SEC Commissioner Suggests “Millionaires Can Fend For Themselves”

One of the stranger recent rule-making efforts by the Securities and Exchange Commission involves the review and potential revision of the definition of an individual accredited investor. Many in the industry suspect that the SEC may consider revising the dollar limits for the individual standard upward, although perhaps even more wonder why the definition needs to be revised, given that it currently seems to be working, and that revising the standards upward will shrink the pool of potential investors in private offerings and possibly close off desperately needed capital to startups and emerging companies. However, one SEC Commissioner has come out publicly questioning the SEC’s efforts in reviewing and possibly revising the individual accredited investor definition. At the Government-Business Forum on Small Business Capital Formation, SEC Commissioner Daniel Gallagher questioned why the SEC “should…spend limited Commission resources ‘protecting’ the wealthiest 2%-3% of investors”. Gallagher noted that he believed that revising the individual accredited investor definition “strains logic and reason”, adding that “millionaires can fend for themselves.” Gallagher pointed out that the Dodd-Frank Act’s removal of the primary residence from the calculation of net worth for the accredited investor standard was already a significant alteration, and that continued government tinkering could actually reduce the availability of capital for startups; Gallagher suggested that the SEC should instead spend its time focusing on how to facilitate capital formation. As someone in the startup and small business industry, it’s heartening to know that there is a voice on the Securities and Exchange Commission that wants the Commission to stop adding layers of regulations that can restrict access to capital, and instead focus on how to foster capital formation (presumably while still upholding the SEC’s mandate of investor protection). Some observers (myself included) have suggested that if the individual accredited investor standard is to be revised, the dollar limits should be left alone — instead, the definition should be expanded to include a sophistication standard, so that a person who may not have wealth but has the education, training, and professional experience to evaluate the merits and risks of a private offering. There are probably plenty of wealthy individuals investing in private offerings that don’t have the education or experience (or are advised by someone with the education and experience) to evaluate the offering, while persons who are perfectly equipped to evaluate a private offering cannot invest dollar one because the offering relies on purchasers being accredited investors — indeed, at the Government-Business Forum, A. Heath Ashure, the Arkansas Securities Commissioner noted that he himself did not meet the financial thresholds of the accredited investors standard (and thus, despite his knowledge and experience in securities offerings, would not be able to invest in many private offerings). Of course, as Commissioner Ashure also noted, a sophistication qualification standard should not be so rigorous so as to be difficult or impractical for issuers to verify investors under or for investors to qualify. However, with this SEC, I don’t hold much hope. Further reading:

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