Empowering Private Companies: Navigating the Changing Reg D Landscape
One of the key priorities on the Securities and Exchange Commission (SEC) agenda, under the leadership of Chair Gary Gensler, is the re-evaluation of Regulation D (Reg D) and the definition of an Accredited Investor. These amendments currently ranked seventh on the list of “improvements,” have raised concerns about their potential impact on the investment ecosystem and private companies.
Reg D is the cornerstone of US private markets, facilitating the raising of over a trillion dollars annually. Recent reports indicate that the total amount raised under Reg D in 2022 exceeded a staggering $2.2 trillion. While a significant portion of these funds supports pooled investment funds, Reg D plays a pivotal role in providing early-stage firms with access to growth capital. Many renowned tech giants at one point or another utilized this exemption before going public, underscoring its importance. Any changes to this exemption could risk destabilizing a previously thriving market, potentially impeding economic activity and stifling innovation.
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The current definition of an Accredited Investor, established in the 1980s, is widely acknowledged as needing an update. The definition is currently based mainly on income and net worth, while this definition overlooks factors such as education and experience. A popular recommendation is to introduce a sophistication qualification, where interested investors would take a brief test to demonstrate their understanding of the inherent risks in investing in private companies and the structure of securities offerings.
Recently, the SEC Small Business Forum, in collaboration with the SEC’s Office of the Advocate for Small Business Capital Formation, issued a report offering various recommendations for improving access to capital, including:
Allowing non-accredited investors to participate in venture capital funds.
Avoiding revisions to the Accredited Investor definition that could make it more challenging to qualify based solely on wealth thresholds.
Widening the Accredited Investor Definition to promote greater diversity among startup investors and entrepreneurs.
Introducing additional measures of sophistication into the Accredited Investor definition.
Expanding the definition to include individuals who invest a maximum of 10% of the greater of their annual income or net assets.
During a recent SEC Investor Advisory Committee meeting, the opening statement emphasized the importance of not harming Reg D in any revisions.
Notably, the Angel Capital Association reported investing hundreds of millions of dollars into private firms under Reg D, with minimal fraud incidence. They support expanding the Accredited Investor definition, as qualified angel investors can provide crucial support to entrepreneurs.
Recent Congressional hearings have also shed light on the exclusionary nature of the current definition, with calls to make it easier, not harder, for individuals to become accredited investors. Restricting investors’ access to these opportunities at a time when the private and public markets are volatile, may compromise entrepreneurship and innovation.
Any measures that make it even slightly more difficult for individual investors to qualify as accredited investors may wind up creating a subtle chill in the market among such investors. The spirit and intention of Reg D was to democratize the raising of capital among investors that were previously unable to access investing in emerging growth companies that were confined to VCs, private equity, or angel investors.
Members of the Association of Online Investment Platforms (AOIP) expressed concerns, highlighting that adding more restrictions could impede both private and public markets, further stifling innovation.
In conclusion, as the SEC moves forward with changes to Reg D and the Accredited Investor definition, we hope they prioritize not hindering the exemption that fuels innovation in the U.S. Our collective goal should be to make it easier for retail investors to participate in private securities offerings. Above all, let us follow the principle of “do no harm” as we navigate these regulatory waters.
You can learn more about the proposed Reg D amendments by navigating to the “2023 OASB Annual Forum Report.”