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SEC Considering Changes to Private Offering Rules

The SEC has issued a Concept Release that requests comment and input on possible changes to the offering rules including the “accredited investor” definition and the use of private funds to raise capital. With respect to the “accredited investor” definition, the SEC asks for input on whether it should (i) revise financial thresholds for qualification; (ii) add categories of qualifying investors based on prior experience, professional credentials, or an examination; and/or (iii) measure accreditation based on amount of investments rather than income. For private funds, the SEC wants input on whether it should (i) include 3(c)(7) (qualified purchaser) funds within the definition of “accredited investor” and (ii) change the definition of qualified client for purposes of taking performance fees. The SEC is also considering changes to Regulation D private placements, Regulation Crowdfunding and secondary trading rules.

We believe that the SEC should expand the “accredited investor” definition and allow broader use of private pooled funds for capital raising and investment. However, we have been here before in 2017, 2013, and 2010. Let’s hope Chairman Clayton, who focuses on capital raising, can make true reform happen this time.

SEC Chairman Attacks “Accredited Investor” Concept

In a recent speech SEC Commissioner and acting Chairman Michael Piwowar argued that the SEC should dispense with the “accredited investor” definition for private offerings.  He asserted that the “artificial distinction” between “accredited” and “non-accredited” investors hurts lower-income investors because they are deprived of higher-yielding investments that offer portfolio diversification.  He maintained that this artificial distinction does more harm than good by “exacerbating inequalities of wealth and opportunity.”   In the same speech, Mr. Piwowar also questioned corporate penalties but not against advisers and broker-dealers, which are regulated entities whose shareholders should fully understand the regulatory risk to the stock price.

OUR TAKE: Back in 2013, the SEC changed Rule 506 to allow general solicitation so long as issuers only targeted “accredited investors.”  (See “SEC Allows Private Fund General Solicitation with Conditions”).  Mr. Piwowar’s suggestion to eliminate the “accredited investor” definition, thereby opening private funds to retail investors, would have far-reaching implications for fund-raising, compliance, and civil litigation.