to the Commission, which has too frequently been ignored. Let’s hope this year’s Forum is more successful and Commission leadership acts and improves access to capital for smaller firms and opportunities for retail investors instead of just talking the talk. Otherwise, it is just another year of inside-the-beltway window dressing as the SEC checks a box.