On September 21, 2023, the U.S. Securities and Exchange Commission's (the "SEC") Investor Advisory Committee ("IAC") met to consider certain matters included on the SEC's rulemaking agenda for this fall, such as exempt offerings under Regulation D Rule 506 and the definition of accredited investor. The following provides a brief summary of discussions at the open meeting.
Panel Discussion Regarding Rule 506 Offerings
The SEC noted in the IAC's meeting agenda that "although Regulation D originated as an effort to assist small business capital formation and continues to play an important role in that arena, companies and private funds of all sizes use the registration exemptions in Regulation D Rule 506. Exempt Offerings pursuant to Regulation D Rule 506 have become the primary way private companies and funds raise capital, dwarfing the amount and size of registered public offerings. Subject to various requirements, companies conducting an offering under Rule 506(b) can raise an unlimited amount of money and can sell securities to an unlimited number of accredited and no more than 35 non-accredited investors." Panelists included Sara Hanks, Kenisha Nicholson, Craig McCann, PhD, Amanda Senn and Alexandra Thornton.
Panelists examined the increased use of Rule 506 and provided recommendations regarding potential changes to improve information asymmetry and provide better investor protections. Craig McCann noted the increasing popularity of exempt securities offerings: at least $15 trillion of Reg D securities were sold from 2009 through 2020, compared to $16.4 trillion of registered securities sold and at least $4.4 trillion of Reg D securities were sold in 2021 and 2022, 13% more than the $3.9 trillion proceeds from public offerings. Panelists further discussed the background, purpose and effect of Form D filings and noted that Form D filings are intended to provide notice of exempt offerings and to allow the SEC to collect empirical data on these filings. However, while a Form D filing is a rule requirement, it is not a condition to the exemption. Panelists noted that some issuers may not make Form D filings, causing the data available to the SEC to be incomplete. Additionally, panelists discussed how Form D filings themselves can sometimes be a vehicle for fraud, as some investors do not understand that Form D filings are not reviewed and assessed by SEC staff and that the SEC stamp on the form can provide the contents therein with legitimacy for investors. Potential suggestions from panelists to alleviate these concerns would be to include a link on Form D filings to standard risk disclosure regarding start-ups already readily available on the SEC's website, including a statement on Form D that the contents are self-reported or including a legend with standard risk disclosure on the form. Last, panelists suggested the SEC examine its rules and regulations covering the public market in order to make the market more accessible.
Panel Discussion Regarding the Accredited Investor Definition
The SEC noted in the IAC's meeting agenda that "under current securities regulations, individuals qualifying as "accredited investors" are permitted to invest in unregistered securities that, by nature, lack many of the protections provided by the regulatory disclosure requirements and attendant accountability through traditional public markets. Over the years, the SEC has continued to evolve standards on these qualifications, with the overarching goal of ensuring 'accredited investors' possess sufficient financial sophistication and necessary financial resources to participate in these inherently riskier and often highly illiquid markets." Panelists included Michael Canning, Marguerite Pressley Davis, Pat Gouhin and Professor Usha Rodrigues. Panelists discussed the origins and intent of the "accredited investor" definition and considered whether the "accredited investor" qualifications remain fit-for-purpose. The panel explored whether updates to the rule may be necessary to ensure the SEC can balance the needs of investors through its tripartite mission of investor protection, ensuring fair, orderly, and efficient markets, and facilitating capital formation. While providing a background of the current "accredited investor" framework, Professor Usha Rodrigues cited stating the SEC's 2015 Report on the Review of the Definition of "Accredited Investor" stating, "the accredited investor definition is a cornerstone of Regulation D" and "the concept intended to encompass those persons and entities whose financial sophistication and ability to sustain the risk of loss of investment or ability to fend for themselves render the protection of the Securities Act's registration process unnecessary." The panelists discussed the growing number of persons captured by the definition of "accredited investor" – 2% in 1982 and over 10% today. Multiple panelists further noted that wealth is not a proxy for financial sophistication and that accredited investors should possess both financial sophistication and wealth to allow them to better assess investment opportunities and isolate themselves from potential losses. Some suggestions proposed by panelists to limit the number of persons falling within the definition of an "accredited investor" include: excluding retirement income from the calculation of wealth; adjusting income levels for current inflation and including a financial acumen threshold; and including tiered pathways to participation for various Regulation D offerings.
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