The Corporate Law Group

More ACred

The SEC proposed some changes to the definition of “Accredited Investors.”  The basic idea is that Accredited Investors don’t need the help of regulators to avoid being ripped off.  In other words, if you are smart and rich (accredited status only measures the later) you are on your own.  It doesn’t matter how little you want to invest, if you are not accredited you are locked out of most private company investments.  You can crowdfund Oculus for their product but if they are acquired a month later for a billion dollars, you get none of that.

The definition is changed every several years.  When the Buzz started practicing law in 1843 anyone who invested $150,000 in a company was de facto accredited.  But that was later dropped.  Not rich enough we guess.

So the regulator critters are at it again.  The SEC says, “The amendments are intended to update and improve the definition [of Accredited Investor] to identify more effectively investors that have sufficient knowledge and expertise to participate in investment opportunities that do not have the rigorous disclosure and procedural requirements, and related investor protections, provided by registration under the Securities Act of 1933.”

At least these changes make accredited status available to more people.  Any rollback in federal paternalism is welcome.   

For individual investors the SEC proposes calling those holding certain professional certifications (think, investment professionals), and “knowledgeable employees” of issuers, accredited.

And for entities, the SEC proposes calling investment advisors, certain LLCs, and certain entities and family offices with $5 million in assets, accredited.

As with other SEC overtures it is too little too late.  Regulation Crowdfunding was supposed to democratize start-up investing but the uber-late, watered down rules we got barely allow non-accredited investors to be able to risk $100 on an interesting project. 

We get it that start-ups are ultra-risky and most will fail.  But an S-1 registration costs $1 million and we need more alternatives.  Capital formation isn’t easy.  Many companies choose to stay private with QIBs trading their stock in a private market unavailable to small investors.  You can buy as many lottery tickets as you want, but you can’t buy a share of stock in a startup.  For your own good.  This doesn’t much help.