The Securities and Exchange Commission under the leadership of Chairman Paul Atkins has made leaps and bounds in updating securities rules to accommodate innovation. He has also expressed his intent on making access to capital easier as well as providing greater access to private securities for a broader audience of investors.
Currently under Reg D only accredited investors may participate in these securities offerings. Reg D is the most widely utilized securities exemption due to its simplicity. You just have to submit a notice filing to the SEC within a couple of weeks of receiving your first funds. There is no followup filing and issuers and investors can determine amongst themselves how a funding round goes. Virtually every prominent private firm uses Reg D. The market is measured in trillions each year.
But because Reg D only caters to the affluent, typically venture capitalists and angel investors, most retail investors are cut out of the equation. Sophisticated investors have learned to jump to the head of the queue when a promising, private firm is nearing an exit, frequently via an IPO to capture capital gains. Some believe this has exacerbated the wealth gap as the door is mostly shut to the less affluent.
To address this shortcoming, the SEC has proposed a rule change to allow retail investors greater access. As currently proposed, the statement of needs is:
“The proposed rulemaking would better facilitate retail investor exposure to private markets through registered investment companies and allow investment advisers to charge performance fees to an expanded set of clients. Over the last two decades, profound shifts have taken place in accelerated growth of private markets as well as increased oversight of and reporting by both private fund advisers and registered funds. Facilitating retail investor exposure to private markets through registered funds and modernizing the performance fee framework would provide needed investment opportunities for retail investors seeking to diversify their investment allocation in line with their investment time horizon and risk tolerance and open more opportunities for retail investors.”
While a step in the right direction, one insider believes this path still creates a gatekeeper instead of allowing investors to determine how they spend or invest their money. Nick Morgan, founder of ICAN – Investors Choice Advocate Network, believes the Commission is missing the mark. Morgan used to work at the SEC and today he is a pro-bono attorney defending those he believes have been wronged by the SEC. He also is a contributor to CI.
Morgan says that providing access to Reg D offerings via an investment advisor is just “preserving the structural gatekeeping model.” Diversification is a good thing and should be available for retail investors. He says this is “progress for advisors, incrementalism for retail investors.”
So should the government decide how you invest your money? Probably not. Anyone can buy a lottery took or bet everything on red in Vegas, so why can’t retail money back a Reg D offering. The current Accredited Investor rule is out of step.
There has been legislation proposed that would update the Accredited Investor definition that would address the current discriminatory environment. Unfortunately, Congress has been unable to approve the change, even when it is clearly a common sense update. You get the government you elect.