SEC To Shrink Investor Access to Private Offerings?

To use the most efficient exemption from SEC registration in the sale of company shares, Regulation D, purchasers generally must meet the definition of “accredited investor.” In the waning days of the Trump-Republican SEC, the definition of “accredited investor” was widened to allow more people to participate in the private placement of securities for non-public companies, including start-ups. Today, with the Democratic majority of commissioners in control, the focus has swung back toward what is characterized as investor protection (as opposed to investor access).

Last week the SEC announced it would propose for comment, in April, amendments to shrink back those eligible for “accredited investor” status.  The threshold of wealth to so qualify ($200K of annual earnings, $300K for couples) has been static for forty years, and now will be adjusted prospectively for inflation.  At the start, only 2% of American qualified for this status; today, 13% do.

It is unclear whether the 2020 liberalization of the people eligible for this status, beyond earnings, would be amended; that new cohort included sophisticated persons, holders of brokerage licenses and “knowledgeable employees” of private funds.  Or whether the net worth alternative test will be adjusted.

Other possible approaches: establishing higher or lower economic thresholds for different parts of the country (higher in wealthier city areas), amending the Rule (701) that allows small firms to  compensate workers with equity which is not registered, and limiting the number of repeat unregistered offerings.

The policies of the SEC always have reflected the differing sensibilities of the party in power, but it is hard to believe that the financial markets are much benefited by a rapid back-and-forth pattern of regulation.

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