Regulation D (Reg D) and the definition of an Accredited Investor are under scrutiny by the Securities and Exchange Commission (SEC), led by Chair Gary Gensler. These potential changes, currently listed as “improvements,” aim to enhance the ecosystem and enable more investors to participate while supporting private firms.
Reg D is a securities exemption that facilitates the US private markets, with over $2.2 trillion raised in 2022 alone. Early-stage firms seeking growth capital benefit significantly from Reg D. Many successful tech companies have utilized this exemption before going public. Alterations to Reg D could undermine this thriving market, hindering economic activity and innovation.
The current definition of an Accredited Investor dates back to the 1980s. It primarily hinges on income and net worth thresholds, overlooking education and experience. One suggestion is to introduce a sophistication qualification test, ensuring investors understand the risks associated with private investments and securities offerings.
The SEC Small Business Forum recently issued a report with several recommendations to improve capital access. The Forum proposed expanding the Accredited Investor definition by allowing non-accredited investors to participate in venture capital funds, maintaining the existing wealth thresholds, diversifying startup investors and entrepreneurs, incorporating additional measures of sophistication, and including individuals who invest up to 10% of their annual income or net assets.
During a recent SEC Investor Advisory Committee meeting, stakeholders emphasized the need to avoid any harm to Reg D. The Angel Capital Association highlighted its substantial investments under Reg D, emphasizing the lack of significant fraud cases. They also advocated for expanding the Accredited Investor definition to support more qualified angel investors and boost entrepreneurship.
Congressional hearings have criticized the exclusionary nature of the current definition, urging easier access to become an accredited investor. Excluding investors from these opportunities was deemed unjustifiable. To foster scaling, success, and sustainability, both Congress and the SEC should focus on expanding the pool of Accredited Investors rather than raising wealth metrics.
Experts from the Association of Online Investment Platforms (AOIP) also expressed concerns. Doug Ellenoff, managing partner of Ellenoff, Grossman & Schole, emphasized that increasing restrictions on investors amidst the fragility of private and public markets would hinder entrepreneurship and innovation.
Ryan Feit, co-founder of SeedInvest (acquired by StartEngine), echoed this sentiment, stating that stricter Accredited Investor status would limit investment opportunities and cast a shadow on the entrepreneurial environment. Feit proposed administering exams to ensure investors’ understanding of investing risks in startups and small businesses, rather than solely relying on wealth-based criteria.
Rebecca Kacaba, CEO and co-founder of DealMaker, warned against changes that restrict capital and access to opportunity. Any modifications to Regulation D that reduce accessibility in private market transactions contradict efforts to support innovation, modernize capital markets, and build a resilient economy. Kacaba suggested simultaneously streamlining access to capital from non-accredited investors through Regulation A and Regulation CF.
Although the SEC intends to revise Reg D and the Accredited Investor definition, the final wording of the amendments is unknown. It is crucial for the Commission to consider the impact on innovation and find ways to facilitate retail investor participation in private securities offerings. The priority is to do no harm and maintain the exemption that drives innovation in the US.
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