Proposed Changes to Securities Regulations

On today’s show we are talking about a proposed change to the accredited investor definition by the SEC. The effect of the change would be to make more private investment options available to individual investors who have a level of financial education and sophistication.

The purpose of today’s show is to open the topic for you to investigate further. I’m not a lawyer, and I’m definitely not a securities lawyer and my role is not to provide legal advice of any kind.

The proposal would expand the number of people allowed to invest in private securities offerings. 

Currently, people who may invest in those markets, known as accredited investors, must have the financial resources to withstand big losses: either $1 million in net assets, not counting their home, or at least $200,000 in annual income.

The SEC proposal, which was approved by a vote of 3-2, would allow investors with certain qualifications, such as an entry-level stockbroker’s license, to sidestep the income and wealth thresholds

The SEC’s rules which were enacted in 1933 were born out of a Depression-era mandate to protect Main Street investors from the vagaries of financial markets. If you go back to the 1920’s, the irrational exuberance of the markets was littered with fraudulent public offerings. Companies with no underlying business issued public offerings and cheated investors out of their life savings.

The SEC estimates that $2.9 trillion was raised through private channels in 2018, versus $1.4 trillion in registered offerings.

The fact is, the vast majority of private offerings today that are filed with the SEC are under Regulation D, part 506. Under a 506 offering, there is 506B which allows up to 35 non-accredited investors and an unlimited number of accredited investors. However, under 506B, solicitation is not permitted. Under 506c, offerings are only open to accredited investors who must demonstrate that they meet the accredited investor criteria. Offerings under 506c are permitted to be advertised and do not require the pre-existing relationship that is part of the 506b rules.

The proposal is outlined in a 153 page document that you can download and read from the SEC website.

There is also a mechanism and a 60 day period for collecting comments from the public, and this too can be done on the SEC website. The methods for submitting comments are outlined on the second page of the SEC proposal.

Just in case you’re thinking that 153 pages is a lot to wade through, I suppose it is. But on each page, there are substantial footnotes. Some pages consist of about 25% actual text and 75% footnotes. Unless you intend to go through all the footnotes and references, it’s actually not too bad a document to read through.

The proposal includes Adding “family offices” with at least $5 million in assets under management and their “family clients,” as each term is defined under the Advisers Act;

The proposal also includes Add the term “spousal equivalent” to the accredited investor definition, so that spousal equivalents may pool their finances for the purpose of qualifying as accredited investors;

If and when these changes might be implemented is anybody’s guess. They could be amended between now and then. Even once enacted in law, they could be further refined by policies governing the implementation of the new rules.

In the coming years, we can look forward to the possibility of an expanded definition for accredited investor that could make a larger number of investors eligible for the accredited investor definition. That, in turn could make the 506c offering an even more effective tool for syndicators and project sponsors to raise capital for real estate projects and other business ventures.