Friday, March 01, 2024

Commissioners offer guidance for advisory committee’s discussion of accredited investors, IPOs

By John Filar Atwood

As the SEC’s Small Business Advisory Committee prepared to discuss the definition of “accredited investor,” Chair Gary Gensler asked the committee members to consider when it is appropriate that investors get, or not get, full and fair disclosure about a securities offering. Regarding the committee’s second agenda item, the state of the IPO market, Gensler touted the recently adopted SPAC rules noting that just because a company uses an alternative method to go public does not mean that its investors do not deserve the same protections as a traditional IPO.

Commissioner Peirce. Commissioner Hester Peirce focused her remarks on the importance of letting investors decide how to invest their money. Investor protections that come in the form of prohibitions, such as the limitations included in the accredited investor definition, run contrary to persons’ right to decide for themselves how and where to invest.

Peirce also worried about the potential negative impact that changes to the accredited investor definition could have on angel networks that help new businesses get off the ground. She acknowledged that investing in young companies is very risky but said that empowering decision making with education is better than taking away one’s right to invest.

With respect to the IPO market, Peirce asked committee members to help identify the causes for the decline in the number of listed companies in the U.S. over the past 25 years. Some of the causes are outside the Commission’s control, she noted, but added that the SEC has a role in the rising costs of being a public company. She cited reports indicating that external reporting costs for public companies have outstripped inflation since 2000, and warned that they could rise further if the Commission moves forward with the climate rule.

Peirce encouraged the committee members to consider what are the most substantial regulatory cost-drivers for public companies, and what regulations dissuade them from going public. She also asked them to help the Commission decide how to better scale regulations to encourage companies to go public earlier in their life.

Commissioner Uyeda. Commissioner Mark Uyeda spoke about the accredited investor definition, suggesting that the SEC move away from an “all or nothing” approach where an accredited investor can invest 100% of his or her assets in a single private offering, but if he or she falls a dollar short of qualifying as an accredited investor, they cannot invest at all. He suggested that the Commission consider allowing an individual to invest up to certain percentages of a personal financial metric, like the aggregate dollar value of his or her securities investments, in private offerings.

Uyeda encouraged committee members not to be restricted by the past. Some have called for the net worth and annual income thresholds to be indexed to inflation from the levels established in 1982, he noted, but pointed out that this assumes that these levels were correct to begin with. That approach also assumes that net worth and annual income are the appropriate metrics for assessing an individual’s ability to invest in private offerings, he said. He advised committee members to develop recommendations free from decisions made over 40 years ago.

Uyeda also suggested that any regulatory approach to private offerings should focus on opportunity rather than paternalism, where the ability of more individuals to participate in private offerings is seen as a benefit, not a detriment. The paternalistic approach in which the government decides who can and cannot invest may harm the exact persons who it is trying to protect, he stated.

Uyeda noted that the Commission’s rules do not limit investments in public companies to only investors who meet certain wealth or income thresholds. Investors have their own tools to protect themselves from the risks of private investments, he said, including diversifying or just walking away from an investment. He encouraged committee members to remember that these other tools exist as they develop their recommendations.

Commissioner Lizarraga. Commissioner Jaime Lizarraga discussed how venture capital’s reach into disadvantaged communities remains very limited. In 2022, he said, Latino, African American, and women-only founders each received less than two percent of venture capital dollars.

Many of the small businesses included in those statistics lack access to traditional entrepreneurial ecosystems, or to the friends-and-family networks that can provide access to needed capital, he said. Due to the essential role these small businesses play in job creation, and in the success of their communities, it is essential that they benefit from the Commission’s capital formation tools and resources, Lizarraga concluded.