Speaking at the beginning of last week’s meeting of the Investor Advisory Committee (IAC), SEC Commissioner Hester Peirce went to bat for smaller firms and private securities issuers – once again.
The SEC is currently considering making the definition of an Accredited Investor more rigorous. This move may limit the number of individuals in the US who can participate in exempt securities offerings under Reg D. Current requirements mandate a salary of more than $200,000 ($300,000 if you are married) or a net worth of more than $1 million (not counting your primary residence). While much time has been spent discussing a sophistication qualification, something that makes a lot of sense, it is not clear if the Commission will march down this path.
Reg D is an incredibly important securities exemption as it is utilized to raise trillions of dollars in private capital each year. It is far larger than public offerings, which suffer from a rule-upon-regulation approach manifested by policymakers who frequently have no experience in the business world. Today, becoming a public company is more of an exit opportunity for early wealthy investors as the cost to become public has become overwhelming except for the largest firms. Staying private as long as possible is now the norm. And things are not going to get any better for public firms as the Commission is looking to add more cumbersome and costly rules – not reduce the burden.
While the Commission wants to make it more difficult to become Accredited, it is also expected to propose a requirement for more disclosure for firms raising capital under Reg D. While the details are not yet available, it will certainly be more rigorous than the single sheet document, or notice filing, required today. This simplicity is what makes Reg D so special and so valuable for the US economy – fueling capital formation, innovation, and economic activity. And while critics worry about fraud perpetrated under Reg D, there is little data to support the thesis that the fraud is excessive.
Commissioner Peirce stated in her opening comments:
“The private market has become a primary source for capital, so I am eager to hear today’s panels on Regulation D and accredited investors. These topics are central to the Commission’s mission to facilitate capital formation, but they are also central to the Commission’s investor protection mission. Enhanced access to private capital is a positive development not only for companies, but for investors. Having a robust private market contributes to the health of our economy, and we should not look to impose public-market-style regulations on private markets. We instead should look for ways to reduce the costs companies face in going and staying public. Many investors have access only to the public markets, a problem that could be addressed by increasing opportunities for retail funds to access private investments. Additionally, as the second panel will consider, the Commission could expand the definition of accredited investor. For me, this issue touches on fundamental liberty concerns; part of protecting investors is protecting their right to invest.”
While Commissioner Peirce’s comments are commendable, as a minority voice on the Commission, the SEC will likely ignore the salient advice.
At the IAC meeting, SEC Chair Gary Gensler avoided sharing his specific opinion on Reg D and the definition of an Accredited Investor but his intent remains clear. More disclosure for Reg D offerings and higher hurdles to qualify as an Accredited Investor. Chatter on the street is the proposal should be released fairly soon. This issue has been a top item on the Gensler Commission since the beginning of his tenure. Even if the IAC supports a “do no harm approach” with Reg D and recommends that more investors can participate in these offerings, the Commission will ignore the Committee and do what it wants, continuing a history of acknowledging SEC Advisory Committees but mostly ignoring any advice provided.