Friday, April 28, 2023

Small business capital formation would benefit from new accredited investor paradigm, Peirce says

By John Filar Atwood

It is time to consider expanding the qualifications for accredited investors, according to SEC Commissioner Hester Peirce, who suggested at the SEC’s annual Small Business Forum that perhaps the definition should include investors who had passed a sufficiently rigorous test, taken high-quality investing courses, or had relevant professional degrees. In prepared remarks, Peirce encouraged participants to discuss this and other ideas for improving capital-raising options for small businesses.

Peirce noted that under the current structure wealth and income measures largely determine the eligible pool of accredited investors. She acknowledged that discarding the accredited investor paradigm entirely would not likely have broad appeal but believes there are credible options for expanding the number of accredited investors.

In addition to her suggestions of rigorous testing, investing courses, or professional degrees, she asked Forum participants to discuss the possibility of allowing anyone to invest some percentage of his or her investment portfolio in private companies—a technique already used in crowdfunding—or allowing people assisted by a sophisticated financial intermediary to invest.

Micro-offering exemption. Outside of amending the accredited investor regime, Peirce asked stakeholders to consider the potential benefits of a micro-offering exemption that would allow companies to raise $250,000 or $500,000 without registering with the SEC or the states. She also asked whether the Commission should adjust Regulation Crowdfunding to make it a more practical solution for early-stage companies, or whether participants thought that a sensible regulatory framework for finders would be helpful in matching investors with small businesses.

In his remarks at the Forum, Commissioner Mark Uyeda focused on the SEC’s lack of follow-through on the recommendation from last year’s meeting that it support underrepresented emerging fund managers, especially minorities and women. He noted that the Commission issued a statement of support for the recommendation but has not taken any concrete action.

Impact of rule proposals. In Uyeda’s view, one way for the Commission to support small business capital-raising is to carefully consider the impact of its rules on small businesses and emerging fund managers. He cited the February 2022 proposals that would impose additional reporting requirements on private fund advisers, noting that commenters have indicated they are likely to place disproportionately large burdens on advisers to small funds and first-time funds.

He discussed one comment letter in particular citing data that more women- and minority-owned firms are associated with smaller and first-time funds. Accordingly, he noted, the proposal could stifle the ability of emerging fund managers, including women- and minority-owned managers, to operate successfully.

Uyeda believes that one change the Commission could make to ease the burden on emerging fund managers is to have a longer transition period to comply with new rules. He pointed to the recently adopted proxy vote disclosure rules which will require emerging fund managers who file on Schedule 13F because they hold more than $100 million in equity securities to file Form N-PX for the very first time. Emerging advisers with several hundred million in assets under management were treated no differently than advisers with trillions of assets under management in this rulemaking, he stated.

New rules or modifications often require further clarification to implement, Uyeda said, so emerging fund managers should be able to have extra time to allow these questions to be resolved before mandating compliance. In his view, expanding private fund adviser regulations will make it more costly to operate and will disincentivize institutional investors from allocating capital to emerging fund managers.

Chair Gensler. SEC Chair Gary Gensler told Forum participants that the Commission is working to make capital markets as efficient as possible to support capital-raising by companies of every size. Many of the projects the SEC is working on today are focused on increasing the efficiency, integrity, and resiliency of the markets to lower costs for all businesses looking to raise money, he said.

Gensler urged stakeholders to share their own views for improving the ability of small businesses to raise capital. The recommendations of Forum participants will inform a report that that the SEC will deliver to Congress and could help the Commission develop policies to benefit small businesses, he concluded.