Wednesday, March 18, 2020

NASAA opposes expanding ‘accredited investor’ definition absent additional investor protections

By John M. Jascob, J.D., LL.M.

NASAA has opposed the SEC’s proposal to amend the definition of "accredited investor" under Regulation D to expand the population of investors who can invest in private offerings. In a comment letter to the Commission, NASAA President Christopher Gerold criticized the proposed rule for not bolstering investor protections in the oversight of the private securities markets. Moreover, the Commission’s desire to allow certain natural persons to become accredited merely through testing and certification is deeply flawed, in NASAA’s view, because the SEC lacks the data that would permit an adequate understanding the types of companies and investors that should be dealing with one another in private offerings.

"Over the years, the SEC has put forth numerous proposals and studies to update or modernize the accredited investor definition," Gerold wrote. "What sets the current Proposal apart from prior efforts is the failure to offer any additional investor protections or improvements to the oversight of the private markets. On the contrary, the Proposal is a deregulatory effort that is singularly focused on expanding the private markets while showing little regard for its potential adverse effects on retail investors and the public markets."

Solid data needed. Before moving ahead with expanding retail investor access to private offerings, the SEC should ensure that enough evidence supports the proposed changes, Gerold wrote. He noted that the Commission has repeatedly cited a lack of data on Regulation D offerings, due in large part to the lack of required disclosures. Although the SEC proposed to remedy this deficiency in 2013 in a companion release to Regulation D amendments implemented in accordance with the JOBS Act, the Commission never adopted the amendments. "It is irresponsible for the Commission to propose regulations after recognizing the need for greater data, and then choosing not to act to obtain that data," Gerold wrote.

Tests of sophistication not sufficient. Gerold acknowledged that certain tests or certifications can be one factor in assessing whether an investor has the necessary financial sophistication for participating in private offerings. NASAA believes, however, that tests or certifications by themselves are not enough. Rather they should be coupled with demonstrable experience of at least five years, coupled with the means to sustain losses. Moreover, Gerold added, some measures discussed in the SEC's proposal are insufficient on their face to assure investment sophistication, such as passage of the Securities Industry Essentials examination, qualification as a certified public accountant or certified management accountant, or the possession of a juris doctor or masters of business administration degree.

If the SEC nevertheless insists on moving forward with the proposal, several modifications are essential, Gerold wrote. First, the SEC should raise substantially the current income and net worth thresholds for natural persons and index those thresholds to inflation. Second, the SEC should exclude agricultural land and machinery, as well as retirement accounts, from net worth calculations. Third, the SEC should continue to require that all natural persons meet the income or net worth thresholds in order to be deemed accredited investors. Fourth, the SEC should require that natural persons have significant investment experience before qualifying as accredited investors.