SEC Regulation D controls who may invest in private companies which are conducting a general securities offering. Designed to protect people who in the SEC view should not be taking chances by investing in speculative early stage companies where there is no public market, Reg D requires as a basic starting point that permitted investors have a certain threshold of economic stability either through annual earnings or present wealth.

Current SEC Commissioners, following the general approach of the current Federal Administration, announced recently that perhaps the SEC view should change and asked  staff to explore what changes might be made to permit a wider part of the population to invest in private companies.

With that as background, on Monday of this week the SEC was sued by two persons who fell below current wealth standards, asking that those standards be eliminated as unconstitutional.  The theories of the suit are that such standards discriminate against Americans who are sophisticated but not wealthy, and (a bit farfetched) also violates the First Amendment which ensures right of free association.

Whether attacking this policy under constitutional standards is clever or inapposite remains to be seen.  However, note one clever selection of one of the plaintiffs: a woman hired to be CEO of an early-stage company falls “just” below the financial investment standards of current Reg D, and points out the anomaly of being able to run an enterprise in which she cannot invest.

Ways in which this plaintiff could be qualified to invest are obvious, suggesting some advance planning to create an appealing argument, but the policy issue being considered by the SEC even before the lawsuit was filed is a serious one: how to weight the risk of poor unsophisticated investors being sold stocks that are typically considered as inappropriate for their risk profile against the benefit of making the funding of innovative new companies potentially more successful?