During my almost ten years of securities practice, I have always had an issue with the people and entities that are allowed to take part in private securities offerings with the least amount of regulation. Those individuals are known as “accredited investors.” The definition of “accredited investor” contained in Rule 501 of Regulation D is based on wealth (net worth or expected income thresholds). For over 35 years, the ability to invest in a private securities offering was mostly open to those who had the wealth to qualify as an “accredited investor.” Although recent regulations such as Regulation CF (Crowdfunding) and the amendments to Regulation A (Regulation A+) have allowed access to private securities offerings by less wealthy individuals who do not qualify as “accredited investors,” the definition of “accredited investor” still made it difficult for the less wealthy to invest in private offerings.
The SEC’s mission statement is “to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.” During my near ten years of practice, I have realized that simply being wealthy doesn’t mean an investor understands the risks pertaining to a particular securities offering and, in the inverse, a lack of wealth (as defined by the SEC in its definition of “accredited investor”) does not mean that an investor cannot understand those same risks.
Today, in a step toward facilitating capital formation, the SEC announced that it was amending the definition of “accredited investor” to allow investors, in addition to the existing wealth-based tests, to qualify on quantifiable measures of professional knowledge, experience or certifications, and FINRA licenses. The amendments also expand the entity qualifications to allow for an “investments test.”
“For the first time, individuals will be permitted to participate in our private capital markets not only based on their income or net worth, but also based on established, clear measures of financial sophistication,” said SEC Chairman Jay Clayton, in a statement. “I am also pleased that we have expanded and updated the list of entities, including tribal governments and other organizations that may qualify to participate in certain private offerings.”
Although I believe this is only an important first step to a more logical approach for identifying those individuals who qualify as “accredited investors,” and are, thus, allowed to participate in private securities offerings with the least regulation, I applaud the SEC for expanding the definition and widening the pool of investors allowed to invest in private securities offerings.
The decision whether to commence a private offering, including the preparation of required disclosures and federal and state compliance, can be complicated and difficult. Business Legal Advisors, LLC has nearly ten years of experience assisting companies with private offerings from preparing for the private offering to the completion of a successful offering.